Vivek Kaul
The Indian Premier League (IPL), the world’s biggest T20 cricket tournament, has been surrounded by controversies for a while. The latest round started yesterday with a panel appointed by the Supreme Court indicting Gurunath Meiyappan for spot fixing. Meiyappan is the son-in-law of the BCCI president N Srinivasan. Srinivasan also owns the IPL Team, Chennai Super Kings (CSK). He is also scheduled to takeover as the first chairman of the International Cricket Council (ICC) from July 2014.
This is not the first time that controversy has hit the IPL. In the past, there have been issues about the shenanigans of Lalit Modi, and how he started and ran the tournament. There have been issues about the union minister Shashi Tharoor using his late wife Sunanda Pushkar to pick up “sweat equity” in the now defunct IPL team Kochi Tuskers Kerala. Then there have also been issues about spot fixing, leading to the arrest of S Sreesanth, Ajit Chandila and Ankeet Chavan, who played for the Rajasthan Royals cricket team.
But despite these controversies, the brand IPL has held strong and advertisers have thronged to it, year on year. Interestingly, the research firm American Appraisal, in a report titled Clearing the Fence with Brand Value: A Concise Report on Brand Values in the Indian Premier League found that “43 percent of the respondents thought that the controversies surrounding the tournament impacted their new or continued relation with the IPL as sponsors or advertisers.” But more interestingly, “almost half said that the controversies in no way influenced their decision to affiliate with the tournament.” American Appraisal reached out to over 300 companies and ad agencies that are involved with the IPL.
So what is it that makes brand IPL so strong despite all the controversies that have surrounded it? India is a cricket mad nation and for any company which has a consumer oriented focus, some money to spend and a lazy marketing strategy, it makes sense to be associated with the IPL brand. But that as they say is a no brainer.
The more important question to ask here is why have the companies continued to be associated with the IPL, despite all the controversies surrounding the tournament. Niraj Dawar possibly has an answer in his book Tilt- Shifting Your Strategy from Products to Customers. As he writes “Brands die hard…One consequence of the strong association of a brand with a criterion of purchase is that even when the brand falls behind technologically or fails to deliver on the product, it continues to benefit from the customers’ default assumptions for a long while…Customer associations provide the brand with the buffer that shields it from crises and quality issues.”
The IPL brand is well settled in the minds of the Indian consumer and the controversies that have hit the cricket tournament have been unable to dislodge it. Given this ‘strong’ association of the Indian consumer with the IPL, it is not surprising that companies and their brands want to continue to be associated with the T20 tournament.
This, despite the fact that the IPL may have failed to deliver on its main product, which is an honestly and competitively played twenty over cricket match. For all we know that may not be happening, given that the owners of IPL teams (like Gurunath Meiyappan of CSK and Raj Kundra of the Rajasthan Royals) may have been betting against their own teams.
A report in the Mumbai Mirror newspaper points out “In his exhaustive and extensive report on the spot-fixing scandal in last year’s Indian Premier League, Justice Mukul Mudgal has raised suspicion about one particular game between the Chennai Super Kings and the Rajasthan Royals. While the 170-page report largely remains inconclusive over whether matches were fixed in the league, it clearly states this particular match needs to be investigated. “The Committee feels that there is enough information available on record to indicate that a further investigation is required in respect of the match held at Jaipur, between Rajasthan Royals and Chennai Super Kings on May 5, 2013,” the report says.”
Despite this, the Indian cricket fan (who also happens to be a consumer) is not done with the IPL as yet. Once a brand is established consumers typically tend to give it a long rope. As Dawar writes “Microsoft was able to retain most of its customers even through the life of the ill-conceived Windows Vista operating system, a disastrous product that would have been the death knell for a start-up brand. Apple’s reputation was barely dented despite the antenna problems of iPhone 4, AT&T’s spotty coverage, and the embarrassment of prematurely launching Siri, an artificial intelligence bot that was not quite ready for prime time, and faulty Apple iMaps. The brand easily withered these slipups.”
If a start-up would have made any of these mistakes, the game would have been more or less over for it. But that is not the case with big and established brands. Interestingly, the controversies started to hit the IPL only after the first few seasons, and by that time it had already managed to establish itself in the mind of the Indian consumer. As Dawar puts it “Customers are slow to switch, so that even if decline sets in, it is gradual allowing the company time to fix the problem and respond to challenges.”
This time that consumers give a big brand to fix itself can also lead to complacency, as happened in case of BlackBerry. As Dawar puts it “It allows managers the room they need to remain in denial about challengers and challenges. When BlackBerry sales continues to rise, even into 2012 in some parts of the world, its newly appointed CEO felt free to declare early that year, “We have fantastic devices in a fantastic ecosystem. I don’t think there is some drastic change needed.”
We all know what happened to BlackBerry after that. Consumers do give long ropes to big brands, but these are not infinitely long ropes. One day their patience does run out. Maybe, there is a thing or two, the Board of Control for Cricket in India (BCCI) which runs the IPL, can learn from this.
The article originally appeared on www.FirstBiz.com on February 12, 2014
(Vivek Kaul is a writer. He tweets @kaul_vivek)
Apple
'Simplicity is the ultimate sophistication'
Vivek Kaul
Stefan H. Thomke, an authority on the management of innovation, is the William Barclay Harding Professor of Business Administration at Harvard Business School(HBS).He is chair of the Executive Education Program Leading Product Innovation, which helps business leaders in revamping their product development processes for greater competitive advantage, and is faculty chair of HBS executive education in India. He is also author of the books Experimentation Matters: Unlocking the Potential of New Technologies for Innovation and Managing Product and Service Development. In this interview he talks to Forbes on the various aspects of innovation.
Innovation is a very loosely defined term these days. How do you define innovation?
When I started looking at innovation more than 20 years back, it seemed to be a little crisper then, in terms of definition. Now its all over the place. Interestingly, Wall Street Journal did an analysis sometime back where it counted the number of times the word innovation appeared in the quarterly and annual reports in the United States in 2011. They counted more than 33,000 times. Its just a much overused word.
So what does the world really mean?
The word innovation itself really means two things. It means novelty and value. The value requirement is a really important point. And that makes it different from the word invention. Invention is a more legal term. It is about getting patents. If you have a name on your patent you know that value is not a requirement to get a patent. It just has to be new and non obvious to get a patent. There are companies that have lot of patents which have no value for anybody. So its an input to innovation.
Innovation at times can be a really simple idea as well?
I was working once with a company in the area of in vitro diagnostics. Basically they made equipment to do blood analysis. So when you go to a hospital they draw blood from you and put it into a machine. The machine analyses your blood and gives printouts. One of the biggest innovations for their customers was an algorithm, which was essentially a piece of software that ensured quality control. That was one of their main selling points and customers would basically buy their equipment because they highlighted that. They said that I have this insurance that when I run these tests that the equipment automatically checks for quality and is actually very reliable. And they marketed that. From an R&D perspective it was one of the easiest things that they have ever done. It was really just an algorithm that they figured out using data.
That’s really interesting…
Yes. So sometimes you know the most expensive things are not necessarily that provide the greatest value to the market and vice versa as well.
I came across a blog you had written on product innovation where you questioned putting more and more features into a product. Tell us something about that?
I wrote an article together with Donald Reinertsen and in this article we talk about myths. This was one of the myths. He is also an expert on product development. And we have been in many meetings where the entire meeting is dedicated to discussing more and more features. There seems to be an assumption that in a lot of teams that we are basically done when we can no longer squeeze more features into a product. Presumably assuming that more features that a product has, the customer actually sits there and counts the features, and that somehow drives our ability to price it.
And you don’t agree with this approach?
Sometimes you can actually add value to a customer experience by taking features out, by de-featuring. But that rarely happens. I have rarely been to meetings where the main purpose of the meeting was to remove features from a product with the intent to add value. Usually when we sit around and discuss to remove features, it is usually because it is too expensive, it is not manufacturable. Maybe what teams should do is think about when they can no longer take things out of a product rather than when they can no longer add things to it. It’s a very different way of thinking about it.
Making things simple is difficult…
We often talk about it as a quote attributed to Leonardo da Vinci that simplicity is the ultimate sophistication. To make things simpler is very hard because that requires you to have a very deep understanding of what the user really wants. And once you have that deep understanding you have the confidence. Mark Twain once said if I had more time I would write a short letter. In fact that should be true in your field as well?
Yes, longer pieces are easier to write.
Exactly. And the same is true about innovation. Creating something out of a lot of bells and whistles is a lot easier to do sometimes than actually creating something that has the essential features because that requires a lot more thought and a lot more research.
Can you give us an example on this, other than Apple?
A small example is the Danish company, Bang & Olufsen. They make very very high end speakers, stereo systems etc, which are beautifully designed. These speakers are one of the most expensive speakers that you can buy. But there are no buttons for adjusting the frequencies, you just have the volume button. That’s it. What they have done is that they have created products that are very expensive and they have taken away all the controls that normally you would like to have.
How did they get away that?
They set themselves a very interesting standard. They said, when you listen to something on our speakers it should sound like the real thing. And we believe that no user will be able to get close to that by tweaking a few buttons than the way we set up. So they set their standards to be very high and said we don’t want the users to fiddle with it because we are getting as close as we can. All we want you to do is turn the volume button up and down. It’s quite contradictory. You would imagine that if you are charging all that money you would want to give more control to the customers.
But a lot of people love fiddling with features…
Yeah. There is always a market for everything.
If you look at mobile phone marketing, the selling point seems to be features…
Look at Japan for example. If you look at Japanese mobile phones they have more features than anything you can imagine. You can watch television on them. They have got everything on these phones. But when you ask Japanese consumers, one of their problems is that they are so complicated to use. Not surprisingly, the iPhone has one of the highest penetrations in the Japanese markets. So the question is how can that be? It is more expensive. It has less technology in it. It has fewer features in it and yet it has one of the highest penetrations in terms of growth.
That’s an interesting example…
The reason why I came up with this observation is because I bought this toaster, which came with a manual and had a little LCD display on it. And it set me thinking. I bought an iMac and it had no manual and I bought a toaster and it came with a manual that thick.
There is no manual with an iMac?
No. There is no manual with an iPhone. You just get a little leaflet in there in terms of what to do if something goes wrong. In fact when Steve Jobs came back to Apple one of the first things he did was he took manuals away from developers. The belief was that manuals are for developers who don’t know how to make it intuitive. So as a developer if we don’t know how to make it intuitive we think that’s there is always the manual where we can write down and explain how it works. The problem is that nobody ever reads a manual. So the perfect solution was lets just take away the manuals from the developers. If you cannot explain it, if you cannot make it intuitive, then don’t it.
Do organisations become less innovative as they become large?
I wish I could give you a yes or no response. There are actually certain advantages that come with size and there are some disadvantages that come with size. As you get bigger., you have a momentum. You have an established customer base. Sometimes you can take a long term view as well because you have got an ongoing business and you can afford to wait a little bit. But you have some disadvantages as well. You have got a customer base, that may hold you back and drive you in a different direction. As you get a bigger, you need to have processes and procedures for coordination that are often then viewed as bureaucratic.
Can you give us an example of a large company that is innovative?
Take a company like BMW. It is very innovative. Right now they are launching the i3 which is an extremely innovative car. Its a fully electric car. But that’s not the only innovation. They also figured out how to actually make the entire body shell out of carbon fibre. This is an example a great innovation in all dimensions. They had to come up with a process innovation. Carbon fibres are basically carbon bodies, very light structures that go into very high end automobiles. For example, Formula 1 cars are typically made from re-enforced carbon fibre bodies. You need to bake them. Its a very labour intensive process.
And BMW changed that?
They couldn’t follow a manual process for a car like this because they want to mass manufacture it. It would be way too expensive. So they had to actually innovate in manufacturing. They had to automate the production of carbon fibre. And it changes everything. Once you make the body of your car from carbon fibre, things like crash dynamics totally change. Then there was the electric side of it as well. So the i3 which is coming out this fall. The whole project was more expensive than any of the car platforms that they have developed recently. Estimates are of around $1-5-2 billion. Its a huge risk and they don’t know whether the car is going to sell in enough numbers. It is going to be priced pretty close to $35,000-40,000 in the United States and close to around 35,000 euros in Europe. This is a huge bet that they are placing.
And they are able to do it because they are big?
BMW is a very big company . A small company may not be able to take that bet because they don’t have the expertise. They may have the expertise in one area but they don’t have all the different knowledge bases that this will require to put something like this together. So BMW has the deep expertise. They are very profitable. So they can afford. Whether they can afford to let the i3 fail that remains to be seen. If it fails that will be a big dent. But they can afford to put $2 billion into something like this which could really change the future not just for BMW but for the car industry as well. So large companies can be innovative.
I was reading one your research papers in which you talk about the fact that you cannot treat R&D like manufacturing and unleash techniques like six sigma….
There is a real danger right. I was working in the quality field when six sigma first came out. Six sigma was essentially designed to address production variability in Motorola’s semiconductor factories. It was adopted by others. And at GE it became a big change management programme. But we should also fundamentally understand what Six Sigma is all about. Six Sigma is about reduction of variability. And that is very suitable for tasks that are very repetitive. Variability is actually a bad thing and you want to drive it out. If I am at a bank and I am processing transactions then I want to these transactions to go through with zero mistakes. Any kind of variability is bad. That’s true…
But if you take a concept like this to innovation where we talk about experimentation, creativity and all these sort of things, variability is something that is quite natural. You take a technique like this and you are trying to drive out variability you can kill the entire process. The more upstream you go the more dangerous it is. Something by the way 3M found out the hard way. Jim McNerney became CEO of 3M. Having come from GE he was a master of six sigma. He drove it in at 3M. It initially helped them because there was a lot of variability at 3M. Fifty five divisions there was not enough co-ordination. When six sigma was implemented in upstream R&D driving out variability, they killed a lot of good things that they were working on. This frustrated a lot of people and later on when the next CEO came he really had to correct that.
Ideas often come at the edges.
It is also sometimes not predictable. If I am a developer and I am developing something new I don’t know exactly what I am going to be doing three weeks down the road. I don’t know the tests I am going to run one month from now because that is the whole point of innovation. Its uncertain. If I had all these answers, I probably wouldn’t be innovating. There wouldn’t be novel because I already know everything about what is going to happen. So inherently there is uncertainty that is built in and we just have to be comfortable living with that uncertainty. That is why I talk about business experimentation.
Can you tell us something about?
One of things that executives need to understand is that most assumptions/hypothesis that they make about novelty turn out to be wrong. The real danger for an executive is that if they feel they have an assumption about novelty and they go out without running the experiment, it could be quite disastrous. I don’t know if you have been following the JC Penney story.
What’s happened there?
It’s a fascinating story. Ron Johnson was the person responsible for Apple stores. More than 1 million are walking through Apple Stores everyday now. He was hired by J C Penney as their CEO, with the mission to revolutionise retail for JC Penney. So that was his job. He was one of the most admired executives in the retailing space for having done what he had at Apple. He tried to innovate retail for JC Penney and it turned out to be a disaster. I think sales were down 25-30% or so. And he didn’t run the experiment.
What happened?
He basically made an assumption of what the future of JC Penney retail should look like and he did away with discounts. He was very confident because he was right in the past. And turned out to be wrong. He should have taken some 20 stores and run randomised field trials. A lot of executives get hired for their expertise and they have a lot of confidence. If you were right ten times in the past. You believe that you will be right the 11th time as well. Sometimes its a curse if we are right all the time. Sometimes the kinds of things we learn in one context we may not be able to move it to another context, when the context changes.
No interview around innovation is complete without talking about Google. The company keeps doing many things, but other than there AdSense business nothing really has been a big money spinner.
That’s been making a lot of money.
Innovation should also lead to some profit. How do you explain the disconnect in case of Google?
I am no expert on Google. There are two ways to look at. One way to look at it is the way you describe it. They have got one business model essentially and they are trying all these things. None of it, at this point seems to be able to create another business model or another source of significant revenue for them. Another way of looking at it is that all the things they do drive more traffic towards them. I don’t know how much money they are spending on Google Glass. But that in itself is driving so much traffic to their site, which then increases the costs of the ads. They can probably pay for the whole project and more, just from the addition of the incremental traffic and the incremental ad revenue that one project created.
This makes tremendous sense…
When you use Gmail, you are actually giving them information. They can actually use it to place customised ads. Its the same thing with Android, which they give away for free. But by making Andorid available for free, its all on the mobile phones and gives them access to mobile phones, which then allows them to do ads on mobile phone. You can kind of see the whole logic. All these things ultimately lead back to their fundamental business model which is the ad model. I bet they are trying really hard to think of other ways at one level, but at another level they are probably thinking about an eco system that they are trying to create that ultimately drives people back into the ad space, and gets more information about them.
So basically they won’t allow any other search engine to come up…
They won’t want to do that. Of course not. They want traffic. The worse thing that can happen to them is traffic going somewhere else and the ad revenue falling .The whole business model will go away.
The interview originally appeared in the Forbes India magazine dated November 15, 2013 with a different headline
‘By introducing cheaper iPhones, Apple will lose its high end position’
Al Ries is a marketing consultant who coined the term “positioning” and is the author of such marketing classics (with Jack Trout) as The 22 Immutable Laws of Marketing and Positioning: The Battle for Your Mind. He is also the co-founder and chairman of the Atlanta-based consulting firm Ries & Ries with his partner and daughter, Laura Ries. Along with Laura he has written bestsellers like War in the Boardroom and The Origin of Branding. In this interview he speaks to Vivek Kaul on why by introducing a cheaper iPhone, Apple will lose its position at the high end. And conversely, it won’t sell very many inexpensive phones because of competition from Chinese and Taiwanese companies.
Apple has come with a low cost iPhone 5C to appeal to the price conscious consumer. Is it a strategy that is going to work?
Yes and no. The strategy will generate additional sales of the iPhone 5C, but in the long term it will damage the iPhone brand.
You have been of the view that extensions tend to cheapen the brand. Will something like that play out in this case?
Yes, it will definitely cheapen the brand.
Why do you say that?
Here’s what normally happens when a new category develops. Apple pioneered a new category called “touchscreen smartphones” with its iPhone brand. Initially, the new product was a big improvement over existing keyboard smartphones like the BlackBerry. This made the iPhone one of the most successful new products ever launched. At one point, it made Apple the world’s most-valuable company. Then competitors entered the market, especially Samsung. Over time, the two brands (Samsung and iPhone) became quite similar, but consumers preferred the iPhone.
Why?
Because the iPhone is a better brand. Not a better product. The next development, a development that happens to every new category, is that the category divides into two categories. One at the high end and one at the low end. Any brand that tries to both ends of the market is bound to suffer.
Can you give us any examples?
Cadillac once was the largest-selling luxury vehicle in the American market. Then it tried to broaden its market by introducing lower-priced vehicles. Today, Cadillac is not considered in the same category as Lexus, Mercedes-Benz and BMW. These three brands each outsell Cadillac by a wide margin. It won’t happen overnight. But long-term, we believe the same thing will happen to the iPhone. By introducing cheaper iPhones, it will lose its position at the high end. And conversely, it won’t sell very many inexpensive phones because of competition from Chinese and Taiwanese companies.
By launching a cheaper version of the iPhone, Apple seems to have started following Samsung’s strategy of having smart phones at various price points. If it’s a strategy that works for Samsung why can’t it work for Apple? After all Samsung has 31% of the smartphone market and Apple has only 14%.
The smartphone market is only six years old. It’s early on in the development of the category. IBM was the first company to introduce a 16-bit, serious personal computer. For several years, IBM had 50 percent or so of the personal-computer market. But because of line extension, IBM’s market share gradually declined until it was less than 10 percent of the market. And so, IBM threw in the towel and sold its money-losing business to Lenovo. Will the same thing happen to Samsung? Perhaps. But it all depends on how smart the competition becomes. If competitors develop narrowly focused brands at the high end and narrowly-focused brands at the low end, Samsung will be the ultimate loser.
Some analysts are of the view that a cheaper iPhone would cannibalize sales of the expensive models. Would that be the case? And even if that is the case isn’t it better that Apple cannibalizes its own sales rather than let someone else do it?
Certainly some cannibalization will take place. But Apple could have used a better strategy than line extension. It could have introduced a cheaper iPhone with a different brand name. Take Toyota, for example. Rather than introduce an expensive Toyota, the company introduced the Lexus. At one point, Lexus was the largest-selling luxury vehicle in America. Currently it’s the No.3 brand. When a category diverges, it is much better to cover the diverging category with separate brands rather than by line extending the company’s existing brand.
When I interviewed your daughter Laura a few months back she told me very clearly that “long-term, we see Apple as the leader in the high-end smartphone category and Samsung the leader in the “basic” smartphone category. Apple would make a mistake in introducing less-expensive smartphones. That would undermine its position at the high end.” Do you see that playing out now? Or would that be too far fetched a statement to make?
That was an astute statement, but apparently Apple management didn’t take Laura’s advice to keep the brand focused at the high end. A brand needs to stand for something to become successful in today’s competitive environment. What’s an iPhone? Is it a high-end phone or a low-end phone? A brand can be successful at either end of the market but not at both ends.
A growing view seems to suggest that Apple has lost its ability to innovate after the death of Steve Jobs. Would you agree with something like that?
Yes. No brand can appeal to everyone. Steve Jobs famously said there are some customers he doesn’t want. (He was commenting on why Apple wouldn’t introduce a netbook, or inexpensive laptop computer.)
Can you give us other examples where extensions have cheapened the brand?
Motorola introduced a $1,400 cellphone called “StarTAC” that rapidly became a very popular high-end cellphone brand. Then the company introduced cheaper versions of the StarTAC phone which undermined its high-end position. (We worked with Motorola at the time and pleaded with them not to introduce the less-expensive StarTAC phones.) Today, Motorola is just another cellphone brand without much of a position. Mercedes-Benz used to be known as the world’s leading high-end automobile brand. But the company keeps introducing low-end models that undermine its high-end perception. Today, BMW outsells Mercedes-Benz on the global market.
On a slightly different what do you think of Microsoft taking over the telecom business of Nokia. Nokia has lost out on the smart phone market. Will Microsoft’s taking over help them in capturing a greater market share in the smart phone market?
Microsoft would have to create a new smartphone category to kickstart the Nokia brand. (Much like Apple did with the touchscreen smartphone.) But that’s incredibly difficult to do in a category that has had so money spent on research & development. Microsoft is unlikely to profit from its Nokia investment. But there’s a larger point to be made. Every company needs a focus for the same reasons that every brand needs a focus.
How do you explain that in the context of Microsoft?
Microsoft is a “software” company. It should not be trying to get into the hardware business. That unfocuses the company and makes it very difficult to manage. Look at Apple, a company focused on selling hardware only. Sure, the company needs software developers to create its hardware products, but that’s a different matter. Look at Apple’s competitors in the American market. Both Dell and Hewlett-Packard are hardware companies trying to get into software and services. And not very successfully. Last year, Dell’s profit margin was 4.2 percent versus Apple’s 26.7 percent. And last year, Hewlett-Packard lost $12.7 billion.
The interview originally appeared on www.firstpost.com on September 12, 2013
(Vivek Kaul is a writer. He tweets @kaul_vivek)
Lessons from Nokia: Companies, unlike cockroaches, aren't great survivors
Vivek Kaul
Cockroaches are great survivors. They can even survive a nuclear attack. As Dylan Grice, formerly with Soceite Generale and now the editor of the Edelweiss Journal wrote in a report titled Cockroaches for the long run! in November 2012 “Cockroaches may not be able to build nuclear bombs, but they can withstand the nuclear war. They survive.”
Grice also points out that the oldest cockroach fossil is nearly 350 million years old. “According to the record of the rocks, cockroaches first appeared just after the second of the earth’s five mass extinctions (defined as the loss of 75% of all species). In other words, that means they survived, the third, the fourth and fifth mass extinctions which followed,” writes Grice.
And there is no rocket science behind the ability of cockroaches to survive. They follow a very simple algorithm. As Grice writes “According to Richard Bookstaber, that algorithm is “singularly simple and seemingly suboptimal: it moves in the opposite direction of gusts of wind that must signal an approaching predator.” And that’s it.”
Such a simple straight forward strategy, along with their ability to go without air for 45 minutes, survive submerged underwater for half an hour, withstand 15 times more radiation than humans and eat almost anything, including the glue on the back of stamps, helps cockroaches survive.
Companies do not come with the same kind of flexibility. Neither are they good at avoiding trouble. And given that their turnover rate is pretty high. The average life span of a company listed on the S&P 500 index of leading American companies is around 15 years. This has come down dramatically from around 67 years in the 1920s.
Companies have a very high mortality rate. As an article in the Bloomberg Businessweek points out “The average life expectancy of a multinational corporation-Fortune 500 or its equivalent-is between 40 and 50 years. This figure is based on most surveys of corporate births and deaths.”
Companies are either acquired, merged, broken to pieces or simply shut down. Nokia, which till a few years back was the world’s leading mobile phone manufacturer, is now going through a phase of trying to stay relevant. It was announced yesterday that the mobile phone division of the Finnish company would be sold to Microsoft for $7.2 billion.
Nokia produced the first mobile phone in 1987, more than a quarter century back. It was the world’s largest vendor of mobile phones, until Samsung overtook it in 2012. Even now, Nokia makes nearly 15% of the world’s mobile phones. But it only has 3% share in the lucrative smart phone market, where the most of the mobile phone users seem to be moving towards.
So what went wrong with Nokia? It failed to see the rise of a new category of mobile phones i.e. the smart phone market. As marketing consultants Al and Laura Ries,write in War In the Boardroom, “The biggest mistake of logical management types is their failure to see the rise of a new category. They seem to believe that categories are firmly fixed and a new one seldom arises.”
Companies tend to remain obsessed in selling a product they are good at selling and thus fail to see the rise of a totally new category. Nokia fell victim to this as well.
The history of business is littered with many such examples. Sony invented the walkman but allowed Apple and others to walkway with the MP3 player market. RCA ,which was big radio manufacturer, had earlier allowed Sony to walkway with the pocket radio market. Southwest Airlines created an entirely new low cost airline market which gradually spread to all other parts of the world. Incumbents like Panam, Delta, Singapore Airlines and British Airways did not spot this opportunity. The 24 hour news market was spotted by CNN and not BBC as you would have expected to given the dominance they have had in the global news market.
So the question is why do incumbents which are doing particularly well fail to see the rise of a new category? The answer for this lies in what happened with Kodak, a company which was a global leader in film photography. As Mark Johnson writes in Seizing the White Space – Business Model Innovation for Growth and Renewal “In 1975, Kodak engineer, Steve Sasson invented the first camera, which captured low-resolution black-and-white images and transferred them to a TV. Perhaps fatally, he dubbed it “filmless photography” when he demonstrated the device for various leaders at the company.”
Sasson was told “that’s cute – but don’t tell anyone about it.” The reason for this reluctance was very simple. What Sasson had invented went against the existing business model of the company. Kodak at that point of time was the world’s largest producer of photo film. And any camera that did not use photo-film was obviously going to be detrimental to the interests of the company.
So Kodak ignored the segment. By the time it realised the importance of the segment other companies like Canon had already jumped in and become big players. Also by then brand Canon had come to be associated very strongly with the digital camera whereas Kodak continued to be associated with the old photo film.
The same thing happened to Sony as
well. The MP3 player was ultimately an extension of the Walkman and the Cdman market which the company had successfully captured. So what stopped them from capturing the MP3 player market as well? Over the years, other than being a full fledged electronics company, Sony had also morphed into a music company which had the rights to the songs of some of the biggest rock stars and pop stars. Hence, Sony supporting MP3 technology would mean that one of the biggest music companies in the world was supporting the free copying and distribution of music because that was what MP3 was all about.
And that of course wouldn’t work. This obsession with the current way of doing business stops companies from seeing the rise of a totally new category of doing business. Closer to home, Bharti Beetel is an excellent example. The company pioneered the sale of landline phones which had buttons. But it was so busy selling these phones that it failed to see the rise of the mobile phone market. And by the time the market took off brands like Nokia were firmly entrenched. This happened at the same time as Beetel’s sister concern, Bharti Airtel, became the largest mobile phone company in India.
Imagine the possibilities here. If Bharti Airtel during its heydays had sold a Bharti Beetel mobile phone along with every connection, a lot of money could have been made.
Another excellent example of this is Xerox. “Just think of Xerox’s Palo Alto Research Center, which famously owned the technologies that helped catapult Apple (the graphical user interface, the mouse), Adobe (post script graphical technology) and 3Com (Ethernet technology) to success,” writes Johnson. But the company had an excellent product in the photo copy machine which was selling like hot cakes, and there was no need for it to concentrate on other products which would be viable some day in the future.
Nokia became a victim of this phenomenon as well where it completely ignored the rise of a new category. The company was busy selling its mobile phones and failed to see the rise of the smart phone market. Even though smart phones have been around for a while now its only in the last couple of years that they have really taken off. Hence, as long as the basic phones of Nokia were selling well, it had no real interest in thinking about the smart phone market.
By the time it woke up to the smart phone game, the likes of Galaxy (from Samsung) and iPhone (from Apple) had already captured the smart phone market. The company has been trying to play catchup in the smart phone market through its Lumia brand but has very little market share. As a Reuters report points out “Although Nokia also said in July it had shipped 7.4 million Lumia smart phones in the quarter, up 32 percent from Q1, it was fewer than the 8.1 million units analysts had anticipated. Nokia now boasts only around 15 percent of the handset market share, with an even smaller 3 percent share in smart phones.”
Blackberry is another such company. It was busy selling phones which had an excellent email application. Meanwhile, it failed to see the rise of the smart phone market like Nokia. It is now trying catchup but other companies have already captured the market. In the days to come, the chances of Blackberry being acquired by another company, like Nokia has been, are very high.
What the Nokia story tells us is that companies unlike cockroaches are not great survivors. As the Bloomberg Businessweek article quoted earlier points out “Even the big, solid companies, the pillars of the society we live in, seem to hold out for not much longer than an aver-age of 40 years. And that 40-year figure, short though it seems, represents the life expectancy of companies of a considerable size…A recent study by Ellen de Rooij of the Stratix Group in Amsterdam indicates that the average life expectancy of all firms, regardless of size, measured in Japan and much of Europe, is only 12.5 years.”
Nokia started operating in 1871 and was named after the Nokianvirta river. It spent more than a 100 years manufacturing everything from boots to cables to tyres. In 1987, the company made the first mobile phone. In 2013, the mobile phone division was sold to Microsoft. That’s a period of 26 years. Almost double the life expectancy of 12.5 years which prevails for companies in Europe. As per that parameter, Nokia survived long enough.
The article originally appeared on www.firstpost.com on September 4, 2013
(Vivek Kaul is a writer. He tweets @kaul_vivek)
‘Adapt to India, don’t wait for it to catch up with your model’
Ravi Venkatesan is the former Chairman of Microsoft India and Cummins India. He is currently a director on the boards of Infosys and AB Volvo. Most recently he has authored Win in India, Win Everywhere – Conquering the Chaos (Harvard Business Review Press, Rs 895). In the book he makes a case for multi-national companies (MNCs) not to ignore India, despite the country being a VUCCA market (i.e. operating in an environment characterised by volatility, uncertainty, complexity, corruption and ambiguity). In this interview he speaks to Vivek Kaul.
The first thing I felt after reading your book was that given the current scenario in our country, its a tad too optimistic….
The reality of the Indian economy is very grim. But in spite of that companies need to find a way to break through. India is one of those extraordinarily fortunate countries which has to do nothing to attract foreign direct investment (FDI). People are dying to come here. We just have to stop scaring them away. Unfortunately we have done a pretty good job of scaring them away to the point where they are really losing interest.
Why have only a few MNCs succeeded in India?
Because only a handful of them have taken the country seriously. It takes three things to succeed in a market like India. Number one is the mindset. Companies need to realise that India is strategically important. It may not have their act together now, but a country of billion people cannot be ignored without consequences. So lets take a long term view. Lets be a leader. That is the mindset needed.
The second thing you need is to get the leadership right. You need a stable leadership team you can trust. You empower them overtime to take most of the decisions. But very few companies have succeeded in doing that. For most of them it is a fast moving sales outfit with no imagination.
The third thing you have to get right is that you have to realise you have to adapt to the country rather than wait for the country to catch up to your business model.
In India the business model may never catch up with you….
Yes. So if you are Apple and you say listen I am going to wait till the distribution system is more efficient and more Indians can afford the iPhone as is. Fine yaar.
Meanwhile the Indians will buy a Samsung...
Yeah. They will buy a little Samsung. A little HTC. A little Nokia. And you are going to be wiped out. When you look at it, this doesn’t sound to be much. But it is an extraordinary one in a hundred who actually gets these three elements right.
So the mindset is very important?
Yes. The global headquarters might say oh my God if they come up with something it will cannibalise my rich product. Imagine an iPhone that is half the price and almost everything that an iPhone is. That would not be good news. It would mean cheapening the brand and destroying the profitability of the company because the Americans will ask why can’t I have that phone as well. And so usually companies decide that do nothing is a good strategy.
Can you give us an example of a company which came to India, tried establishing its business model which did not work and then adapted it with success…
Microsoft came to India with its arrogance and established a certain presence. Then Bill Gates woke up and he realised, hey listen we have a $100 million business and 1000 people in a country of a billion people. What is going on? This was 2003. So they hired me in all their wisdom, even though I did not know anything about IT.
What was one of the main issues facing the company? Back then the piracy rate was 75%. Bill said this is okay. We will get them using it, one day we will collect. Steve Ballmer said, time has come to collect. “You are the country head, you collect,” he told me.
What did you do?
I went around enforcement, ye wo kiya, par kuch nahi hua (did this and that, but nothing happened). Then one minister, who shall remained unnamed, called me, and spoke to me in Tamil, and said “listen, you seem like a good guy, but maybe a little stupid. So let me give you some advise. Copyright in India means right to copy. So you change your business model because India is not going to change for you guys.” So we changed our business model in 2006-07. We changed our pricing. We came up with local language versions. Changed distribution and took the piracy rate down from 75% to 64% and saw dramatic growth.
You cut prices dramatically…
Office used to be $300. We came up with Office Home and Student which is $60. We came up with a version of Office for government schools which was $2. So if somebody said what is the price of Office in India? The answer was I don’t know. It’s free if you are an NGO. It’s two dollars if you are a school, and its $300 if you are Infosys. So that is adapting your business model for the reality of a country.
Any other examples?
JCB is a beautiful example. Everyone else came with an excavator. These guys came with a backhoe Bakchoes was 1960s technology, but India needed a backhoe. The country needed something low tech, very versatile and very inexpensive. They also localised to get the price point right. Also everybody optimises a machine for productivity i.e. how much mud can you dig in one hour. These guys optimised it for fuel efficiency i.e. how much mud can I dig per litre of diesel. Every point they made a different decision based on the market. How do you adapt your equipment so that it can run on adulterated diesel and abuse? You can’t find operators to run the machines. So lets start schools for backhoe operators across the countries.
The other companies did not do these things?
Everybody else was saying when the market comes up, then we will do it. These guys created the market and so they own it. Do you have a microwave oven from Samsung?
No…
It doesn’t say time setting. It says dal. It figures out the time and setting on its own.
That is a great innovation…
And it is so simple. And it will also in certain models say dal in Hindi. Is this rocket science or genius? No it is paying attention to your customer. That is all it is.
The interview originally appeared in Daily News and Analysis on July 27, 2013
(Vivek Kaul is a writer. He tweets @kaul_vivek)