An interesting article on outsourcing from Fortune.
The way we have come along is what it says opening the mind to the thoughts of where individually & community as a whole we would be heading towards in the future.
Every weekday, as the tropical sun begins its swift descent over the Deccan plain, fleets of what the Indians call "multi-utility vehicles" fan out across Bangalore. The Tata Sumos and Toyota Qualises bump along the potholed, muddy residential streets of India's fifth-largest city, stopping to pick up young men and women and carry them to work. Then, as business hours begin in the Eastern U.S., thousands of these young Indians don telephone headsets and do their enthusiastic best to help the American people get their Internet service working, figure out their credit card bills, and order tacky limited-edition collectibles.
After years of wondering what all those fiber-optic cables laid around the earth at massive expense in the late 1990s would ever be good for, we finally have an answer: They're good for enabling call-center workers in Bangalore or Delhi to sound as if they're next door to everyone. Broadband's killer app, it turns out, is India.
It's not just about call centers. In Bangalore some 110,000 people are employed writing software, designing chips, running computer systems, reading MRIs, processing mortgages, preparing tax forms, and doing other essential work for U.S., European, Japanese, and even Chinese companies. Intel, Cisco, Oracle, Philips, and GE are among the multinationals with significant R&D facilities there. AOL, Accenture, and Ernst & Young have big operations in town too. Scores more Western corporations outsource work to Indian companies like Bangalore-based IT services firms Infosys and Wipro.
Meanwhile, GE Capital employs more than 15,000 people in Delhi and other Indian cities who answer calls from credit card customers, do accounting work, manage computer networks, and the like. In Chennai (formerly Madras), a staff of 350 design the PowerPoint presentations that McKinsey consultants around the world show their clients. In Mumbai (Bombay), Morgan Stanley has been hiring equity analysts to help cover U.S. companies from 102 time zones away. There are more than 350,000 people working in IT services and outsourcing in India now; the number is expected to pass one million before 2008.
The attraction of the Indian knowledge workers who get those jobs is that they're paid 10% to 20% of what Americans would expect for similar work--and in many cases they do it better. That has stoked understandable alarm in the U.S. Together with China's rise in manufacturing, it is bringing protectionists out of the woodwork. It is also causing even those of a less reactionary bent to wonder just what it is that Americans will do for a living now that even knowledge work can easily be sent overseas.
And what do those young Indian knowledge workers (they are, overwhelmingly, young) think about this turn of events? Sitting on the terrace one pleasant October evening at a swank Bangalore bar called the 13th Floor (which is in fact on the 13th floor of an office building on M.G.--short for Mahatma Gandhi--Road, the city's main drag), I pose the question to a group of young managers and engineers from Wipro: "Do you feel bad about taking jobs from Americans?"
Several of them respond with a torrent of economic reasoning that would have made David Ricardo, the 19th-century English apostle of free trade, proud. Trade enriches all, they say. The American economy will take the money it's saving by outsourcing and invest it in the growth industries of the future. Besides, the U.S., Western Europe, and Japan will all face labor shortages in a few years as their populations age.
"Try explaining that to the customers I'm talking to," retorts Sapna Sudhir, a 28-year-old with a razor wit who manages IT projects for retailers, mostly in the U.S. "'Let's talk about the transition process,' I tell them. 'I'm going to transition your job to India.' ...There's a lot of hostility." Sudhir waxes conflicted about this for a few moments. Then she slips into the tougher language of her colleagues. "It's Who Moved My Cheese? The cheese has moved. You'd better move along too. This is a capitalist economy. He who bids the lowest gets the job."
That is what the world has come to. An ambitious young woman from a nation that spent the first four decades of its independence floundering in a semi-socialist economic miasma is lecturing Americans on capitalism in the language of a cheesy American business bestseller. And she's doing it at a slick night spot on a road named after the saintly ascetic who won India its freedom. Isn't it magnificent?
So let us step back a moment from the current plight of the U.S. The long-term fate of the earth rests largely with the 95% of humanity that doesn't happen to live within America's borders. About a sixth of the world's people live in India. That's why I've come to Bangalore, a South Indian metropolis of almost six million, where globalization and digitization are having the just the kind of transformative impact that hyperventilating Silicon Valley seers were predicting a half-decade ago.
That India may turn out to be one of the winners of the digital, global, interconnected economy has of course come as a surprise to many people--not least the Indians. The Mahatma had envisioned the nation he helped create as a land of self-sufficient villagers who grew their own food, spun their own cloth, and turned their backs on industrial modernity. India's first Prime Minister, Jawaharlal Nehru, was all for self-sufficiency too, albeit on the national level. And while Nehru felt India had to industrialize to achieve this self-sufficiency, he didn't trust industrialists.
Thus was India set upon the economic course it followed for decades: The government owned most major industries, discouraged foreign trade, and--in order to steer the country's scarce resources away from frivolities--forced anybody who wanted to manufacture a new product to get permission first. (As Nehru put it, "Why do we need 19 brands of toothpaste?") In response, India's economy stubbornly refused to move faster than what came to be known as the "Hindu rate of growth" of 3.5% a year--disastrously slow for a developing country with a burgeoning population.
A currency crisis in 1991 finally put an end to this madness. After being forced to fly the bulk of the nation's gold reserves to London as collateral for an IMF loan, a government led by the chastened Congress Party of Gandhi and Nehru finally started hacking away at India's economic regulations and import tariffs.
Even during the decades of economic stagnation, India did have some things going for it: Much to the surprise of many skeptics in the West, its democratic institutions--elections, a free press, an independent judiciary--survived and thrived. While huge swaths of the Indian populace received no education at all, instruction in the upper echelons of the educational system was of surpassing rigor. And while some political leaders tried to impose the North Indian language Hindi as the national tongue, the true national language of the educated classes remained English.
So while India as a nation remained closed to the global market economy until the 1990s, millions of Indians developed the skills to join it--which many did by emigrating to the U.S., Britain, and elsewhere. A few multinationals, like Unilever and Citicorp, began mining Indian talent aggressively. Bhaskar Menon, a former Citibank executive who now runs an Indian call-center operation called Msource, remembers sitting in on a meeting in 1985 at which Citi's India chief reported the unit's profits for the year to CEO John Reed. "John said, 'This would pay for our stationery in New York--don't worry about it. Your mandate is to export 15 middle-management people to New York every year.'"
The talent hunt has only escalated--since the mid-1990s global firms like McKinsey and Goldman Sachs have recruited students at India's top business schools for jobs in New York, London, Tokyo, and everywhere in between. But starting in the 1970s, another form of talent export that didn't require outright emigration began to evolve in the software business. Indian companies that wanted to import computers had to come up with the foreign currency to pay for them. So the likes of Mumbai-based industrial conglomerate Tata began sending teams of engineers to the U.S. to work on software projects for American clients and bring home dollars. Over time, with the rise of data networks and satellite communications, it became possible to do more and more of the work remotely from India.
That was the genesis of the Indian IT services industry--now led by Tata Consultancy Services, Infosys, and Wipro. Foreign multinationals also eventually saw the wisdom of tapping into Indian talent in India at Indian salary levels: Texas Instruments led the way when it opened an R&D center in Bangalore in 1985. The rise of big India-based tech companies, though, has had special significance in a country that has long associated foreign investment with imperialism (understandably so, as the British Raj began as a purely commercial venture). Software exports may directly account for only about 200,000 jobs in a country of one billion people, but the Indian leaders of the software industry have become hugely influential in the nation's political and economic life. Their message: Economic openness is good for India, because India is perfectly capable of competing internationally.
TCS, Infosys, and Wipro now each boast revenues of about $1 billion a year. That's still tiny in comparison with competitors like IBM's global services division ($40 billion) and Accenture ($12 billion), but it's clear that the Indian pipsqueaks have caught the attention of the big guys. Accenture now has 4,000 employees in Bangalore and Mumbai, up from just a couple of hundred a year ago.
"They have the advantage of stronger brands," says Wipro chairman Azim Premji of his foreign competitors. "We're working on that. They have no experience with the global delivery model. We're masters at it." Premji, whose 84% stake in Wipro makes him the richest man in India, has a habit of making such bold, almost smug pronouncements. "U.S. society is not being reskilled and retooled to stay on top of the emerging environment," he tells me during my visit to Wipro's headquarters southeast of Bangalore. "You need to retool your educational system."
A few miles away, on the sprawling Infosys campus, CEO Nandan Nilekani has no such harsh words for the foreign competition. But he, too, exudes confidence. "There's a sense that the worm has turned and our time has finally come," he says. "A lot of people tell me that the air here is like the Valley in 1999."
Ah, the Valley. The world is lousy with places claiming to be another Silicon Valley. But in Bangalore the claims have an eerie ring of truth. For one thing, as in Northern California, the climate is a big draw--Bangalore is 3,000 feet above sea level and thus has the most bearable summer weather of any Indian metropolis. What's more, like the San Francisco area it boasts fine educational institutions (foremost among them the Indian Institute of Science, founded in 1909) and an openness to outsiders--born of the city's status as a big army garrison since colonial days and as the home of India's defense and aerospace industries since independence. There's even a wine country (okay, one winery) north of town.
The real clincher is that despite constant complaints about the city's insane traffic, skyrocketing real estate prices, and fickle workforce--and constant efforts by other cities, especially Hyderabad and Chennai, to get in on the action--companies and people keep coming to Bangalore. Which, of course, sounds exactly like Silicon Valley in the late 1990s. And while Bangalore was a graveyard of failed startups in 2001, just like the Valley, the very corporate cost cutting that has meant continued lean times in California has brought tons of new business to South India.
India is a developing country, and for all its affluence Bangalore is still a city of power outages (all office buildings and many homes have backup generators), inadequate roads, a third-rate airport, over a million slum dwellers, and lots of wandering cows. But it's become attractive enough that Indian expats are moving back.
"In 2002 I thought, 'It looks like India is the place for global IT,'" says Sean Narayanan, an India-born U.S. citizen whose siblings live in the U.S. and whose parents spend six months a year there. "I had to get experience here." So he left a job with Booz Allen in northern Virginia to work in Bangalore for Cognizant, a Dun & Bradstreet software services spinoff. Narayanan and his wife are clearly ambivalent about the move--they live in a gated community east of town that appears to have been airlifted straight from Florida and are currently planning to stay only a couple of years. But still, they're here. "It's no longer considered hardship duty," Narayanan says.
For another bunch of Bangaloreans, the call-center workers, the very idea of hardship is so, well, dated. In the late 1990s, GE Capital pioneered the practice of putting Indians on the phone with Americans. This first call center was in Gurgaon, then an obscure Delhi suburb. Now Gurgaon is bursting with glass office towers and glitzy shopping malls, and call centers have spread to every major Indian city--including Bangalore. In the process, they've spawned a consumer generation unlike any the country has ever seen. Indian call-center workers may make a lot less money than Americans (salaries start at about $2,000 a year), but they make a lot more money than fresh-out-of-college Indians who aren't computer geniuses have ever made before.
My first encounter with this new India is at the Bangalore offices of Msource, which runs call centers for financial institutions in the U.S. and Britain. I tell the six young Msource employees gathered around me that I've heard call-center workers are materialistic, brand-crazy sorts who drink and smoke a lot. That's right, they tell me. I ask about their aspirations, if they hope to own a house and a car by the time they're 40. Most nod. "I want it by the time I'm 28," says Anshul Pathak, 23.
Actually, although Pathak still lives with his parents, he already has the car. He joined Msource a year and a half ago and proved so good at cajoling American deadbeats into paying off credit card debt that he now trains new hires to do the same. Along with his Maruti Suzuki 800 subcompact, he has a Bajaj Pulsar motorcycle. His mobile phone is a Sony Ericsson T610 with a built-in camera. He banks with Citibank. On nights off he hangs out with friends in bars where he favors the local beer, Kingfisher, but others go for foreign concoctions like Bacardi mixed with Sprite. Or they go to Starbucks-like coffee shops where a cappuccino costs $1--an absurdly large sum to older Indians. Pathak watches American movies, That '70s Show, MTV. He brushes his teeth with Colgate. He owns a pair of Nikes and a pair of Reeboks. While much has been made in the U.S. media of how Indian call-center workers are trained to sound more American, the best "training" of all is simply the lives they lead.
It's not all slavish imitation, either. India at its best is a lot like the U.S. at its best--a nation of staggering ethnic and religious diversity that somehow holds together by dint of tolerance and a sense of shared destiny. And now that India wants to join the material world, it seems churlish for Americans to begrudge it entry. "For the last 20 years, you've been telling countries like India and China to adopt free markets and join the global economy," says Nilekani of Infosys. "Now that we're doing it, you can't just say, 'Stop it!'"
In fact, we probably really can't. India and the U.S. are already entwined in an economic embrace far more intimate than that which has traditionally linked trading partners, one that could be exceedingly painful to get out of. These guys know what we owe on our credit cards, after all.
Thursday, March 01, 2007
Tuesday, February 27, 2007
Making the most of uncertainty - McKinsey article
In extremely uncertain environments, shaping strategies may deliver higher returns, with lower risk, than they do in less uncertain times.
Hugh Courtney
2001 Number 4
Shape or adapt? For years, executives have regarded the question as perhaps their most fundamental strategic choice. Is it better for a company’s competitive position to try to influence, or even determine, the outcome of crucial and currently uncertain elements of an industry’s structure and conduct? Or is the wiser course to scope out defensible positions within an industry’s existing structure and then to move with speed and agility to recognize and capture new opportunities when the market changes?
As globalization, digitization, and unfettered capital markets raise levels of uncertainty and rewrite definitions of opportunities and risks, this basic strategic choice has morphed into a more complex and high-stakes dilemma. The right strategic bets can return far higher payoffs, far more quickly; the wrong ones carry a much higher risk of systemic failure. Betting big today may fundamentally reshape a market on a global scale to the advantage of a company or quickly produce losses that can throw it into bankruptcy. A company may avoid foolhardy mistakes by waiting for uncertainty to diminish, or it may squander the chance to lay claim to first-mover advantages.
The truth is that no dominant solution exists. You might argue that any good strategy should attempt to shape and adapt by specifying actions designed to increase the probability of some outcomes while simultaneously preparing for others. That approach may work in some cases. Yet the actions a company must take to shape the market are often inconsistent with those needed to adapt. Consider Qualcomm. For the past few years, it has been trying to move the wireless-telephone industry toward its CDMA (Code Division Multiple Access) technology. CDMA, a technical standard that determines how information travels and communicates through a wireless network, is competing with other technologies to become the industry standard for next-generation mobile phones.
Qualcomm realizes that if it wants to shape the industry, it must build a coalition of supporters around the CDMA technology. This approach involves cutting deals with wireless companies to get them on board and convincing consumers that CDMA is superior. To win the standards battle, Qualcomm must be totally committed to the cause or at least look as though it were. If the company tried to hedge its bets by producing chips for a competing technology as well—something an adapter might do—it would undoubtedly undermine its shaping efforts. How could Qualcomm convince its potential partners that CDMA was superior if it simultaneously invested in competing standards?
As the story of Qualcomm illustrates, under uncertainty, shaping actions are often at odds with adapting ones. Shape or adapt is therefore a real choice for most companies most of the time. But how, amid rising uncertainty and ever greater risks, can a company nail down the right strategic choice?
The different shapes of shapers and adapters
An essential starting point is understanding your alternatives. Shaping and adapting strategies may take many different forms. Shapers generally attempt to get ahead of uncertainty by driving industry change their way. Some, like Qualcomm, aim to increase the probability that a preferred technology or business process will become an industry standard. Others grapple with uncertainty by introducing fundamental product, service, or business-system innovations intended to redefine the basis of competition in an industry: think of the low-price, point-to-point air travel model of Southwest Airlines, Dell Computer’s direct-sales approach, or Netscape Communications’ breakthrough Internet browser, Navigator.
Other shapers try to restructure unstable industry environments by making bold mergers and acquisitions, as BP did in the oil industry, or by breaking up integrated companies, as AT&T did in 1996 by spinning off its equipment provider, Lucent Technologies. Other companies, such as McDonald’s in the 1990s, shape nascent markets by replicating business systems in new geographies. Still others focus on shaping the conduct of competitors; in the 1970s, for example, DuPont built its capacity in the titanium dioxide industry ahead of market demand, thus influencing its competitors’ expansion plans.
When a market is stable, adapters try to define defensible positions within the existing structure of the industry in which they compete
Adapters, by contrast, take the existing and future industry structure and conduct as given. When a market is stable, adapters try to define defensible positions within the industry’s existing structure. When high uncertainty prevails, they attempt to win through speed and agility in recognizing and capturing new opportunities as the market changes. They might quickly follow a potential shaper’s lead, as Compaq Computer did when it bet on Microsoft and Intel with early alliances in the 1980s. Other adapters hedge against future market uncertainty when they can identify a limited, discrete set of paths the market may follow. In the late 1980s, for example, software companies could hedge against uncertainty about which PC operating system would emerge as the industry standard by developing products for each of the contenders, notably DOS, Macintosh, Windows, Unix, and OS/2.
Still other adapters build their strategies around constant experimentation in products, services, and business systems. In the credit card industry, Capital One Financial conducted 27,000 tests of products, prices, features, packages, marketing channels, credit policies, account-management approaches, customer service methods, and collection and retention procedures in 1998.1 Finally, some adapters manage uncertainty by building flexible organizations designed to respond to changing market needs. Many professional-services firms, for example, focus on recruiting and developing people with general-management skills that will be valuable to clients regardless of how the market evolves.
With such a broad range of approaches, no wonder business strategists can’t agree on a dominant answer to the shape-or-adapt problem. In fact, even individual companies may not consistently choose one alternative across all issues, business lines, and times. Nor do the data support a one-size-fits-all answer. McKinsey research suggests that 86 percent of the biggest business winners from 1985 to 1995 followed predominantly market-shaping strategies.2 Yet the research clearly shows that adapters too can win big.
Understanding uncertainty
Whether a company should attempt to shape or adapt depends largely on the level and nature of the uncertainty it faces. To put things simply, when it faces very high levels of uncertainty about variables it can influence, shaping makes most sense. Adapting is preferable when key sources of value creation are relatively stable or outside the company’s control.
The logic is straightforward. Highly uncertain markets—in which technology standards are changing, competitors are constantly entering and exiting, and consumers have yet to lock into a limited number of preferred brands—offer the greatest headroom to implement successful shaping strategies. A series of major acquisitions, a bold technology investment, an aggressive product-bundling strategy—all may end up making order out of chaos and fundamentally reshaping a market to a company’s advantage.
In practice, however, executives facing high uncertainty are often biased in favor of adapting strategies. Part of the problem is a reliance on strategic-planning tools and processes that are ill suited to highly uncertain business environments. While standard tools such as Michael Porter’s five-forces framework,3 discounted cash-flow models, and core-competency diagnostics may provide deep insight into untapped strategic opportunities in relatively stable markets, they rarely generate deep foresight into the opportunities that may arise in rapidly changing ones. Without such foresight, it is no surprise that companies favor adapting strategies; after all, successful shaping strategies require executives to define the future they are trying to create.
An aversion to risk is misguided when a company’s actions can strongly influence, if not determine, the outcome of key uncertainties
Since foresight is the key to taking full advantage of the strategic opportunities offered by high uncertainty, companies must reinvent their strategic-planning processes to include such tools as scenario planning and game theory if they wish to be successful shapers. Companies that adopt these approaches can generate the foresight necessary to consider the full range of strategic shaping and adapting options. Nonetheless, a misguided aversion to risk may prevent even the most prescient strategists from favoring shaping strategies in the face of high uncertainty. Precisely as the possibility of shaping the market increases, the appetite—or courage—to do so typically wanes. This aversion to risk is misguided when a company’s actions can indeed strongly influence, if not determine, the eventual outcome of key uncertainties.
Consider the case of Minnetonka, the successful shaper of the US liquid-soap market in the early 1980s. When the company launched its Softsoap brand, a key uncertainty was the plans of its major potential competitors: would Colgate-Palmolive, Procter & Gamble, and Unilever choose to enter the market, and, if so, when? Minnetonka shaped this uncertain environment by aggressively locking up key suppliers of essential liquid-soap dispenser parts, thereby preventing competitors from scaling up their own businesses quickly. At the time, only two companies supplied the plastic pumps that dispense liquid soap. Minnetonka locked up both suppliers’ total capacity by ordering 100 million pumps to support its national rollout strategy for Softsoap. This tactic not only influenced the competitors’ conduct—the source of Minnetonka’s uncertainty—but also dictated it in the short run: the plastic-pump shortage prevented competitors from making a full-scale entry into the market for 18 to 24 months.4
By comparison, Circuit City failed in its shaping strategy for its Divx technology, an alternative to the established standard DVD format for digital videodisc players. An important reason was that Circuit City couldn’t successfully influence a crucial uncertainty: the sales and marketing efforts that other electronics retailers would devote to Divx. Only if retailers promoted this technology could it succeed. Retailers, however, were reluctant to market Divx players because doing so meant handing royalties to Circuit City, a formidable competitor. Circuit City thus had only limited ability to increase the probability that Divx would win the standards war against DVD.
When a company can’t influence important uncertainties, an adapting strategy may be preferable. Hewlett-Packard, for example, faced unpredictable ink-jet printer demand across a variety of countries in the 1980s. HP was then customizing its ink-jet printers for use in different non-US markets at the factory and shipping the printers in finished form to its warehouses, for the company had decided that it was cheaper to customize the printers at the factory than in the field. The problem was that since demand in the various countries rose and fell unpredictably, HP often found itself with excess printers configured for certain countries and with shortages for others.
This uncertainty created an ongoing supply-and-demand mismatch at HP’s warehouses. HP had little ability to influence total demand for printers in the different countries, so it developed a strategy to adapt itself to this key uncertainty: it postponed customizing the printers until it had shipped them to the warehouses and had firm orders in hand. This approach substantially decreased the company’s stock-out and inventory-carrying costs while also slightly increasing production costs, since customizing at the warehouse was more expensive. Net savings from this strategy came to about $3 million a month, according to Corey Billington, who directed HP’s strategic-planning and modeling unit.5
Tailoring choices to the four levels of uncertainty
As a rule of thumb for making decisions, then, shaping makes the most sense when uncertainty is high and can be influenced by a company’s actions. To fine-tune this approach, a company must consider ways of varying how it thinks about shaping versus adapting—depending on the nature of the uncertainty it faces. Uncertainty always takes one of four general forms (exhibit).6 Understanding which form you face is crucial when you decide whether to shape or adapt.
Even the most stable business environments can be susceptible to periodic bouts of upheaval that are driven by bold shapers
When confronting a future that seems clear enough to predict, strategists have traditionally favored adapting strategies geared to the existing market. In such stable markets, shaping opportunities often are not readily apparent, and companies believe that locking in a business system that is successful today will most likely produce success tomorrow. Yet even the most stable business environments are susceptible to periodic bouts of upheaval, driven by shapers capable of identifying and developing innovative products, services, and business systems that displace competitors.
Shapers at this lowest level of uncertainty intentionally seek to create chaos out of order. Their efforts are risky, uncommon—and sometimes effective. USA Today transformed newspaper markets so greatly that even the staid New York Times and Washington Post now feature color pictures. And the original overnight-delivery strategy of Federal Express reshaped the sleepy mail-and-package-delivery industry.
However, shapers in more uncertain environments attempt to lower the level of uncertainty, thereby creating order out of chaos. When the future holds a limited set of possible outcomes, for example, shaping strategies attempt to increase the probability that one of the outcomes most favorable to the company actually occurs—as Qualcomm is trying to do with its CDMA strategy and as electric power producers are trying to do with their regulatory strategies in California. Just as a limited number of wireless-telephone technologies are competing to become the next-generation industry standard, so too a limited number of possible actions by California officials could change the nature of regulation in electric power markets. In both cases, companies are attempting to shape the market toward their desired alternatives. Since adapters at this second level of uncertainty must prepare for only a limited set of possible outcomes, hedging strategies may also make sense. PC software companies could successfully hedge their strategies in the late 1980s, for instance, precisely because only a rather limited number of operating-system standards could emerge as near-term market leaders.
By contrast, if a wide range of possible outcomes can be identified, shaping strategies focus on moving the industry toward the "right end of the range." While companies that successfully shape markets with a limited set of possible outcomes create the scenario most favorable to them, in the third level of uncertainty success is defined by the ability to set the broad direction of the market. Internet-banking shaping strategies, for instance, are designed to increase the share of financial-services transactions taking place on-line, and a significant component of Monsanto’s life sciences strategy involves the acquisition of seed companies in hopes that this approach will increase the rate at which farmers adopt the company’s genetically engineered seeds.
At higher levels of uncertainty, hedging strategies become less desirable, since it is difficult to determine if all bases have been covered; instead, successful adapters tend to focus on continuous experimentation (Capital One in credit cards) or on building flexible organizations (professional-services firms). Finally, when an entire industry is in flux, an effective shaper can bring the market to order by setting an industry technology standard, consolidating a group of fragmented competitors, and even offering a new business model for the industry. As uncertainty grows, so too will the chance that other competitors will emulate any company willing to take a stand.
This reality implies, paradoxically, that shaping strategies in the most uncertain environments may involve higher returns and lower risk than these strategies do in situations with lower residual uncertainty. If you believe in a new industry standard, for example, and are willing to invest in its development, your creation could well serve as a "touchstone" that others react to. You would, in fact, be bringing some order to a market in chaos: if your com-pany was a credible player in the industry, your commitment might well persuade others to commit themselves as well. Your belief in the new standard may set off a chain of events that creates a self-fulfilling prophecy. The credibility of Netscape’s management team, for example, was a key factor in its successful attempt to set new standards for Internet browsers when it first launched Navigator.
Other factors
As executives face their shape-or-adapt choices, they must weigh factors beyond the level of residual uncertainty—factors such as the external market environment and the company’s capabilities and aspirations. Shaping strategies, for example, make most sense in markets that offer strong first-mover advantages. One market that may not offer them is Internet-based commerce, which by its very nature invites comparison shopping, thus perhaps undermining one of the most important potential first-mover advantages: brand and customer loyalty. As a result, it isn’t clear yet whether e-commerce shapers such as Amazon.com and eBay have established any sustainable first-mover advantages. Being an e-commerce adapter—replicating good ideas and avoiding bad ones—may offer returns similar to those won by pioneering shapers, without all the risk. Only time will tell.
Similarly, even excellent companies are not cut out to be shapers in all situations. Successful shaping usually requires a clear vision of an industry’s future evolution (as Bill Gates had for PCs); deep pockets; a strong reputation; a leadership position in a related business; world-class technology, innovation skills, or both; and operational excellence. Not all companies have these qualities. As the former chief executive of Iridium, John Richardson, has admitted, for example, its attempt to shape the satellite telephone market was undermined by "inept" marketing and products that "didn’t work" at the time of the company’s service launch.7
Successful shapers share a formidable list of attributes. Managers might therefore be tempted to regard adapting as the easy or fallback strategy alternative. This idea is mistaken on two fronts. First, it leads managers to assume that adapting, unlike shaping, doesn’t require proactive strategic commitments. Nothing could be further from the truth. Following a potential shaper’s lead, hedging against possible future outcomes, experimenting continually, and even building a flexible organization require real up-front commitments—financial and human.
Second, the mistaken idea that adapting is the easy alternative leads managers to assume that passive—not active—management is required to see it through. Yet adapters in highly uncertain environments must be skilled at spotting their new opportunities and threats and at turning on a dime to reorient their companies when necessary. This is hardly passive and hardly easy for many companies. For a company that has difficulty dealing with ambiguity, a bold shaping strategy may be the only way to avoid the dangerous "do nothing" trap.
As strategists make shape-or-adapt choices, uncertainty, perceived first-mover advantages, and the company’s capabilities and aspirations play important roles. No algorithm exists to weigh each factor, nor can a one-size-fits-all answer suit all companies in all situations. One thing, however, is certain: strategists who develop a thorough understanding of the level and nature of the residual uncertainty their company faces can develop a richer set of feasible alternatives and make better-informed choices to shape or adapt.
About the Author
Hugh Courtney is an associate principal in McKinsey’s Washington, DC, office. This article is adapted from his book, 20/20 Foresight: Crafting Strategy in an Uncertain World, Boston: Harvard Business School Press, 2001.
Hugh Courtney
2001 Number 4
Shape or adapt? For years, executives have regarded the question as perhaps their most fundamental strategic choice. Is it better for a company’s competitive position to try to influence, or even determine, the outcome of crucial and currently uncertain elements of an industry’s structure and conduct? Or is the wiser course to scope out defensible positions within an industry’s existing structure and then to move with speed and agility to recognize and capture new opportunities when the market changes?
As globalization, digitization, and unfettered capital markets raise levels of uncertainty and rewrite definitions of opportunities and risks, this basic strategic choice has morphed into a more complex and high-stakes dilemma. The right strategic bets can return far higher payoffs, far more quickly; the wrong ones carry a much higher risk of systemic failure. Betting big today may fundamentally reshape a market on a global scale to the advantage of a company or quickly produce losses that can throw it into bankruptcy. A company may avoid foolhardy mistakes by waiting for uncertainty to diminish, or it may squander the chance to lay claim to first-mover advantages.
The truth is that no dominant solution exists. You might argue that any good strategy should attempt to shape and adapt by specifying actions designed to increase the probability of some outcomes while simultaneously preparing for others. That approach may work in some cases. Yet the actions a company must take to shape the market are often inconsistent with those needed to adapt. Consider Qualcomm. For the past few years, it has been trying to move the wireless-telephone industry toward its CDMA (Code Division Multiple Access) technology. CDMA, a technical standard that determines how information travels and communicates through a wireless network, is competing with other technologies to become the industry standard for next-generation mobile phones.
Qualcomm realizes that if it wants to shape the industry, it must build a coalition of supporters around the CDMA technology. This approach involves cutting deals with wireless companies to get them on board and convincing consumers that CDMA is superior. To win the standards battle, Qualcomm must be totally committed to the cause or at least look as though it were. If the company tried to hedge its bets by producing chips for a competing technology as well—something an adapter might do—it would undoubtedly undermine its shaping efforts. How could Qualcomm convince its potential partners that CDMA was superior if it simultaneously invested in competing standards?
As the story of Qualcomm illustrates, under uncertainty, shaping actions are often at odds with adapting ones. Shape or adapt is therefore a real choice for most companies most of the time. But how, amid rising uncertainty and ever greater risks, can a company nail down the right strategic choice?
The different shapes of shapers and adapters
An essential starting point is understanding your alternatives. Shaping and adapting strategies may take many different forms. Shapers generally attempt to get ahead of uncertainty by driving industry change their way. Some, like Qualcomm, aim to increase the probability that a preferred technology or business process will become an industry standard. Others grapple with uncertainty by introducing fundamental product, service, or business-system innovations intended to redefine the basis of competition in an industry: think of the low-price, point-to-point air travel model of Southwest Airlines, Dell Computer’s direct-sales approach, or Netscape Communications’ breakthrough Internet browser, Navigator.
Other shapers try to restructure unstable industry environments by making bold mergers and acquisitions, as BP did in the oil industry, or by breaking up integrated companies, as AT&T did in 1996 by spinning off its equipment provider, Lucent Technologies. Other companies, such as McDonald’s in the 1990s, shape nascent markets by replicating business systems in new geographies. Still others focus on shaping the conduct of competitors; in the 1970s, for example, DuPont built its capacity in the titanium dioxide industry ahead of market demand, thus influencing its competitors’ expansion plans.
When a market is stable, adapters try to define defensible positions within the existing structure of the industry in which they compete
Adapters, by contrast, take the existing and future industry structure and conduct as given. When a market is stable, adapters try to define defensible positions within the industry’s existing structure. When high uncertainty prevails, they attempt to win through speed and agility in recognizing and capturing new opportunities as the market changes. They might quickly follow a potential shaper’s lead, as Compaq Computer did when it bet on Microsoft and Intel with early alliances in the 1980s. Other adapters hedge against future market uncertainty when they can identify a limited, discrete set of paths the market may follow. In the late 1980s, for example, software companies could hedge against uncertainty about which PC operating system would emerge as the industry standard by developing products for each of the contenders, notably DOS, Macintosh, Windows, Unix, and OS/2.
Still other adapters build their strategies around constant experimentation in products, services, and business systems. In the credit card industry, Capital One Financial conducted 27,000 tests of products, prices, features, packages, marketing channels, credit policies, account-management approaches, customer service methods, and collection and retention procedures in 1998.1 Finally, some adapters manage uncertainty by building flexible organizations designed to respond to changing market needs. Many professional-services firms, for example, focus on recruiting and developing people with general-management skills that will be valuable to clients regardless of how the market evolves.
With such a broad range of approaches, no wonder business strategists can’t agree on a dominant answer to the shape-or-adapt problem. In fact, even individual companies may not consistently choose one alternative across all issues, business lines, and times. Nor do the data support a one-size-fits-all answer. McKinsey research suggests that 86 percent of the biggest business winners from 1985 to 1995 followed predominantly market-shaping strategies.2 Yet the research clearly shows that adapters too can win big.
Understanding uncertainty
Whether a company should attempt to shape or adapt depends largely on the level and nature of the uncertainty it faces. To put things simply, when it faces very high levels of uncertainty about variables it can influence, shaping makes most sense. Adapting is preferable when key sources of value creation are relatively stable or outside the company’s control.
The logic is straightforward. Highly uncertain markets—in which technology standards are changing, competitors are constantly entering and exiting, and consumers have yet to lock into a limited number of preferred brands—offer the greatest headroom to implement successful shaping strategies. A series of major acquisitions, a bold technology investment, an aggressive product-bundling strategy—all may end up making order out of chaos and fundamentally reshaping a market to a company’s advantage.
In practice, however, executives facing high uncertainty are often biased in favor of adapting strategies. Part of the problem is a reliance on strategic-planning tools and processes that are ill suited to highly uncertain business environments. While standard tools such as Michael Porter’s five-forces framework,3 discounted cash-flow models, and core-competency diagnostics may provide deep insight into untapped strategic opportunities in relatively stable markets, they rarely generate deep foresight into the opportunities that may arise in rapidly changing ones. Without such foresight, it is no surprise that companies favor adapting strategies; after all, successful shaping strategies require executives to define the future they are trying to create.
An aversion to risk is misguided when a company’s actions can strongly influence, if not determine, the outcome of key uncertainties
Since foresight is the key to taking full advantage of the strategic opportunities offered by high uncertainty, companies must reinvent their strategic-planning processes to include such tools as scenario planning and game theory if they wish to be successful shapers. Companies that adopt these approaches can generate the foresight necessary to consider the full range of strategic shaping and adapting options. Nonetheless, a misguided aversion to risk may prevent even the most prescient strategists from favoring shaping strategies in the face of high uncertainty. Precisely as the possibility of shaping the market increases, the appetite—or courage—to do so typically wanes. This aversion to risk is misguided when a company’s actions can indeed strongly influence, if not determine, the eventual outcome of key uncertainties.
Consider the case of Minnetonka, the successful shaper of the US liquid-soap market in the early 1980s. When the company launched its Softsoap brand, a key uncertainty was the plans of its major potential competitors: would Colgate-Palmolive, Procter & Gamble, and Unilever choose to enter the market, and, if so, when? Minnetonka shaped this uncertain environment by aggressively locking up key suppliers of essential liquid-soap dispenser parts, thereby preventing competitors from scaling up their own businesses quickly. At the time, only two companies supplied the plastic pumps that dispense liquid soap. Minnetonka locked up both suppliers’ total capacity by ordering 100 million pumps to support its national rollout strategy for Softsoap. This tactic not only influenced the competitors’ conduct—the source of Minnetonka’s uncertainty—but also dictated it in the short run: the plastic-pump shortage prevented competitors from making a full-scale entry into the market for 18 to 24 months.4
By comparison, Circuit City failed in its shaping strategy for its Divx technology, an alternative to the established standard DVD format for digital videodisc players. An important reason was that Circuit City couldn’t successfully influence a crucial uncertainty: the sales and marketing efforts that other electronics retailers would devote to Divx. Only if retailers promoted this technology could it succeed. Retailers, however, were reluctant to market Divx players because doing so meant handing royalties to Circuit City, a formidable competitor. Circuit City thus had only limited ability to increase the probability that Divx would win the standards war against DVD.
When a company can’t influence important uncertainties, an adapting strategy may be preferable. Hewlett-Packard, for example, faced unpredictable ink-jet printer demand across a variety of countries in the 1980s. HP was then customizing its ink-jet printers for use in different non-US markets at the factory and shipping the printers in finished form to its warehouses, for the company had decided that it was cheaper to customize the printers at the factory than in the field. The problem was that since demand in the various countries rose and fell unpredictably, HP often found itself with excess printers configured for certain countries and with shortages for others.
This uncertainty created an ongoing supply-and-demand mismatch at HP’s warehouses. HP had little ability to influence total demand for printers in the different countries, so it developed a strategy to adapt itself to this key uncertainty: it postponed customizing the printers until it had shipped them to the warehouses and had firm orders in hand. This approach substantially decreased the company’s stock-out and inventory-carrying costs while also slightly increasing production costs, since customizing at the warehouse was more expensive. Net savings from this strategy came to about $3 million a month, according to Corey Billington, who directed HP’s strategic-planning and modeling unit.5
Tailoring choices to the four levels of uncertainty
As a rule of thumb for making decisions, then, shaping makes the most sense when uncertainty is high and can be influenced by a company’s actions. To fine-tune this approach, a company must consider ways of varying how it thinks about shaping versus adapting—depending on the nature of the uncertainty it faces. Uncertainty always takes one of four general forms (exhibit).6 Understanding which form you face is crucial when you decide whether to shape or adapt.
Even the most stable business environments can be susceptible to periodic bouts of upheaval that are driven by bold shapers
When confronting a future that seems clear enough to predict, strategists have traditionally favored adapting strategies geared to the existing market. In such stable markets, shaping opportunities often are not readily apparent, and companies believe that locking in a business system that is successful today will most likely produce success tomorrow. Yet even the most stable business environments are susceptible to periodic bouts of upheaval, driven by shapers capable of identifying and developing innovative products, services, and business systems that displace competitors.
Shapers at this lowest level of uncertainty intentionally seek to create chaos out of order. Their efforts are risky, uncommon—and sometimes effective. USA Today transformed newspaper markets so greatly that even the staid New York Times and Washington Post now feature color pictures. And the original overnight-delivery strategy of Federal Express reshaped the sleepy mail-and-package-delivery industry.
However, shapers in more uncertain environments attempt to lower the level of uncertainty, thereby creating order out of chaos. When the future holds a limited set of possible outcomes, for example, shaping strategies attempt to increase the probability that one of the outcomes most favorable to the company actually occurs—as Qualcomm is trying to do with its CDMA strategy and as electric power producers are trying to do with their regulatory strategies in California. Just as a limited number of wireless-telephone technologies are competing to become the next-generation industry standard, so too a limited number of possible actions by California officials could change the nature of regulation in electric power markets. In both cases, companies are attempting to shape the market toward their desired alternatives. Since adapters at this second level of uncertainty must prepare for only a limited set of possible outcomes, hedging strategies may also make sense. PC software companies could successfully hedge their strategies in the late 1980s, for instance, precisely because only a rather limited number of operating-system standards could emerge as near-term market leaders.
By contrast, if a wide range of possible outcomes can be identified, shaping strategies focus on moving the industry toward the "right end of the range." While companies that successfully shape markets with a limited set of possible outcomes create the scenario most favorable to them, in the third level of uncertainty success is defined by the ability to set the broad direction of the market. Internet-banking shaping strategies, for instance, are designed to increase the share of financial-services transactions taking place on-line, and a significant component of Monsanto’s life sciences strategy involves the acquisition of seed companies in hopes that this approach will increase the rate at which farmers adopt the company’s genetically engineered seeds.
At higher levels of uncertainty, hedging strategies become less desirable, since it is difficult to determine if all bases have been covered; instead, successful adapters tend to focus on continuous experimentation (Capital One in credit cards) or on building flexible organizations (professional-services firms). Finally, when an entire industry is in flux, an effective shaper can bring the market to order by setting an industry technology standard, consolidating a group of fragmented competitors, and even offering a new business model for the industry. As uncertainty grows, so too will the chance that other competitors will emulate any company willing to take a stand.
This reality implies, paradoxically, that shaping strategies in the most uncertain environments may involve higher returns and lower risk than these strategies do in situations with lower residual uncertainty. If you believe in a new industry standard, for example, and are willing to invest in its development, your creation could well serve as a "touchstone" that others react to. You would, in fact, be bringing some order to a market in chaos: if your com-pany was a credible player in the industry, your commitment might well persuade others to commit themselves as well. Your belief in the new standard may set off a chain of events that creates a self-fulfilling prophecy. The credibility of Netscape’s management team, for example, was a key factor in its successful attempt to set new standards for Internet browsers when it first launched Navigator.
Other factors
As executives face their shape-or-adapt choices, they must weigh factors beyond the level of residual uncertainty—factors such as the external market environment and the company’s capabilities and aspirations. Shaping strategies, for example, make most sense in markets that offer strong first-mover advantages. One market that may not offer them is Internet-based commerce, which by its very nature invites comparison shopping, thus perhaps undermining one of the most important potential first-mover advantages: brand and customer loyalty. As a result, it isn’t clear yet whether e-commerce shapers such as Amazon.com and eBay have established any sustainable first-mover advantages. Being an e-commerce adapter—replicating good ideas and avoiding bad ones—may offer returns similar to those won by pioneering shapers, without all the risk. Only time will tell.
Similarly, even excellent companies are not cut out to be shapers in all situations. Successful shaping usually requires a clear vision of an industry’s future evolution (as Bill Gates had for PCs); deep pockets; a strong reputation; a leadership position in a related business; world-class technology, innovation skills, or both; and operational excellence. Not all companies have these qualities. As the former chief executive of Iridium, John Richardson, has admitted, for example, its attempt to shape the satellite telephone market was undermined by "inept" marketing and products that "didn’t work" at the time of the company’s service launch.7
Successful shapers share a formidable list of attributes. Managers might therefore be tempted to regard adapting as the easy or fallback strategy alternative. This idea is mistaken on two fronts. First, it leads managers to assume that adapting, unlike shaping, doesn’t require proactive strategic commitments. Nothing could be further from the truth. Following a potential shaper’s lead, hedging against possible future outcomes, experimenting continually, and even building a flexible organization require real up-front commitments—financial and human.
Second, the mistaken idea that adapting is the easy alternative leads managers to assume that passive—not active—management is required to see it through. Yet adapters in highly uncertain environments must be skilled at spotting their new opportunities and threats and at turning on a dime to reorient their companies when necessary. This is hardly passive and hardly easy for many companies. For a company that has difficulty dealing with ambiguity, a bold shaping strategy may be the only way to avoid the dangerous "do nothing" trap.
As strategists make shape-or-adapt choices, uncertainty, perceived first-mover advantages, and the company’s capabilities and aspirations play important roles. No algorithm exists to weigh each factor, nor can a one-size-fits-all answer suit all companies in all situations. One thing, however, is certain: strategists who develop a thorough understanding of the level and nature of the residual uncertainty their company faces can develop a richer set of feasible alternatives and make better-informed choices to shape or adapt.
About the Author
Hugh Courtney is an associate principal in McKinsey’s Washington, DC, office. This article is adapted from his book, 20/20 Foresight: Crafting Strategy in an Uncertain World, Boston: Harvard Business School Press, 2001.
Thursday, January 11, 2007
Transparency
The word transparency is often used in all corporate governance session/seminars & all the more in b-schools. But the sad thing is that its again only theory, there are hardly 2-3% of the people in the corporate world who walk the talk.
Why can't people be transparent? Is it ego, is it that their weakness will be exposed or may be just that they don't even know what it means or they just want to go along with the things without the crave to atleast change things & become transparent.
There have been many instances that i have been mocked upon for being transparent or saying certain things on the face, i do feel bad about it but later definitely feel that it's the way be. I just hope that this will always remain.
Ask your boss/colleague about when do we start this project, he says immediately & later says take a look at what it's all about so that you understand it, later we'll talk.. the later god knows when it will happen.
After "n" days out of the blue you will have to explain the project & also your action steps !!
Instead it can always be put across in a lot better way to take a look at it & then when he gets more clarity on that we can take it forward but be prepared for it.
Loads of bigger instances that i have come across but for various reasons cannot write.
Is corporate world all about gains only & not relationships? Is it a mad rush for name,fame & money - AT ANY COST.. who knows?
The cause of stress at work is not work alone i feel but all the other unwanted things that come by it.
Hope there will be days to come where businessmen/entrpreuners/Top management become more 'mature' to make workplace a better place to be as we spend around 7 - 8 months a year at our work.
Why can't people be transparent? Is it ego, is it that their weakness will be exposed or may be just that they don't even know what it means or they just want to go along with the things without the crave to atleast change things & become transparent.
There have been many instances that i have been mocked upon for being transparent or saying certain things on the face, i do feel bad about it but later definitely feel that it's the way be. I just hope that this will always remain.
Ask your boss/colleague about when do we start this project, he says immediately & later says take a look at what it's all about so that you understand it, later we'll talk.. the later god knows when it will happen.
After "n" days out of the blue you will have to explain the project & also your action steps !!
Instead it can always be put across in a lot better way to take a look at it & then when he gets more clarity on that we can take it forward but be prepared for it.
Loads of bigger instances that i have come across but for various reasons cannot write.
Is corporate world all about gains only & not relationships? Is it a mad rush for name,fame & money - AT ANY COST.. who knows?
The cause of stress at work is not work alone i feel but all the other unwanted things that come by it.
Hope there will be days to come where businessmen/entrpreuners/Top management become more 'mature' to make workplace a better place to be as we spend around 7 - 8 months a year at our work.
Sunday, January 07, 2007
Science declines but technology advances
SWAMINOMICS
Brilliant scientists like CNR Rao, scientific advisor to the prime minister, can be dead wrong. They say that Indian science and technology are in crisis. Nonsense, technology has never been in better shape.
Rao complains that scientists and engineers are leaving universities and government labs for private sector companies (mainly in software). High attrition of scientific staff is hobbling Indian space and defence programmes. Promising scientists are migrating. India’s share of published scientific papers is falling: Rao says it is down to barely 3% against China’s 12%. In the first half of the 20th century, CV Raman won the Nobel Prize, and SN Bose along with Einstein devised the Bose-Einstein statistics. Nothing similar happens now.
Rao argues that Indian science needs a big step-up in government R&D budgets, higher retirement age in universities, and the slashing of red tape. I agree. But I think this problem pales in comparison with India’s phenomenal success in becoming a global hub for brain-intensive services and manufacturing. Pure science may be in trouble, but Indian technology is booming as never before, and that is far more important.
Tata Motors developed the Indica, beating global rivals like Fiat’s Palio. Tata Motors is now set to produce a one-lakh rupee car, the cheapest quality car in the world. This is a major technological feat.
Our software industry is set to become world number one. Starting from low-end software, Indian companies have risen so fast and competitively up the ladder that price earning ratio of the Indian trio is higher than for the American trio. Corollary: the Indian companies will probably take over the American giants in due course.
Reliance can build oil refineries at 66% of the cost in the US or Europe, and so has the highest refining margins in the world. Brain-intensive manufacturing has made India world class in small cars and auto ancillaries. Hyundai, Suzuki and now Nissan have made India a centre for global export production.
India has developed high skills in computer-aided design and manufacturing, and in tooling. This has sparked a boom in auto ancillary exports, which could cross $2 billion this year. Bharat Forge can go from concept to prototype to commercial production in three months, against six months or more abroad. Superior skills have enabled it to take over rivals across the world, and it should be world number one by 2008.
Multinationals are rushing to India to set up R&D centres. The list includes General Electric, IBM, Suzuki, Hyundai, General Motors, Timken, Astra Zeneca and Texas Instruments. General Electric’s Bangalore lab is its second biggest in the world, and has helped attract back to India many scientists who had earlier migrated. Shanta Biotech and Biocon have established India as a force in global biotechnology. Reliance Life Sciences has been recognised by the US National Institutes of Health for stem-cell research.
Tata Steel’s skills have made it the second cheapest steel producer in the world, so giants like Corus wants to be taken over by it. Fifty years ago, the world’s most economic two-wheelers from Piaggio gave 27 kms/litre of petrol. Today, Bajaj Auto and Hero Honda have developed indigenous models giving over 100 kms/litre. They have thrashed global giants Honda and Yamaha who are used to producing gas-guzzlers abroad. Bajaj once used technology from Kawasaki but now produces much better technology itself.
Less high-profile but more significant may be the mushrooming of new companies to do contract R&D for global ones. Divi’s Labs and Vimta Labs are some new stars in this firmament. So, R&D in government labs may be in trouble, but it is booming in the private sector. In the licence-permit raj, companies had no incentive to do R&D. But competition induced by economic reform means that R&D is crucial to survival. That has changed everything.
Patent applications in India have shot up from 4,000 in 1995 to 17,000 in 2004. Under Dr Mashelkar, the government’s CSIR labs have developed R&D partnerships with private sector companies, a promising way forward.
Why, then, do some scientists bemoan the decline and fall of science? Some (though not all) have the old Soviet mindset, glorying above all in indigenous technology in nuclear energy, missiles and space. Soviet scientists got unlimited sums for strategic goals, without having to worry about cost-effectiveness. This helped them make missiles and nuclear bombs. Alas, this approach was not conducive to producing the most elementary consumer goods of decent quality or price. The Soviet Union couldn’t produce competitive wheat or textiles, machinery or trucks. This led ultimately to its economic and political collapse. That vividly illustrates the very limited relevance of space and defence technology for a country’s well-being.
India needs, above all, technology that benefits consumers through improved products. So, I cheer the fact that India has become a global power in brain-intensive services and manufacturing. Our technology was lousy in our scientific heyday when CV Raman won his Nobel Prize. We are much better off today.
Brilliant scientists like CNR Rao, scientific advisor to the prime minister, can be dead wrong. They say that Indian science and technology are in crisis. Nonsense, technology has never been in better shape.
Rao complains that scientists and engineers are leaving universities and government labs for private sector companies (mainly in software). High attrition of scientific staff is hobbling Indian space and defence programmes. Promising scientists are migrating. India’s share of published scientific papers is falling: Rao says it is down to barely 3% against China’s 12%. In the first half of the 20th century, CV Raman won the Nobel Prize, and SN Bose along with Einstein devised the Bose-Einstein statistics. Nothing similar happens now.
Rao argues that Indian science needs a big step-up in government R&D budgets, higher retirement age in universities, and the slashing of red tape. I agree. But I think this problem pales in comparison with India’s phenomenal success in becoming a global hub for brain-intensive services and manufacturing. Pure science may be in trouble, but Indian technology is booming as never before, and that is far more important.
Tata Motors developed the Indica, beating global rivals like Fiat’s Palio. Tata Motors is now set to produce a one-lakh rupee car, the cheapest quality car in the world. This is a major technological feat.
Our software industry is set to become world number one. Starting from low-end software, Indian companies have risen so fast and competitively up the ladder that price earning ratio of the Indian trio is higher than for the American trio. Corollary: the Indian companies will probably take over the American giants in due course.
Reliance can build oil refineries at 66% of the cost in the US or Europe, and so has the highest refining margins in the world. Brain-intensive manufacturing has made India world class in small cars and auto ancillaries. Hyundai, Suzuki and now Nissan have made India a centre for global export production.
India has developed high skills in computer-aided design and manufacturing, and in tooling. This has sparked a boom in auto ancillary exports, which could cross $2 billion this year. Bharat Forge can go from concept to prototype to commercial production in three months, against six months or more abroad. Superior skills have enabled it to take over rivals across the world, and it should be world number one by 2008.
Multinationals are rushing to India to set up R&D centres. The list includes General Electric, IBM, Suzuki, Hyundai, General Motors, Timken, Astra Zeneca and Texas Instruments. General Electric’s Bangalore lab is its second biggest in the world, and has helped attract back to India many scientists who had earlier migrated. Shanta Biotech and Biocon have established India as a force in global biotechnology. Reliance Life Sciences has been recognised by the US National Institutes of Health for stem-cell research.
Tata Steel’s skills have made it the second cheapest steel producer in the world, so giants like Corus wants to be taken over by it. Fifty years ago, the world’s most economic two-wheelers from Piaggio gave 27 kms/litre of petrol. Today, Bajaj Auto and Hero Honda have developed indigenous models giving over 100 kms/litre. They have thrashed global giants Honda and Yamaha who are used to producing gas-guzzlers abroad. Bajaj once used technology from Kawasaki but now produces much better technology itself.
Less high-profile but more significant may be the mushrooming of new companies to do contract R&D for global ones. Divi’s Labs and Vimta Labs are some new stars in this firmament. So, R&D in government labs may be in trouble, but it is booming in the private sector. In the licence-permit raj, companies had no incentive to do R&D. But competition induced by economic reform means that R&D is crucial to survival. That has changed everything.
Patent applications in India have shot up from 4,000 in 1995 to 17,000 in 2004. Under Dr Mashelkar, the government’s CSIR labs have developed R&D partnerships with private sector companies, a promising way forward.
Why, then, do some scientists bemoan the decline and fall of science? Some (though not all) have the old Soviet mindset, glorying above all in indigenous technology in nuclear energy, missiles and space. Soviet scientists got unlimited sums for strategic goals, without having to worry about cost-effectiveness. This helped them make missiles and nuclear bombs. Alas, this approach was not conducive to producing the most elementary consumer goods of decent quality or price. The Soviet Union couldn’t produce competitive wheat or textiles, machinery or trucks. This led ultimately to its economic and political collapse. That vividly illustrates the very limited relevance of space and defence technology for a country’s well-being.
India needs, above all, technology that benefits consumers through improved products. So, I cheer the fact that India has become a global power in brain-intensive services and manufacturing. Our technology was lousy in our scientific heyday when CV Raman won his Nobel Prize. We are much better off today.
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