Anuradha Sengupta: In the past decade or so, in order to survive, Indian companies have had to go on crash courses to re-learn the rules of business. The paradigms for competition, consumer expectations, policy frameworks have all changed. On Lessons in Excellence today we'll talk about how to dismantle the old order and bridge the adaptive disconnects or the gaps that show up in the new way of making sense of the old and the new one. We'll do that with special focus on Indian companies and changing markets and consumers. Here is Jerry Wind and with him is marketing and business strategy consultant Rama Bijapurkar. Jerry, dismantling existing models; it's not an internal process only is it? It is about taking down or adapting the systems and processes that these models have spawned.
Yoram Wind: Correct. It is much more that changing the mental model of the company is reflected in their business and revenue models and value propositions and it really involves all the stakeholders of the firm and the entire architecture - organisational architecture of the firm. So not only have you to change your strategy - you have to change the components that we discussed yesterday in terms of you have to focus on how to create a corporate culture, how do you change the structure, how do you change the business processes, what type of competencies do you need, what type of people do you need, what resources you need.
Anuradha Sengupta: This can be painful isn't it and this can be expensive - this entire process?
Yoram Wind: It is painful. The expense is really a question because a surgery is sometimes cheaper in the long run and more effective than slight changes. Furthermore, if you are going in for a re-invention of an organisation with having stretch objectives like with doubling of revenues and profits in three years or something like that it is obvious that you cannot continue doing this the old way. So you have to look at new ways of doing it and this typically leads companies to look for better and more efficient, cheaper and better ways, and faster ways of doing things. So it is not always more expensive, depending the way you do it.
Anuradha Sengupta: Right, Rama, this might not be more expensive but there is effort, energy, emotion, investment that has gone into creating this infrastructure, this investment - it's grand, maybe. Is that one of the reasons, maybe, why companies don't react so fast to the changing environment?
Rama Bijapurkar: I think it has less to do with discarding infrastructure and brand investment, it's more to do with discarding knowledge or conventional wisdom because when you move away from the 'doesn't everybody know that this is the way the world works', you have to have a very clear and proven alternate view of the market and when you don't have an alternate view of the market, then your tendency is to stay with the safe.
For example what we have seen in the FMCG sector is the amount that it has been competing with durables that have been financed by credit. So consumers are mortgaging their future income to buy durables and houses and what is left is coming to the FMCG sector. Now for the sector to learn to compete in this kind of an environment with the other categories with which it has never competed with before is a lot of stress. And, well, to have to discard and build new models is risky and dangerous, because who knows, if you compete with the mobile phone, your FMCG competitor may take your pants off.
Anuradha Sengupta: But do you believe that this is one of the reasons that slow companies down when it comes to reaction, the fact that there is so much at stake already?
Rama Bijapurkar: I do. I believe that unless you have a clear alternate view of the world, you have a comfortable clear view that is not proven unless and until it tanks you completely, so you don't fix it till it is completely broke and you do not have a clear enough alternative view that says 'go right ahead, this is the path'. So it is a risk aversion also because the market is completely confused and we have to lay our bets and it is confused because India is going through so many layers and levels of change that most of us, including our politicians, don't know which way it is going.
Anuradha Sengupta: Jerry, you want to react to that don't you?
Yoram Wind: Yes, because even if you know what the right model is, if you have a new mental model, I don't think we can underestimate the infrastructure. The infrastructure can be an incredible obstacle to change. A company, for example, when they went through a series of changes, and they realised that they had to change the entire workforce environment.
They changed the structure of the buildings, they created new areas, they eliminated secretaries, they eliminated a whole variety of process teams. So the infrastructure is a very important component we have take into account when we are thinking about how do we go about implementing the new mental model. But the point that Rama made in terms of points where you want to go - that is absolutely critical. That is the heart of everything we are talking about in terms of "how do you know that your mental model is not correct?" and you have to change it.
Anuradha Sengupta: Yes. Rama, how do you see Indian companies deal with this issue?
Rama Bijapurkar: I see Indian companies often noticing the changes happening. I see them uncomfortable in their guts that this is not the best way to do it. For example I see a lot of debates, the macho class debates is my most famous and favorite one - which is "should we be classy, defined as high margin, high tech, high everything or should we not?" There are many other debates, many brands and single brand debates and so on.
And, I think that what companies do is see it and hope that somebody else does it, which usually somebody else doesn't do because that somebody is the market leader who has no incentive to change whatsoever. So I am saying there is a lot of panic right now, panic that is not necessarily translated into action no matter which sector you look at - the IT sector, the two-wheelers, whether it is FMCG, whether it is b2b businesses.
Anuradha Sengupta: You mentioned the market leader and the market leader's model is what other people are following and taking cues from and even if that doesn't seem to be the right model, they don't have the courage to come up with an alternative. Is it a courage issue or is it a lack of ideas? I would like Jerry also to comment on that.
Rama Bijapurkar: What I see, whether you look at media companies, whether you look at two-wheeler companies or any other company, I see what the people are actually saying -"If his mental model is not correct, then how come he is the market leader and he is making so much money?" And we've had situations, when I worked in a two- wheeler company, when we push the market leader's lead still a little bit, you will find that you can build a huge and successful brand but it take a very pushy CEO to do it.
So the point is - if that model is flawed then why is he the market leader, if that model is flawed, then why is he making so much money? So it is then back to saying, "if he aren't broke, then, well here is a successful guy who is making so much money, so who am I to say that, that model is not right?" Also structurally market leaders have a lot of money; our markets are not deep enough to be No.2 - and a very weak number 2 - so that stakes are very high.
Yoram Wind: Well, your questions about whether it is courage or something else, I think that courage is part of it but I think the incentive system - the fact that typically if you are going through a major change, it may lead to a short-term impact. At least in the US there was the impact of the quarterly running report. A lot of CEO's and market leaders are reluctant to undertake major changes, which will affect short-term changes. This is changing.
There are changes in the whole institutional investors area and at least some of them are likenedd to pension funds and others are receptive of CEO's who come to them with long range plans as these are the changes that we are going to take, we are going to take it in the short term and we are going to continue. You can take examples of disasters such as the Times Warner-AOL - probably one of the largest in history with a $100 billion write-off and the Street accepted it.
Anuradha Sengupta: They did not have the mental model to deal with two such separate entities, did they, which came together artificially?
Yoram Wind: Well, this is one of those interesting things because they had a very visionary strategy - the integration of the two companies. Similar to the earlier attempt of Sony acquiring Columbia pictures to combine, in this case, the hardware and the software. In the case of Time Warner-AOL, the new technology was the old established media and the premise of this success was that they were able to provide an unbelievable package to advertisers.
But what happened was the dotcom bubble collapsed. After 9/11, the advertising market basically eroded completely and the environment changed in the way they could not do. Then to augment this was the dramatically different corporate culture between the two and this proposed integration was a disaster. They were just not able to integrate, which is again going back to the infrastructure - 'how do you make it happen?' You have a great vision but how do you make it happen?
Anuradha Sengupta: You want to answer Rama's concern of, 'if a market leader has a model and if there is nothing wrong with it because they are making money, when is the right time?' Where do you get the courage from, if you are No. 2 or No.3, to come up with an alternative? Because there is no incentive, is there?
Yoram Wind: There is a huge incentive… I always liked the advertising of Avis -"We are No. 2. We try harder." I think if you are No. 2 or 3 or 4 or 10, the only chance you have is to do something yourself. To go against this big market leader is a slow, incumbent, typically arrogant…
Anuradha Sengupta: Rama, why is it not happening in India?
Rama Bijapurkar: I totally agree with him that they see a lot of people at NO. 2, 3 and 4 see the market leaders floored. I also heard discussions in the offices of the No. 2 and 3 that "you know, we know he is going to crack up." The minute somebody comes to challenge him, this will happen. So why don't you challenge him?
Anuradha Sengupta: What's the answer to that?
Rama Bijapurkar: The answer to that is, it takes too much money. there is always within the system which says, "you got to have to prove it", the onus, the proof is on the challenger to prove his guts.
Anuradha Sengupta: Which of these stake holders do you think are the most resistant to dismantling these old processes because, I think Jerry mentioned investors, who would you think is the most important?
Rama Bijapurkar: I find that the investors are saying, "for god's sake can you stop going?" - what we say QSQT -quarter se quarter tak (from-quarter-to-quarter). "From this quarter to the next quarter can you not do it; can you give us a longer growth story?" But I think within the stakeholders it's more like the conservative camp and the liberal camp and I think it can come from anywhere. Sometimes the CEO is a conservative, sometimes the CEO is the liberal and the board is the conservative. Sometimes it is just the people in the organisations who have been built to go back to your people infrastructure, they have been built for a particular kind of model and so. They actually refuse to move no matter what the incentive is. So, I think, it is an eco- system that is locked in to avoid pain.
Yoram Wind: We found actually that major obstacles are either the top management or when you have an enlightened top management then very often the middle management who are going to be affected the most are the ones who are going to resist. Because they are the ones who are going to be buried in most of the changes and they are the ones to resist. There is also an environmental, especially in the States. I don't know to what extent it is true in India but in the States there is an easy solution to the No. 2 or 3 or 4, which is virgin acquisition.
They basically perceive that "we are not successful because we are smaller so let us become bigger and acquire. And if No. 2 and 3 will merge together with 3, 4 and 5 and will become bigger and we will fight exactly the war of yesterday as opposed to try and look forward". So that is unfortunately one of the ways because that is the easy way of doing this. You have issues like typically by integrating their control, short term cost savings, and then let the successor worry about what will happen later on and most mergers and acquisitions fail in the long run.
Rama Bijapurkar: But I guess historically the market leader has been the leader by far - if you look at the net profit of the leader, the net profit of No.1 and the net profit of No. 2, sometimes it is a factor of 4,5 3 because in a regulated market the leader becomes bigger and bigger and bigger. But I also hear them say, "he has got more to loose than me but then why don't you make the leap?"
Anuradha Sengupta: You mentioned No. 2 and No.3 and mergers and acquisitions. In the pharma sector you have seen this haven't you, Rama? How do you see that being dealt with in India?
Rama Bijapurkar: Actually the more interesting question on the merger is that we have seen mergers or buyouts of foreign companies that have come over and brought over Indian companies and those marriages have just not worked at all. I think we don't have a very good track record with ourselves in respect to mergers.
I think it is a bit like what Jerry says, they come together for a set of reasons, when Indian companies No. 2 or 3 come together and then they play the game exactly the way the big guy would. But when you have three pieces who together want to play the game like one big piece, it is always bound to fail. I mean I always wonder why don't we have a model that is a competitive model that says three pharma companies will come together and will do joint R & D and take on the world? A model that says the enemy is out there.
Anuradha Sengupta: Nicholas Piramal is about to do that isn't it?
Rama Bijapurkar: How about Nicholas, Dr Reddy's, Zydus, all of them coming together and saying, "let us jointly do it and share it", or I often wonder, if your four big IT companies come together and bid for a $4-billion dollar contract - when within your mind - you say that the enemy is not within us but is out there.
Anuradha Sengupta: What does it entail to sort of think like that?
Yoram Wind: Our situation where you start seeing the virtual network corporation. We are not thinking about the object of being me or a single company or acquiring others, rather creating a network of other related companies and talking about pharmaceuticals, when Merck was established. From day 1 they said, "We are not going to engage in R & D. We are not going to rely on manufacturing. We are going to rely for R & D from our two parents - Astra and Merck. And we are going to rely on Merck for the manufacturing and basically we are going to specialise in marketing and the distribution side."
So increasingly you start seeing the dark companies that are rethinking the identity of the company and moving towards another company. The challenge here is again especially in the case of pharmaceuticals is the mental model that we have because the fundamental mental model for pharmaceuticals has not changed for years. It is still selling pills at the time consumers want wellness.
You have a financial arrangement there, which forces the financial companies to react to pressure on discounts on cost per pill. At the time their only concern is - whether it is a hospital or others, basically it is the survival and the growth of the hospital - there is a total mismatch between the old fashioned model of the pharmaceuticals. And they were not able to break even in product offering or the revenue side. And that lets them to realise that to continue to have growth is not by creating a new mental model here but through acquisitions. That is the reason we have all these mergers and acquisitions and most of the pharmaceutical companies are in trouble because they are looking for these blockbusters, they are relying on this as opposed to thinking of other ways of growing.
Anuradha Sengupta: What about media and advertising companies, because today you are seeing the second-largest holding company in the world trying to create a completely different model of approaching the advertising business, isn't it Rama?
Rama Bijapurkar: I think advertising is interesting because I think Indian advertising has suffered severely from what I call the surrealisation of the entire industry. What they have actually done is that they have all come together under one banner and then spun-off media buying, as a result of which a 15 per cent commission paid for by the media model in their heads, they now move to where advertising agencies now actually don't know who pays their bills. In the past it was in the gray where the customer paid it or the client paid it or the media paid it.
Now the media buying has taken a certain amount of the value as a result of the unbundling, that advertising agencies don't know what their role is in totality0 - the value has moved over to the client. The client is saying, "I would be the integrator and I will push everybody for the lowest price", and what they actually need very urgently is a new mental model where instead of being the dis-mediator, the traditional agency should actually come together as the aggregator of everybody's services.
There was a news article the other day that said that clients basically didn't know who to go to for creative judgment because it was partly with the media-buying house. There is a whole generation of advertising professionals who have not got experience of media planning, so can you create better without it. So there is a whole mess out there, which needs to be resolved.
Why does it not get resolved? I think as right now margins are dipping and dipping and dipping it will either get resolved by the industry, but more likely, it will get resolved by the client who is now saying, "I don't have the skills to be the integrator, I don't have the money to be the integrator." So there are two pitches world-wide where they call the holding company, the financial company to come and pitch. So that is a new model - it is sort of going back to it in a different kind of way. So I think the Indian advertising business had a new model created and in its mind now it does not know whether it is fish or fowl and that is interesting.
Anuradha Sengupta: Jerry, going back to companies, which want to talk to consumers and listen to consumers - is research adequate enough?
Yoram Wind: Well, first we have to make a distinction between good research and bad research and unfortunately there is a lot of bad research.
Anuradha Sengupta: And Rama has got some strong views on that.
Yoram Wind: There is a lot of bad research. A lot of companies rely on focus group interviews and other totally non-representative studies. Focus group interviews provide some interesting insights that you cannot project from them. So there is the distinction but even if you have good research, I would say that research is the only necessary condition to understand what the customer wants and hopefully you have the right research methodology to understand really what the customer-needs are, where they are moving, how they are changing and the like. And then what you need is, you need to change your mental mode concerning your relation as a firm with the customer because just finding information from them and continuing doing what I am doing is not going to help me.
The new model is how do we primarily get the customer involved in the process, in the R & D process. Co-production if you want to of the products and services. There is the incident - kind of the new product development process, it started actually with the finding of lead users and in the industrial context the idea is that lead users are the ones that develop the more innovative products, not the company and once customers develop a product solution to their needs, they will find a company willing to manufacture and sell it to others. So it is a reversal of this. The other big example is in customerisation and the idea is increasingly the companies are, in a sense, inviting the customer into their labs, into their R & D to design together. A company like Dell Computers - in a sense you are a part of the design of the product that you want.
Anuradha Sengupta: Rama, are Indian companies doing it? You have railed against the fact that they are product-centric and are not customer-centric for the longest time.
Rama Bijapurkar: Yes, I have always maintained that asking the customer about the product till kingdom come is not customer-centricity and that very few research projects have the courage to talk to the customer about the customer. As far as the research is concerned I think that the notion is taking some root that the lower middle-class educated woman who has more aspirations than money is often the lead user on a lot of things.
The bigger problem is I think we are not doing enough macro-consumer work because there is big change happening. For example half of urban India has gone self-employed. That little piece requires huge changes in models because if you are in the healthcare business, you must realise that what makes self-employed people paranoid is the day you fall ill and you don't go to work and you don't earn. In the end there is no pay-check. It means that the middle class is more compliant than the upper class as far as healthcare is concerned because they need the stuff. It also means that large banks and companies haven't actually figured out or done credit appraisals for anybody else apart from the salaried worker.
Just having self-employed people changes the way homes live, things happen. I mean it is a huge ripple of change. So a simple macro - I keep saying that we have enough macro- economic discipline but in this country we need a macro-consumer discipline that looks at demographics, economics, values, attitudes. For example, rural. Actually, we do not have a ready number for what is rural GDP. We know agriculture and we assume that agriculture is equivalent to rural agriculture.
But some work recently Serge and I have jointly done has shown that about half of rural is non-agriculture. Now simple statistics like that can completely transform the way you look at agriculture if you look at rural. If you are a company in the business of selling tractors, you say, if half of the rural is not agriculture, what else can I sell them? If half if the rural is non-agriculture because the younger generation don't want to be farmers and we know agriculture to be non-competitive, why are we not denim-ising rural India and putting all of them into jeans? So, I think we are not really looking at enough of the macro stuff, richer families have fewer children, stuff like that.
Anuradha Sengupta: Jerry, what Rama has - all the things that she mentioned explained how diverse, how disparate the Indian market is and the Indian context is - is there a way you can create a model for the country today for ourselves and for the behaviour that will follow?
Yoram Wind: Yes because India is not unique in being heterogeneous. The US is incredibly heterogeneous. The only difference is that the US is much smaller than India but you have incredibly heterogeneity in the US and this basically goes back into the fundamentals of how do you segment a market, how do you decide on which target segments you want to follow and design products and services that meet their needs. It is as simple as this. It is pretty fundamental.
I think the difficulty here is that do you really have the infrastructure to be able to implement easily some of the changes, some of the strategies that you want to do given the magnitude of the population you are dealing with, but to reach the Indian market is no different really conceptually here than dealing with any other heterogeneous population and the problem always has been that for typical foreigners, they look at the Indian market as it were a homogeneous market or the Chinese market, and there is nothing…
Anuradha Sengupta: Do you see that with this attitude that Jerry just talked about that this is a homogeneous market, you see that with MNC's wanting to get into the emerging…
Rama Bijapurkar: All the time. In fact I have been asked - while it is a simple segmentation - I have been asked, "why do we need a Rolls Royce approach to segment a market as tiny as this?", because the mental model they come with is "segmentation is for complicated markets which have a lot of value". Uniformity for small markets.
The fact is that this market has the strategic complexity way in excess of its current market worth and I think the degree of heterogeneity from the poorest to the richest is in a way mind boggling only because you have the nuclear warheads and you have the illiterate people and you flag off the nuclear warhead with a coconut and welcome a computer with a bindi.
So you are right. It is ruthlessly saying that it is my target but then I think we find that the multinationals have trouble dealing with 'my target India' because they are calisthenic. Because one billion Indians eat half a gram of pasta a day, I'll have a market four times the size of Argentina. And, that is the mental model they come with, the spreadsheet calisthenic model.
Anuradha Sengupta: Jerry you want to close this show with your take on how to… you said it is as simple as that, just a minute-and-a-half ago!
Yoram Wind: Conceptually, it is simple because you have to change the mental model of assuming that India is a homogeneous market and look at it as a heterogeneous market as it is. And understanding this heterogeneity and understanding how it is changing, I think tragedy in many of the segmentation approaches that people looked at the starting is they segment the market. Then, "here's the segments" and they stay there. It is absurd.
Segments change. Segments are dynamic. What you have to do is decide what is the mental model that I have in terms of addressing the market as a whole, how am I going to translate this into a business proposition into a revenue model which will relate to this. Obviously If I have a poor segment, I cannot obviously offer them a product that is expensive and they cannot afford buying it and I cannot make money on this.
So the question is "how do I find out a match between the business model and the revenue model" that allows me to succeed as a company and the consumer to get real value out of the relationship so that they will be satisfied they will be able to continue to be loyal customers and spread the word that this will solve some of the problems you had with advertising because increasingly it is not the traditional advertising that is affected but other approaches like word of mouth and different more innovative approaches to advertising or communications and marketing that companies should think about.
Anuradha Sengupta: Right. Rama, Jerry, thank you so much. We will have to close this show in Lessons in Excellence here. Thank you very much for watching.
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