In my last post in this series I had suggested that the enterprise software industry is being forced to embrace the “lean” model requiring two separate strategy responses. The first is a reflexive response of consolidation and preservation. The second is a considered response of leveraging the lean model to build out a new business at the bottom-of-the-pyramid. This second strategy response is hard to do. And the IT industry is not doing it.
Building a new business at the bottom-of-the-pyramid requires incubating new products or business models in emerging markets. Why is in-market incubation so hard to do?
Inertia is the first culprit. After all, product and business model incubation has traditionally been a head office responsibility. In recent years, people have developed enormous faith around this common practice and have, in my view mistakenly, elevated it to a fundamental tenet of doing business. In doing so they have ignored the stories that offer a different data point. For instance, you don’t hear much about the fact that IBM PC was cooked in Florida, HP printers happened in Vancouver, or that Intel Celeron came out of Israel. Contrary to the head-office supremacy theory, the reality is that when a company is working on something distinctly different to its current DNA, there is an advantage in not being in the head office.
Changing ocean currents
The second culprit is unique to the IT industry. It is the ‘next-big-thing’ cycle. The industry has been enormously successful in picking the next-big-thing – it could be client-server computing, wireless LANs, grid computing, you name it – and having the customers follow suit. This next-big-thing would usually ignite a new market, create multiple new businesses and change the industry order. Just like the Atlantic current keeps Europe warm, this next-big-thing cycle has kept the IT industry hot.
Every major next-big-thing cycle has resulted in IT’s share of capex in US going up. It’s gone from 17% in 1960 to 46% in 2001. Now that IT accounts for about 50% of all capex spend in US, it can’t go much higher. So the rate of growth of IT spend is converging with GDP growth. The old ocean current that kept the industry hot is changing. You can describe this change in many ways: some say that the industry is maturing; other say that things have become good enough. All this points to a basic fact that the industry has to now learn a new game of getting market-led growth rather than technology-push growth.
Learning the new game
Frankly the IT industry has to look outside to learn the new game. What better place to learn than from GE. Jeffrey Immelt had a great interview in HBR recently which gives an insight into what’s going on there. The whole interview is available at the GE site here, but I would like to quote some key parts (underlined emphasis is mine):
Let’s move on to globalization, another part of your growth process. I’m struck by something I’ve heard your executives say—that developing a product for Malaysia or India can’t happen through “defeaturization.” The right solution is not an American product stripped down to meet an Indian price, but a truly Indian product designed from the ground up to carry an Indian price.
It’s a big change in orientation, and we talk a lot about it—but to be candid, it’s still mostly aspirational. This year we put together a team of 25 people from across the company to figure out what it takes to go from a defeaturing mind-set to a customer optimization mind-set. When we have our growth playbook session (our old S-1 process) this summer, that is going to be a prominent part of it. So when Dave Calhoun, for example, gets up to talk about the infrastructure business, he’s going to have to say, “Here’s what I have to do in infrastructure to have more developing-market interplay.” Maybe for aircraft engines it won’t be much, but in energy or water, it’s going to be a big deal. We’re putting 50 people on the ground in India to help with the “1 lakh car” [a vehicle that will cost customers 100,000 rupees, or roughly $2,250] that Ratan Tata is behind. The assumption is that it will be made of plastic, so it could mean a lot to our plastics business. This may be my hottest topic right now. We can’t develop CT scanners in Milwaukee for China; we’ve got to develop them in China.
And if the Chinese customer is different from the Indian customer, is different from the North American customer—
So be it.
What makes local product development so hard? Or, to look at it another way, what do you think the components of the solution are?
There are at least three pieces. It’s different people. It’s funding differently—taking money out of the United States and western Europe and allowing people to spend it in their own regions so that they can really optimize it. And it’s about being better at adaptable and low-cost manufacturing. So, coming out of this study, we’ll make some decisions on people and where they go, we’ll change some funding, and then, as part of our growth playbook, we want to come up with ten emerging-market products. We want to do a $500,000 MRI machine that is a step function different from anything we’ve ever made. We also want to make a village-level desalination product. Right now, if you’re Algeria and you’re going to drop $2 billion into the most sophisticated desalination plant in the world, we’ve got that covered. What we don’t have is a $35,000 municipal water system that can be deployed easily. Investors who don’t know the reality of the developing world see this kind of thinking and say, “God, this is risky.” And I say, “You want to see something risky, try selling a lightbulb to a big-box retailer.” I think we can get a 45% to 50% contribution margin on a product like this if we design it there, if we make it there, and if it never gets touched by someone in Milwaukee or someplace far away like that. It needs to leverage global technology, but it’s got to be in the market and of the market.
What are they doing? They are changing two related things. First they are focusing on the bottom-of-the-pyramid opportunities, and, second, they are incubating the new products or business models in-market and not in head-office.
Same prescription, different doctor
IT industry needs the same prescription. In fact, I would say that in some ways the industry is at a fortuitous place. For instance, the enterprise software industry can use the emerging lean model as an invitation to develop the bottom-of-the-pyramid opportunities. If it does that it will get ahead of the curve.
But can the traditional firms, spoilt by the next-big-thing-cycle and a false sense of tradition that worships the head office, break free? I think they can. But who said orbit change is easy?
Previous articles in this series:
Anatomy of New Growth in India
Another Reason to Not Ignore Emerging Markets
Later article in this series:
Likely OLPC Lessons
[Growth Anatomy Series Roundup is here]
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