Monday, December 31, 2007

The Chinese currency (appreciation) issue

On July 21 2005, China announced that its currency (renminbi/yuan) will no longer be pegged to the US dollar. The exchange rate on that day was 8.11 yuan to a dollar. On Dec 31 2007, the exchange rate was 7.3 yuan to a dollar. Thus, the yuan appreciated about 11% in two and a half years. The yuan rose about 1% just this week alone.

But the United States and other trading partners are still pushing for a faster rise, saying a weak yuan is contributing to China's bulging trade surplus by making Chinese exports cheaper and more competitive.

The strong yuan causes potential problems for the Chinese exporters – since it will cost more for the (US/external) importers. However, a strong yuan (by letting in more imports at a cheaper price) keeps down inflation. However, the Consumer Price Index (CPI) was about 7% higher than last year. Thus the rising inflation makes it much easier for the Chinese government to accept a stronger yuan.

However, the Chinese exporters do not like the strong yuan. Local politicians are also concerned about social issues if the exporters start laying off workers due to hit on margins.

Meanwhile China’s central bank governor Zhou Xiaochuan has stated that he will implement a tight monetary policy in 2008 using a range of tools to keep a check on liquidity. The central bank has increased interest rate 6 times in 2007 to check excess liquidity and inflation.

It will be interesting to see the Chinese dance on holding/appreciation of the yuan. They will do well to avoid the case of “Dutch disease”. The term “Dutch disease” was coined in 1977 by the Economist and it refers to episodes where large inflows of foreign exchange—usually as a result of the discovery of natural resources or massive foreign investment—leads to appreciation of the currency, undermining a country's traditional export industries. ("Dutch disease" originally referred to the adverse impact of the discovery of natural-gas deposits in the Netherlands on that country's manufacturing exports).

India is also in a similar situation with respect to the appreciation of its currency (Rupee). A report released by Goldman Sachs states that the appreciation in rupee will continue to put a downward pressure on inflation, which is forecast to stay around 4.4 per cent in 2008. Let’s see how the 2 countries deal with the currency issue (appreciation) in 2008.

Sunday, December 30, 2007

(Lack of) Branding among Asian companies

Consider this – Asia comprises of 4 billion people which is about 60% of the world population. On an average, the Asian economy is growing at 8% as compared the 3% in the United States & Europe. Over the last 25 years, the high-tech exports of the United States dropped from 31% to 18% while exports from the Asian countries increased from 7% to 25%.

However, if you look at the top 100 global brands, only 11 Asian companies find a spot (per Interbrand and BusinessWeek ratings) (Toyota at #7 was the top ranked Asian company). Professor Amitava Chattopadhyay of INSEAD(see footnote) says that history explains part of that reason. Historically, the wealthy folks in the Asian countries went for higher studies to Western Countries and flaunted Western brands. Relatively speaking, it is only in recent years that local Asian brands have had respectability and some semblance of parity with their Western counterparts.

Traditionally, branding has received step motherly treatment within Asia. He states that Asian companies have traditionally focused on operations, technology and manufacturing but have not spent enough attention on marketing. But now Asia has achieved critical mass – due to economic growth, availability of disposable income and creation of a larger consumer class.

The companies need to instill the brand values and meaning within its employees and also engage in educating the outside ecosystem (consumers, suppliers, partners, etc). Another example is that if you look at the website of a Western (Europe, United States) company, they provide the bios of their executive management team. However, in contrast (till a few years ago) many Asian companies used to shy away from providing detailed bios of their management team. Not sure why? This is changing now, but companies need to celebrate and highlight the strength of their management team. Another positive change is that (large) family run businesses are now getting in professional management into their companies.

However, getting to be the top brand will not be an easy challenge – since historically consumers have held Western brands in high esteem. The Asian challengers will need to make a concerted effort to claim a spot at the top.

INSEAD (pronounced IN-SEE-ADD) is a leading graduate business school and research institution with campuses in Fontainebleau (near Paris), France and in Singapore. In 2006, an INSEAD Executive Education centre was inaugurated in Abu Dhabi.

Friday, December 28, 2007

Should you fire your worst customer(s)?

Conventional wisdom reminded us “The customer is always right”. Companies went to great lengths to placate customers and bent over backwards to achieve high customer satisfaction scores.

Then, in the 1990’s the science of CRM (Customer Relationship Management) highlighted the differentiation (of cost vs. revenue) across different customer sections (via customer segmentation). CRM depicted clearly how different customer segments had varied costs (to serve) and revenues – which were not necessarily proportional. While this was probably known at an abstract level, CRM provided tools and techniques to measure the cost to serve a particular customer segment as well as the corresponding revenues.

This led to the realization that the lowest value customer(s) were at times very expensive to serve. The cost to serve them far outweighed the benefits and sometimes they would drain the company’s scare resources. This caused companies to look carefully on whether they should keep or fire those customers. Recently, Sprint fired a small section of its customers who were disproportionately calling customer service.

Read this letter that Sprint sent out in June 2007 firing low-value (high-nuisance) customers

Brad Anderson, CEO of Best Buy publicly stated that he wanted to separate the “angels” among his 1.5 million daily customers from the ‘devils”.

However, recent research by Professors at the Wharton School arrives at a different point of view. They argue via empirical (market) data and theoretical models (applied game theory, Nash equilibrium) that firing customers may not necessarily be a good idea. They state that firing low-value customers may actually decrease firm profits and that trying to increase the value of these customers may be counterproductive. This is a certainly a contrarian view.

However, they do agree that companies need to provide differentiated service to various customer segments (e.g. provide high-touch to high-value customers). They do agree with the concept of Customer Value Management (CVM) – to maximize the lifetime profitability of your customer base. They say that if you fire your low-value customers, it provides competitors with an easy target (to go after your existing customers who they know are high-value customers). They say that if you make low-value customers more valuable, this can also be counter-productive because it also encourages your competitors to poach more intensely.

Their research states that the optimal solution is to keep the high-end customers and at the same time keep the low-value customer but find cheaper, better ways to manage them (self service, etc). You have to keep your competition confused about who your good and bad customers are.

I agree that there is a case to be made for firing low-value customers. However, this new research does offer a strong point of view – to NOT fire low-value customers. This is especially true in a highly competitive market – where firms are on the lookout to poach customers. So, the next time your boss asks you to fire a low-value customer – do consider this contrarian view.

Tuesday, December 25, 2007

Prof Bala Balachandran

Brief Background
Prof Bala Balachandran was my Professor during the Executive MBA program at the Kellogg School of Management. He is based out of Chicago but travels around the world frequently. I have gotten to know him over the last 2 years. I also had a chance to catch up with him in Chennai last December on a business trip.

He is on the Boards of several Indian companies including Godrej and CRISIL. He is also Chairman of the Board of ALLSEC Technologies – a global consulting and call center company with over 2,400 professionals headquartered in Chennai and operating in New Jersey, India, and Jamaica. Prof Balachandran has been honored with the prestigious Padmashri Award, one of the highest honors bestowed by Government of India for Excellence in Education and Literature. He is also the founder of the Great Lakes Institute of Management, a global business school, in Chennai, India.

His first foray in Indian management schools first started in 1991 – when he created the management program at Management Development Institute (MDI) in Gurgaon. Then, around 1997 he played a major role in forming the Indian School of Business (ISB) in Hyderabad along with Rajat Gupta (then CEO of McKinsey). Finally, he founded the Great Lakes Institute of Management in Chennai in 2004.

Dr Bala’s MBA School - Great Lakes Institute of Management
Great Lakes has several luminaries on its advisory board. Ratan Tata, Madhur Bajaj, Kumaramangalam Birla, G.P. Goenka, Indira Nooyi -CEO of Pepsi, Narayana Murthy of Infosys, Deepak Parekh - Chairman of HDFC, S Ramadorai - CEO of TCS, Ravi Venkatesan - Chairman of Microsoft India are on the advisory board of the school. He is also closely associated with President Jimmy Carter in the "Habitat for Humanity" program.

His students at Great Lakes call him “Uncle Bala”. Dr Bala states that the school is innovative in its approach to education
a) The curriculum requires students to work closely with NGO’s – thus nurturing corporate social responsibility
b) There are horizontal (marketing, finance, etc) and vertical (industry) specializations. Finance in a family run business is different than Finance in an investment bank
c) Emphasis on applied (empirical) research
d) Students learn Chinese as part of the course. Dr Bala recognizes that China is growing into a powerful force and is preparing students to be ready to take advantage of opportunities
e) He ensures that Professors have a good blend of teaching, consulting and research (publishing papers)

His views
Prof Bala is a fan of the partha system. Partha is a system of accounting that was developed in Marwari culture that permeated many Indian businesses, and its principles still influence the accounting and financial structure of Birla (mega Indian business house). Partha is a manual system to determine input costs and the daily cash flows. In 2001, Kumar Mangalam Birla (8th youngest billionaire outside of India with a net worth of $9 billion) hired the Boston Consulting Group (BCG) to install its Cash flow Return on Investment (CFROI) metric, which functions as a kind of computer-spreadsheet era version of partha.

Prof Bala states that he likes the partha system since many times companies with excellent bottom line, great EPS fool experts because they fail to notice the horrible cash flow issues. Partha catches that right upfront.

He mentions that generally people measure costs, manage costs and execute process improvements. He states that they should go further and use cost as a weapon for supremacy or leadership. Cost has to be understood to find opportunities and uncover risks where one is vulnerable. Of course one needs to look to increase top line (revenues) as well – however, if one does not understand their cost structure and its allocations (fixed, variable, direct, indirect) across the various product lines – it would severely restrict growth or cause the company to fold. He says when it comes to strategic cost management, the need is to identify various business drivers like value drivers, revenue drivers and cost drivers.

His plans
At over 70 plus years, Dr Bala is a man in a hurry. He teaches at Kellogg and is also very involved with Great Lakes. He is always on the move. He is eager to move Great Lakes into the bigger 18 acre facility – that will be ready in 2008.

Finally, I have been invited by Dr Bala to give a talk at his business management school (Great Lakes). I am absolutely delighted and honored by this offer. I do plan to give a talk during my next visit to India – sometime in 2008.

Monday, December 24, 2007

The Kellogg team in India

I met up with Dean Dipak Jain and the entire Kellogg Alumni Advisory Board in Mumbai, India in early January 2007. Dean Jain brought about 60 members of the Kellogg Alumni Advisory Board on a week long India trip. Senior Associate Dean Kathleen Hagerty and Associate Dean Roger "Whit" Shepard also accompanied them. They spent 3 days in Hyderabad, a day in Mumbai and a couple of days in Delhi where they caught up with the Indian Prime Minister – Mr. Manmohan Singh. Sanjay Shroff – Kellogg alum from Bangalore did a terrific job co-coordinating the trip for the team.

My brother (who works for an investment firm in Mumbai) and I caught up with the team in Mumbai. We had a quick breakfast at the Taj Hotel in South Bombay. From there, we went to the HSBC office that was about 10 minutes away. Mr. Subir Mehra – Head of Commercial Banking at HSBC (also Kellogg alum) greeted us and gave us a presentation about his group. He was followed by 2 other Kellogg alums - Siva Ramamoorthy (Director Sales & Marketing – Intel) and Vinod Dasari (COO of Ashok Leyland) who presented their companies plans with the backdrop of India’s tremendous growth opportunities. I wanted to invite a good friend and an alum - Peter Mukerjea (then CEO of Star TV India), but he was vacationing in Australia at that time.

From there, we proceeded to the star event of the day – lunch meeting with Mr. Mukesh Ambani (ranked #14 richest by Forbes – with a net worth of $20 billion). See link for details

We arrived at the Reliance (Mr. Ambani’s company) world headquarters in Nariman Point. His head of business development provided a brief overview of the company’s operations and history. After that, walked in Mr. Ambani. He was dressed in a simple white shirt and dark pants. He then proceeded with a short presentation of his company’s growth plans and his vision of establishing a retail division. The retail story is incredible because he is not just planning to build retail stores, but in-fact also backward integration with distribution channels, transportation, and logistics all the way to the farmer in the field. People who have followed the Ambanis’ know that when they take up a project, they do a fantastic job in setting new quality standards. He then took a few questions. After that, he posed for a group photo. See link here – my brother and I are at the back row.

The team rested at the Taj hotel in the afternoon and then around 4:30 pm boarded 2 buses that took us to the TCS (Tata Consultancy Services) facility in Andheri. The trek was from the southern part of Bombay to the western suburbs. It was a huge sprawling campus which was very surprising (in a place like Mumbai where real estate is premium). The CEO of TCS, Mr. S Ramadorai and his leadership team hosted a dinner for us. Mr. Firdose Vandrevala (who was the CEO of Motorola India & Tata Power and now Chairman & MD of the Hiranandani group's real estate firm Hirco) also attended the dinner reception.

We finished dinner around 10:30 pm and then headed back home. It was certainly an honor to be in the company of those folks. The Kellogg team from the US seemed to have a great time in India (almost all of them had never been to India before). I am sure they carried warm memories of this trip. I certainly cherished this day with my fellow Kellogg compatriots. Dean Jain and Sanjay Shroff organized the event extremely well. The following day, they met up with the Prime Minister – Mr. Manmohan Singh in New Delhi.

Sunday, December 23, 2007

The Law of Large Numbers - Gambler's fallacy

The “Law of Large Numbers” (a.k.a. Bernoulli's law) is a statistical theorem that is defined as follows - The average of a large number of independent measurements of a random quantity tends toward the theoretical average of that quantity.

Simply stated, the law of large numbers states that if you repeat a random experiment, such as tossing a coin or rolling a die, many, many, many times, your outcomes should on average be equal to the theoretical average.

If you toss a “fair coin”, there is a 50% chance that it would be heads. However, it does not necessarily mean that if you toss the coin 2 times, you will get heads one time. However, if you repeat this experiment many, many times – you should get closer to 50% (number of times you get heads).

Mathematician John Kerrich tossed a coin 10,000 times while interned in a prison camp in Denmark during World War II. At various stages of the experiment, the relative frequency would climb or fall below the theoretical probability of 0.5, but as the number of tosses increased, the relative frequency tended to vary less and stay near 0.5, or 50 percent.

Insurance companies rely on this theorem. Out of a large group of policyholders the insurance company can fairly accurately predict not by name but by number, the number of policyholders who will suffer a loss. In other words, the more cars you insure, the more accurately you can predict the number of cars likely to be stolen. However, note that the individual policyholder cannot accurately predict (whether he will be in an accident this year or not).

Casinos also use this principle. The gambler's fallacy, also known as the Monte Carlo fallacy, is the false belief that odds increase or decrease depending upon recent occurrences. So, if black has come up 5 times in succession at a roulette table, the gambler is almost sure that the next one is red to even out the pattern. As discussed earlier, while it is true that the pattern will even out in the “long” run, it may not be necessarily true in the “short” run. Casinos take advantage of it (since they have the advantage of the long run).

Another area of confusion is how large is “large”? Is it 100 samples or 1000 samples or 10,000 samples? The technical definition is closer to infinity. However, from a practical standpoint, it is subjective and depends on the circumstance and the span of control.

A key statement to be understood is “A chance event is uninfluenced by the events which have gone before”. A coin toss, rolling a die, roulette is a game of independent trials. While using “samples” is certainly an effective statistical technique, be aware of the effect of the “Law of Large Numbers”. Do not fall prey to the gambler’s fallacy.

Saturday, December 22, 2007

The lunch carrier in Bombay - a lesson in management

Dabbawalas, (a person who carries lunch) in Bombay, India is a group of people carrying and delivering freshly made food from home in lunch boxes to office workers. Though the work sounds simple, it is actually a highly specialized trade that is over a century old and which has become integral to Bombay’s culture.

I have personally used this service while I used to live in Bombay several years ago. It may be a bit hard for folks to understand why it is “unique”, but once you understand the challenges of the daily office going worker (and the chaos in the trains) – you will appreciate this.

The dabbawala originated when India was under British rule: many British people who came to the colony didn't like the local food, so a service was set up to bring lunch to these people in their workplace straight from their home. Nowadays, Indian office-goers are the main customers for the dabbawalas.

At about 20,000 people per square kilometer, Bombay is India's most densely populated city with a huge flow of traffic. Because of this, lengthy commutes to workplaces are common, with many workers traveling by train. Riding in a local train is nothing short of an adventure. About 6 million people use the trains daily. Forget getting a seat – one would consider it lucky even if one has space to hang out of a moving train. The main mode of transport for the Dabbawala is the train. They have to maneuver the crowd every day – twice – once to deliver the food to the office, and then to return the container back to home.

See this link to get a glimpse of travel in a train in Bombay

They carry lunch in a cylindrical aluminum container. Instead of going home for lunch or paying for a meal in a café, many office workers have a cooked meal sent from home - essentially delivering the meal in lunch boxes and then having the lunch boxes collected and re-sent the next day. This is done for a small monthly fee. The meal is cooked in the morning and sent in lunch boxes carried by dabbawalas, who have a complex association and hierarchy across the city.

A collecting dabbawala, usually on bicycle, collects containers from homes. The containers have some sort of distinguishing mark on them, such as a color or symbol (most dabbawalas are illiterate).

The dabbawala then takes them to a designated sorting place, where he and other collecting dabbawalas sort (and sometimes bundle) the lunch boxes into groups. The grouped boxes are put in the coaches of trains, with markings to identify the destination of the box (usually there is a designated car for the boxes). The markings include the rail station to unload the boxes and the building address where the box has to be delivered.

At each railway station, boxes are handed over to a local dabbawala, who delivers them. The empty boxes, after lunch, are again collected and sent back to the respective houses.

More than 175,000-200,000 lunches get moved every day by an estimated 4,500-5,000 dabbawalas, all with an extremely small nominal fee and with utmost punctuality. Forbes magazine gave a Six Sigma performance rating for the precision of dabbawalas (one mistake per 8 million deliveries).

The BBC has produced a documentary on Dabbawalas, and Prince Charles, during his visit to India, visited them (he had to fit in with their schedule, since their timing was too precise to permit any flexibility). Owing to the tremendous publicity, some of the dabbawalas were invited to give guest lectures in top business schools of India, which is very unusual. Most remarkably, the success of the dabbawala trade has involved no modern technology.

The service is uninterrupted even on the days of extreme weather, such as Bombay’s characteristic monsoons. The local dabbawalas at the receiving and the sending ends are known to the customers personally, so that there is no question of lack of trust. Also, they are well accustomed to the local areas they cater to, which allows them to access any destination with ease. In fact, I recall an incident – when I reached office around 1 pm – due to traffic challenges caused by incessant rains – and was surprised to see my lunch container sitting on my table (it reached at the usual time of 11:30 am).

The secret to their success is lies in collaboration between team members with a high level of technical efficiency in logistics management. They follow some simple concepts effectively.

· Consistency - Whatever the food, it must all go within the standard container. No exceptions allowed. This helps them streamline their process in terms of delivery and handoff

· They adhere to low-cost (their charges are extremely low), excellent response-time (always punctual) and predictable quality (the food is not messed up). They DO NOT try customization/variety (meaning offering the flexibility to send items that do not fit in the container, temperature sensitive, etc)

The new Financial Power Brokers in the World

The Dec 2007 article by McKinsey outlines the world's new financial power brokers. In summary

a) The new financial power brokers are oil-rich countries, Asian Central banks, hedge funds and Private Equity firms. Their assets have tripled since 2000. Even though it constitutes only 5% of the total global assets, their rise over the last 5 years has been astounding.

b) The 4 entities (oil-rich countries, Asian Central banks, hedge funds and Private Equity firms – in that order) have helped lower the cost of capital for borrowers around the world. In the United States, it is estimated that long-term interest rates are as much as 0.75 of a percentage point lower thanks to purchases of US fixed-income securities by Asian central banks and petrodollar investors—$435 billion of net purchases in 2006 alone.

c) At the end of 2006, the oil exporters collectively owned $3.4 trillion to $3.8 trillion in foreign financial assets. Second in size to petrodollars are the reserves of Asia's central banks. In 2006, Asia's central banks held $3.1 trillion in foreign-reserve assets, 64 percent of the global total and nearly three times the amount they held in 2000. China alone had amassed around $1.4 trillion in reserves by mid-2007.

d) Hedge funds have added to global liquidity through high trading turnovers and investments in credit derivatives, which allow banks to shift credit risk off their balance sheets and to originate more loans. Private-equity firms are having a disproportionate impact on corporate governance through leverage-fueled takeovers and subsequent restructurings.

Net/net - Regardless of whether interest rates rise or oil prices drop, the four new power brokers will continue to grow and shape the future development of capital markets. In particular pay close attention to the Middle East. The Gulf Cooperation Council (GCC) states—Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates (UAE)—are the largest oil exporters. Recently, an Abu Dhabi based fund bought 5% stake in Citigroup. Dubai has reinvented itself as a financial powerhouse not just dependent on oil. Since the Gulf is situated between Asia and Europe, it is becoming a hub for travel and logistics.

Taking this to the next level, I predict that the Gulf would be a major source of opportunity for software vendors - since development in economic areas would necessitate software automation and streamlining of processes. The other 2 areas for software vendors are India and China - due to the sustained high rate of growth.

See some interesting videos about Dubai
CBS 60 minutes - Part 1 (the cheapest room at the Burj-al-Arab hotel is $2000 a night)

CBS 60 minutes - Part 2

A nice report by Richard Edelman - CEO of Edelman PR firm

Tuesday, December 18, 2007

Need an urgent reservation at a fancy restaurant?

You need to take your client or your date to Nobu, Lupa or Gramercy Tavern on Friday night? Need to take your friends to Le Bernardin this Saturday? You called these places and there are no reservations. Don't worry. PrimeTimeTables ( ) might be your answer.

For about $40 (approx) a reservation, service providers like PrimeTimeTables and will provide you reservations at fancy upscale restaurants.

Essentially, these providers capitalize on the arbitrage opportunity available (restaurants make reservations, but do not penalize no-shows). They make reservations under fictitious names well in advance and then sell that to the public. Once you purchase the reservation, you are provided with a pseudonym that you will need to use for your reservation.

Since restaurants usually experience an average of 30% no-shows, it is to their benefit to ensure a full house. The customer who is in a rush and is willing to pay a premium is assured of his/her reservation. By providing this service, PrimeTimeTables also makes a nice commission. Seems like a win-win all around - although some people do not like the idea of using "fictitious names".

Forgetting the moral side of the equation, it is an excellent lesson in Economics 101. Since the restaurant does not charge a penalty for no-shows and it hurts them (in case of a slow day/evening), the arbitrageur (PrimeTimeTables) finds the next available customer for the restaurant for a fee. As more of these providers come up, it would cause their fees to go down (price war). Also, it might become an issue for the “legitimate customer” to get reservations – since these providers would grab more and more of the reservations.

But till then, we can make an advance reservation ourselves at Nobu or go to PrimeTimeTables!!!

Monday, December 17, 2007

The challenges of innovation

Innovation has been defined in various ways – invention, new idea, how to do more with less, cost reduction, new market entry, new usage of a current idea, etc. Then, there are various types of innovation – social, process, marketing, supply chain, financial, product, service, disruptive, etc.

In pure economic terms, the change (innovation) must increase value (for the company, customer) through a combination of variables (revenue, cost, etc). According to Regis Cabral “Innovation is a new element introduced in the network which changes, even if momentarily, the costs of transactions between at least two actors, elements or nodes, in the network”. Here, Cabral is talking about reduction on the cost side. An example is Wal-Mart squeezing efficiencies in supply-chain logistics (with its suppliers) – thereby reducing cost. There is also a revenue side story about innovation. Think of the Apple ipod – and the revenue side becomes clear. Innovation encompasses areas outside the supply pushed (due to technical possibilities) or demand-led (based on customer need). Especially, disruptive innovation like the Internet changes the rules of the game (and in some cases changes the game itself).

What can companies do to stay ahead of the innovation curve?
As they say, “even though every company has sales reps, selling is everybody’s responsibility”. In other word’s, even folks outside of the Sales function have a responsibility in selling/pitching their company’s products and services. While they (non-sales folks) may not actively engage in the selling process, they must be ready to outline their firm’s value proposition and differentiators.

In the same vein, innovation is not just the responsibility of the “R&D” department. While the “R&D” department’s focus is on innovation, it does NOT absolve others of their responsibility in driving innovation across the organization. The days of simply relying on R&D to come up with the next wave of products/services is the thing of the past. With the advent of the Internet, free-flowing information and the fast pace of change, every person within the firm be empowered to contribute his/her share in the innovation life-cycle.

Companies that do not realize this are wasting precious human assets by under-utilizing them. However, it is not just enough to recognize that each person can contribute (many a times disproportionately) to breakthrough innovation. Companies need to provide structure (framework) and the freedom to encourage fresh ideas/experimentation, provide an opportunity to incubate them and eventually capitalize on the ideas that are ready for action.

In his book “The Future of Management”, Gary Hamel outlines the success of 3 highly innovative companies – Google, Whole Foods and W.L.Gore (makers of Gore-Tex). Whole Foods breaks down traditional hierarchies and gives authority (as well as responsibility) to each store to perform and exceed targets. Since the team is accountable, they self-manage. An example is a new hire is vetted by the entire team before confirmation. The team knows that if it picks a “slacker”, its performance will be down and as a result, everyone suffers. In the 15 years following its IPO in 1992, the company’s stock price rose by nearly 3000 %, dramatically outperforming its grocery-sector rivals. Between 2002 and 2007, its same-store sales growth averaged 11% per annum, nearly three times its industry average. W.L.Gore believes and practices a flat organization. People work in teams. Its structure is similar to lattice than a ladder. Senior folks don’t appoint juniors; instead the team nominates “leaders”. At its core, Gore is a marketplace for ideas, where idea champions compete for time of the company’s most talented individuals, and where associates eager to work on something new vie for the chance to join a promising project. Gore is a highly successful $2 billion privately held company. Google needs no introduction about its massive success. Most of us have heard about the fact that Google encourages its employees to spend 20% time on projects that they are passionate about (that are not in their job description). The culture supports experimentation, small teams and a flat organization. In short, innovation happens at every level and touches each employee. For a detailed description of innovation at these 3 firms, read “The Future of Management” by Gary Hamel (Chapter 4, 5, 6). Or view this link

Companies need to encourage each employee to think “innovation”. Innovation is not the birth-right of executive management or the “R&D” department. In many cases, they are (many a times) so far removed from the “grinds of every-day battles”, that unless they engage with the field at a close level, they may miss the innovation bus. While every organization may not be able to change itself into a flat organization like Gore, they can at least ensure that they encourage their employees to share radical ideas and provide a “safe” environment to do that. The companies of tomorrow will be the ones where front-line workers collaborate with customers, suppliers, partners and provide feedback on the trends they see to the organization which in turn provides a sound platform to take it to the next level.

While the “R&D” department will still continue to exist, innovation will no longer be its exclusive ownership. Rather, firms that provides and encourages employees at all levels to think and outthink the competition and then takes steps to execute those ideas will be the winners of tomorrow. As William Pollard said “Learning and innovation go hand in hand. The arrogance of success is to think that what you did yesterday will be sufficient for tomorrow”. So, go out there, create an open environment that encourages employees to think up innovative ideas and have a structure in place that selects the best ideas, incubates them and makes it ready for prime time.