Innovation, Development, and India

Stephen DeAngelis

December 23, 2009

Professor C.K. Prahalad, who became famous for asserting that profits could be made by selling products and services to the world’s poorest people (i.e., those at the bottom of the pyramid), believes that next wave of innovation will focus on sustainable development [“Next wave of innovations will be driven by sustainability: CK Prahalad,” by R. Sridharan, Economic Times (India), 20 November 2009]. If he’s correct, that will be good news for those struggling to break free of poverty’s grasp. Sridharan reports on the results of an interview he conducted with the famous economist. He introduces his interview this way:

“He’s going green. After core competence and the bottom of the pyramid, the world’s best-known management guru of Indian origin, C K Prahalad, is talking sustainable development. Why? Because, as he argued in a recent article in the Harvard Business Review, ‘sustainability is the mother lode of innovations that yield both bottom-line and top-line returns’. In an exclusive interview, the Paul and Ruth McCracken professor of strategy at Stephen M. Ross School of Business at the University of Michigan, talks about sustainable development, the bottom of the pyramid, and his own intellectual journey over the years.”

The first question posed by Sridharan had to do with Prahalad’s assertion “that for companies there’s no alternative to sustainable development.” Prahalad responds:

“I am just recognising the inevitable. If you look at the water shortage, high commodity prices and certainly global warming, then the need for sustainable development is obvious. So, my starting point is, don’t deny the obvious, get on with it and innovate. … If you deeply understand sustainability, then it’s just like the quality movement some 30 years ago. If you recall, there was a lot of debate about whether quality will increase cost. What did we find? That if you deeply understand quality and you put methodology in place, costs automatically come down. I believe sustainability can be the next quality challenge. It’s going to drastically reduce costs and increase consumer acceptance. Don’t look at sustainability as compliance and regulation, but as an opportunity for breakthrough innovation.”

In other words, Prahalad is saying that good business is good for business. When I started Enterra Solutions, I did exactly what Prahalad suggests — I looked at the complex landscape of compliance and regulation and saw that companies that learned how to navigate that terrain efficiently would have a competitive edge over others. Sridharan questions that assumption and Prahalad responds:

“If you really look at it, the first ones to start developing sustainable technologies as their core strength will have a huge advantage over others. Especially, if they publicise it and get consumer acceptance.”

Most regulation and compliance mechanisms were put in place to generate trust in the buying public. If companies can demonstrate that they are fully compliant and profitable, their valuation should increase not decrease. The next subject to which Sridharan turned was the supply chain. He wondered how “you sell sustainability across a value chain that spans hundreds of vendors?” Prahalad responds:

“First, you have to recognise that large companies are allies in sustainable development and not adversaries. And large companies must also recognise how their large footprint allows them to create sustainable development. Take WalMart, for example. There are thousands of suppliers around the world and they touch millions of consumers every week. And it’s a small node called WalMart through which all suppliers go to the consumer. So WalMart is in a position where it can both help establish standards with suppliers and it can also educate consumers by boldly challenging choice and pricing. So large companies can make a great contribution in a relatively short period if they embrace sustainability.”

The next subject to which Sridharan turns is what role India should play in this bold, new, sustainable world. He says, “India can argue that it’s not a big polluter compared to developed countries, so the companies here don’t really need to start thinking of sustainable development. What would you tell such companies?” Prahalad replies:

“In India, you don’t have to start (on sustainable development) because you are a big polluter. You can start because there’s a shortage of resources. If I look at a washing machine that recognises when electricity was cut off and starts the wash cycle from there and not the beginning, then it saves energy, it saves water and it is acceptable in India because it is sustainable development and it’s good business. The beauty of this is, if you innovate here, you can take those innovations back to the US.”

Sridharan and Prahalad go on to talk about how you get the billions of people at the bottom of the pyramid to join the global middle class without adding unsustainable pressures on the world’s resources. It’s worth a read. But, I want to stop there because Prahalad’s last answer provides a good segue to the next subject I want to address. How India can outsource innovation to the rest of the world. The developed world has both admired and resented India’s “outsourcing” success; but some people in India worry that India will be perpetually tagged as a source of cheap labor rather than being respected as economic powerhouse driven by innovation [“In India, Anxiety Over the Slow Pace of Innovation,” by Vikas Bajaj, New York Times, 9 December 2009]. Bajaj reports:

“People here are also worried about the future. They fret that Bangalore, and India more broadly, will remain a low-cost satellite office of the West for the foreseeable future — more Scranton, Pa., in the American television series ‘The Office,’ than Silicon Valley. … Why, they worry, hasn’t India produced a Google or an Apple? Innovation is hard to measure, but academics who study it say India has the potential to create trend-setting products but is not yet doing so. Indians are granted about half as many American patents for inventions as people and firms in Israel and China. The country’s corporate and government spending on research and development significantly lags behind that of other nations. And venture capitalists finance far fewer companies here than they do elsewhere.”

Bajaj insists that there are a number of reasons that India has yet to become a nation known for its innovations. Among those reasons are: “A financial system that is reluctant to invest in unproven ideas, an education system that emphasizes rote learning over problem solving, and a culture that looks down on failure and unconventional career choices.” Homegrown innovators who start companies are essential to India’s future “because they are more likely to create the next wave of jobs than large, established Indian technology companies, many of which are experiencing slower growth. These companies could also help offset some of the outsourcing jobs the country will likely lose because of greater automation and competition from countries where costs are even lower.” Recognizing the challenges faced by entrepreneurs is a lot easier than addressing them. Bajaj continues:

“There are historical reasons that starting a business in India is difficult. During British rule, imperial interests dictated economic activity; after independence in 1947, central planning stifled entrepreneurship through burdensome licensing and direct state ownership of companies and banks. Businesses found that currying favor with policy makers was more important than innovating. And import restrictions made it hard to acquire machinery, parts or technology. Inventors came up with ingenious ways to overcome obstacles and scarcity — a talent Indians used the Hindi word ‘jugaad’ (pronounced jewgard) to describe. But the products that resulted from such improvisation were often inferior to those available outside India.”

As if burdensome government bureaucracies weren’t a big enough hurdle for entrepreneurs to get past, they face an even bigger challenge — raising capital.

“Venture capital funds have flocked to India in recent years, but they are more likely to invest in established businesses than young firms. In the United States, Israel and elsewhere, the initial, or seed, capital for many start-ups comes from rich individuals known as angel investors. But most rich Indians prefer to invest with family members or close friends because its considered safer and provides assurance that the lender will be able to borrow from relatives in the future.”

Bajaj is not entirely pessimistic in his report about India’s future, however. He says that despite all of its disadvantages India also possesses some important advantages. He concludes his article on a positive note:

“Engineers and biologists are plentiful, though they need to be trained more than their counterparts elsewhere. And operating costs are a lot lower than in the San Francisco Bay Area, which was critical more than two years ago when he and his partners started the company with their own money. There may yet be hope for Indian innovation. Some are looking to fill the venture fund vacuum. … Another change may augur well. Until early this decade, the Indian market was too small and isolated to make it very lucrative for businesses to develop products here, so most technology companies focused on selling services to the West, said Girish S. Paranjpe, joint chief executive of Wipro’s information technology business. ‘That will change dramatically because the Indian market has become bigger,’ he said. In the last eight years, the size of the Indian economy has roughly doubled along with the importance of foreign trade. There could still be something to envy and fear.”

Bajaj’s optimism is decidedly tepid compared to that of Reena Jana writing for BusinessWeek [“India’s Next Global Export: Innovation,” 2 December 2009 print issue]. Jana looks at India’s jugaad philosophy and sees an idea with “attributes just right for these times” whereas Bajaj sees a philosophy that often results in products that are inferior to those available outside India. Rather than demeaning the jugaad philosophy, Jana praises it. She reports:

“On a November afternoon, a dozen executives from companies including investment banks Rothschild and Goldman Sachs and tech research firm Gartner ringed a conference table in a brownstone on New York’s Upper East Side. They were there to learn how U.S. businesses could develop products more cheaply and quickly by borrowing strategies from India. Speaker Navi Radjou, who heads the recently formed Centre for India & Global Business at England’s Cambridge University, summed up his advice in one word: jugaad.”

As Bajaj previously noted, jugaad is an improvisational style of innovation that was developed primarily because Indian inventors wanted to address pressing needs of those around them but had few resources upon which to draw. Jana claims this process is “how Tata Group, Infosys Technologies, and other Indian corporations have gained international stature.” Jana is so certain that jugaad represents the future that she says the term will likely “enter the lexicon of management consultants, mingling with Six Sigma, total quality, lean, and kaizen, the Japanese term for continuous improvement.” She continues with caution:

“Like previous management concepts, Indian-style innovation could be a fad. Moreover, because jugaad essentially means inexpensive invention on the fly, it can imply cutting corners, disregarding safety, or providing shoddy service. ‘Jugaad means “Somehow, get it done,” even if it involves corruption,’ cautions M.S. Krishnan, a Ross business school professor. ‘Companies have to be careful. They have to pursue jugaad with regulations and ethics in mind.’ The rise of jugaad raises another question: Do companies really need to pay someone to tell them something that’s as elementary as keep it simple?”

In other words, if jugaad is to play a future role in business management, its practitioners are going to have to find a way to balance jugaad’s tendency to cut business corners with the public’s right to buy quality products. Jana continues:

Jugaad seems aligned with the times. Recession-slammed corporations no longer have money to burn on research and development. Likewise, U.S. consumers are trading down to good-enough products and services. Meantime, the Indian economy continues to plow ahead despite the global recession—it grew at a 7.9% clip in the third quarter—suggesting its executives have a winning strategy. Already, companies as varied as Best Buy, Cisco Systems, and Oracle are employing jugaad as they create products and services that are more economical both for supplier and consumer. ‘In today’s challenging times, American companies are forced to learn to operate with Plan Bs,’ notes Radjou. ‘But Indian engineers have long known how to invent with a whole alphabet soup of options that work, are cheap, and can be rolled out instantly. That is jugaad.'”

Jana notes that a number of respected individuals, companies, and institutions are already incorporating jugaad in their curricula.

“Prasad Kaipa, a former manager at Apple’s in-house training university, uses jugaad in the courses he’s teaching at Hyderabad’s Indian School of Business. The University of Michigan’s Ross School of Business, where high-profile Indian-born professor C.K. Prahalad teaches, has opened a research office near Infosys’ headquarters in India so faculty members can observe how Indian software companies come up with ideas. McKinsey consultants have begun talking up jugaad principles with clients, too.”

In a post entitled America’s Competitive Edge, I noted that Amar Bhidé of the Columbia Business School claimed that “what the country needs is better MBAs, not more PhDs.” I remarked that the qualifier “better” is extremely important because “I suspect a lot of Americans believe that it was unprincipled executives with MBAs who betrayed their trust and plunged the world into its worst financial crisis in a generation.” Indian proponents of jugaad are also skeptical of those holding MBAs.

“Top executives at Cisco, which opened what the San Jose (Calif.) company calls a second global headquarters in Bangalore in 2007, are importing the Indian mindset as they meld teams of U.S. engineers with Indian supervisors. ‘The innovation agenda in India is affordability and scale,’ says Wim Elfrink, Cisco’s chief globalization officer, who moved from San Jose to Bangalore in 2007. ‘People are masters of managing costs down, but not creativity. If Indian engineers find out an executive has an MBA, they will say, “Unlearn, and observe.”‘ … ‘Jugaad is an Indian philosophy, but it’s not unique to India,’ Kaipa says. ‘Companies in all parts of the world can learn from it and make it work for them, too.'”

Although I anticipate that India will eventually profit from what has come to be called “reverse innovation,” that is, innovation that flows from developing countries into developed countries, its entrepreneurs will continue to face Sisyphean challenges as long as Indian bureaucracies remain bloated, complex, and inefficient. It’s time for the Indian government to apply a little of the jugaad philosophy on itself.