The announcement last month by Tata Motors of its newest car, the Nano, was revealing on many levels. The announcement generated extensive coverage and commentary, but just about everyone missed the Nano’s real significance, which goes far beyond the car itself.
But, O.K., let’s start with the car itself—particularly the price. At about $2,500 retail, the Nano is the most inexpensive car in the world. Its closest competitor, the Maruti 800, made in India by Maruti Udyog, sells for roughly twice as much. To put this in perspective, the price of the entire Nano car is roughly equivalent to the price of a DVD player option in a luxury Western car. The low price point has left other auto companies scrambling to catch up.
How could Tata Motors make a car so inexpensively? It started by looking at everything from scratch, applying what some analysts have described as “Gandhian engineering” principles—deep frugality with a willingness to challenge conventional wisdom. A lot of features that Western consumers take for granted—air conditioning, power brakes, radios, etc.—are missing from the entry-level model.
More fundamentally, the engineers worked to do more with less. The car is smaller in overall dimensions than the Maruti, but it offers about 20% more seating capacity as a result of design choices such as putting the wheels at the extreme edges of the car. The Nano is also much lighter than comparable models as a result of efforts to reduce the amount of steel in the car (including the use of an aluminum engine) and the use of lightweight steel where possible. The car currently meets all Indian emission, pollution, and safety standards, though it only attains a maximum speed of about 65 mph. The fuel efficiency is attractive—50 miles to the gallon.
Hearing all this, many Western executives doubt that this new car represents real innovation. Too often, when they think of innovation, they focus on product innovation using breakthrough technologies; often, specifically, on patents. Tata Motors has filed for 34 patents associated with the design of the Nano, which contrasts with the roughly 280 patents awarded to General Motors (GM) every year. Admittedly that figure tallies all of GM’s research efforts, but if innovation is measured only in terms of patents, no wonder the Nano is not of much interest to Western executives. Measuring progress solely by patent creation misses a key dimension of innovation: Some of the most valuable innovations take existing, patented components and remix them in ways that more effectively serve the needs of large numbers of customers.
But even this broader perspective fails to capture other significant dimensions of innovation. In fact, Tata Motors itself did not draw a lot of attention to what is perhaps the most innovative aspect of the Nano: its modular design. The Nano is constructed of components that can be built and shipped separately to be assembled in a variety of locations. In effect, the Nano is being sold in kits that are distributed, assembled, and serviced by local entrepreneurs.
As Ratan Tata, chairman of the Tata group of companies, observed in an interview with The Times of London: “A bunch of entrepreneurs could establish an assembly operation and Tata Motors would train their people, would oversee their quality assurance and they would become satellite assembly operations for us. So we would create entrepreneurs across the country that would produce the car. We would produce the mass items and ship it to them as kits. That is my idea of dispersing wealth. The service person would be like an insurance agent who would be trained, have a cell phone and scooter and would be assigned to a set of customers.”
In fact, Tata envisions going even further, providing the tools for local mechanics to assemble the car in existing auto shops or even in new garages created to cater to remote rural customers. With the exception of Manjeet Kripalani, BusinessWeek‘s India bureau chief, few have focused on this breakthrough element of the Nano innovation (BusinessWeek.com, 1/10/08).
This is part of a broader pattern of innovation emerging in India in a variety of markets, ranging from diesel engines and agricultural products to financial services. While most of the companies pursuing this type of innovation are Indian, the U.S. engineering firm, Cummins (CMI) demonstrates that Western companies can also harness this approach and apply it effectively. In 2000 Cummins designed innovative “gensets” (generation sets) to enter the lower end of the power generator market in India. These modular sets were explicitly designed to lower distribution costs and make it easy for distributors and customers to tailor the product for highly variable customer environments. Using this approach, Cummins captured a leading position in the Indian market and now actively exports these new products to Africa, Latin America, and the Middle East.
We have called this “open distribution” innovation because it mobilizes large numbers of third parties to reach remote rural consumers, tailor the products and services to more effectively serve their needs, and add value to the core product or service through ancillary services. Three innovations in products and processes come together to support “open distribution:”
• increased modularity (both in products and processes)
• aggressive leveraging of existing third-party, often noncommercial, institutions in rural areas to more effectively reach target customers
• creative use of information technology, carefully integrated with social institutions, to encourage use and deliver even greater value.
Modular designs combined with creative leverage of local third-party institutions help participants to get better faster. Companies such as Tata and Cummins are going far beyond “customer co-creation” in the narrow sense of soliciting isolated ideas from customers. Instead, they are building long-term personal relationships with customers, enriched by the specialized capabilities of broad networks of third parties that generate much deeper insight into customer needs and afford opportunities to tailor value.
Such innovations are quite different from those in the retail distribution systems pioneered by companies such as Dell (DELL) and the leading big-box retailers. These U.S. companies developed completely self-contained and highly standardized facilities and services for customers. But the open-architecture approach pioneered by Indian companies may offer much greater opportunity to deliver more tailored value to customers than the closed-architecture U.S. approach. The techniques initially developed to reach poor and rural customers may have even greater potential when used to reach highly demanding, affluent, urban customers in Western economies.
The Tata Motors/Nano approach contrasts with the strategy of most other manufacturers. For more established automakers each new model represents an advance in tight integration, with more and more of the functionality deeply embedded in electronics that truly represent a “black box” to the customer. The days of customizing cars to personalize them and push their performance limits are rapidly receding into distant memory for the average customer. Yet, as Kathleen Franz, makes clear in her wonderful book, Tinkering: Consumers Reinvent the Early Automobile, it was the open design of early automobile models that blurred the lines between consumption and invention and led to a wave of innovations that were later embraced by the auto industry.
What are the broader lessons that Western executives should learn from this innovation story?
Emerging markets are a fertile ground for innovation. The challenge of reaching dispersed, low-income consumers in emerging markets often spurs significant innovation. Western executives should be careful about compartmentalizing the impact of these innovations on the edge of the global economy. As we suggested in Innovation Blowback, these innovations will become the basis for “attacker” strategies that can be used to challenge incumbents in more developed economies. What’s initially on the edge soon comes to the core.
• Find ways to help customers and others on the edge to tinker with your products. Modular and open product designs help engage large numbers of motivated users in tailoring and pushing the performance boundaries of your products, leading to significant insight into unmet customer needs and creative approaches to addressing those needs.
• Pay attention to institutional innovation. Western executives often become too narrowly focused on product or process innovation. Far higher returns may come from investing in institutional innovation—redefining the roles and relationships that bring together independent entities to deliver more value to the market. Tata is innovating in all three dimensions simultaneously.
• Rethink distribution models. In our relentless quest for operating efficiency, we have gone for more standardization and fewer business partners in our efforts to reach customers. As customers gain more power, they will demand more tailoring and value-added service to meet their needs. Companies that innovate on this dimension are likely to be richly rewarded.
February 26th, 2008 | Posted by stockIBM announced it expects to spend $12 billion on buybacks this year. While that is one of the largest announcements, it is an authorization to buy, not a buy. That said, over the last year and a half many companies have issued statements of intent similar to IBMs, with practically all of them following through. IBM does currently hold the record for actual quarterly buybacks at $15.7B (Q2,’07), and ranks third in buybacks ($34.3B) over the past three years.
The 10Ks are coming in and at this point the Q4 buyback numbers are ahead of my $139 billion estimate, which considering that the Financials have pulled back, speaks to the strength and depth of the buybacks.
For 2008, I expect buybacks to remain active for the non-Financial issues. They still have excess cash of $600 billion that equates to 65 weeks of net income, investors still favor them, EPS are increased the quarter they are purchased and, based on the schedule of expiring employee options (many of which date back years) and the current stock prices, it will be a busy year for option exercising
Good news, Q4 EPS is almost over; bad news, Q1 starts soon
February 22nd, 2008 | Posted by stockAmerican International Group (AIG) announced that they will release their 10K, which will include their Q4 EPS, after the close of business Thursday, February 28th and then have their earnings conference on Friday, February 29th – an unusual sequence of events. Their pre-announcement on February 11th that their auditors had found material weakness in their internal controls that would escalate an expected $1 billion charge to a $5 billion charge has not been built into many of the street estimates (another story), so the charges classification, description and interpretation will be of interest to many. Related, a strong drink will be had by many when this year’s round of audits is over.
Another reason AIG is so critical is that it may be the last major issue with “charges” (at least we hope so) to post their Q4 EPS. Therefore, the Q4 index EPS will be able to be used (but not closed until the retailers report is published) with a much higher degree of confidence.
The two other Financial issues of interest still open are Freddie Mac, which declares before the opening on 2/28 (with an expected charge), and Fannie Mae, which may not declare for a while, were both downgraded by Merrill Lynch today from neutral to sell.
As far as Q1 goes, concern has now been replaced by long faces regarding a continuation of the now familiar charges, as well new ones caused by LBO loans, inventory write downs for non-Financials, and of course the general economy – where a more cautious consumer can’t be good for retail sales or margins. However, we won’t have long to wait if we wish to ‘get real’ since some of those November fiscal Financial issues end their Q1 period in a week. For them the comparisons for their Level 1, 2 and 3 will be November 30th vs. February 29th, a time when neither housing nor liquidity has improved.
On the bright side we should all feel a little richer come mid-year, when those stimulus and tax refunds come in, and the Fed cuts begin to be felt. The question remaining however is this: Is it enough to jump start the economy, or is it just another short term fix for a spending junkie? In my opinion, one good sign is the fact that so many people used their holiday gift cards from Wal-Mart on basic staples (like food) instead of on discretionary items (like TVs).
February 21st, 2008 | Posted by innovOn a typical weekday, Dr. Mark P. Ombrellaro is scrubbed in for surgery by 8 a.m. The 46-year-old vascular surgeon runs a private practice in Bellevue, Wash. The more he operates, the more he learns about how the body responds to physical trauma. The deep knowledge he gains of human anatomy also helps him in his avocation: He builds high-tech video game accessories, which heighten the game experience by giving players the faintest sense of what it feels like to be struck by bullets or battered by fists.
Ombrellaro is on the cutting edge—literally—of the most provocative new trend in the $18 billion video game industry. Today’s slickest games render in excruciating detail the sights and sounds of a battlefield or sports arena. But that’s not enough for hard-core gamers addicted to the rush of ultrarealistic simulations. They want to participate in scenes with as many of their senses as possible. A technology known as haptics—virtual touch, if you will—makes that possible. By donning a vest or helmet studded with tiny computerized air pistons, gamers can feel the thwack of a punch without actually having to suffer the pain.
Medical professionals are finding a profitable niche in the virtual-touch revolution. Their long-term goal is to simulate sensations from the caress of a hand to the impact of a bat against bone. TN Games, a division of Ombrellaro’s 8-year-old Redmond (Wash.) startup, TouchNetworks, brought to market one of the first haptic vests during the holiday 2007 shopping season. It sold out its first shipment, according to Ombrellaro. In December, TN Games signed an agreement with video game giant Activision (ATVI), maker of Guitar Hero and other top-selling video game franchises, which bundled the $170 accessory with the war game Call of Duty 2. TN Games plans to sell a haptic helmet, sleeves, and pant legs by the end of 2008.
Medicine’s contribution to the game business isn’t limited to bullet blasts. Another touch startup, Novint Technologies (NVNT) in Albuquerque, got its start designing simulation systems for Lockheed Martin (LMT), Chrysler, and Chevron (CVX). In 2003 the company started developing medical software with Dr. John Wills, an anesthesiologist who heads the critical care department at the University of New Mexico. Novint developed a simulator to train doctors in administering delicate injections, mimicking the resistance a needle encounters as it passes through flesh. Based on this software, Novint released a game controller last June called the Falcon with an unusual globe-shaped handle. The device transmits subtle pressure signals to a gamer’s fingertips. In one game, The Ship, the Falcon allows players to feel what it’s like to inject enemies with lethal poison.
If such grisly technology were only flowing from docs to game addicts, society might raise an eyebrow. But expertise flows from the game room to the operating room, too. Consider the latest project from BreakAway, a game startup in Hunt Valley, Md. The company creates simulations for defense contractors such as Northrop Grumman and Boeing, as well as video game software for Electronic Arts and Microsoft. Its newest endeavor, a federally funded project called Pulse, is a detailed medical training simulation. It allows doctors to practice surgical procedures. The simulation, being tested at Yale and Johns Hopkins, leans heavily on game-related incentives—trainees are rewarded by points. Adding touch to the digital hospital is “absolutely a future possibility,” says Pulse Executive Producer Ed Fletcher.
But Fletcher hasn’t forgotten video games. He hopes to apply what he learns in the OR to game depictions of torn tissue and flowing blood.
Some rebound in Emerging Markets
February 15th, 2008 | Posted by stockThere has been some rebound in the Emerging Markets with 21 of the 26 showing a February-to-date gain.
Data is based on S&P/Citigroup Global Equity Indices
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February 15th, 2008 | Posted by stockTwo quick notes to end the week:
1. Deutsche Bank (DB) has an interesting note out on home prices in the U.S.
After an exhaustive analysis of 100 metropolitan areas around the country, the bank’s analysts say home prices will fall at least another 8.1%. Prices could drop as much as 25.7% from this point.
This is a wide range, a demonstration of how much uncertainty is floating over housing market at this point. Also, in contrast to those who say the problem is confined to just a few regions, Deutsche Bank thinks the weak housing market stretches across the country, with three-quarters of metropolitan areas expected to see prices fall.
2. If you read a lot of financial news, you might enjoy this Onion piece.
Public Speaking: Too Much Information?
February 14th, 2008 | Posted by innovYou’ve got questions? We’ve got answers. This week, executive communications coach Aileen Pincus answers some frequently asked questions from executives about communication.
I’m part of a research team with a nonprofit organization. We are often asked to present our key findings to those outside our organization. I’m told my presentations are sometimes too detailed, but I don’t want to damage my credibility by leaving out important information. Is there a way to get it right?
You can get it right, if you pay attention to your audience. Understand to whom you are presenting and why.
Some audiences (perhaps other researchers in your field) will have a higher tolerance for supportive details. Understand though that a higher tolerance doesn’t mean an infinite tolerance. Even an audience that is well-schooled and interested in your topic wants you to get to the point about why you’ve selected the facts or data you have and what they amount to. Don’t provide any audience with a “brain dump” of information with the idea of showcasing your own knowledge. It may have the exact opposite effect if it creates the impression you simply don’t understand the larger picture.
The key is to ask yourself what you want your audience to leave your presentation knowing—your main messages—how your audience might use that information, and what specific points you need to make in support of your findings.
Remember that no audience, no matter how invested in your information, wants or needs the same thing from you in an oral presentation that they could get from you in a written one. The oral presentation is by necessity less detailed and at a higher level: It’s not meant to be a written report delivered orally.
If you stay audience-focused, you’re more likely to avoid offering too much detail to any audience. Unless you are accustomed to your audiences clamoring for more time or detail from you, assume you can pare down your data without sacrificing credibility.
I prefer using a podium when I speak; otherwise I don’t know what to do with my hands, my body, or my notes. Having a podium isn’t always an option for me. In fact, sometimes I don’t know whether I will have one or not. How can I get comfortable speaking without one?
With or without a podium, you’ll need to get comfortable with your hands, your body, and your notes. Most speakers like using podiums because it can provide a level of comfort in an anxiety-producing situation.
From an audience’s perspective, however, the podium is often a barrier to good communication. Recent studies show that comprehension increases markedly when we can take in visual cues, such as hand gestures, from a presenter. Anything that comes between the presenter and the audience blocks those cues.
Instead of hiding behind a podium or using it as a crutch, try to decrease your anxiety in the opening moments of your presentation. That’s when you’re likely to be the most nervous, so something as simple as diverting attention from your performance might give you the time you need to relax. Try opening with a question for the audience, temporarily shifting the focus from yourself. You might also try opening with a prop or by showing a video.
Confidence is a great antidote to nerves. Practice your material well, especially those opening moments. Keep in mind that your audience wishes you well and does not expect perfection. A pause while you review your notes on a nearby table is just fine, once you’ve delivered your opening.
Remember, practice will help you gain the confidence you need to leave the podium behind and your audiences will appreciate really getting to know you.
February 13th, 2008 | Posted by stockHistorically, as defined by the S&P 500, 51.9% of the trading days are up and 46.2% are down. For Valentine’s days it is different. On February 14th the market has been up only 39.3% of the time and down 57.4% of the time (it was down for the Saint Valentine’s Day massacre in 1929). Oh well, the market is still our sweetheart, even if the returns are shorts.
The tax rebates will be calculated from the 2007 returns (so you must file to get a rebate), but next year the IRS will recalculate your rebate based on your 2008 tax return. If you received more than you should have, it’s yours. If you got less, they will send you the difference. Therefore, if you have a child in 2008 (10 months to go), you get an additional $300 – after all it is Valentines Day. Somehow I don’t think China will adopt this policy.
February 13th, 2008 | Posted by innovBusiness management trends follow an interesting pattern—they track economic cycles. When times are good, the focus is on growth, creativity, and innovation. As the economy slows, attention turns to cost-cutting, productivity, and process control. Psychologically, this makes sense. Humans are programmed to hoard resources in uncertain environments—it’s how our ancestors survived the ice age.
This cyclical pattern suggests managers believe profitable growth is impossible in a sluggish economy, so they focus on bottom line management until times improve. But profitable growth is exactly what successful innovation delivers. So why dump innovation when the economy decelerates? Wouldn’t we all prefer profitable growth to just growing our profitability?
The economic wheel is turning. Companies such as General Electric (GE) are already shifting away from innovation toward portfolio restructuring aimed at incremental growth. Others, such as Motorola (MOT) and Whirlpool (WHR), are refocusing their innovation efforts through the lens of design. There’s a belief in some quarters that design can keep innovation relevant—that applying design thinking to our biggest business problems will deliver sustainable growth. “If we can just get business people to think more like designers,” the argument goes, “we’ll get them out of their linear, analytical boxes and inspire them to generate novel, customer-centered solutions that will drive new growth.”
The problem with this thinking is twofold: First, it paints businesspeople who aren’t designers as uncreative and inattentive to customer needs. Worse, it runs the risk of overpromising what design thinking can deliver, which is a surefire way to undermine the role of design, and innovation, in creating new business value.
Consider the fate of strategic planning. In the 1960s and 1970s, strategic planning ruled the roost in the business community. Companies flocked to build strategic planning capabilities, and business schools scrambled to teach the new discipline. Strategic planning was hailed by consultants, academics, and newly minted MBAs as the foolproof path to sustainable growth, bridging the divide between performance management and business planning. Strategic planning groups sprang up in every business unit, and corporate bureaucracies were created to coordinate all the new planners.
Unfortunately, this zeal for strategic planning was based more on theory than on proven business results. Once it was revealed that most companies did just as well with or without strategic planning, CEOs fought back. Jack Welch led the charge at GE, and other leaders followed. As BusinessWeek reported in 1984 “scores of planners have been purged.” Strategic planning as a practice became widely viewed with suspicion, a sentiment that lingers in many corporations.
Does this mean that strategic planning provides no benefit? Of course not. It was overzealous belief in the power of a single solution that left many companies ill-positioned for the economic challenges of the 1970s. Overpromising the impact of any particular discipline almost inevitably leads to its subsequent marginalization. This is the risk inherent in the current trend equating design with innovation.
The contrasting approaches to design as an agent of change and growth at Dell (DELL) and Hewlett-Packard (HPQ) help illustrate this problem. At HP, the approach is strategic. As CEO Mark Hurd works toward a leaner organization, HP’s design leaders have focused on simplification, reducing SKUs and crafting reusable design elements for application across a wide variety of products. By using design thinking to craft products that are more attractive, easier for consumers to use, and less expensive to produce, designers at HP are connecting with both a larger corporate strategy and real people’s needs to drive growth and profitability. Design is being used as a lever within a larger strategic framework, yielding focused innovations in products, processes, and metrics that are clearly benefiting the company’s top and bottom lines.
At Dell, design appears to be operating mostly in response to marketplace trends, unconnected to a larger strategy. Flashy new colors and finishes introduced last year are grabbing attention but are also likely to increase costs and add production complexity. As the company moves beyond the direct-to-consumer model into multibrand retail venues, its products must now compete side-by-side with the likes of HP, Lenovo, and Toshiba. Is more style at a higher price what people want from Dell—the onetime champion of ever-improving value? Only time will tell. It’s too early to determine the impact of these changes on the company’s overall performance. For now, design for its own sake seems to constitute the whole of Dell’s innovation strategy.
Giving design a seat at the leadership table can and should deliver real business benefits. Applying the tools and techniques of design practice to large, complex business challenges can yield interesting insights and novel solutions. But promising more than design thinking can deliver risks a real backlash that could not only discredit design, but also accelerate the rejection of innovative growth as a goal.
Leading development of the Harley-Davidson (HOG) Museum, I faced a range of business challenges: selecting the right location, synthesizing the needs of the company and Milwaukee city planners, shaping a building that was both iconic and timeless, telling stories that would engage visitors from casual tourists to the devoted Harley faithful, and designing a sustainable business model. Design thinking was often helpful, and sometimes essential, in solving these complex problems—but only when connected with empathy and business strategy. And other techniques were equally valuable in identifying hidden opportunities for community-building, co-created experiences, and new business platforms. There is no single, turnkey innovation solution.
Design thinking is a useful innovation tool, not the absolute source of sustainable growth. Meeting complex growth challenges requires a broad range of capabilities from across the social sciences, business strategy, and design. Just as there is no one, best approach to innovation, there is also no evidence that profitable growth is impossible in a slow economy. As the economic cycle turns again, managers face a critical choice: Will they join the packs that give up on growth while waiting for better times? Or will they find new ways to grow during the coming storm?
Buffett bond insurer plan leaves the gun, takes the cannolis
February 12th, 2008 | Posted by stockWarren Buffett’s offer to take over insurance coverage of $800 billion of muni bonds from the troubled “big three” insurers is no rescue plan for them — it’s a death knell. Any insurer that accepted this offer would have little left but some cash from Warren and a box of rocks. Of course, better alternatives to ward off Buffett’s reinsurance plan are shrinking fast. Those that reject his offer might wake to find the metaphorical horse’s head in their beds a few weeks down the road.
Recall that the three bond insurers, MBIA (Symbol: MBI), Ambac Financial Group (ABK) and Financial Guaranty Insurance Co., spent years as highly profitable but sleepy outfits lending their triple-A ratings to municipalities for a small fee. Munis rarely defaulted, the insurance made it easier for big investors to shop amongst the many diverse issuers and the issuers saved alittle on their interest costs. Win, win, win.
To goose their growth, however, the big three ventured into murkier areas of finance like structured debt and derivatives. Defaults on those deals are now sky high, investors are holding insurance-backed securities trading like the insurance is worthless and almost the whole mortgage market is in chaos. Lose, lose, lose. The major Wall Street banks and brokers, holding billions in debt insured by the big three, would face substantial losses if the insurance is vaporized. The municipal market has also suffered from the uncertainty but to a lesser degree since the underlying bonds backed by the insurers are sound, not something you can say for all the subprime mortgage-backed securities and collateralized debt obligations supported by insurance.
So what Buffett is in essence offering is to take away the safest, steadiest and most profitable pieces of the big three’s portfolios and leave them with the toxic waste. A bit of capital would be freed up but a huge amount of future profits would shift over to Mister Buffett’s coffers. In return for a modest boost to stability in the municipal market, Buffett’s plan appears to pull the rug out from under the insurers and what’s left of the structured finance market. Ouch. One of the three, not named, has already turned the offer down. You can see why but in a few more weeks they may have no choice to but to take an offer they can’t refuse.
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