isb insight - indian manufacturing: making it work

Indian Manufacturing: Making it Work

In this Issue : MANMOHAN S SODHI PRESENTS A FLOW PERSPECTIVE ON THE NEW NATIONAL MANUFACTURING POLICY* PLANNING COMMISSION MEMBER ARUN MAIRA DISCUSSES THE GOAL OF THE NEW POLICY * AMIT NANDKEOLYAR WRITES ON HOW CULTURAL DIFFERENCES CAN IMPACT NEGOTIATION OUTCOMES

Volume 9 Issue 3 RS 250

Indian School of BusinessGachibowliHyderabad 500 032India

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From left to right: Adi Godrej, Chairman, ISB Executive Board, Pramath Sinha, ISB’s Founding Dean, and Ajit Rangnekar, Dean ISB at the launch of “An Idea Whose Time Has Come,” a book by Sinha that traces ISB’s ten-year journey. The book was launched at the School’s tenth anniversary celebrations held on campus.

Dear Reader,

This is our first issue of the year and I wish you a very prosperous 2012!

As we begin this year, one question looms large: can we sustain the growth trajectory in 2012?

In order for the country to grow undeterred, it must develop its manufacturing sector and

create millions of new employment opportunities for the Indian youth. So far, though

considered vital to the country’s growth, Indian manufacturing has contributed only about

15% to the GDP compared to services (about 57%). In light of this, the government’s initiative,

the National Manufacturing Policy (NMP) seeks to increase the role of this sector in the

country’s growth. The ambitious plan hopes to encourage manufacturing to thrive in India so

that it can spur the growth of the country at a faster rate and have a multiplier effect on the

Indian economy. India is a young country with over 60% of population in the working age

group of 15-59 years. India will have to create 220-250 million jobs between now and 2025 if it

has to exploit its demographic dividend.

This special issue on manufacturing focuses on NMP. We offer perspectives from individuals

who were deeply involved, directly or, through consultative feedback, indirectly, in the

creation of this policy. Arun Maira, Member, Planning Commission, provides compelling

statistics allowing global comparison to provide the rationale behind the NMP. B

Muthuraman, President of CII and Sunil Kant Munjal, Joint Managing Director of Hero

MotorCorp provide an industry perspective as to why they believe the policy is what the doctor

ordered for Indian manufacturing. Finally, Professor ManMohan Sodhi, Executive Director

of ISB's newly launched Munjal Global Manufacturing Institute takes a flow perspective in

analysing the NMP and in bringing the three viewpoints together along with related policies

on retail and even ostensibly unrelated policies like the Food Bill. He also outlines gaps that

need to be covered not only by the government but also by the private sector.

Our feature stories are an eclectic mix: authors explore topics ranging from the fashion

industry’s ecological footprints to cultural twists in negotiations to the impact of increasing IT

capacity in electronic retail firms.

I hope you find this issue interesting and insightful. Do send me your feedback at editor_

[email protected]. I look forward to hearing from you.

Sriram Gopalakrishnan

from the editor’s desk

contents

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Volume 9 Issue 3

5Cover Stories

5 THE NEW NATIONAL MANUFACTURING POLICY: A FLOW PERSPECTIVEWhat are the outcomes of the new National Manufacturing Policy (NMP) on India’s development? Professor ManMohan S Sodhi discusses.

10 A PLAN TO GROW INDIAN MANUFACTURINGArun Maira presents his views on the government’s new policy.

13 MANUFACTURING IN INDIA: WHY IT MUST THRIVE Sunil Kant Munjal discusses the issues related to implementing the new manufacturing policy.

16 A TONIC FOR SPURRING GROWTH What impact will the new manufacturing policy have on businesses in India? B Muthuraman provides an overview.

Features

20 THE CULTURE OF TRUST AND NEGOTIATIONCultural differences in trust impact negotiation outcomes. Professor Amit Nandkeolyar writes from his research.

23 FASHION INDUSTRY: A STORY OF CONSUMPTION AND WASTEDoes “ethical” fashion have a place in India? Professor Tonya Boone provides an insight.

26 ELECTRONIC RETAILING: INCREASING IT CAPACITY MAY ALIENATE CUSTOMERSWhat are the implications of increasing IT capacity on firms and customers? Professor Subodha Kumar presents his findings.

29 ORAL INSULIN: BREAKTHROUGH INNOVATION AT BIOCONWhat was the dilemma Biocon faced with its latest breakthrough for diabetics?

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Editorial: Vimla Sriram, Mariya Mustan and Sriram Gopalakrishnan

Print/Distribution: Laxmi Devi Pant and T A V Srinivas

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© COPYRIGHT, 2007. INDIAN SCHOOL OF BUSINESS (ISB). ALL RIGHTS RESERVED. ALL ARTICLES HAVE BEEN COPYRIGHTED BY ISB AND NO PART OF THIS MAGAZINE MAY BE REPRODUCED EITHER IN PART OR FULL, OR ELECTRONICALLY STORED INTO A RETRIEVAL SYSTEM, OR DISSEMINATED IN ANY FORM (ELECTRONIC, MECHANICAL, PHOTOCOPYING, RECORDING OR OTHERWISE) WITHOUT ISB’S PRIOR WRITTEN PERMISSION.

For subscriptions and advertisements contact [email protected]

Face to Face

33 BANK OF BARODA: A TURNAROUND TALEBank of Baroda Chairman M D Mallya discusses the spectacular turnaround of the bank with Professor Rajesh Chakrabarti.

37 NITISH SENGUPTA: ON REVIVING SICK PUBLIC SECTOR UNITSProfessor Rajesh Chakrabarti and Senior Researcher Kanchan M talk to Nitish Sengupta about reviving India’s PSUs.

40 INCULCATING A CULTURE OF RESEARCH In the second of this two-part interview, Professor Krishnamurthy Subramanian talks to Anjan Thakor about role of research and faculty development.

Knowledge Sessions

43 SME FINANCING CHALLENGES: BUILDING ALTERNATIVE FINANCE OPTIONSA report on the symposium organised by the Centre for Analytical Finance (CAF) at the ISB.

44 CHARTING INDIA’S GROWTH TRAJECTORYWhat is the future of India 20 years after economic liberalization? 45 industry leaders present their perspectives at the ISB Leadership Summit 2011.

45 DIFFUSION 2011: BUSINESS SKILLS FOR SOCIAL IMPACTA report on the capacity-building workshop organised by ISB students to empower non-profits.

In Brief

46 Insights in brief

Book Review

48 A review of “Organization Development: Accelerating Learning and Transformation” by S Ramnarayan and T V Rao

COVER STORY ISB INSIGHT 5

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The new National Manufacturing Policy (NMP) with its National Investment and Manufacturing Zones (NIMZ) has been finally approved and comes at a crucial time with the country facing a lower gross national product (GNP) growth compared to the recent past, smaller net inflow of foreign investment, domestic politics creating paralysis, and a sharply devalued currency. Improving manufacturing makes sense: manufacturing is not only connected to other sectors but is also the jewel of a multi-strand necklace where the strands are flows of different kinds to and from other sectors.

This article considers such flows in analysing the NMP and other proposals. My conclusion is that the government is taking a holistic approach to manufacturing, considering the different flows needed to make India a major economy. However, the government must further consider such initiatives as creating an Internet superhighway, virtual manufacturing zones to support IT solutions

for industry clusters, finding supply-chain finance solutions to help tier-2 suppliers, usually [SMEs] and finding creative solutions for land use. In addition, the government must further skills development for the manufacturing sector for the long term.

While considering different flows – that of materials, information, cash, skills, land use and even prosperity – I refer to three companion articles in this special issue on manufacturing, written by Arun Maira, Member Planning Commission, who is involved with the creation of the policy,1 with consultative feedback from B Muthuraman, President of the industry body, Confederation of Indian Industries (CII)2, and Sunil Kant Munjal, Joint Managing Director of Hero Motocorp as well as a Past Pesident of the CII.3

Flow of MaterialsMaterials need to flow in and out of manufacturing plants, and in and out of the manufacturing sector.

Professor ManMohan S Sodhi discusses the implications of the new National Manufacturing Policy (NMP) on

various aspects of India’s development.

The New National Manufacturing Policy: A Flow PerspectiveBY MANMOHAN S SODHI

COVER STORY 6 ISB INSIGHT

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These flows need infrastructure – roads, the cold supply chain, an information infrastructure, etc, – to aid the supply chain. While gains have been made in the road infrastructure to aid truck movement, it is to be noted that this is the most expensive mode of transportation – see Munjal3– that also adds congestion and pollution. In any case, India has a reprieve only till 2020 for increasing carbon pollution on grounds of economic growth so the window for developing badly-needed rail and water-based infrastructure is not large.

The current tax system in India distorts and constricts supply chain flows. To this extent, the government hopes to implement the two-layer Goods and Services Tax (GST) to further simplify the current value-added-tax (VAT) while at the same time, creating more uniformity and scope of products. From a manufacturer’s viewpoint, “this consolidated tax reform will help spur capital investment by eliminating cascading of taxes. It will also remove trade biases against Indian manufactured goods. Most important, it will ensure free flow of goods through a common market.” 3

To take the flow from finished end product from factory or distribution centre to end consumer, the retail sector needs to put in large investments in the supply chain. Such investment (and expertise) will have to come primarily from foreign direct investment (FDI). While the government’s recently retracted retail policy was touted to help the agriculture sector, it would have also helped the manufacturing sector to get end products sold, without which the sector cannot make intermediate goods either. Still, the government must be commended on its vision and continuing efforts on this front.

Flow of InformationAlong with material flows, manufacturing also needs the flow of information for orders, order status, and deliveries. Although the rest of the world depends on

India for many IT needs, there is very little evidence of IT use within the country. True, many Indians now have Google Mail or Facebook accounts, but these are not enough for manufacturing. I have seen presentations on Cloud Computing as the silver bullet for Indian manufacturing but these presentations appear to have been hastily recycled from the slides I saw in the late 1990s and use the same acronyms and technology. At this stage, I am skeptical that the vendors have anything real to offer today but eventually, I hope they will.

But before we get Cloud Computing for manufacturers, we will need access to the Internet, a cheap and now ubiquitous way to exchange information – compared to the expensive and awkward electronic data interchange (EDI). Although Indian telecom majors have provided mobile phones at much lower cost to Indian consumers relative to the West, the quality of Internet access is poor and cost is high relative to the West. It may well be that, as in the US or Korea, the government or the public sector will have to step in by providing Internet “superhighways” and cheap access.

Indian software vendors and system integrators have an important role to play for Indian manufacturers but they will have to change their business model. They cannot get the same consulting or licensing fees from Small and Medium Enterprises (SMEs) in India as they can from large manufacturers in the west, but they can support Indian manufacturers at a much lower price point with standardised software given the massive scale in India. Customisation can be minimised. Cloud Computing would become tangible as a delivery mechanism of cheap standardised solutions for information storage and exchange. Moreover, large IT vendors/system integrators can create virtual information exchange zones around the supply chains of major original equipment manufacturers (OEMs) or, in cooperation with state or central governments, around clusters of SMEs.

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Flow of Cash and FinanceInadequate credit holds back many SMEs. This applies to investment as well as to working capital. There are different ways credit can be made available: First, in the past, the State Bank of India sought to creatively improve the lot of many small manufacturers through a mix of consulting and credit. Other public and private sectors should take note.

Second, the government can create conditions where supply-chain finance becomes a reality, whereby the small suppliers to big OEMs or their suppliers can get short-term credit against the supplies while they await payment. The government can also encourage credit rating or facilitate foreign banks to step in as competition to domestic banks.

Third, enterprising banks such as the SBI can seek to emulate the Grameen Bank model of giving a loan to only one out of four-or-five micro-entrepreneurs in a cluster, and funding the others when the first one has repaid the loan. Over time, perhaps, private sector entrepreneurs may join in with other operational models.

Finally, the new manufacturing policy envisages creating of Technology Acquisition and Development Fund (TADF), targeting micro and small enterprises in particular, to facilitate technology acquisition, creation of patent tools and development of manufacturing equipment.2 Such a fund could therefore, provide finance for investment, and suitably implemented, would further not only manufacturing but more importantly, the capability thereof.

Flow of SkillsIndia will need to create 200-250 million additional (net) jobs over the next 15 years if it is to employ the children currently in school.1 The demographic dividend, if any, will come from the flow of these children into the workforce. This requires an education policy consistent with the country’s changing needs over these 15 years. Indeed, the

new NMP takes this into account with its emphasis on vocational education with “farm-to-work” and “school-to-work” programmes, and on seeking to add 100 million manufacturing-related jobs by 2022.3

Muthuraman2 points out the unavailability of skilled labour as a constraint on Indian manufacturing. The reasons are deeply intertwined: Salaries for many workers even in the OEMs are the government-mandated minimum wage; rigid labour policies ensure most workers are hired only on contract (and at minimum wage); there is little incentive for manufacturers to train contract workers; and union unrest at major OEMs seems always close at hand. Any proposed solution can quickly get into the chicken-and-egg problem.

But there are encouraging win-win areas that can create virtuous cycles. As Munjal3 points out, union membership is falling and one way to rejuvenate unions would be to have fresh talent coming into employment. Flexible laws on entry and exit of workers would encourage companies to step up hiring, provide training, and enable unions to increase their base and have a more productive say.

Regarding skills development for the manufacturing sector, the Industrial Training Institutes (ITIs) have done a tremendous job thus far, but there must be more such institutes. Curriculum requirements "too" have changed and will continue to do so. And not only the workers, but also the owner-managers of SMEs need to be “upskilled.” Part of the solution lies with the private sector: OEMs can help by working with engineering and business schools.

In the long term, the flow of students from primary school to higher secondary and beyond, with many going into the manufacturing sector must be considered. Consideration must be given to the trainers and faculty for these

Professor ManMohan S Sodhi is Executive Director of the Munjal Global Manufacturing Institute at the Indian School of Business (ISB).

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students. For instance, India should have high quality DBA or D Eng Programmes (Doctorate in Business Administration or in Engineering) to supplement the meager PhD programmes – DBA/DEng programmes will turn experienced professionals into faculty for the rapidly growing “universities” and “schools.” One prominent management institute even has its own recent graduates teach the students, highlighting the problem of not being able to find faculty.

Flow of Land UseLand ownership seems to block any reform or initiative in India, whether it is Tata Motors’ experience in Bengal, or it is the Special Economic Zone (SEZ), or the government attempting to widen roads in Uttar Pradesh. The huge increases in price of land in the past years are a huge detriment to sale of land and only encourage non-use or even crime.

Even industrialists sometimes buy land, ostensibly for industrial development, but then hold on to it with the expectation that the returns by selling the land in the future will be higher than they could make with manufacturing. I recently heard the term “land mafia” for the first time. And, tenants can be a nightmare – the going rate to get the tenant to vacate is supposedly half the value of the property!

The government – central and state – has to work on the tighter implementation of existing laws. Moreover, creative use must be made of ownership by way of legally valid (and enforceable) medium-term, say 10-15 year leases that offer both owners and tenants some security. This way, land use can “flow” and help manufacturing not only in the NIMZs but also in the rest of the country.

Flow of Prosperity Across Social TiersManufacturing can provide “inclusive growth” and the new NMP is consistent with that. For a country with over 90% of the employed working in the so-called informal sector, many with little formal education,

manufacturing sector’s role in upgrading the skills of the masses needs to be emphasised. IT-related services or banks require a higher threshold of education than manufacturing so the sector can greatly improve the earning potential and skills of people from the so-called bottom of the pyramid, especially the poorest of the people. For instance, ITC’s incense stick business has its main ingredients processed by women in rural India and Hindustan Unilever Ltd sells its products through Shakti Ammas in parts of rural India.

The government’s “inclusive growth” aim is important because the belief that prosperity can “trickle down” has not worked in the past. Indeed, high ranking countries in GNP terms like Argentina, at the turn of the previous century, fell behind other countries owing to the extreme concentration of wealth.

Still, from a manufacturing perspective, the telling metric is the Global Hunger Index 2011 by the International Food Policy Research Institute (IFPRI). This metric is composed of the proportion of undernourished as a percentage of the population; the prevalence of underweight in children under the age of five; and the under-five mortality rate. Notwithstanding the tremendous progress and globalisation in India, the country is ranked close to the bottom on this index, below many sub-Saharan African countries. The situation is much better than that in 1990 but the index barely budged in the go-go decade 2000-2010.

Of particular concern is the situation with children: 43.5% of Indian children below the age of five are undernourished (IFPRI, 2004-2009 data). These are the very children for which the manufacturing policy aims to create the 200-250 million jobs by 2025! These children are in danger of being underdeveloped, not only physically but also mentally. Without intervention, the demographic dividend will turn into a demographic burden in the coming decades.


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For this reason, the government must be commended and supported for tabling the National Food Security Bill 2011, that seeks to provide cheaper food grain to over half of India's 1.2 billion population and ensure that people "live a life with dignity" as Food Minister KV Thomas puts it. Whatever the skeptics might say, the proposed bill makes perfect sense for Indian manufacturing in terms of investing in future workers.

ConclusionFrom a flow perspective, the Indian government has taken an admirable and holistic view encompassing land, infrastructure, taxes, and skills. To the extent the pre-election politics may force the government to retract some steps is unfortunate but one can only hope some of these policy steps will remain and retain holistic form.

From a flow perspective, more can be done. Opening up the retail space to foreign investment must be welcomed to build up badly needed supply chain infrastructure and skills. Availability of credit to SMEs by way of supply chain finance for

working capital and for investment is also needed. Development of rail and water-based transport needs to be looked into. Land reform by way of creating legally enforceable land leases letting the farmers or whosoever else retain ownership is needed to remove a huge block in the growth of manufacturing. Skilling in the long term is a huge gap although the NMP has spelled out initiatives in the medium term.

India and Indian manufacturing stand at a cusp today. The efforts the government is making by way of the new NMP and its related initiatives on food security and on retail can indeed turn Indian manufacturing into the jewel it should be.

References

1Maira, A. A Plan To Grow Indian Manufacturing. ISBInsight (Vol.9

Issue 3).

2Muthuraman, B. The National Manufacturing Policy: CII’s

Perspective. ISBInsight (Vol.9 Issue 3).

3Munjal, S. K. Building a case for manufacturing in India. ISBInsight

(Vol.9 Issue 3).


Over the years, various policy initiatives and economic reforms have made India one of the fastest growing economies in the world. However, the performance of India’s manufacturing sector causes concern particularly when compared with the manufacturing sectors of other countries in similar stages of development. The increasing gap in both, the sectoral share of manufacturing and the productivity of the manufacturing sector in India, compared with such countries, including China, indicates that the country has not been able to fully leverage the opportunities provided by the dynamics of globalisation.

Today, the manufacturing sector contributes about 15% of India’s GDP, with estimated revenues of about Rs 30 lakh crore in 2008-09. While the recent growth of manufacturing makes India one of the better performers amongst the large and rapidly developing economies (RDEs), the sector’s share of GDP is among the lowest in this group. Manufacturing has not been the engine of growth for the Indian economy and needs to grow at a much faster rate to have a higher multiplier effect on the national economy. The manufacturing sector employed 58 million people or just about 12% of the workforce in 2008. This share is

low compared not only to other developing countries, but even with more developed economies where there is a higher demand for services. Additionally, many studies have shown that over 90% of the manufacturing jobs in India have been created in the “informal” sector with hardly any growth in organised sector jobs.

India is a young country with over 60% of population in the working age group of 15-59 years. India will have to create 220-250 million jobs between now and 2025 if it has to exploit its demographic dividend. A large share of these jobs will have to be for the migrating labour from rural to urban areas, which will see rural population decreasing from about 70% in 2010 to less than 63% by 2025. This means about 50-60 million low skilled people will move out of agriculture and related jobs, and will be looking at alternate employment options. It is estimated that every job created in manufacturing has a multiplier effect of creating four additional jobs in related activities. Thus, job creation in the sector can be a major instrument for reaping the demographic dividend.

Labour productivity varies by sub-sectors in

India’s manufacturing sector needs to grow and contribute more toward the economy. In order to facilitate this

growth, the Indian government has proposed a National Manufacturing Policy (NMP). Arun Maira, Member,

Planning Commission, presents his views on the government’s new policy.

A Plan To Grow Indian ManufacturingBY ARUN MAIRA

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manufacturing. While some sectors like metals are capital intensive on account of the nature of production processes required and hence, inherently not labour intensive, other sectors like textiles and paper are employment intensive. At the same time, it is expected that labour productivity for all sectors should gradually improve over time. Looking at the disaggregated historical growth of the sub-sectors of manufacturing, a similarly distributed growth of approximately 11-13% would yield an additional approximate 80-120 million jobs by 2025, assuming an annual improvement of 3% in labour productivity. Thus, an improvement in the growth of the manufacturing sector would have significant benefits on employment as well.

Besides growth and employment, there is a third issue facing the manufacturing sector – the

lack of depth that manifests itself in two ways: (i) the relatively low level of “value-addition” in the products manufactured in the country, and (ii) the growing imports of capital equipment – the building blocks of a country’s manufacturing competitiveness. Also, growth in resource-intensive manufacturing has led to high degree of impact on the environment. According to the National Productive Council, the total cost of environmental impact is estimated at $32 billion.

The Goals of the PlanIndia’s strategic objectives for the manufacturing sector in the next 15 years are to bring about a quantitative and qualitative change via a set of policy choices with the following five core objectives:i. Increase manufacturing sector growth to 12-14%

over the medium term to make it the engine of growth for the economy. The 2-4% differential over the medium term growth rate of the overall economy will enable manufacturing to contribute at least 25% of the national GDP by 2025.

ii. Increase the rate of job creation in manufacturing to create 100 million additional jobs by 2025. Emphasis should be given to creation of appropriate skill-sets among the rural migrant and urban poor to make growth inclusive.

iii. Increase “depth” in manufacturing, with focus on the level of domestic value addition, to address

the national strategic requirements.iv. Enhance global competitiveness of Indian

manufacturing through appropriate policy support.

v. Ensure sustainability of growth, particularly with regard to environment.

Industrial Policy as a Process of LearningAgainst this backdrop of the country’s urgent needs and expectations, the new National Manufacturing Policy (NMP) is a welcome step. However, with it also comes the skepticism as the policy, by itself, will not produce the results. Implementation is vital. Moreover, many areas touched upon by the policy require further delineation and agreements. Therefore, the quality of the process for implementation, involvement of all stakeholders, and on-going evolution of the policy will

be the key to achieving the policy’s ambitious goals. For a nation to accelerate growth in manufacturing,

it is important for the government to have a strategy that induces such growth. To ensure the development of a successful strategy (which is really an evolving set of policies rather than a single panacea), there needs to be an effective and on-going process of interaction, collaboration, and learning amongst producers and the government. The process of industrialisation is a process of learning and of developing increasingly complex capabilities. The essential features of a manufacturing ecosystem that has the capability to learn includes depth in terms of stages of value addition in manufacturing processes, a combination of human skills & embodied technology in hardware, knowledge and a large and demanding customer base to create a productive and competitive industry, and a range of sizes of firms, including small and medium-sized firms. There are five processes that enable a manufacturing ecosystem with the above features to learn:• Fruitfulinteractionamongstdiverse

components of the system.• An effervescent process of

innovation. • A responsive regimen of standards. • A strong IP regime.

India will have to create 220-250 million jobs between now and 2025 if it has to exploit its demographic dividend.

Arun Maira is member of the Planning Commission.

BY ARUN MAIRA

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• Processes that enable system-wide learning and continuing improvement such as total quality management, business excellence, etc.

Thus the focus of industrial policy is not to “pick winners” but to create an ecosystem in which more winners emerge and, as they emerge, are enabled by the ecosystem to become stronger.

The Architecture of the Manufacturing PlanThe process for developing the plan has focused on ensuring collaboration between a diverse set of stakeholders including the government, industry, state representatives, experts, etc, creating alignment on national goals rather than silo-limited objectives, focusing on underlying root causes and developing recommendations appropriate to the level of maturity of various policy areas.

The architecture of the manufacturing plan has three components: • Capabilities and processes that go across many,

if not all sectors of manufacturing, and that incorporate into the ecosystem the processes for

rapid learning and building of capabilities.• Plans to strengthen performance of select

sectors.• The institutional ability for effective consultation

and collaboration between producers and public policy-makers & implementers.

The constraints on India’s manufacturing sector that policy-makers must address now are fundamentally different to the constraints that were addressed in the policy reforms of the early 1990s. Then, the constraint was mainly government’s restrictive licensing policies. Bold, “stroke of pen” reforms could relieve industry of those constraints. The challenges to be overcome now – land acquisition, industrial relations, environmental clearances, etc, – involve many other stakeholders. They must be heard and satisfied that their interests will be served by the reforms, or they will block them. Better consultation is the essence of good democratic governance. Therefore, the quality of the process of interaction amongst stakeholders in the course of formulation of policies and their implementation is the key to achieve the ambitious objectives of the Manufacturing Plan.

It is estimated that every job created in manufacturing has a multiplier effect of creating four additional jobs in related activities. Thus, job creation in the sector can be a major instrument for reaping the demographic dividend.


Given the easy availability of most raw materials and the relatively inexpensive workforce, the ingredients should have been in place for a sound manufacturing ecosystem in India. Yet for long, manufacturing has been a poor cousin to the service sector, which accounts for 57% of national output. In other Asian countries at similar stages of development, manufacturing has contributed much more significantly towards national GDP, compared to India’s 16%.

Finally, the government seems to have woken up to this anomaly and the Union Cabinet recently cleared a policy that includes setting up National Manufacturing and Investment Zones (NMIZ).

Besides creating NMIZs, the manufacturing policy also maps out a broad canvas of intent. These include: • Simplifiedbusinessregulationstohelpreducethe

compliance burden on industry.• An exit mechanism for closure of sick units. This

would include a job loss policy where sick units could pay suitable worker compensation in the event of business losses.

• Emphasis on vocational education, with “farm to work” and “school to work” programmes for the minimally educated workforce.The initiative couldn’t have been better timed:

Industrial output is contracting after sustained

monetary tightening as higher credit costs have forced companies to defer fresh investments.

The government’s plan is ambitious: To increase manufacturing’s share of GDP to 25%, and create 100 million additional jobs by 2022. In order to see this vision to reality, it is time to translate intent into action.

NMIZs should be set up very quickly without any policy adulteration. These zones should operate under a set of laws and rules that are prevalent in other top Asian countries, and not the rest of India.

It is equally important to implement GST (Goods and Services Tax) as early as possible. This consolidated tax reform will help spur capital investment by eliminating cascading of taxes. It will

Sunil Kant Munjal, Joint Managing Director, Hero MotoCorp, argues the need for the long-awaited government’s

new National Manufacturing Policy (NMP) and writes about the issues related to implementing this plan.

The initiative couldn’t have been better timed: Industrial output is contracting after sustained monetary tightening as higher credit costs have forced companies to defer fresh investments.

Manufacturing in India: Why it Must ThriveBY SUNIL KANT MUNJAL

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also remove trade biases against Indian manufactured goods. Most important, it will ensure free flow of goods through a common market.

At the same time, it is important to increase the efficiency of the agriculture sector. Currently, around two-third of India’s manpower is involved in the agriculture sector, and a large segment of this manpower is redundant. With greater agricultural efficiency, there will be a higher flow of jobs to the manufacturing sector.

Once NMIZs start attracting investment, generating real growth and creating jobs, it should facilitate a change in the mindset of the political and trade union class, who’ve been the biggest opponents to parts of the reform in the manufacturing sector.

To ensure genuine traction for the new National Manufacturing Policy (NMP), it is absolutely vital to liberalise India’s labour markets, otherwise there is a disincentive for industry to create jobs.

For this to happen, government agencies, industry representatives and representatives of major unions need to understand each other better. Unions need to be made to understand that flexibility in the movement of labour (through necessary amendments in the Industrial Disputes (ID) Act, Contract Labour Act, Factories Act, etc.) is in their interest as much as it is in the interest of company managements, as it would create many more jobs and make more talent available to the industry.

Membership intake within unions over the years has declined sharply because there has been a

significant decline in the recruitment of fresh workers. Thus, flexible laws on entry and exit of workers would encourage companies to step up hiring, create more jobs, which in turn, would allow unions to increase their base and take a more productive stand.

India’s need for its manufacturing sector to grow, prosper and expand dramatically stems from its sheer potential to create multipliers. According to the Asian Development Bank, in China, every

1% growth in GDP has reduced poverty by 0.8%, whereas in India 1% growth has reduced poverty by only 0.3%. This is because India’s growth driver has mostly been services, and not manufacturing.

The manufacturing sector scores over the service sector on two counts: first, it has a higher job-creation potential at the lower end of the economic pyramid. Second, the manufacturing sector also provides far more buoyancy to the government’s coffers – both factors are crucial in a developing country such as India.

However, for many decades, the lack of government backing has ensured a low position for manufacturing in India’s economic priorities. The state-driven missionary zeal seen for setting up and facilitating global scale manufacturing facilities in countries such as China, Korea, Thailand and Malaysia has somehow been missing in India, even 20 years after the economic reforms.

The supportive infrastructure environment for doing business has traditionally been poor. Not only do firms pay a much higher price for power in India than elsewhere in the world, they also face much greater uncertainty of supply. Likewise, despite considerable improvement, the transportation network in India remains unreliable and inefficient. While 57% of goods in India are transported by road – the most inefficient, expensive and emissions-intensive mode of transport – the figure in China is 22%.

The time taken, and therefore the cost incurred, to clear the goods entering and exiting the ports and to move the goods between ports and manufacturing sites, which is so critical for assembly and processing activities, is much higher and more variable in India than in the competing countries across Asia.

For decades, the policy environment in India discouraged manufacturing activity. Until the 1980s, India didn’t even encourage large scale labour-intensive manufacturing. Large Indian and foreign firms were confined to a positive list of capital-intensive sectors. For the companies even on this list, scale and size was restricted through licensing.

These restrictions were removed in 1991, and by

In the recent past, we have taken cold comfort in the belief that India’s manufacturing will never be mass-based like China’s; nor will it be capital-intensive like Europe’s or US’s – it will be skill-intensive.

Sunil Kant Munjal is Joint Managing Director of Hero MotoCorp.

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the new millennium, most labour-intensive products including toys, footwear, sports goods and apparel were taken off the reservation list. Even for products still on the list, large-scale production has been permitted with an export clause.

Yet labour-intensive manufacturing has remained stubbornly unresponsive – especially in assembly and processing activities – because of restrictive labour laws. It is difficult for the firms to even reassign the workers from one task to another. These provisions have not only resulted in very low worker productivity, it has also led to a shortage of skilled manpower in a country with such a large population and high unemployment.

In the recent past, we have taken cold comfort in the belief that India’s manufacturing will never be mass-based like China’s; nor will it be capital-intensive

like Europe’s or US’s – it will be skill-intensive. We also get enthused that India is creating its own niche in areas such as pharmaceuticals, chemicals, biotech, gems and jewellery, and automobiles.

We are hopeful that in these and a few other areas, India could emerge as a global hub. These are sectors where labour costs make up a smaller proportion of total costs and have somehow managed to operate in such an environment.

However, the very nature of these sectors means that job creation will not explode, in fact, as production volumes grow in India, multiple locations come up and these sectors have also started facing a shortage of skilled manpower.

It is therefore time to face up to the challenge and give the entire manufacturing sector its first real chance since independence to make a mark for itself.


The new National Manufacturing Policy (NMP), which aims to generate 100 million jobs and increase India’s GDP to 25% by 2022, is a positive development and will definitely put the manufacturing sector in a long-term high growth trajectory. The Confederation of Indian Industries (CII) believes that this is a positive development because India’s growth will falter without large-scale job creation and the service industry alone cannot deliver on the growth promise.

No major country in the world has become economically prosperous without going through long periods of manufacturing dominance. This is true of the US, Western Europe, Japan and now China; India cannot be an exception. A comparison with other emerging economies indicates just how much India has lagged in the manufacturing sector. Manufacturing in India contributes to a mere 15% of GDP, unlike other countries such as China (34%), Thailand (40%), South Korea, Poland, Turkey and Malaysia (approximately 26-30%), which are far ahead in this arena. Moreover, in last two decades, the Indian economy has moved from being largely agrarian to being more service-oriented, skipping the phase of industrialisation. This is of utmost importance if India is to provide gainful employment to the millions, who are entering the working age population every year.

In India, the rising operating costs of companies have restricted their profits thus limiting their capacity to reinvest. Already-planned large investments are also being hampered on account of delays in environmental clearances and land issues. In addition, manufacturing industry growth over the years has been hampered by issues such as:• Hightransactionandcompliancecosts,• Stringent exit mechanisms,• Rigid labour laws,• Lack of skilled human resource, and• Inadequate infrastructure.CII has been raising these issues with the government and the announcement of the new NMP, which incorporates all these important aspects, is a welcome step. CII has made the following recommendations for a comprehensive policy for long-term high growth of manufacturing in the country and these are now part of new NMP.

National Investment and Manufacturing ZonesThe policy proposes to create National Investment and Manufacturing Zones (NIMZ). NIMZ would be an integrated industrial township having world-class infrastructure, will utilise clean and green

A Tonic For Spurring Growth

B Muthuraman, President, Confederation of Indian Industries (CII) and Vice-Chairman of Tata Steel, provides

an overview of the government’s National Manufacturing Policy (NMP) and its possible impact on businesses

in India.

BY B MUTHURAMAN

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technologies as manufacturing processes, and will have skill development facilities, etc. The proposed NIMZ would be “islands” that would have all the enabling provisions and suitable environment for manufacturing growth in the country.

Rationalise and Simplify Business RegulationsThe cost of compliance is quite high in India, which is further compounded by the multiplicity of inspections, delayed clearances & approvals that add further burden on the manufacturer.

The new NMP would rationalise and simplify business regulations through various path-breaking initiatives such as:• Doing away with irrelevant acts;• Encouraging self-certification and third-party

inspection such as the Boilers Act. [Boilers Act (1923) was formulated during the British rule to ensure safety of boiler users. Recently, the government decided to amend the act by allowing internationally accredited private agencies to inspect and certify the boilers for safety.];

• Delegating power to a single body such as the Special Purpose Vehicle (SPV); and

• Systemising inspection and introduction of joint annual inspections with prior intimation.

The current policy would simplify business regulations as it has incorporated pre-existing best practices of various states and adopted them for the NMP.

Exit MechanismCurrently, a sick unit cannot be shut down very easily as the current exit mechanisms for sick units are complex and time consuming. This leads to locking of funds and assets. The policy has taken a very balanced approach to this problem by suggesting progressive exit mechanisms and also providing a safety net for workers at the same time. It has proposed measures such as job loss policy and alternative option of

sinking funds, asset redeployment options, provisions for providing suitable worker compensation, clearing debt and reinvestment of income generated from the disposal of assets, etc.

Technology Acquisition and DevelopmentIn India, technology acquisition and development is another challenge that we face. Meeting this is critical for achieving our manufacturing aspirations and becoming globally competitive.

The policy envisages creating of Technology Acquisition and Development Fund (TADF), which would facilitate technology acquisition, creation of patent tools and development of domestic manufacturing equipment. The provisions have been made especially for micro, small and medium enterprises (MSMEs) for reimbursements on technology acquisitions and patent tools. The policy also proposes to focus on green manufacturing technology, which is identified as a new avenue for manufacturing growth by the CII-BCG report on Manufacturing.

Skill DevelopmentLack of skilled manpower is another constraint for growth of the manufacturing sector. With some other government policies [such as Mahatma

Gandhi National Rural Employment Guarantee Act (MNREGA)], wages have gone up considerably reducing the availability of labour force. The identification of skill development as area for policy intervention by NMP would help address the issue of shortage of workforce.

Micro, Small & Medium EnterprisesMSMEs play a pivotal role in the overall industrial economy of the

Manufacturing in India contributes to a mere 15% of GDP, unlike other countries such as China (34%), Thailand (40%), South Korea, Poland, Turkey and Malaysia (approximately 26-30%), which are far ahead in this arena.

B Muthuraman is President of the Confederation of Indian Industries (CII) and Vice-Chairman of Tata Steel.

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country. MSMEs are thus important for the national objectives of growth with equity and inclusion.

The policy aims to curb the bottlenecks faced by MSMEs such as access to adequate and timely funds, by providing exemptions from capital gains tax for investments in enterprises, enabling venture capital funds, liberalising Reserve Bank of India (RBI) norms and Insurance Regulatory & Development Authority (IRDA) guidelines, setting up Stock Exchange for SMEs, creation of separate funds with Small Industries Development Bank of India, etc.

Domestic Value AdditionThe policy envisages using government procurement as policy instrument for the growth of manufacturing

sector in India. It stipulates local value addition for government procurement to develop domestic manufacturing. Similar local value addition in respect of infrastructure sector is also proposed, where government agencies and public sector import equipment to boost manufacturing growth in the sector.

With the new NMP coming close to becoming a reality, there is optimism and hope within industry, that this large missing part in India's economic reform is finally getting addressed and CII is hopeful that the policy would be implemented soon. It is extremely important now that consultation process with the states is expedited on the new NMP for faster implementation.

The policy proposes to create National Investment and Manufacturing Zones (NIMZ). NIMZ would be an integrated industrial township having world-class infrastructure, will utilise clean and green technologies as manufacturing processes, and will have skill development facilities.

ISB INSIGHT 19 FEATURES

Features20 THE CULTURE OF TRUST AND NEGOTIATION

23 FASHION INDUSTRY: A STORY OF CONSUMPTION AND WASTE

26 ELECTRONIC RETAILING: INCREASING IT CAPACITY MAY ALIENATE CUSTOMERS

29 ORAL INSULIN: BREAKTHROUGH INNOVATION AT BIOCON

20 ISB INSIGHTFEATURES

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A decade of explosive growth has resulted in India becoming the world’s fourth largest economy in 2010. As India’s development continues, business negotiations, both within India and across cultures, will increasingly determine whether the country stagnates or integrates into the world economy. If Indian managers can use negotiations to create joint gains (value that benefits both themselves and their counterparts), then deals would get made and businesses would prosper. On the other hand, if Indian managers negotiate poorly – reaching deals that leave potential gains on the table – India’s businesses will suffer, with consequences for its billion-plus citizens and the broader global economy. Hence, it is critical to understand how managers can successfully create joint gains.

Economies of the world are inter-connected; this creates a need for negotiations that span different cultures. This has spurred an interest in understanding the impact of culture on negotiation in various settings. For example, there are cultural

differences in negotiation strategies that manifest early during negotiations. While Western negotiators (e.g. Americans) tend to rely on information-sharing strategies, their Eastern counterparts (e.g. Japanese) tend to rely on offer-making strategies. The existence of cultural differences in negotiation strategies is rather well-documented in empirical research but why culture impacts negotiation outcomes is less understood.

Culture and Trust People from different national cultures vary in their willingness to trust one another. Typically, Westerners (i.e. North Americans, Western Europeans) tend to make the “swift trust” assumption: others deserve to be trusted until they prove otherwise. In contrast,

Easterners (i.e. East and South Asians) not only generally trust less than Westerners but also condition their trust on the situation. This brings to forth the question as to why some cultures, whether Western or Eastern, trust more than others.

How do cultural differences in trust impact negotiation outcomes? Professor Amit Nandkeolyar writes from a

recent research conducted with colleagues Dishan Kamdar from the Indian School of Business (ISB), and Brian

Gunia and Jeanne Brett, both from the Kellogg School of Management.

BY AMIT NANDKEOLYAR

The Culture of Trust and Negotiation

We propose that the absence of clear institutional norms and sanctions suggest that interpersonal and not institutional trust is the primary driver of behaviour in negotiations. In particular, negotiators from tight cultures such as India, who depend on institutional trust, should trust little in negotiations.


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Recent studies have suggested an answer: High and low-trust cultures have different mechanisms for controlling behaviour. Cultures in which social norms are clearly defined and reliably imposed (i.e. “Tight Cultures”) tend to enforce behavioural expectations through monitoring and sanctioning. Individuals from these cultures tend to rely more on institutional trust than interpersonal trust to control behaviour and sanction deviance. The term "institution" is commonly applied to customs and behavior patterns important to a society, as well as to particular formal organisations of government and public service. For example, industry, religious system, marriages, military, judiciary, educational community are all various types of institutions. Trust in these institutions, such as government or military, would constitute institutional trust unlike interpersonal trust i.e. trust in a person. One of the primary psychological indicators of cultural tightness is “felt accountability” or the subjective weight of others’ expectations. Psychological research has thoroughly documented how Indian culture fosters higher felt accountability than the US culture by framing everyday social responsibilities as moral, rather than personal choices. One reason for substantial felt accountability is that Indian culture affords numerous and overlapping institutional guarantors of behaviour. From childhood, Indians learn that many, if not most, social interactions are embedded in family networks and that family members – even distant ones – stand ready to monitor and sanction deviance. Indian traditions, such as weddings, reinforce the salience and potency of family ties and may also provide opportunities for monitoring and sanctioning. In all of these ways and others, Indian society reinforces cultural tightness. In contrast, cultures, for example, the US, in which social norms are relatively flexible (i.e. “Loose Cultures”) and informal, typically propose expectations but permit individuals to define range of tolerant behaviours within which they can exercise their own preferences. Thus, enforcement in loose cultures is left to interpersonal mechanisms.

People in strong cultures do not need the social intelligence to find out who is trustworthy – trust is not needed. The strong norms and sanctions underlying institutional trust in “tight” cultures seem to eliminate the need for interpersonal trust. As long as the institutions remain in force, interpersonal trust is unnecessary, and a lifetime of externally controlled situations prevents individuals in such cultures from developing much interpersonal trust. Conversely,

cultures with weak norms and sanctions afford few external guarantors of behaviour. Smooth social interaction requires individuals from such cultures to extend one another interpersonal trust. A lifetime of situations relatively free from external constraint leads these individuals to trust swiftly and have faith in one another, unless and until their trust is violated. In sum, institutional and interpersonal bases of trust appear to substitute each other. We propose that the absence of clear institutional norms and sanctions suggest that interpersonal and not institutional trust is the primary driver of behaviour in negotiations. In particular, negotiators from tight cultures such as India, who depend on institutional trust, should trust little in negotiations.

Trust and Negotiations How does trust impact negotiation outcomes? Empirical evidence suggests that use of high or low trust is associated with the usage of one of two negotiation strategies: Questions & Answers (Q&A) and Substantiation & Offers (S&O). As the name implies, Q&A involves asking questions and providing answers early in the negotiation. It entails sharing information about the preferences, priorities, and interests. In contrast, S&O implies that substantiation complements offers by justifying a negotiator’s own demands and by challenging the counterpart’s rationale (i.e. logic, assumptions, or facts) or using emotional tactics (e.g. threats, power plays, appeals to fairness). In general, high-trusting negotiators use the Q&A strategy as they believe their partners will use the shared information in a mutually beneficial way and not take advantage of it. However, low trusting negotiators stick to the S&O strategy as they are concerned that their counterpart may exploit shared information – so they question the need to ask or answer truthfully. We propose that high-trusting Americans will use the Q&A strategy more than Indian negotiators. Likewise, low trusting Indian negotiators will use the S&O strategy more than American negotiators.

Use of negotiation strategies is critical to creating mutually beneficial joint gains. Creating joint gains involves reaching insights, i.e. discovering the trade-offs that give negotiators favourable terms on their highest priority issue(s) and incorporating those insights into agreements. In order to achieve insight or an understanding of underlying priorities,

Amit Nandkeolyar is Assistant Professor of Organisational Behaviour at the ISB.

22 ISB INSIGHT

negotiators need to use Q&A strategy as they facilitate information sharing about preferences, interests and priorities. This promotes higher insights, more trade-

offs and higher joint gains. Relying on S&O focuses on positional, issue by issue haggling, and parties tend to miss the relevant trade-offs, have lower insights and realise poor joint gains.

To summarise, if Q&A strategy is positively related and S&O is negatively related to insight and American negotiators use more Q&A and Indian negotiators use more S&O, then American negotiators are expected to have greater insights into each others’ priorities than Indian negotiators do. Finally, as insight is positively related to joint gains, we also expect Americans to negotiate higher joint gains than Indians.

Based on three separate samples of participants enrolled at the Indian School of Business (ISB) and the Kellogg School of Management in MBA and Executive Education programmes, we find support for the propositions that Americans were more trusting, used more of the Q&A strategy, obtained more insights, and achieved higher joint gains compared to their Indian counterparts. Indian negotiators were less willing to trust than American negotiators; they reported using more of the S&O strategy, realised fewer insights, and lower joint gains than their American peers. All three studies provided strong support of causal relation between culture and joint gains. Figure 1 depicts the schematic diagram of the theoretical model.

Our results suggest that in India or in other tight cultures, behaviours indicative of trust should primarily emerge in situations governed by strong institutions.

A pertinent example might be negotiations over a marriage contract, which involves protracted and highly ritualized interactions between two families

over issues from gifts to guests. Given that the beliefs and values within a culture are resistant to change, it is important for managers to understand negotiators’ cultural orientation towards trust.

In light of India’s tremendous economic success, our results suggest that Indian managers will benefit from creating more joint gains that may facilitate further economic development. We suggest several ways in which low-trust negotiators can benefit by achieving high joint gains. Even negotiators with high propensity to trust may find these prescriptions useful when negotiating with low-trust counterparts. First, the low-trust negotiators could be trained to signal their own trustworthiness and to analyse whether their counterparts are reciprocating. Second, they can also be trained to “read” the offer patterns, and glean insights into the counterparts’ priorities. Finally, the low-trust negotiators could be encouraged to rely more heavily on multiple-issue (as opposed to single-issue) offers, which build upon their primary preference for S&O.

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We find support for the propositions that Americans were more trusting, used more of the Q&A strategy, obtained more insights, and achieved higher joint gains compared to their Indian counterparts.

1For a detailed review of empirical evidence of impact of culture

on negotiation outcomes, please refer to the following publication.

Gunia, B. C., Brett, J.M., Nandkeolyar, A. K. & Kamdar, D. (2011).

"Paying a Price: Culture, Trust, and Negotiation Consequences."

Journal of Applied Psychology, 96, 774-789. This article contains

edited and summarised excerpts from the original article.

Negotiation Strategies

InsightCulture Trust Joint Gains

Figure 1: The causal relationship between culture, trust, strategy, insight, and joint gains


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Fashion Industry: A Story of Consumption and Waste

The fashion industry is one of the largest industrial sectors in the world. According to United Nations Environmental Program, the fashion sector – comprising textile and apparel creation and production, is the second largest global economic activity in terms of trade. The global sector is valued at $1.44 trillion. The Indian industry generated $63 billion in 2010, accounting for14% of industrial production and 4.5 % of GDP. India, one of the largest producers of textiles and apparel, employs 35 million workers, second only to agriculture. I have recently started a project to explore the challenges and opportunities for sustainable, ethical fashion in India. The industry is so large that changes made here would have significant worldwide impact.

The fashion supply chain is diverse and complex, spanning four or more tiers, including design, raw material harvesting, spinning, yarn production, dyeing, weaving, cutting, stitching and final garment construction. It incorporates handcraft and cottage workers as well as high-volume technology intensive facilities. Fashion supply chains and processes frequently cross international boundaries in pursuit

of ideas and inspiration for design, and to access labour during garment construction. My research focuses on the design process – the adaptations made to accommodate ethical concerns and the effect on supply chain relationships. You cannot achieve sustainable production without a sustainable design. Designers can have significant effect as their choices drive production in the near term, and fashion trends in the longer term. Designers’ decisions about fabric,

construction and production techniques constrain or facilitate the activities throughout the supply chain.

Fads that Add Fashion leaves a terrible environmental footprint along its entire supply chain. Textile and garment production facilities are large consumers of water and energy. The raw materials used in fibre production may be synthetic, such as rayon and nylon, animal-based, such as wool and silk, or plant-based, such as cotton and flax. Each of these raw materials has a drawback. Synthetics are often petroleum-based, slow to decompose and difficult to recycle. Animal-based fibres use large quantities of water in washing and processing. Conventionally grown, plant-based fibres rely on petro-chemical pesticides, herbicides and fertilisers. Artificial dyes may contain heavy metals, such as copper and chromium, which accumulate in ground water supplies, and are toxic to fish and humans. In addition, the various stages of textile and garment production process use solvents and hazardous chemicals that generate toxic waste water and volatile emissions.

The trail of damage to the environment continues even after the garments reach the end of the supply chain and onto the consumers’ hands. Much of the environmental impact occurs during use due to frequent machine washing, drying and ironing. Laundering consumes significant water, while machine drying consumes energy and emits greenhouse gases. Many of the surfactants used in detergents are toxic to aquatic life and persist in the environment for a long

Professor Tonya Boone draws upon her research on sustainable supply chains to discuss the impact of fashion

industry on the environment and the implications of fast fashion for India.

One consequence of fast fashion has been an explosion in consumption accompanied by increased waste.

BY TONYA BOONE


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time. Many items also require dry cleaning, which uses petroleum-based solvents that have been linked to nervous system damage, and are possible carcinogens. A BSR (Business for Social Responsibility) life cycle analysis concluded that laundering accounted for at least 40% of apparel greenhouse gas emissions.

Fashion Trends: Fast, Furious and Disastrous Fast fashion, which references apparel with short product life cycles, has emerged as a potent competitive force. Fast fashion brands introduce new styles at more frequent intervals, focusing less on durable quality, and more on low costs and up to the minute designs. One consequence of fast fashion has been an explosion in consumption accompanied by increased waste. A 2006 University of Cambridge study found that UK consumers were buying one-third more clothing in 2006 than in 2002, with only a fraction being recycled. According to the US EPA (Environment Protection Agency), more than 13 million tons of textiles were disposed of in the US in 2010. Only 15% was diverted from landfills or waste systems.

Flouting Labour Laws The managerial malpractices in textile and apparel production have been cited in many reports. Researchers have concluded that labour laws were regularly violated in the fashion industry. A 2009 global survey by the International Trade Union Confederation found that apparel and textile manufacturing are among the worst violators of labour rights and fair trade practices. Abuses identified by the researchers include killings, threats, forced overtime work, physical abuse, low wages, poor working conditions and lack of sick leaves. A 2009 study of working conditions in the US fashion industry by a coalition of labour researchers found the following abuses: unpaid overtime, denial of breaks, illegal pay deductions and retaliation for reporting illegal practices. Indian apparel and textile manufacturers have been blacklisted by the US department of labour because of child and forced labour.

The growth of mass production, and particularly fast fashion with its short product life cycles, has exacerbated environmental and social impacts. Over the last several years, India has witnessed a change in purchasing patterns, as consumers shift their apparel purchases from custom work by tailors to ready-to-wear. The ready-to-wear market is forecast

to grow from C 1,543 billion in 2009 to C 4,000 billion in 2015. Ready-to-wear offers more styling options, convenience, consistent quality and reduced time required to receive a finished garment. Mass production, however, displaces local artisans and crafts people. It moves self-employed workers, such as tailors to wage workers. The displacement of local artisans risks the loss of local techniques and skills.

The proposed FDI scheme by the Indian government could have a tremendous impact on this sector. It will likely accelerate penetration of retail into rural areas, and consequently, the growth of the ready-to-wear market. Proponents expect FDI will reduce prices for consumers. This is likely to put downward pressure on wages as garment construction is highly labour intensive.

Ethical Fashion: A Step in the Right DirectionSustainable or ethical fashion is a response to the environmental and social devastation wrought by conventional production techniques. It strives to provide a platform for ethnic communities and artisans, just treatment for workers and mitigation of harmful environmental effects. Ethical fashion captures some model examples of business social responsibility and environmental sustainability throughout the fashion supply chain.

My research has identified three primary approaches that designers use to incorporate sustainability. These approaches vary in the extent to which they address social and/or environmental issues. The first category of designers focus primarily on reducing negative environmental impacts. They may try to lessen negative environmental impacts through material choices, by selecting next generation synthetics, recycled or organic raw materials in their designs in order to reduce resource consumption or the use of pesticides. Alternatively, some have adopted fabric innovations based on bio-mimicry, nanotechnology or modularity to extend garment life or stretch time between washing. Other environmentally focused designers specify colours based on natural dyes which eliminate the toxic effects of dyeing. Also, in this category are designers who adopt construction or production techniques to mitigate negative environmental effects. These designers typically insist on using sources that adhere to environmental standards, such as organic certification or, they may adopt construction techniques such as modularity or that allow consumers to customise the garment.


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Next are designers who focus primarily on reducing the negative social and cultural impacts of fashion production. Designers in this category insist on fair trade and labour practices. In addition, they may choose textiles and construction techniques that rely on traditional weaving and handwork techniques that support local craftspeople and artisans. For example, several Indian designers are showcasing modern garments that draw on India’s varied and rich textile traditions, incorporating for example, hand block printing, and chanderi and khadi techniques and textiles. Designers often use ethnic identities and native cultures as a source of inspiration and branding – frequently without giving credit or acknowledgment to the respective cultural traditions or artisans. In addition, conventional design processes tend to be relatively linear, with designers and their buyers sourcing raw materials and garments without much input from manufacturers. Some ethical designers, on the other hand, integrate craftspeople and artisans into the design process, providing them with recognition and compensation for their craft. In effect, they become collaborators with the designer rather than labourers. This allows the designer to benefit from their knowledge about fibres, fabrics and techniques while providing timely market feedback to the artisans about their work.

Finally are designers who address environmental and social issues through their choices. This is the most challenging category. It requires vigilance and accountability throughout the supply chain. These designers may work with Global Organic Textile Standard (GOTS) certified facilities. GOTS indicates that a manufacturer’s entire supply chain meets specified environmental and social criteria, and their performance has been independently verified. By October 2011, India had more GOTS certified facilities than any other country. A number of companies have built brands around environmental and social performance. Patagonia, a US supplier of athletic apparel, is famous for its commitment to environmental sustainability. Alta Gracia, a Dominican Republic based supplier of collegiate apparel has built a loyal following on 450 US college campuses by committing to respecting worker rights and paying a living wage. Bhu:sattva is a venture based in Ahmedabad, distinguishing itself through environmental and social responsibility, as well as cultural sensitivity. The number of designers who adhere to fair trade and environmentally responsible practices is growing slowly. Their work has been

showcased during fashion week in London, New York, Paris and Milan.

Ethical fashion relies on conscious consumption by consumers. Designers are able to influence buyers’ behaviour to some extent, but consumer engagement is important. Consumers’ ethical fashion practices borrow heavily from practices around sustainable food. First, slow fashion attempts to manage the natural tension between fashion and consumption. Slow fashion is about buying fewer but longer lasting garments. It stresses thoughtfulness in apparel selection. It emphasises durable, aesthetic and construction quality, and opposes standardisation and fashion fads.

Next, the local fashion movement emphasises the importance of place in fashion in order to strengthen the relationship between consumer and producer. One goal of the movement is to make consumers more aware of the physiological as well as physical needs that fashion fulfils, and to consider the entire life cycle impacts of clothing – from raw material to disposal. Proponents of these consumer movements contend that getting consumers to buy clothes that reflect geographic place, better help to fulfil the psychological needs that fashion represents. Buying local also helps to sustain local materials and skills. Buying clothes close to their point of production helps to reduce the environmental impact of transporting clothing globally.

Ethical fashion requires collaboration between designers, manufacturers and consumers to adequately address the impact of production processes and consumption patterns. Ethical designers must meet consumers’ needs in terms of style, comfort, quality, value and aesthetics while minimising environmental and social impacts. Consumers must consider how their buying habits and patterns of apparel use affect environments and cultures. Professor Rishtee Batra of the ISB, and I are beginning a study in which we investigate the alignment between the aesthetic qualities desired by consumers and those provided by the designers. Sustainable and ethical fashion production poses a challenge to designers, producers and consumers. However, it also represents a source of creativity and innovation. Ethical fashion presents India with an enormous opportunity to capitalise on this movement in its nascent state.

Tonya Boone is Associate Professor of Operations Management at the Mason School of Business, College of William and Mary, and a Visiting Scholar at the ISB.


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Over the last decade, the number of Internet users has increased by leaps and bounds reaching 1.97 billion worldwide in June 2010 – up from only 45 million in 1995 and 361 million in 2000. Following this rapid growth in Internet usage, the number of online shoppers has also risen dramatically. For example, more than 627 million people worldwide have shopped online by October 2005. Furthermore, the US retail e-commerce sales grew 11% in 2009 to reach $155.2 billion and are expected to reach $248.7 billion by 2014.

Commensurate with the increasing number of online shoppers, there has been an explosive growth in the number of electronic retailers worldwide in last few years. An aspect of online shopping that is of interest here is the presence of processing delays at e-commerce sites. There are several potential causes of the delays associated with serving customers at an e-commerce site. Of these delays, there are some that are outside the control of the firm, e.g., the delay at the client end caused by a slow processor or network connection. The delays that can potentially be influenced by the firm’s decisions could be related

to network delays caused by network devices, such as switches and routers, and the network connecting to the server, or server delays caused by delays at the firm’s website. In this research, IT capacity refers to capacity that can be increased by the firm to reduce delays experienced by online shoppers.

There is considerable empirical evidence that processing delays indeed matter: online shoppers have been found to be very sensitive to processing delays at websites and are prone to abandon shopping if the processing speed is slow. Websites with lower download delay are typically accompanied with greater perceived success by site users. Around 69.4% of all potential online transactions are abandoned and one of the biggest culprits is the poor response time associated with satisfying a customer request. Zona Research Study estimates losses associated with response times of eight seconds and higher to be $4.35 billion annually, whereas the average response time for top 15 e-retailers in July 2005 was 20.16 seconds. A survey shows that the consumers shopping via a broadband connection are even more impatient and will wait no more than four seconds for a web page to render, and 33% of dissatisfied online shoppers attribute their dissatisfaction to the website being too slow. A recent study finds that quoting the lowest price increased the overall satisfaction in only 5% of the top 100 online retail sites, but the site experience, especially performance, provided the biggest payback to retailers.

The examples mentioned above seek to persuade

Electronic Retailing: Increasing IT Capacity May Alienate Customers

Do firms or the customers always benefit when an electronic retailer increases its IT capacity or advertising

effectiveness? Professor Subodha Kumar writes from his research.

In this research, IT capacity refers to capacity that can be increased by the firm to reduce delays experienced by online shoppers.

BY SUBODHA KUMAR


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the reader that Information Technology (IT) capacity could be a significant bottleneck in many e-commerce sites – sometimes the traffic arriving at the site may be too high for the installed level of IT capacity. Thus, the goals of reducing delay and generating more traffic are usually in conflict with one another. While more traffic can be generated through advertisement, the higher traffic can slow down the site so that the conversion of arrivals to purchases may suffer. Given that the IT capacity limitations can adversely affect the revenue of e-commerce firms, electronic retailers must factor this constraint while choosing the optimal level of advertising. Most previous studies, however, have ignored the interaction between the IT capacity of a firm and the corresponding optimal advertising level. As IT matures and becomes an integral part of firm’s operations, its role in traditional business decisions needs to be re-evaluated. This role is especially relevant for an online business when deciding on the

optimal advertising expenditure for the firm. In this study, we analyse the advertising effort for electronic retailers in a duopolistic setting where the two firms have different IT capacities.

Customer RenegingIn a typical e-commerce website, similar to a processor sharing system, the IT capacity constraint affects the processing time of requests submitted by customers. This limited capacity could potentially lead to customer reneging and loss of revenue. To estimate this loss, we consider three possible outcomes of a customer’s visit. First, the customer may make a purchase. Second, the customer may browse the site, but at the end, decide not to make a purchase because of reasons other than a slow response time. Finally, the customer may leave the website before the purchase decision because of slow response time. In this study, we focus on the third scenario or customer reneging.

Several studies have shown that reducing the number of customer requests (for processing) has the single biggest impact on improving response time and reducing reneging. If reneging is excessive, it may be better to reduce the level of advertising and divert

some resources to improve response time. We show that the traditional advertising decisions dramatically change in the presence of IT constraints. We consider IT capacity constraints at both firms and obtain optimal advertising paths (and the corresponding traffic) for the firms. Our analyses clearly demonstrate that, in the presence of IT capacity constraints, advertising strategies must be carefully managed by electronic retailers.

Controlling Wasteful ExpendituresOur study provides several interesting results for the managers of the electronic retailers. First, we show that, under certain conditions, as the IT capacity of a firm increases, the total number of customers finishing the transaction at both of the firms decreases. In other words, increase in the IT capacity of a firm may alienate more customers. This is a counterintuitive and surprising result. However, it can be explained

as follows. Whenever a firm increases its IT capacity, it advertises more in order to attract more customers from the other firm. Under certain conditions, the firm may not be able to handle the additional traffic in an efficient manner. Hence, in those conditions, the total number of customers finishing the transaction may decrease. We further analyse the conditions under which such scenario is possible. We find that it is possible only when the customers are highly impatient and the IT capacity of the other firm is high.

The main takeaway from the above discussion is that without IT capacity constraints, there is no negative impact on consumers; each firm tries to attract more traffic, but at the end, each consumer is served by either of the two firms. However, in the presence of IT capacity constraints, the equilibrium levels of advertising could not only hurt the profits of the firms, but more IT capacity could increase the dissatisfaction among the customers. In this scenario, a policy-maker may want to intervene by

A recent study finds that quoting the lowest price increased the overall satisfaction in only 5% of the top 100 online retail sites, but the site experience, especially performance, provided the biggest payback to retailers.

Subodha Kumar is Assistant Professor in Information and Operations Management at Mays Business School, Texas A&M University, and a Visiting Scholar at the ISB.


Features

introducing some mechanisms that ease wasteful advertising expenditures (e.g., by imposing a Pigovian tax – A special tax that is often levied on companies with negative externalities.)

Next, we find that, an increase in the advertising effectiveness of a firm may also reduce the number of customers finishing the transaction. The condition under which it happens is same as that in the case of IT capacity, i.e., when the customers are highly impatient and the IT capacity of the other firm is high. Furthermore, since the marginal benefit of advertising increases with an increase in the advertising effectiveness, we would expect advertising to increase with the increase in advertising effectiveness. However, when the marginal cost of advertising exceeds the marginal benefit, the firm will reduce its advertising level. Because of these two opposing effects, we find that the advertising expenditure rate does not always increase with advertising effectiveness. Specifically, the advertising rate increases with the advertising effectiveness at the lower level of advertising effectiveness, whereas it decreases at the higher level of advertising effectiveness. This result can be explained in the following economic terms. When the effectiveness of a resource initially increases, more of it gets used because its marginal benefit continues to be higher than the cost, but as further use of it is made, diminishing returns set in and its use begins to decrease. In summary, the firms need to be prudent in spending dollars on advertising as well as on improving advertising effectiveness.

We also found another interesting and surprising result: As the average value obtained by the firms from each customer increases, the advertising expenditures of both firms increase but their arrival rates remain unchanged. This result may seem counterintuitive at first glance but can be explained as follows. As the average value increases, it encourages both firms to advertise aggressively in an attempt to attract more customers. However, while the arrival rates (Average rate at which customers arrive to the system) for either firm do not change, their advertising costs increase. In summary, an increase in average value triggers unhealthy advertising competition between the firms. Again, this result alludes to the fact that the firms need to control wasteful expenditures under competition.

Customers’ Impatience LevelWe find that that the higher capacity firm gains when customers are more impatient. Based on our results,

we conclude that as the impatience level increases, the increase in reneging for the higher-capacity firm is more than the increase in its arrival rate. Unless the possibility of market expansion is considered, in traditional advertising problems, the loss of one firm is always the gain of the other firm, i.e., the total loss in the system is zero. On the other hand, our results show there is a positive loss in the system in presence of the IT capacity constraint, because customers can renege. This is an important result for managers because it highlights the significance of considering IT capacity constraints and customer behavior at e-commerce sites in what are traditionally considered to be pure marketing decisions.

Further, when customers become more impatient, both firms reduce their advertising rates. Since reneging increases substantially with impatience and one firm does not gain everything from the loss of the other firm, it is not advantageous for either firm to advertise more with an increase in the impatience level. We also note that the difference between the advertising expenditure rates of firms increases at higher impatience levels. This result indicates that when impatience levels are relatively high, the more effective and the higher capacity firm should advertise more as compared to the less effective and the lower capacity firm.

Similar FirmsFinally, we analyse the scenario when the firms are very similar in terms of IT capacity and advertising effectiveness. In this case, the marginal benefit of increasing advertising (following an increase in the advertising effectiveness) is always more than its marginal cost. This result is clearly different from the results discussed earlier for the case when the firms are not similar. Earlier we also discussed that, under certain conditions, increasing IT capacity of a firm may result in higher customer dissatisfaction. However, when the firms are similar, increasing IT capacity always makes the customers happier and more people complete the transaction.

1For a more detailed analysis, see the following article: D. Liu, S.

Kumar, and V.S. Mookerjee, “Advertising Strategies in Electronic

Retailing: A Differential Games Approach,” Information Systems

Research, forthcoming. This article contains edited and summarised

excerpts from the original article.


Features

Oral Insulin: Breakthrough Innovation at Biocon

"It has been my dream to make a global impact with a “Made in India” label. I think a lot of my generation comes from that frame of reference. We have always had to apologise for India and now is the time we don’t want to apologise for our country. We want to be proud of it." - Kiran Mazumdar-Shaw

The morning of April 27, 2009 witnessed intense activity at Biocon’s Bangalore office, where the future of oral insulin IN-1051 was being discussed. As they completed their presentations to the committee, Harish Iyer, Head of R&D at Biocon, and Anand Khedkar, Senior Scientific Manager of the project, posed a tough question before Biocon’s senior management: How much risk was it ready to take with IN-105?

Biocon’s management was faced with the dichotomous situation of a financial crunch due to declining profit margins in 2008-09 on the one hand, and the possibility of creating a global profile as a leading Indian innovator, on the other. Encouraged by positive global reviews from Phase II studies of the IN-105 concept, management at Biocon was toying with the idea of proceeding with Phase III studies. Kiran Mazumdar-Shaw, Founder and CEO of Biocon, was in a dilemma with regards to the scale of the study – whether to have it within India or outside; should it be done in-house or with a partner? Unlike many of Biocon’s projects in the generics arena, this project would require a significant resource commitment, with very little guarantee of success. However, if successful, it would open up a substantial global opportunity for the company.

Biopharmaceuticals IndustryThe global biopharmaceuticals industry revenue was expected to grow at compound annual growth rate (CAGR) 3.6% from 2008 to reach US$ 734 billion by 2013. The biotech sector alone had been growing at 10.2% per annum from 2005 to 2009 and was expected to reach a value of US$ 318.4 billion by the end of 2014. The biotechnology industry was mainly located in advanced global economies. India ranked 11th world over with 325 firms and was ranked 4th in Asia-Pacific.

The industry developed products through discovery R&D (production of new chemical entities or NCEs) as well as reproduction of generics (drugs which were in the market, but out of any patent protection). A company got patent for a new chemical entity (NCE) or a production process for only 20 years, after which generic drug versions could be developed and sold by other companies. Drug development, from discovery to marketing, was estimated to require an investment of nearly US$ 1 billion and industry profitability was under constant attack as costs continued to rise and prices came under pressure. Industry experts estimated that on an average only 25 truly novel drugs, termed within the industry as NCEs got approval for marketing in any single year. This approval involved a heavy investment in pre-clinical development and clinical trials, as well as a commitment to ongoing safety monitoring. What added to the woes was that the development of any NCE took 10 to 15 years, going through three main phases of clinical trial (see Figure

The quest to be recognised as a global leader in innovation led Biocon to discover and develop IN-105, oral insulin

for diabetics. Faced with initial success, the Biocon team was rearing to charge ahead with the final testing.

Everything looked rosy, but was it actually so? Nita Sachan, Senior Researcher, Biocon Cell for Innovation

Management at the Centre for Leadership, Innovation and Change (CLIC), Prasad Kaipa, Senior Research Fellow

& Director Emeritus, CLIC, Anand Nandkumar, Assistant Professor of Strategy, ISB and Charles Dhanaraj, Head

& Senior Research Fellow, CLIC are co-authors of this case.

BY NITA SACHAN, PRASAD KAIPA, ANAND NANDKUMAR AND CHARLES DHANARAJ


Features

1). Thus, having only 20 years of patent protection meant that companies hardly had time to recover the money they had invested. Adding fuel to fire was the fact that development and approval of generics was less risky and inexpensive compared to the original drug. Generics were typically sold at one-tenth of the original drug price, if not less.

As drug development costs soared, global pharma

companies started looking to emerging markets such as India and China, where pharmaceutical production and clinical trial costs were at least 50% lower than in Western nations. Although funding continued to be a major constraint, several Indian firms got encouraged by the new patent regime coupled with the large pool of local talent and returning Indian diaspora, to foray into discovery R&D and the generics business. Mazumdar-Shaw reflected:

“The Indian pharmaceutical sector in general has thrived on generics or me-too products. In the biotech industry, too, most companies are opting for bio-generics. In Biocon, we have balanced our portfolio between bio-generics and novel research programmes. The talent you require for bio-generics is no way inferior to novel research. Yes, you have to invest far more because you're doing something for the first time. The difference between bio-generics and novel research isn't so much about the talent as the management’s risk appetite.”

Biocon Over the YearsWhat started as a small biotech garage-outfit in 1979, in less than 30 years became the number one biotech

firm in India with global sales of US$ 712 million in more than 75 countries. Biocon’s product portfolio consisted of 36 key brands across four therapeutic divisions of diabetics, nephrology, oncology, and cardiology. Mazumdar-Shaw led the company through several international partnerships and joint ventures. She ensured that the company remained up to speed with market developments and steered

Biocon and its subsidiaries3 into different areas of the biopharmaceuticals business. While the company had shied away from overly aggressive moves, it had consistently moved ahead in its quest to establish itself as an innovation leader. Keeping with this spirit, in 2003, she decided to move Biocon’s focus from the flourishing generics business to discovering NCEs. One such NCE was IN-105. Mazumdar-Shaw recalled:

“We believed that we had some advantage to focus on the oral insulin research programme. For a programme like this, the cost of goods is a major factor to be able to make commercial success. Our location, India, was a huge advantage for us in this. We can actually bring commercially viable oral insulin into the world market. Oral insulin would have a unique therapeutic effect as compared to plain insulin because of the way it is delivered. I really believe that it has the potential of reversing early stage diabetes.”

In the past several companies had made failed attempts at oral insulin formulations. Undeterred by this fact, Biocon continued developing IN-105 and had successfully completed Phase II of the clinical trial. Globally Biocon’s IN-105 was

Figure 1: Stages of clinical trials

Average US cost (in mil US$) Indian cost

Phase I

Clinical trials are the first evaluations to determine the safety, dosage range, or side effects of new drugs or treatments. Patient group size 20-200.

2050% less than the average cost in US

Phase IIClinical trials test the drug or treatments among a larger group of patients 100-500.

5060% less than average cost in US

Phase III

Phase III trials are used to confirm effectiveness, monitor side effects, and compare the drug or treatment to commonly used treatments. Patient group size 1,000-5,000.

10060% less than average cost in US


Features

considered one of the oral insulin programmes furthest along in its development. Many within Biocon felt that whether to go to Phase III or not was not the question. Since they had successful Phase II studies, the logical next step was to continue on with Phase III. But the exact way to go about it was what required deliberation.

As the management committee was meeting to finalise its strategy for IN-105, three major issues specific to IN-105 would be raised at the meeting: Should Biocon undertake this risky investment now? Should the clinical trial be local or global? And should they go with or without a partner? There were several issues which were brought to the fore: Phase III trials required huge investments and Biocon was just recovering from a major financial crunch after the global recession of 2008; several major pharma companies in India were shutting down their R&D units; moving to Phase III in India had its own advantages and risks, and the net value that a global partner would add was not known clearly.

Overall, there was consensus that IN-105 had the potential. However, the challenges associated with the molecule were not trivial. Along with the

execution strategy, senior management also pondered over Biocon’s ability to manufacture it at a lower cost in order to market it at a sellable price. Iyer and Khedkar were convinced of the move forward. Khedkar remarked:

“For over a hundred years, no one has been able to change the way insulin is administered. If Biocon is able to do it, then it completely changes the way diabetes is treated. Even if we fail, each step is a learning process for Biocon’s long term R&D capabilities.“

Mazumdar-Shaw clearly indicated the management’s intentions with her opening statement at the meeting:

“It is prudent at a time like this to remain committed to our innovation-led business strategy, which we believe will enable us to build a strong competitive edge for the foreseeable future. Innovation, we firmly believe, holds the key to leadership and profitability.”

The case summary was written by Arohini Narain, Centre for Teaching, Learning and Case Development (CTLC) at the ISB.

Cover Story


Face to Face33 BANK OF BARODA: A TURNAROUND TALE

37 NITISH SENGUPTA: ON REVIVING SICK PUBLIC SECTOR UNITS

40 INCULCATING A CULTURE OF RESEARCH

ISB INSIGHT 33 FACE TO FACE

Face to Face

You joined Bank of Baroda as chairman of the bank. That

is very interesting from a leadership-management-

change point of view, especially since you were an

outsider at that time and coming from banks that had

different business models from the Bank of Baroda.

Can you talk about your experiences coming into and

taking over this bank, the challenges faced and how

things have worked out since then?

In the last five years, the Indian public sector banks have transformed themselves. They were losing market share to the private sector and therefore, it was a question of survival. Banking sector should change to capture emerging market share. The best part is that we have been able to change seamlessly, without really disturbing the system. Today, I think the public sector as a group is competing strongly with the private sector despite the constraints and difficulties normally associated with the public sector. As a group, I think we have done exceedingly well, proving to the country that public sector banks can perform, provided they have a passion and strategy to excel. Three and half years ago, when I joined the bank, I found that it had a great legacy and value system that could be harnessed. Therefore, we took the journey of transformation forward. Two or three important things had happened before I joined. First, the implementation of a robust technology platform was created and there had been a migration to the core banking platform. Second, a brand-building exercise had begun and taken roots very strongly. The visibility,

strength and the image of the bank was slowly taking a much better shape than in the recent past.

Did you have a consultant on this?

No. The brand-building exercise and technology implementation had already started. These were two ongoing strengths that I had inherited. For me, it was a case of building a team that could respond to the needs of the hour. First, the idea had to be accepted in the bank. As a new CMD, how can one build and lead a team? Being a CMD coming from another bank, has both advantages and disadvantages but there are more advantages. You do not have past relation with team members. and therefore have no biases, whether extremely positive or negative.As a new CMD , it is the first hundred days that will make a mark on the performance as the CEO. If the bank has been successful, I would say that what I did in those first hundred days had a tremendous impact. I tried to become an integral part of the team while looking at the bank from an outsider’s perspective. This approach gave me tremendous knowledge of the bank’s strengths and how to perhaps, “encash” its great potential. We zeroed in on a couple of simple things forming part of strategic thinking. How could we use the power of technology to drive business growth? Secondly, how could we take the HR initiatives to the next level in terms of team building, involvement, participative management and getting the entire employee workforce to identify with the

Bank of Baroda: A Turnaround TaleIn the first of this two-part interview, Professor Rajesh Chakrabarti talks to M D Mallya, Chairman and Managing

Director, Bank of Baroda about the developments in the bank since he took over in May 2008 and the change the

public sector banks have gone through in the last five years.

34 ISB INSIGHTFACE TO FACE

Face to Face

institution? It required tremendous amounts of articulation and communication. I am not in favour in issuing circulars or making speeches. I believe in action and implementation and making things happen. Communication through one-on-one interaction at different levels can bring about a change.

How is the member board divided administratively for

the region?

We have a four-tier system. We have a branch, a regional office, a zonal office and the Corporate Office at Mumbai/ Baroda. Moving to a three-tier system is difficult for a large bank.. Empowerment, delegation and control are easier in a four-tier system: Everybody need not converge at the corporate office for decisions. The zonal office takes care of all the requirements of the region and its branches. The corporate office devotes more time to the policies. This system had been working well so there was no need to change anything. I believe in disseminating change slowly that can bring decision makers and decision seekers closer. The transformation has been seamless. Same people, same centre, same rules and same game – but played differently. I changed the focus to being customer-driven, with efficiency and quality in mind. If you take care of the intangibles

such as customer services and HR management, then the tangibles will automatically come. We listened to team members with any good idea, observations or any feedback, irrespective of whether they were right or wrong.. They were comforted by the knowledge that we were there to counsel and help them move forward instead of blaming the past. Infact, here were plenty of occasions where we said that the past and legacy was very strong, which was true. So, it gave a lot of confidence to people.

The whole exercise in the initial period was confidence-building. We wanted the people to have confidence in the institution, the leadership and most importantly, self-confidence – that we are capable. I believe that a public sector employee with the age profile that we have is as good as anybody else in the

industry. Since I had long tenure of over four years I could get time to make a positive impact of my leadership style on the bank’s functioning. Therefore, whatever vision and initiatives we discussed were based on a medium-term perspective of four to five years because I knew that I would be there to implement it. We were clearly focused on execution. And the support of every stakeholder, from the board of directors to the unions, from the federations to the top and middle management, was sought. There is a greater coordination between the management and employees unions, all uniting together to drive growth.

Federation is officers’ federation?

No. The federation belongs to the clerical staff. The association is the officers’ association. But, they have been responding very constructively to the management’s call through constructive activities of unity. Transparency, togetherness and trust – these are the three hallmarks on the basis of which our entire HR function is based. So if any one of us commits any mistakes as far as these three important pillars are concerned, I said I could be personally contacted any time. I have communicated this very clearly with everyone that I am approachable for

redressing their grievances. The response from the field was overwhelming. It is a sort of wave of growth momentum. Once it starts, we can push it forward. The results came. In my initial discussion with the staff, I told that we had made a profit of 1,436 crores in 2007/2008. That was the balance sheet I had signed when I came in May 2008. I said, “Can’t we make it a profit of 1,436 crores per quarter?” I told them to look at this as an idea and that we would work on the strategies, initiatives and the execution. It caught on and we are almost at it. This year, we will certainly have a quarter, where we will make C1,500 crores of profit.

Congratulations. This is a remarkable achievement.

Within about four or five months of my joining, in

As a new CMD , it is the first hundred days that will make a mark on the performance as the CEO. If the bank has been successful, I would say that what I did in those first hundred days had a tremendous impact.


Face to Face

August and September 2008, the global crisis broke out. The whole world was in turmoil and India was not an exception. Sentiments were bad and therefore, there were doubts about what would happen. We have a lot of international business. Therefore if something happens in Europe or the West, certainly one would expect a little bit of stress for us. But to my mind, it was a golden opportunity. It became so difficult for the high street banks to do business in the foreign markets that business was available to us on a platter. We had liquidity and therefore, we could get good business opportunities. Margins were very good. International business thrived and Indian business did not suffer. It was an interesting development that gained momentum with everyone participating. We continuously talked about consistency and sustainability. Without this, the business model does not make any sense. Many initiatives were taken. We tried to ensure that the technology that was implemented was utilised to drive the business. We put in place the business process re-engineering (BPR) project. We tried to ensure that the technology is utilised for better customer service, product development, innovation, and perhaps, improvement of operational efficiency in all units. Many initiatives were taken including centralisation of activities, taking the back office out of the branches, converting the branches into sales and marketing outlets, etc. These are some of the offshoots of the BPR. It was implemented slowly and steadily. It became a great success. This motivated the team. When one sees that the other person does very well because of certain developments and initiatives, the

team gets motivated. The replication of such efforts results in growth.

Was branch re-designing a part of it?

Yes. Entire process changes were made in the branch. One was the setting up of the central processing centres or loan factories. This was for retail processing and the SME segment. It was taken off the branch. This was a new concept, which caught on very well. It had tremendous amount of impact in terms of better credit origination, marketing capabilities,monitoring and in getting better market share. The turnaround time was reduced and efficiency improved. This led to improved customer service and increased business from the segment. We were very clear that we did not want to change the entire mix of business. We wanted to grow at a steady pace without over-reliance on any single segment.

The whole exercise in the initial period was confidence-building. We wanted the people to have confidence in the institution, the leadership and most importantly, self-confidence – that we are capable.

In conversation: MD Mallya (left) with Rajesh Chakrabarti (right)

36 ISB INSIGHT

Face to Face

FACE TO FACE

You said that the emerging change was already in

progress before you came. So when exactly did Bank

of Baroda become 100 % CBS (Core Banking Services)

enabled?

In September 2008 about 1,000 branches were on CBS when I joined. Thereafter, 2,000 branches were added in next six months time to put CBS on fast track. I gave my team six months. But they accomplished the task much earlier. It was a huge effort and very

successfully implemented. We created what we called Regional Back Offices (RBOs). There are ten in different zones. The entire account opening has been shifted out of the branch. When a person comes to open a savings account, only once the KYC (Know-your-customer) is to be done by the branch. The rest is handled by the centralised office of the bank. After scanning the account opening form, within two or three days, the account kit including the personalised

cheque book is handed over to the account holder. We freed the branch officials from doing work that could be handled elsewhere so that they could attend to sales and marketing. Likewise, we also improved customer service through the BPR. Operational efficiency and productivity increased. Per employee business that was about eight lakhs in 2007/2008 increased to 13 lakhs in 2008/2009, an increase of almost 60-65%. We are one of the top banks in terms of employee business, per employee business. Cost to income ratio was reduced from 53%to 38%. Employees were more self-motivated. During 2008/09 the entire staff were galvanised to believe that the bank could do wonders. In the next year, we consolidated on the gains of 2008/09. Acceptability was very strong and therefore, response to our initiatives was huge – whether it was a campaign to mobilise CASA, or good quality credit accounts. We asked everyone to participate. Awards and accolades, which trigger better work, followed. We stressed that with awards the responsibility also increases. So 2010/11 was a successful year: We grew at about 28% when the industry growth was 20%. We had the lowest delinquencies, lowest NPA (non-performing asset) levels; good growth as far as CASA (Current Account, Savings account) was concerned and tremendous improvement in return on investment. Credit is given to the participating employees. The CNBC TV 18 Award was also given to Bank of Baroda as the “Best Bank in India” for 2010 but we cannot be complacent. I want to continue to make positive changes in the bank by introducing more strategic HR management policies to harness employees’ capabilities to overcome future challenges. We have now appointed the Boston Consulting Group to remodel our HR functions. Through strategic HR intervention we aspire to improve people’s leadership qualities to a level such that the bank becomes independent of individual competencies. We are trying to build an institution that is strong enough to face future challenges. That is the vision for the next three to five years.

Rajesh Chakrabarti is an Assistant Professor of Finance at ISB

2010/11 was a successful year: We grew at about 28% when the industry growth was 20%. We had the lowest delinquencies, lowest NPA (non-performing asset) levels; good growth as far as CASA (Current Account, Savings account) was concerned and tremendous improvement in return on investment.


Face to Face

The Centre for Leadership, Innovation and Change

(CLIC) is working on several research projects with

emphasis on public sector units (PSUs) in India. PSUs

occupy an important part in the Indian economy but

there is some criticism about their performance. What

are your views on the current status of PSUs in India

vis-à-vis other emerging economies and where do you

think Indian PSUs will be ten years from now? What is

your vision for PSUs in India?

If I may say so, your assessment of the Indian public

sector is a little outdated. If you had said this about five or ten years ago, it would have been alright. But in the last few years, the public sector has recorded a tremendous amount of recovery and transformation. If you see the number of Indian companies in the Fortune 500, there are about eight of them – five from the public sector and only three from the private sector. In the Bombay Stock Exchange, if you consider the entire market capitalisation, there are 47 public sector undertakings that are listed and they (PSUs)

account for about one-third of it. And in 2008-2009, during the world economic crisis, the Indian public sector stood its ground and did not retrench people or cut down on their production. On the other hand, the public sector helped the government of India to a large extent to tide over the Indian economy. Two or three years ago, the number of sick enterprises in the public sector was about 50. Today, I think it is around 30. A few enterprises have made a remarkable turnaround. Companies such as Heavy Engineering

Corporation (HEC) in Ranchi, which from its inception never made profit, have made profits in the last few years, but how? When the steel industry of India went into a period of depression, no new steel mill was set up for several years and this did not generate any profit. But we persuaded HEC that with their capacity they could meet the requirements of other industrial metals and not just steel. They did the market research and discussed with organisations such as the Nuclear Corporation and now they are

Nitish Sengupta: On Reviving Sick Public Sector UnitsA team from the Centre for Leadership, Innovation and Change (CLIC) at the ISB, comprising Rajesh Chakrabarti,

Assistant Professor of Finance, ISB and M Kanchan, Senior Researcher, CLIC talks to Nitish Sengupta, Chairman of

the Board for Reconstruction of Public Sector Enterprises (BRPSE). Sengupta has been instrumental in the revival

of sick Public Sector Enterprises (PSUs) and the success stories of 11 of those PSUs have been documented in the

report “Metamorphosis.”

If you see the number of Indian companies in the Fortune 500, there are about eight of them – five from the public sector and only three from the private sector.


Face to Face

supplying Nuclear Corporation’s requirement with their existing machinery. HEC has been profitable the last three years. The HEC was also meant to meet the requirements of the steel industry. But if the steel industry does not have any construction activity, it does not mean that the company should stop. We persuaded them that with their ability and capability they can undertake other construction work. They followed the advice and today, they are also profitable. These companies are now moving around the country, seeking new jobs and opportunities. Today, the public sector does not present a picture of being disabled. They are trying their best to come up in efficiency and performance.

With reference to your “Metamorphosis” report,

since its inception in December 2004, the Board for

Reconstruction of Public Sector Enterprises (BRPSE)

has received 67 cases for reference out of which it

has recommended 59 cases for revival to the Indian

government. The government has restructured 40 of

them with an investment of C 23,612 crores, in both

cash and non-cash benefits. What criteria do you use

for evaluating a sick industry to decide whether it

should be restructured or closed down?

First of all, we try to restructure. If it cannot be done, we recommend closing down like what we did for Hindustan Cable. For about three or four companies, we are recommending them to close down.

But do you have any criteria that you use for whether a

company should be restructured or whether it should

be closed down?

We feel that if a company is true to the discipline of the

balance sheet and profit and loss statement, it cannot be closed down. But where it is not able to conform to the discipline, it has to close down. Now let us ask the question of whether the company’s products are being accepted by the market. If the products are not being accepted by the market and if the company cannot change, then we recommended closing down.For example, Indian Hindustan Copper, until 1991, was a star industry doing very well. But then, they did not change on time and the entire market was taken over by optical fiber, no longer copper cable. But they did not switch to optical fiber on time and today, the whole market is taken over by PSUs that are producing optical fiber. And there is no scope for Indian Hindustan Copper.

To consider whether it is a turnaround or not, you have

taken three consecutive years’ profit after tax and the

positive net worth. Is there a specific reason why you

have taken three consecutive years?

There is no specific reason.It could have even been five years but we accepted three years as a kind of acceptable standard.

When considering a turnaround, why do you consider

the net profit after tax and not cash flow from

operations?

We consider net profit because it has some implication on the company’s financials as a whole. Cash can come out of the blue sometimes.

Does BRPSE or the government have a mechanism for

measuring and monitoring the progress of each of the

units where you have infused funds?

Nitish Sengupta

In 2008-2009, during the world economic crisis, the Indian public sector stood its ground and did not retrench people or cut down on their production. On the other hand, the public sector helped the government of India to a large extent to tide over the Indian economy


Face to Face

We have been doing that for some time. We meet two or three companies, get their facts and figures, their balance sheets for two or three years, and then try to assess how far they have applied the recommendations of the BRPSE and their results after implementing our recommendations.

Do you have any restrictions or clauses that you attach

to these companies? For example, if they do not show

a certain amount of profit, the next installment of

restructuring amount would not be available to them?

Certainly.

Public sector enterprises, even central public sector

enterprises show a very wide range of heterogeneity

in terms of their work culture. We normally club

them together and stamp a particular characteristic

for all the public sector enterprises, which does not

seem to be true at all. Based on your experiences,

how can some of them have the same restrictions in

paying and incentivising their employees, and the

work environment in shambles? And yet in some other

places, the work culture is very vibrant, and they stick

to routines and outputs.

Well, I am afraid you will have to go back to the question of leadership. Who is the leader? Has he got the vision and the desire to improve? G K Pillai, the Chairman of HEC, had the vision and he has accomplished the transformation. Companies such

as Oil and Natural Gas Corporation Limited (ONGC) have done very well. Bharat Heavy Electricals Limited (BHEL) has also done well. BHEL’s order books are full for twenty years. And today, India has such a demand for them that sometimes we joke that we need two more BHELs. Otherwise China is flooding our market.

When mobile telephones have come into India, why is it

that China is still dominating the whole market?

I have suggested that ITI (Indian Telephone Industries) should be amalgamated with or made a subsidiary of BSNL. But they disagreed and countered that BSNL is only a service provider. But according to me, that is a funny argument. Vertical integration is a standard process in the industry. In this manner, you rely less on Chinese companies, both in terms of providing service and manufacturing. There is scope for it. Incidentally, the pay

revision of the public sector enterprises has also benefitted the companies. We submitted a report about two years ago and one of our biggest recommendations was that a company can pay its executives a higher salary than what is admissible by the government, provided it comes from the profit. That has done wonders.

Today, the public sector does not present a picture of being disabled. They are trying their best to come up in efficiency and performance.

M Kanchan is Senior Researcher at the Centre for Leadership, Innovation and Change (CLIC) at ISB.

Rajesh Chakrabarti is Assistant Professor of Finance at the Indian School of Business (ISB).


Face to Face

As a ten-year-old institution, ISB is still finding its

feet as a research-oriented institution. The School’s

vision is to be known as a thought leader for tomorrow.

However, we must recognise that publishing in the top-

tier journals is a culture that is often not very natural

to countries outside the United States. As such, in this

debate between relevance and rigor, what are the steps

that ISB must take and who are the stakeholders that

ISB needs to engage in the path towards realising this

vision?

I think that for business schools, there are two key stakeholder groups – recruiters and faculty. Under recruiters, one group consists of the companies that are recruiting your students and the other comprises companies that you would like to welcome on board as recruiters. You need to engage with these companies and ensure that you understand their needs. You must also make sure that the students they recruit

fit those needs. The other key stakeholder group is faculty. Besides that, there are also other important stakeholder groups such as students, alumni, etc, – but they all fall in place if you attend to the two key stakeholder groups that I mentioned. You must make sure that your faculty has the resources to do high-quality research and an environment that is conducive for that. I think having high-quality faculty who engage in high-quality academic research is the lifeblood of a good institution. I really believe that. Often, people question the need to have faculty who publish in top-tier journals that business people can’t read. I think this is important for a lot of reasons. Firstly, people misunderstand the role of research in teaching and in the success of an institution. If you have a high-quality academic research focus, it attracts the smartest people and brings cutting-edge research into the classroom. There is a difference

Inculcating a Culture of ResearchIn the second of the two-part interview, Professor Krishnamurthy Subramanian talks to Anjan Thakor, John E

Simon Professor of Finance and Director of the PhD programme, Olin Business School, Washington University in

St Louis, on the importance of research and on building a strong team of faculty at the Indian School of Business

(ISB).

In conversation: Anjan Thakor (left) with Krishnamurthy Subramanian (right)


Face to Face

between a faculty who is simply presenting material researched by somebody else versus someone who is teaching from his own research and imparting the practical applications to students. There is a qualitative difference; but as teachers, we have to do both. We can’t just teach based on our own research. We also have to teach material that other people have developed but we know that there is a difference in the level of enthusiasm, conviction and passion that is brought to the classroom when you are talking about your own research. Having cutting-edge researchers implies that more cutting-edge knowledge is being brought to the classroom. This also permits creation of knowledge that helps companies think about the "next practices" as opposed to “best practices”. This is a term coined by CK Prahalad, my former colleague at Michigan. He used to talk about this with companies. According to him, you have to lead the thought process in companies as opposed to simply telling them about the best practices. Research enables you to do that. I think applied research is important too. You have to be able to bridge the gap between what we publish in journals and what somebody else is going to read. For this, you need to have a good core of clinical faculty who are doing applied work or writing books that managers read. The best example of that is probably Harvard Business School. But there are others as well. When I was in Michigan, we had a core of thirty or so clinical faculty. They had a ladder rank system and they were required to publish and have visibility within the corporate communities. To get promoted, you had to have CEOs write letters of recommendations for you if you were a clinical faculty member. These professors were not tenure-track. But they had their own system of evaluation and they were encouraged to think independently and create knowledge that was more applied in nature. The other thing I would say to educational institutions like ISB, and Indian companies in general is to have more of a global ambition. I see that in China. The Chinese have enormous global ambitions. They think about the time when they were the dominant country in the world and they want to return to those days. When I come to India, I sense that there is so much satisfaction with the economic growth that has occurred, that people seem to have forgotten the glorious tradition of this country. Between 500 BC and 1400 AD, India was the richest country in the world. There was a time when this country had close to 40% of the world’s GDP. These are also the times when the Greeks, Romans and Egyptians

were thriving, so these numbers for India are truly impressive. We have got to think big. We can’t be satisfied just because we are growing at 8% a year. We cannot be satisfied with five or six billion dollars in FDI. China receives 55 billion dollars in FDI every year. I think by the same token, ISB, for all its commendable success, has to think more globally. I would like to see this institution thrive as a global player on the research front and in terms of attracting students and faculty. Hong Kong University of Science and Technology (HKUST) had that ambition to be more global, so half their faculty now is non-Chinese and they are also very research-active. I would like to see ISB flourish as a global institution, as the School has a fantastic campus, great facilities, a good brand name, and an emerging research faculty. I think ISB also has the potential to become a more visibly-networked player in the global research community.

Given that ISB’s faculty pool is growing, it needs some

amount of mentoring from people who are accomplished

and can provide advice on how to overcome certain

challenges that young institutions face. How can we

build our capacity in this area?

The Chinese schools are also going through this process. The simple answer is to hire some senior faculty. This is easier said than done – but it is not just a question of money. It is a question of the network within which people reside. They don’t want to leave their network because there is a lot of value in belonging to a particular network. Even for US schools, it is a very daunting task to hire senior faculty from other schools. I think a better advice is to create some sort of a system whereby you can attract senior faculty to come and spend a substantial amount of time here, to work with people. But again, the challenge is that these people are busy. I am sure that there are many ways to do this. One of the ways would be for the ISB faculty to begin developing interesting databases about India because there are so many interesting problems that you can study if you have access to data. I think ISB is ideally situated to play this role. If you can become the assembler of important databases and provide opportunities for people who are interested in research to come and spend time here, become familiar with the database, work with the faculty here, then I think you will get collateral benefits that address the issues you have mentioned.

Krishnamurthy Subramanian is an Assistant Professor of Finance at the Indian School of Business (ISB).


FACE TO FACE

Knowledge Sessions43 SME FINANCING CHALLENGES: BUILDING ALTERNATIVE FINANCE OPTIONS

44 CHARTING INDIA’S GROWTH TRAJECTORY

45 DIFFUSION 2011: BUSINESS SKILLS FOR SOCIAL IMPACT

ISB INSIGHT 43

Knowledge Sessions

KNOWLEDGE SESSIONS

Knowledge Sessions

Research carried out by the Centre for Analytical Finance (CAF) has shown that a large chunk of the financing for small and medium enterprises (SMEs), over 50% by some estimates, comes from non-bank, non-market sources. These alternative sources of finance of which receivables financing/trade credit is the primary means are therefore very important for SMEs. The cost of alternative sources of financing also tends to be significantly higher than traditional bank financing. The purpose of the panel was to identify problems facing alternative finance and to propose solutions for the same.

Bringing alternative finance into the market system through financial intermediaries holds great promise. It has the potential to reduce the cost of capital for SMEs while simultaneously creating a credit history for SMEs which in turn, would make it easier for them to access cheaper bank finance. However, for this to happen, we need to erect what Mukherjee called “the three pillars” – high quality origination, orderly risk transmission and robust risk aggregation. The first pillar requires credit assessors with in-depth local knowledge, who have the ability to judge a borrower’s credit worthiness in the absence of detailed documentation. This lack of documentation makes SMEs unattractive clients for traditional lenders. MFIs, non-banking financial companies (NBFCs) and even credit raters can potentially fill this gap by relying on their local, specific knowledge of SME businesses. Once this happens, SME credit could be packaged in the form of loan pools or securitised assets, and sold to investors who would be interested in such asset classes. This would be the second pillar. The third pillar requires that originators build investor confidence in these new assets through responsible marketing and co-investment. In fact, Chaitanya Pande mentioned that a few years ago, there had

been sales of SME loan pools which received a good response from market participants but since then, the practice has died out. Speaking as an investor, he believed that there would still be an appetite for assets backed by SME credit. An example of such an asset would be securitised trade credit. Professor Sankar De explained how trade credit owed by large firms to SMEs could be packaged as a securitised asset, which would essentially be commercial paper with the credit rating of the large firm. However, implementing such an idea would require regulatory clarity, exchange tradability and formal rating programmes.

Ravi Tyagi discussed the NSE’s plan to set up an SME Exchange. Firms listing on the exchange would be able to access equity capital, which is sorely lacking for SMEs in India due to an underdeveloped venture capital industry.

Throughout the discussion, all panellists agreed that there was no silver bullet – none of the ideas alone could solve the problems facing SME financing. Lack of information and regulatory uncertainty remain major stumbling blocks. However, continued financial innovation can play a significant role in allowing SMEs – the engines of growth in any emerging economy – to reach their full potential.

SME Financing Challenges: Building Alternative Finance OptionsA panel discussion on “Alternative Financing Sources for SMEs” was held as part of the symposium on SME

Financing Challenges organised by the Centre for Analytical Finance (CAF) at the Indian School of Business (ISB).

The panellists included eminent personalities in the financial sector such as Rakesh Kapoor of IFCI Factors,

Sucharita Mukherjee of IFMR Capital, Ravi Tyagi of NSE, Chaitanya Pande of ICICI Prudential AMC, SK Das of Bank

of Baroda, Amit Shah of Citibank, and the moderator, Professor Sankar De, Executive Director, CAF.

Centre for Analytical Finance (CAF) Symposium panel discussion

44 ISB INSIGHT

Knowledge Sessions

KNOWLEDGE SESSIONS

The two-day ISB Leadership Summit held on campus recently presented a confluence of ideas by India’s noted industry and thought leaders on the direction the country must take at this inflection point in order to remain a key global competitor in the future. Through panel discussions organised by the professionals clubs at ISB, the summit brought out debates and discussions on areas pertinent to the country’s development.

A panel discussion on “Bottom of the Pyramid” brought to the fore the need to evaluate our parameters of measuring poverty. According to noted economist and Visiting Faculty at ISB, A K Shiva Kumar, parameters such as access to education and healthcare must be utilised to define who populate the bottom of the pyramid.

Managing Director and Co-founder of Peepul Capital, Srini Raju underscored the importance of technology and training in helping the poor. This training is extremely vital as their mind-set needs to change. Formal training will facilitate self-reliance and help the poor enter the mainstream workforce at par with the rest of the population. Hence, training

institutes such as the one being set up by National Innovation Council, keeping in line with the National Skill Development initiative, play a very important part in the path ahead.

In the panel discussion on “The Changing Face of Indian Healthcare,” K G Ananthakrishnan, Managing Director, MSD India spoke about the four key problems in the healthcare-pharmaceutical sector: accessibility, awareness, affordability, and acceptability. He particularly stressed on awareness as the focal point of all the problems. Ananthakrishnan spoke of the trends in healthcare, such as the shift in the disease profile of the population towards chronic diseases, which represents an opportunity for pharmaceutical companies.

Directi’s Founder and CEO, Bhavin Thurakhia, in the panel discussion on “Technology 3.0 – Innovation, Inclusion & Disruption,” spoke about the opportunity India holds in the online landscape and the gap that budding entrepreneurs could fill. However, for these entrepreneurs to realise their dreams and contribute to the India growth story, a better and far-reaching education system, supportive government policies and a risk-taking attitude, is required.

Ajit Sarkar, Google’s Director of Online Sales, expanded upon Thurakhia’s point to highlight how the social media revolution is helping ordinary people realise their dreams, by providing low-cost alternatives to compete with the more established players in the market. He cited the example of the viral song “Kolaveri Di,” amongst others, to highlight innovative techniques, which have stood out from the clutter and made obscure artists household names overnight.

Despite the problems and challenges that lie ahead, the leaders were extremely positive about the future of India, especially the growing middle class who keep the excitement alive and fuel the “India Dream.”

“India at an Inflection Point,” was the theme of this year’s ISB Leadership Summit. A timely assessment of where

the country is headed 20 years after opening its economic doors to the world, the event hosted 45 industry leaders,

who through interactive panel discussions, presented their perspectives on the path ahead for the nation.

Charting India’s Growth Trajectory

Lt Gen Randhir Kumar Mehta (left) and Dean Ajit Rangnekar (right) addressing audience during the ISB Leadersip Summit 2011

ISB INSIGHT 45 KNOWLEDGE SESSIONS

Knowledge Sessions

The nonprofit sector plays a vital role in supporting various socioeconomic, cultural and political needs, through a practical approach. In the context of India, where development outcomes have not been able to completely address the economic and social disparities that exist in the society, nonprofits must take up the challenge to make the country’s growth inclusive and sustainable. Even though nonprofits are motivated to work for their respective social causes, they are resource-constrained and are not adequately equipped with trained staff who can effectively replicate the successes of modern business approaches in the organisations. Because of the lack of business expertise, the already-limited resources are underutilised, leading to further underperformance. It is thus important that nonprofits are imparted with business and management practices so that they are able to maximise their resources in order to achieve efficient outcomes.

The “Diffusion” workshop was initiated by the ISB with the belief that training in business skills and networking for nonprofits will be effective in strengthening their potential. This will, in turn, contribute towards bringing about higher level of human welfare that will help substantiate the nation’s progress.

At the Hyderabad workshop, 30 participants, from senior and middle-management levels from 25 organisations, attended the workshop where they were exposed to some of the best management practices that they can leverage upon to build scale and efficiency in their organisations. The workshop was a blend of case studies, interactive lectures, and discussions encompassing topics such as Organisation Building, Governance & Metrics, Fundraising & Revenue Generation, Innovation & New Business

Models, Negotiation, Marketing & Branding, Disaster Management and Leveraging Technology. The course content for “Diffusion 2011” was developed by ISB students of the Net Impact Club, Class of 2012.

While “Diffusion” workshops have been a regular event at the ISB, this was first time that the workshop was also held outside Hyderabad – in Patna, the state capital of Bihar. Bihar, owing to its sheer geographical size and highest share of Indian citizens below 25 years of age, will play a crucial role in the country’s overall development. This northern state has recently emerged as one of the centres of growth in India and is witnessing major activity and support from the non-government agencies. However, given the magnitude of the current and anticipated challenges, there is a need for nonprofits to re-examine their working context, and adopt innovative models and entrepreneurial approaches to the Patna landscape.

The importance of supporting NGOs in the Indian landscape was best explained by Krishna Tanuku, Executive Director, WCED, who stressed that “social entrepreneurial approaches, with appropriate scale, scope and focus can complement traditional NGO approaches in bringing about sustainable development.”

Diffusion 2011: Business Skills for Social ImpactThe Wadhwani Centre for Entrepreneurship Development (WCED) at the Indian School of Business (ISB), in

association with the Net Impact Club (ISB Chapter) organised a two-day capacity building workshop “Diffusion

2011,” in Patna (October 3-4, 2011) and Hyderabad (December 10-11, 2011) for training nonprofit organisations in

basic business and management skills.

ISB Student Conducting a Diffusion Workshop

Cover Story

In Brief

Raj Jain, CEO, Bharti Walmart, was at the Indian School of Business (ISB) to grace the graduation ceremony of executives graduating from the Centre for Executive Education’s “Strategic Retail Management” programme for senior officials.

At the occasion, he stressed the importance of enthusing employees and to create a fun culture at the workplace – this was essential for the success of any retail business. “As an owner, manager or CEO, you can never touch your customers. Your associates or the people who work at the stores are the ones who serve your customers. You must develop the skill to be able to infect the same amount of enthusiasm and passion as you have for the business to those people – and if you are unable to do that; no matter how good your processes, systems, technology or product is, your retail will always fail.”

In a discussion on “Challenges to Private Equity Investments in India,” Dushyant Singh, Associate Director, Transaction Services Strategy, Coopers outlined some of the major challenges in private equity including the intense competition for deals resulting from asset valuation. He explained that often, there is a mismatch between promoters’ expectations and what private equity investors are willing to pay. Another problem he highlighted, was that deal sizes in India are still fairly small. Thus, a lot of work is put into one deal, which may not yield a large payoff. Lastly, he said that the sources of investment are limited because of the regulations governing the kind of businesses private equity funds can invest in India. Singh was speaking at Artha, ISB’s annual Finance Conclave.

Share Enthusiasm with Customers: Bharti Walmart CEO

Balance Reality with Expectationsfor PE Investments

46 ISB INSIGHTIN BRIEF

Khemka Foundation partnered with the Centre for Emerging Markets Solutions (CEMS) at ISB and organised the 3rd annual “Khemka Forum on Social Entrepreneurship.” Social entrepreneurs, some from Africa and Pakistan, came together at ISB to discuss some of the challenges they faced and share their stories. Suneet Singh Tuli of Datawind spoke about his difficulties as he tried to come up with a low-cost Internet device. Despite skepticism from different sources, he advised the audience to be strong and follow their goals, “If you have a vision and you believe that the opportunity exists, you have to go for it,” he asserted. Several panel discussions that lasted two days dealt with issues such as challenges surrounding finding funds, affordable housing, employability of underserved youth and public-private partnerships in the basic-needs sector.

The Indian School of Business (ISB) hosted Swavalamban II, a seminar on “Strengthening Manufacturing in India through Defence Offsets.”

The seminar provided insights on the key technologies that need to be identified so that offsets can add strategic value rather than just economic value to the nation. The discussion also highlighted an urgent need to enhance the R&D capacity of the private sector in order to become attractive to foreign original equipment manufacturers (OEMs) for formation of joint ventures, and enable Indian companies to become major players in the global supply chain. The speakers also voiced the need to relax FDI restrictions to promote technology transfer by OEMs.

Amongst the prominent guests who graced the seminar included His Excellency Shri E S L Narasimhan, Governor Andhra Pradesh and Shri M M Pallam Raju, Raksha Rajya Mantri (Minister of State for Defence).

Social Entrepreneurship: A Way Out of Poverty

Strengthening Manufacturing via Defence Offsets

ISB INSIGHT 47 IN BRIEF

Cover Story

COVER STORY 48 ISB INSIGHT 48 ISB INSIGHTBOOK REVIEW

With the rapid and discontinuous changes and daunting challenges in business environment sweeping across the world, from emerging economies to the developed countries, there is need for a new mind-set to proactively deal with such challenges. Organisations require people whose mind-sets foster a work culture that is inclusive, transparent, empowering, aligning, and one that builds trust..

In such a scenario, senior business leaders and managers are confronted with the challenges of making complex joint ventures, mergers, and acquisitions across international boundaries. They are sometimes required to fundamentally alter the business models of the firm and align values at different levels, and

involve employees at all levels in creating a larger vision and giving new direction to the organisation. In order to bring about such radical changes, the leaders have to learn to become facilitators. Irrespective of their size, ownership and scope, organisations have a sense of urgency to bring about such mind-set changes. The senior management of dynamic organisations are also deeply concerned about developing leaders rapidly. Continuous learning and development and management of change have, therefore, acquired a centre stage as never before.

What can be done to accelerate such learning and transformation?

Lucidly articulating the challenges of change in the contemporary and emerging scenario as stated above, Ramnarayan and Rao have addressed the issues very comprehensively in their thoroughly revised version of “Organization Development.” They have redefined and significantly extended the boundaries of Organisation Development (OD) to include a large repertoire of approaches and methods for change, effectiveness and transformation in organisations keeping the bedrock of total system-level, behavioural science process-oriented and humanistic values-based-framework.

In the first part the authors present a theoretical base that traces the historical evolution of OD through three generations from internal and micro focus to macro and external focus with emphasis on large-scale changes, based on the new paradigm of concepts from Positive Psychology and Appreciative Enquiry in the third generation OD. A wide range of classic, tried and tested learning methodologies/interventions, and perceptive contemporary thinking in OD has been concisely covered by original authors, and the authors of the book.

The second and third parts feature an extensive range of very practical learning resources, relevant cases, and highly insightful interviews from internal and external OD practitioners.

The style of presentation that begins with practical situations to illustrate the concepts, explains them, and how to operationalise them in practice. The short chapters in the book are very reader-friendly. For those interested in understanding the phenomenon of change and OD, this insightful book with its vast repertoire of relevant chapters is a must read.

While this book will help revive the interest of business leaders and professional managers in OD, specific chapters/write-ups providing insights in Positive Psychology and Appreciative Enquiry, and their application and impact on OD’s emerging paradigm and practice would have further enhanced the knowledge of the readers.

Book ReviewOrganization Development: Accelerating Learning and TransformationBy S Ramnarayan and T V Rao.Reviewed by: Abad Ahmad, Former Dean, Faculty of Management Studies (FMS) and former Pro-Vice Chancellor, University of Delhi

PUBLISHERS: SAGE Response, New Delhi, 2011 (Second Revised Edition).

From left to right: Adi Godrej, Chairman, ISB Executive Board, Pramath Sinha, ISB’s Founding Dean, and Ajit Rangnekar, Dean ISB at the launch of “An Idea Whose Time Has Come,” a book by Sinha that traces ISB’s ten-year journey. The book was launched at the School’s tenth anniversary celebrations held on campus.

Indian Manufacturing: Making it Work

In this Issue : MANMOHAN S SODHI PRESENTS A FLOW PERSPECTIVE ON THE NEW NATIONAL MANUFACTURING POLICY* PLANNING COMMISSION MEMBER ARUN MAIRA DISCUSSES THE GOAL OF THE NEW POLICY * AMIT NANDKEOLYAR WRITES ON HOW CULTURAL DIFFERENCES CAN IMPACT NEGOTIATION OUTCOMES

Volume 9 Issue 3 RS 250

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