Professor CK Prahalad said to innovate companies need to fold the future, not extrapolate the past. “We are not suggesting a revolution, we are taking about a planned, directionally consistent evolution. Therefore, we conserve resources and speed up the process of transformation.”
Excerpts from CNBC-TV18 Menaka Doshi’s interview with Professor CK Prahalad:
Q: When, where, and how, if there is at all such a specification in the life of a business, can this whole process of innovation be inculcated? Does it have to be right from the beginning, or somewhere in the middle? How does one decide whether you are ready to be able to inculcate this and what does it take to inculcate this transformation?
A: The starting point of the transformation is for senior leadership to ask a simple question, not what the world is today but where will our competitive landscape be 10-15 years from now? 10 years from now, 15 years old will be our primary customers. What will be their expectations? How will we fulfill those expectations?
The first principal for me is that you cannot go there from here. We have to start from there. In other words, you have to imagine and must have a point of view. If you have a point of view, then the translation is lot easier. So, they say folding the future is what is required, not extrapolating the past.
Second, you must have a point of view, only then can you say that okay, if this is my point of view, I can audit both the managerial and IT capabilities inside my company. Then, I can start by saying I am going to put one building block at a time and establish a milestone. So, I don’t take a big risk, I build one step at a time, but like a marathoner with speed and directionally correct.
We are not suggesting a revolution, we are taking about a planned, directionally consistent evolution. Therefore, we conserve resources and speed up the process of transformation.
Q: The companies that you cite as examples are companies that were able to recognize the change in the competitive landscape 5-10 years ago. The Googles, and Apples realised that technology is not going to be inaccessible to the poor but it is going to become a commonly accessible resource. The digitization of products, convergence, and social networking were things they were able to understand 5-10 years ago.
A: Everybody can recognize it now. But very few companies are figuring out how it will change their business.
Q: But will it still give you the advantage now? Don’t you have to be ahead of the curve?
A: Absolutely. It will give a tremendous advantage. For instance, I sell tyres and have lots of information about you and you have a lot of information about me. Now, when I come to sell the next round, I don’t have to sell you unique tyres. I can now give you a special deal. I know your drivers are very safe, and you only have long hauls. Therefore, I can give you a special deal. In other words, the switching costs for you has gone up, I can retain you much better. If you are selling only tyres on prices like old ware that was a transaction, now this is a relationship.
Q: But weren’t customer relationship managers doing this anyways for 10-20 years?
A: No, there is no way they could have done it. Customer Relationship Management, or CRM, is fundamentally a company’s view of the consumer and not the consumer’s collaborative dialogue. CRM has never been co-creation. That means you are a joint problem solver. Your involvement is as important to me and we jointly create value. We jointly partnership value. So, there is collaboration between the consumer and the company and there is also competition for value appropriation.
Q: You have mentioned the instance of ITC’s e-choupal network in a big way. You have recognised the gap of information and what it can do to the economic lifestyle of a human being and found a product to deliver to them in this space.
A: Suddenly, you find the so-called illiterate farmers checking the Chicago Board of Trade. That is fascinating for me. It is so empowering.
I also want to think about what co-creation does. If I co-create with you as a consumer, I reduce the risk of product development because you are helping me to define it. Since a lot of people are involved in helping me to figure out what it is, it reduces time and investment. Think about risk, time, and investment reduction. That is how you create value.
Q: Three points -- legacy issues, IT infrastructure and managerial talent -- to make in the Enablers of Transformation as you put it in your book and you have quoted a whole host of examples for each one of these. On legacy issues, you spoke of General Motors in the book. Would you like to take us through some of the work that they have probably done to fit your definition of innovation now?
A: Actually GM is a very interesting case. Look at the sheer size of the company; it is a country by itself and global, through acquisitions, wide variety of independence given to the subsidiaries, European subsidiaries versus US versus the far flung operations. If you look at any one time, there are probably 7,000 applications running on different systems. How they consolidate all that is a fascinating problem by itself.
General Motors is the world’s largest auto-maker with nearly 3,00,000 employees. It has launched a company wide drive to redefine its organizational structure. Roles and responsibilities are being shuffled to assure stronger control and management of critical business processes, breaking stereotypes and managers are being shifted from functional and geographic spans of control to global process-oriented roles to drive standardization. It is a step that has helped GM strike up balance between flexibility and efficiency.
When you have had a huge history under a large company like GM, you have to clean up this legacy before you can do many of the things that they are talking about. There is a big lesson for Indian companies. We are now globalizing and acquiring a large number of companies. We are not only going to get mini-cultures and sub-cultures in terms of managerial work, we are also going to get a large number of legacy systems.
The question is how do we put a price on the integrational legacy system, harmonizing these legacy systems and harmonizing the managerial culture.
Q: Implicit in your entire conversation has been the fact that you have to have world class IT infrastructure. It is something that we cannot get away from in today’s business environment. But that is something that you have stressed on again and again in all the logistics examples that you gave, including FedEx and UPS?
A: It has to be real time, event driven and not just transaction driven. That is where it is critical. It must be resilient and change-oriented. Therefore, the cost of the change must be low. It must be able to use the existing legacy system. You can’t throw away all the legacy assets and so how does it get into the legacy systems and bring an upgrade is an important point.
Q: You seem to see a serious lack of innovation in Indian IT. Are you saying they have lost the ability to innovate?
A: No. It is in the context of the ‘power of the dominant’ logic. IT companies have been extraordinarily successful. They have built a business model and changed their business. The underlying strength of innovation in IT has grown from cost arbitrage to quality arbitrage to quality technology arbitrage. Now, it is cost, quality, technology and in some cases innovation.
Q: Are there any instances in Indian IT where you can see efforts to change things?
A: There are some in HCL where you have embedded software building the entire integrated system. We talk about TCS doing the Ferrari deal. Those are very different value-added kind of activities. But still every large company does it. Infosys does it and so does Wipro. They all understand it. Just because everybody understands that the business model is going to be broken in the future, it does not mean all of them have the capability to change the business model ahead of time by design. It is happening slowly. Everybody is trying to get a little bit of consulting help in the front-end to change the business model. Everybody is trying to negotiate a different way of pricing.
But if you don’t change; the IBMs and Accentures are coming to India. They will get the same advantage. The idea is not to say IT companies in this country have lost their innovation advantage. That is not the message at all. The message is that just because you intellectually understand what needs to be done, does not mean it will automatically get operational. There is a gap between an intellectual understanding and an operational change. That is the gap that companies have to learn to bridge.
Q: In the course of the book, you have frequently mentioned three companies while giving instance of how this whole new age of innovation is going to play itself out. What do you think best exemplifies the innovation that you were talking about in companies like ING, ICICI, and Apple?
A: Apple has a unique way of developing software media solutions. It really understands that manufacturing is key, so is software. This is the stuff that makes Apple. The company is into software not hardware, but hardware is a carrier of the software, so people still need a device. The second thing that they have understood very clearly is that they can't do it themselves, so content has to come from a wide variety of people.
Q: Have you been able to distill a philosophy in the organization that allows them to develop?
A: The philosophy is co-creation.
Q: Have they been able to recognize that way ahead of the curve?
A: They use the term co-creation. The underlying philosophy is very clear. It is co-creation and a very user-friendly interface. If you use the i-pod, you will know how user friendly it is because ordinary people can use it and can download. So, in other words it is a very user-friendly interface.
Look at ICICI Bank and the transformation of the company through IT and business process understanding.
At the core of its business, is innovation and driving innovation is technology. The transformation of ICICI Bank from an institutional operation to a sophisticated, fast moving retail banking powerhouse is an outstanding example in capability building. ICICI Bank’s evolutionary business model is based on continuous innovation to offer world-class services at an affordable cost through technology mediated businesses and analytics. It has changed the face of banking in India. Today, with over 600 branches and 3,000 ATMs reaching over 10 million customers, ICICI’s assets are worth over USD 79 billion and is an example of transformation from within at its best.
They try something, if it works they scale like crazy; if it doesn’t work they kill it and that is very much the kind of thing that we are talking about. There is no one person doing it.
Q: Everyone in the company is responsible for doing this?
A: All the senior managers have to do it and all the middle level mangers have to do it. So, they have created a culture of aggressive, ‘we can do it’ macho approach. That is what people see outside. Internally, there is a method to how this happens.
They can make a mistake. The goal is not to say whether they will make a mistake. They have taken a very traditional institutional company in their vibrant innovative retail bank and they are moving globally very rapidly.
Q: While you were studying the strengths, were there any weaknesses that you thought could potentially be a risk to this entire innovating ability?
A: When you grow that rapidly, there are so many people who have to be trained. Somebody somewhere is not going to be compliant, is going to make mistakes, somewhere the business process is going to be broken. All these are risks. But the interesting question is do we slow down or do we keep going and put checks and balances to make sure that that doesn’t happen.
In other words, the risk is inherent in the rapidity of change and scale, incorporating so many new people into the system and building business processes very rapidly. All of them are potential risks.
Q: What is the message to the manager, to be able to inculcate this newly defined process of innovation in his or her team and across an organisation?
A: The best way to phrase is going back to Gandhi. You must be the change that you want to see. That is an important message there. In his own unique way, Gandhi probably captured the spirit of what this book is all about.
If you want to understand this new world, you must be a part of it. For people who are at senior levels of management, 45 year old and above and are not part of this generation, it is natural. Therefore, we have to reinvest in ourselves. To me, I had to do it myself. So, it is not as if I am asking people to do something that I don’t. You have to reinvest in yourself; you have to use these tools. You have to understand how people are evolving and changing and you must have a point of view.
People underestimate how critical this is. Don’t worry too much about everything that can go wrong. Think big and de-risk the change process. Take small steps, learn rapidly, scale fast and then move on. Taking a big risk is not smart, neither is it prudent and nor is it sustainable. Sometimes you can succeed but sometimes you will fail and you cannot compromise the organisation’s vitality. Lastly, engage all people. I have no interest in satisfied consumers or satisfied employees. I want excited consumers and excited employees. Create the excitement of making something bigger than ourselves.