Bhupesh Bhandari: When innovation acquires new meaning

We often associate innovation with a product or a process. Some tinkering with a product or service, or some modification in a process here and there is what we like to call innovation. This is the most commonly understood form of innovation. In the fast-moving times that we live in, this isn’t enough. In the broader sense, innovation has come to mean a change in the business model itself.

Innovation happened, purists will tell you, when Tata Consultancy Services began to offshore information technology, and when Dhirubhai Ambani told his son, Mukesh, that only if he can price a call less than a postcard will his mobile services business have a future. Or when Jack Welch set up call centres at Gurgaon near Delhi to answer queries raised by General Electric customers in the US. Running such call centres in the US was expensive. He saved millions of dollars by moving these to low-cost India. Lalit Modi innovated when he brought cricket and the club format together in the Indian Premier League.

Any change in business model has to result in success for it to be called innovation. Anything new will not qualify as an innovation. Two examples come to mind. More than 10 years ago, Kabir Mulchandani had set the consumer electronics market on fire. He sold at rock-bottom prices and offered his customers unbelievable combos. For a while, he seemed unstoppable. Rivals began to study his model. But the business ran out of steam in a few short years. His business was built on scale and quick rotation of money. This meant that a small hitch somewhere in the chain could derail the whole business. And that’s precisely what happened. It’s also true that the brands he sold — first Akai and Aiwa — did not want to be seen as discount brands.

Capt GR Gopinath started India’s first low-cost airline, Air Deccan. He, it seemed, had all costs under control and had maximised all revenue streams. Amenities to staff and customers were cut, e-tickets were made the norm, and space was sold on the aircraft to advertisers. But the complexities of the business were way beyond what he had imagined and, therefore, Gopinath could not keep a lid on the losses. He eventually had to sell Air Deccan to Vijay Mallya. It is only now that some companies have learnt to tame the animal called budget carriers, and have started to report profits. So, who was the innovator here, Gopinath who came up with the idea of an Indian low-cost airline, or Indigo and SpiceJet which were the first to run low-cost airlines profitably?

The graveyard of ideas that went bust is long. But that is not such a bad thing to happen. Not every idea will succeed, but it will certainly provide insights into how not to do things. Failure is an inalienable part of entrepreneurship. It is the bedrock on which success grows.

On the other hand, there are companies that have successfully written new business scripts. They got it right the first time. Mankind Pharma, for instance, went against the grain and focused on rural markets. While urban markets were cluttered (Every molecule has at least 50 brands; there are over 20,000 registered pharmaceutical companies in the country! What else do you expect?), the rural markets were under-serviced. The process was tedious and the returns were suspect. Still, Mankind Pharma took the plunge. It had a free run in this virgin territory for several years. Bruised and battered in the overseas markets, every large Indian company now wants to follow it. Multinationals too are not far behind. Various contact and delivery models are being worked out.

Indian businessmen, to be sure, are in desperate need of such out-of-the-box thinking. Many of them did overseas acquisitions when money was easy to come by and markets were booming. But the markets began to collapse towards the middle of 2008. The fundamental logic of the business in most cases, as a result, needs to be changed. Production needs to be migrated to low-cost countries like China and India; markets need to be expanded in emerging geographies like BRIC.

In some cases, one can see that happening. Jaguar-Land Rover, under Tata Motors, has successfully hunted for orders in China — the world’s biggest emerging market for luxury cars. The company, in that way, has invested in the future of the marquee brands. Hindalco has moved a Novellis information technology unit from the US to India.

Dr Reddy’s Labs acquired Betapharm of Germany in 2006 for 480 million euros. It remains to date the largest overseas acquisition by an Indian pharmaceutical company, and there have been dozens in the last few years. Production by third-party vendors was expensive. So, Dr Reddy’s has moved almost 30 per cent production to India. More important, to keep health-care costs low, Germany has moved to a tender-based system — whoever quotes the lowest, gets the order. This has brought prices there crashing down. It remains to be seen how Dr Reddy’s can live with this complexity. It’s not an easy task.