Indian Innovation: Driving Differentiation
Successful companies need to create a sustainable advantage and superior value for customers relative to the competition. Generally this implies creating more value to customers at comparable cost, comparable value at lower cost and hence lower price, or both. In some sense, focus on operational efficiency and aggressive leverage of factor cost advantages (e.g., lower cost of labor, land, electricity, etc.) seems to be the natural way forward for emerging economies as the examples of Germany in the mid-nineteenth century and contemporary China have shown.
India is different. Besides a strong focus on operational efficiency to earn the right to play, Indian companies simultaneously drive innovation. How innovation in India is played out varies. Business model innovation, application innovation (apply existing products and technologies for innovative uses) and product cost innovation (frugal engineering) are the prominent forms that we at Roland Berger have come across in our interactions in this country. Real technological breakthroughs are possible and are happening in India. Significant impact in this area may, however, require a closer cooperation between industry and academia as well as a major quality improvement in tertiary education in the country.
The innovation focus of companies operating in India and their need for a differentiated value proposition stems from the compulsion to compete in higher-margin businesses. India's government-specific advantages (GSAs) are relatively weaker than those of comparable nations such as China. In terms of country-specific advantages (CSA), India had little advantage in terms of blue-collar labor over most of the last two to three decades due to higher cost and stricter labor law regulations. White-collar labor, particularly in IT-related services, provided a much better CSA to Indian companies than pure manufacturing. Firm-specific advantages (FSA), i.e., firm-level assets and capabilities that contribute to competitive advantage, are probably India's strong point, as successful Indian companies have had to overcome significant challenges in their environment. With this background, a purely operational excellence, low-cost labor, manufacturing-focused strategy is out of the question since CSAs and GSAs prevent Indian companies from reaching the same cost position as, for example, Chinese companies.
Fundamental research has negligible relevance in an Indian context. The weakness of India's tertiary education results in challenges regarding the quality (not the quantity) of qualified labor. Most universities are driven more by internal politics than by the desire to foster knowledge. The results are visible in simple, indicative output measures. The number of peer-reviewed articles in engineering increased five-fold in China between 2000 and 2010, but only doubled in India during the same period. The same picture emerges when we consider patenting activities as a proxy for the capacity of research institutions to drive applied research. In 2010, India produced less than one patent per 1000 faculty members, trailing her East Asian neighbor by a factor of 160. Both on the education and innovation front, companies desire better cooperation with academia.
India's forte, "Frugal Innovation", i.e., the capability to deliver customer-centric value-add at an acceptable price point, is relevant in India as well as in emerging and sub-segments of developed markets. Frugal innovation is a structured innovation process that clearly focuses on delivering customer value at predetermined price points. Resource constraints and the desire to open untapped markets to products and services via adequate price points and acceptable value-for-money propositions are at the heart of the frugal innovation movement. Key frugal players such as Godrej, Tata, Hindustan Unilever, and Husk Power Systems, as well as global giants (e.g., Siemens), leverage their frugal engineering capabilities to develop new market segments in the country and beyond.
In addition, global MNCs leverage India aggressively as a hub for global R&D with companies such as Bosch, Mercedes-Benz, Honeywell and GE housing the largest R&D centers outside of their home locations in cities such as Bangalore, Pune, Delhi or Mumbai. Here, "India Inside" innovation is vital for the parent companies' global success as witnessed by more than 200 patents yearly that are coming out of the Mercedes-Benz R&D center alone.
Lastly, the impressive success of India's startup and incubator ecosystem is being noticed globally. India today is the world's third largest start-up ecosystem with work happening not only in aggregation of customer demand or B2C but also in artificial intelligence, deep learning, automated guided vehicles, unmanned aerial vehicles, etc. Venture capitalists and angel investors around the globe have trained their sights on India and are scouting for the next big thing. Large multinational corporations are not sitting back either. In an era where competitive advantage is short-lived and companies need to constantly innovate to stay ahead, engaging with start-ups provides a way to connect with the latest in innovation and thinking.
Clearly, Indian innovation has matured and continues to support the success of Indian companies within India and abroad. With an improved academic research environment and better industry-academia collaboration, the sky is potentially the limit for Indian innovators.