Good distribution network can help
Indian companies capture U.S. markets
Renewable energy is one key area for
innovation during economic slowdown
CHENNAI: If Indian companies make the right decisions during the economic slowdown period, they could actually come out of it and better placed than before to capture world markets, says Vijay Govindarajan, Chief Innovation Consultant at General Electric, and professor at the Tuck School of International Business.
Cutting unnecessary costs, pruning wide-ranging innovation investment and expand their core business are the ways ahead for Indian companies, he says.
Since Prof. Govindrajan last spoke with The Hindu 11 months ago, the global economic landscape has been turned upside down. The crisis in the American financial sector has had dire implications for the global economy. Freely available credit during good years covered up both poor management and greed of the sort that is bringing down big names in the American financial establishment, as well as actual fraud of the sort that has been exposed at Satyam, he said.
“So far, we have been growing without any strategy or logic. Simply sucking out the inefficiency of the Licence Raj days has driven economic growth for the last 15 years,” he says. The slowdown is set to change all that. “We are going to see new winners and new losers on the Indian competitive landscape. Only the smart guys are going to survive,” he says.
Four U.S. slowdowns
He has researched four U.S. slowdowns of the last half century: the oil shocks of the early 1970s, the crippling unemployment of the early 1980s, the recession of the early 1990s and the dotcom bust of 2000. “In each period, about 60 per cent of companies barely survived, while 30 per cent died. But the remaining ten per cent or so actually became breakthrough performers and that’s mostly because of the choices they made during the recession period,” he says.
These companies first made the choice to take a hard look at their costs and adopt a zero-base approach, says Prof. Govindarajan. “Think, if you were building up this industry from scratch today, how would you do it in the most economical way? And then go out and make those changes to your existing industry,” he says. “Remember that you are aiming to make the same profit, while facing a 25 per cent fall in revenues, so you must save on costs.” The first step would be to renegotiate commodity contracts originally signed in an era of soaring commodity prices.
The second step for successful companies is to prune their innovation pipeline. “It’s not a time to cut innovation expenditure, but to focus it. Select fewer projects, but do them well,” he says, adding that the selected projects should not be risky “breakthrough innovations”, but more reliable “adjacency innovations.”
Such innovations would extend the core activities of the company, by creating a new product for an existing customer or adapting an existing product for a new customer.
Prof. Govindarajan suggested several areas ripe for such innovation. One example would be the auto industry, where a company like Tata, with its Nano, or Mahindra, with its lightweight agricultural vehicles, could adapt them to create specialised products for the developed world. “U.S. companies are caught up in the struggle for survival. Smart Indian firms, making the right acquisitions, can take advantage of that,” he said, urging Indian industry to end its indiscriminate acquisition spree, and instead zero in on acquisitions that will help them takeover industrialised markets with existing products. “The American car giants will be selling off assets soon. If an Indian firm picks up a good distribution network, it can capture the market,” he said.
Renewable energy is another key area for Indian companies to implement adjacency innovation during the economic downturn. “The energy infrastructure in the U.S. was built in an era when renewables were so expensive and oil was very cheap, he said, explaining that the mega power plants and national transmission grids acted as a disincentive for the U.S. to invest in renewable energy on a large scale.
However, in India, where 60 per cent of the country has inadequate transmission and distribution infrastructure, it was ridiculous to spend trillions to replicate the western model. Instead, a focus on decentralised power, with local generation and distribution naturally favoured renewable sources such as wind and biomass. If Indian companies used the recession period to develop existing renewable energy technologies, scaling them up and commercialising them, they could grab the lead in a key industry of the future, said Prof. Govindarajan.
Online education, telemedicine and the manufacture of inexpensive medical equipment were other areas where Indian innovations during the downturn could be important, said Prof. Govindarajan.