Carl Stern

Rakesh Vohra

Oded Sarig

Montek Ahluwalia

an

uf

ac

tu

rin

Pr

od

Logistics

Collaborative Planning, Forecasting & Replenishment Information Flow

Pr

oc

ur

em

lo

en

uc

tF

End Consumer

Warehousing

Global integration

Inventory Management

Material Flow COVER STORY

ith iew w Board Inter v of the n a m r Chai BCG

ECIAL HT SP rl Stern G I S N I Ca

Supply Chain
Delivering Value

J U N E 2 0 07

From the

editors desk
Dear Reader, With Indian companies trying to enhance manufacturing capabilities to meet the pressures of globalisation, supply chain management has become a critical issue. How can effective supply chain management deliver competitive advantage? How can the service industry add value through supply chain management? Indias food chain leads us back to the villages and with the retail industry taking off in a big way, how can supply chain be used optimally to benet those at the bottom of the pyramid? These and many more questions are answered by leading academics, in this issue of the ISB Insight. Management is not all analytical and deductive; in fact, it is most effective when right brain inductive thinking is given due importance, says Chairman of the Board, BCG, Carl Stern, in a fascinating interview with the Deputy Dean, adding testimony to the ISBs relentless efforts for increasing the diversity in its class. We have continuously added the academic content in the ISB Insight with a view to showcasing the latest management thinking. Discussions, articles, interviews on Entrepreneurship and Design Ethnography, and recent research ndings have been added in this issue. I hope you will nd them interesting and will let us know your feedback. We could not feel satised without including the biggest events at the ISB Graduation Day and Placements 2007. Snapshots of these and various other activities also add spice to the issue. The editorial team of the ISB Insight has grown to include a large number of writers contributing to the issue. We hope to evolve continuously to full the requests for more content that many of you have shared with us. Do write to us at editor_insight@isb.edu.

ISB Insight Team Bhuvana Ramalingam Mohan Chandran P Varshaa Ratnaparke Mrinal Kanti Ray Monidipa Mukherjee Madhavilatha G Pallavi Dutt Design & Cover Illustration: Trapeze Resources: Learning Resource Centre at the ISB Printed at Kala Jyothi Process Pvt Ltd Indian School of Business Gachibowli, Hyderabad 500032, India Phone: 91 40 23007000, Fax: 23007012 Email: editor_insight@isb.edu www.isb.edu Inside Cover: A view of the architectural splendour and greenery at the ISB

Bhuvana Ramalingam Editor

June 2007 | ISB

insight | 1

S T O R Y

Contents
4 Cover Story: Supply Chain Delivering Value With Supply Chain being given increased importance in most companies, we examine how technology can aid companies in harnessing it to the fullest for delivering optimum customer value. Managing Service Inventory to Improve Performance Professor Sunil Chopra and Associate Professor Martin A Lariviere explain how push-pull boundary in service inventory can act as a strategic lever in managing service offerings. 18 Casting Off the Chains Professor ystein Fjeldstad and Associate Professor Espen Andersen discuss two new alternative models to Value Chain Value Shop and Value Network in the value creation process. 22 Harnessing Technology for Efcient Supply Chain Management Technology can be a great enabler in signicantly enhancing customer value. Industry executives from various sectors shed light on the role and scope of technology in Supply Chain. 28 ISB Insight Special: BCG Interview Carl Stern Ajit Rangnekar, Deputy Dean, ISB, in a tte--tte with Carl Stern, Chairman of the Board, BCG. 32 Financing Firms in India Sankar De, Executive Director of CAF and Clinical Professor of Finance, ISB, discusses the research paper on Indian Financial System, presented at the ISB-Wharton-SIFR Conference, while Shamika Ravi, Professor of Economics, shares some of the deliberations at the Conference.

C O V E R

6
Carl Stern, Chairman of the Board, BCG, at the ISB

10 Rural Supply Chain Networks: The Future With nearly 60 per cent of population living in rural India, Rural Supply Chain Networks offer the next big opportunity in future, says N Viswanadham, Clinical Professor of Operations, ISB.

Montek S Ahluwalia, Deputy Chairman, Planning Commission of India, Rajat Gupta, Chairman, Governing Board, ISB and M Rammohan Rao, Dean, ISB, at Grad Day 2007

14 Information, Incentives, and Supply Chain Contracts Assistant Professors Milind Sohoni and Aditya Jain, discuss the importance of information sharing and aligning incentives for efcient Supply Chain Management.

ISB Juniors Kids Day

2 | ISB

insight | June 2007

37 Focus on Financial Economics Ramana Sonti, Assistant Professor of Finance at the ISB, discusses one of his research papers on IPOs accepted for publication in the Review of Financial Studies. 38 The New Spirit of Entrepreneurship Teaching Entrepreneurship has become one of the hottest career options today. Professors K Ramachandran, Phillip H Phan, and Ramakrishna Velamuri discuss the emergence of the new spirit of entrepreneurship among youth. 41 Faculty Felicitations ISBs Faculty add more jewels to their crowns with their unrivalled performance and accomplishments. 42 When Creativity Meets Commerce Professors Alladi Venkatesh and Jonathan E Schroeder share their perspectives on Design Management, Design Ethnography, and Visual Culture. 46 Walking the Graduation Aisle Class of 2007 The Class of 2007 came off with ying colours in all areas of academic activity and left their indelible mark in the history of the ISB.

47 Placements 2007 The Thrill of Roles Over Numbers The ISB students choose off-beat job proles in unconventional sectors and give precedence to job roles over lucrative pay packets. 48 Becoming a Global Entrepreneur The ISB launches The Global Growth Entrepreneurship Programme to equip participants to contend with global players. 50 ISB Happenings A kaleidoscope of activities on campus academic, co-curricular, cultural and social reinforcing the vibrant environment at the ISB. 52 Book Review N Viswanadham, Executive Director of GLAMS, and Clinical Professor of Operations, ISB, reviews Building Supply Chain Excellence in Emerging Economies.

Montek S Ahluwalia giving away the Convocation Degrees on Grad Day 2007

Carl Stern addressing the ISB students in Class

Team Building on Orientation Day - Class of 2008 June 2007 | ISB

insight | 3

Supply Chain
Delivering Value

C O V E R

S T O R Y

4 | ISB

insight | June 2007

n today s highly competitive world, a company s success depends on how well it can control its supply chain by surmounting the resultant bottlenecks. With Frost & Sullivan forecasting that the supply chain market revenues would reach $8.67 billion in 2009 (World Supply Chain Management Investment Analysis and Growth Opportunities, Frost & Sullivan, March 13, 2006), the market is only getting bigger. Global sourcing has become a reality now, and many companies are under tremendous pressure to reduce their inventory levels and simultaneously expedite faster order-fullment cycles. As many companies still continue to outsource manufacturing to low-cost countries, the frequency and intensity of supply chain disruptions increases substantially. Research studies have demonstrated that several organisations are not fully equipped to manage supply chain risks, and that only between 5 and 25 per cent of Fortune 500 companies are prepared to handle disruptions in supply chain. The costs of supply chain disruption can be very high ranging from USD 50 million to USD 100 million for a single day. Supply chain disruptions can also lower the shareholder value by up to 10 per cent. To reduce the frequency and costs of supply disruptions, suppliers and manufacturers need to adopt a set of processes and enabling

technologies. A combination of process changes and use of advanced technology can enable in enhancing the supply chain efciency of companies and delivering value to the customer. Sharing of relevant information quickly and through multiple sources is one of the most effective ways of enhancing supply chain performance. The advent of technology has bridged the barriers to distance, enabling faster sharing of information. Also, global networking through technology helps in securing delivery reliability, cost efciency, and superior quality. Supply chain optimisation requires the technology and tools that have global enterprise scope for organisation redesign, and can adapt to the dynamic nature of supply chain events, providing real-time solutions to supply chain problems. A set of technology tools that can track changes in supply chain and perform under a variety of operating and economic environments is the need of the hour. This issues cover story carries interviews from accomplished companies on the issues of harnessing technology for efcient Supply Chain Management practices to deliver value to the endcustomer. Distinguished academicians also express their views and arguments with regard to the signicance of supply chain and the various possibilities it offers to a company in delivering customer value.
June 2007 | ISB

insight | 5

C O V E R

S T O R Y

Managing Service Inventory

to Improve Performance

Sunil Chopra, IBM Distinguished Professor of Operations Management at the Kellogg School of Management, Northwestern University, Evanston, Illinois and Martin A. Lariviere, Associate Professor of Managerial Economics and Decision Sciences at the Kellogg School of Management, provide insights on how push-pull boundary in service rms can be used as a strategic lever in managing service offerings.

Sunil Chopra, IBM Distinguished Professor of Operations Management, Kellogg School. Evanston Photographic Studios 6 | ISB

n recent years, the practice of pushing product by building inventory in anticipation of demand has fallen out of favour. Many companies have shifted to a pull environment, in which they build product only in response to actual demand. These rms have moved the push-pull boundary the point at which a supply chain switches from building to forecast to reacting to demand away from their end customers. By decreasing the amount of work completed before actual demand is known, rms avoid costly mismatches in supply and demand. For example, Dell Inc. has assumed and maintained a leadership position in the personal computer industry in no small part by setting its push-pull boundary to offer customers greater customisation. As repositioning of push-pull boundary has paid huge dividends for many product-based rms, it is only natural to wonder what kind of promise this approach holds for service rms. A basic tenet of service management is that services cannot be inventoried. Yet this view relies on an extremely narrow denition of inventory as nished product waiting for customers. In a service setting, the placement of the pushpull boundary denes the portion of the work that has been performed and stored before the customer arrives. We call this work service inventory, which includes all process steps that are completed prior to the customer s arrival. By using the correct form of service inventory, companies can offer better quality, faster response times and more competitive pricing. In this article, we discuss how moving the push-pull boundary

in service rms can be a strategic lever in designing and managing service offerings. Services as Attributes and Processes Service inventory needs to be viewed in the context of how rms compete and create value for customers. Every service represents a bundle of attributes quality, speed, customisation and price produced through a set of processes. Customers elect to buy from a service provider only if the attributes of its offering are more attractive than the available alternatives. In service businesses, as in others, work can be performed and stored in anticipation of demand. By wisely choosing what kind of inventory to hold, companies can improve quality, response times, customisation and pricing. How well a service rm delivers its bundle of attributes depends on its process choices. Thus, process design is one of the most fundamental managerial decisions. We emphasise three drivers of performance: the placement of the push-pull boundary, the level and composition of resources, and access policies. The push-pull boundary determines how much work is done and stored as service inventory in anticipation of demand. Resources that is, the people and the equipment that the provider employs are used to perform the actual work of delivering a service. And access policies are used to govern how customers are able to make use of service inventory and resources (for example, should any airline travellers be encouraged to complete check-in at a kiosk instead of going through an agent at the counter?). Most studies of

insight | June 2007

service processes have focussed on resources as the key lever in service design and performance. However, decisions about the push-pull boundary, resources, and access policies are interrelated. A rms ability to deliver targeted levels of quality, speed, customisation and cost for given resource levels depends on both how much work is done ahead of demand (and thus how much work must be done in reaction to demand) and how the rm allows customers to tap into its resources. Where to locate the pushpull boundary is thus a signicant decision in service-process design. The Role of Service Inventory There are many different types of service inventory, and the choice a service provider makes depends on its industry and desired position in the market. A rheumatologist, for example, needs to produce letters for insurers on the status of patients. A system that automatically helps generate these letters represents a type of service inventory. The tools that help customers set up and run online auctions on eBay Inc. constitute another type of service inventory. Credit rating agencies, which sell consumer data and credit scores to nancial institutions, have built their entire industry around service inventory. Financial institutions, in turn, have their own form of service inventory in the predetermined rules they apply to different customers on the basis of their nancial proles and credit scores. In all these examples, the service providers have shifted the push-pull boundary by performing some part of a service before the service request has arrived. The title insurance industry illustrates some of the potential gains of moving the push-pull boundary closer to the customer. Title insurance assures a prospective property buyer (or, more specically, a buyer s lender) that a particular property title is unencumbered by liens or any inheritance claims. The title insurance industry has traditionally operated in a pull mode: Research about a property is initiated only when a customer requests a new policy. However, the Radian Group of Philadelphia has begun to alter this practice by gathering and storing the title information in anticipation of customer demand. Radian collects existing tax records, probate lings,

Martin A Lariviere , Associate Professor of Managerial Economics and Decision Sciences, Kellogg School Evanston Photographic Studios

deed registrations and other public records related to properties. Because it stores the records in its own database, Radian can offer title insurance on re-nancings quickly and cheaply. It charges just $250 for a renancing, several hundred dollars less than a conventional rm. Radians database of tax histories and deed recordings represents service inventory indeed, it performs the same basic functions as conventional product inventory. The inventory acts as a buffer, allows the company to take advantage of economies of scale and expedites customer service. A traditional rm pulls tax records on only a handful of pending transactions at a time, but Radian can collect all the tax records at once thus exploiting economies of scale for a much lower cost per unit. When

a customer requests information, the turnaround time is rapid. As the title insurance example shows, service inventory is frequently made up of information such as databases or decisionsupport mechanisms. The availability of cheap computing and massive data storage often argues in favour of maintaining service inventory. Although service inventory is often based on information, not all information qualies as service inventory. It must represent preperformed steps in the delivery process that reduce the amount of work required when an order arrives. A database of consumer credit scores is service inventory for a mortgage lender, because evaluating credit history is a large part of the lending process. A database of everyone who has applied for a mortgage in the past year, however, does nothing to reduce the work required to reply to a service request; it is not service inventory. Our concept of service inventory is different from Theodore Levitts vision of industrialisation of service. Levitt argued that a standardised service (such as Jiffy Lube International Inc.s oil changes for vehicles) would result in signicant reductions in cost. But such cost savings come at the expense of exibility and variety (for example, Jiffy Lube does not service brakes). Moving the push-pull boundary toward the market can allow service providers to make decisions about which areas of improvement to emphasise: consistency, speed, customisation or costs.

A Framework for Service Process Design

The performance of a service process depends on three factors: the push-pull boundary, resources and access policies. Quality Variety Speed Price

Service Attributes

Service Process Design

Resources

Push-Pull Boundary

Access Policies

June 2007 | ISB

insight | 7

C O V E R

S T O R Y

The Strategic Impact of Pushing Services Companies seeking to improve their competitive capabilities by using service inventory should pay attention to the four major service attributes: quality, speed, customisation and price. Quality: Consumers value various aspects of service quality, but in many cases transactional conformance being able to get a well-dened service reliably and accurately is the No. 1 concern. In this case, moving the push-pull boundary toward the market and increasing service inventory tends to increase service quality. An investor looking to rebalance his or her portfolio or sell stock, for example, places an extremely high value on transactional conformance. The investor wants reliable, accurate information about how best to make the adjustments, and service inventory provides an effective mechanism for satisfying this objective. Boston-based Fidelity Investments has reacted to this need by developing service inventory in the form of Web-based tools that allow investors to perform a variety of analyses. Transactional conformance is also critical for purchasing airline tickets, making hotel reservations and seeking technical support. Speed: Service inventory can shorten service turnaround time by reducing the amount of work required once customers enter the process. For example, a customer picking up laundered shirts and a suit from the dry cleaners frequently must wait for an employee to locate the items. Obviously, it would be faster for the customer if the cleaner consolidated orders in advance. This is what Zoots, a chain of dry cleaners based in Newton, Massachusetts, does. The company even takes the idea one step further; it puts the customer s items in a secure locker (accessible 24 hours a day) and bills a pre-approved credit card. Zoots has reduced the pull portion of the pickup process to a minimum. The customer spends less time in the store and is free to pick up dry cleaning at any time. No matter when customers show up, Zoots is able to achieve a higher level of staff utilisation because employees are able to work at a steady rate. Customisation: Whereas inventory generally tends to constrain customer choice, welldesigned service inventory can be used to offer greater variety and customisation
8 | ISB

quickly, at relatively low cost. Service inventory enhances customisation by allowing general capacity to deliver specic results or by giving customers increased information and control. JW Marriott Hotels and Resorts At Your Service programme is an example of the former. The programme keeps track of individual guest preferences and complaints. If a guest prefers feather to foam pillows, it is noted in the database, and the feather pillow will be on the bed the next time that guest checks into a Marriott hotel. Through this programme, Marriott is building up its service inventory and using the inventory to customise its offerings. Marriott can take what would otherwise be a generic hotel room and tailor it to the traveller s individual taste. Price: Moving the push-pull boundary in the direction of end-users can offer signicant cost savings, giving service providers greater pricing exibility. The savings can ow from simply using less expensive resources and developing selfservice options. Alternatively, service inventory can enhance the productivity and exibility of frontline workers. Operating a technical support help desk, for example, is less costly if user problems are handled quickly and correctly the rst time. Service inventory also lowers costs by fullling the basic roles of inventory: exploiting economies of scale and buffering resources. Locating the Push-Pull Boundary Strategically Although many companies are already using service inventory to carve out unique positions in their markets, we believe signicant opportunities await rms that are willing to rethink the location of their push-pull boundaries. For example, industry experts estimate that only 10 per cent of telecommunications industry service orders are done through the Web (compared with about 30 per cent of airline ticketing). Since the cost of processing a transaction through a traditional call centre is about 10 times that of processing the same transaction over the Internet, there is clearly a payoff in moving more customers to cheaper resources. This is not to say that all service inventory is worth building. Before investing in service inventory, a service provider must consider

when service inventory will enhance its competitive position and how its access policies can be adjusted to maximise the chances of success. Determining the Right Level of Service Inventory The ideal location of the push-pull boundary depends on the specic characteristics of the particular market and the cost of creating service inventory. The market characteristics determine the likelihood that service inventory will actually be used; the cost inuences how risky it is to build service inventory. As with product inventory, building service inventory is more attractive when there is a greater chance that it will actually be used or when the cost of building it is low. One market characteristic favouring high levels of service inventory is when customised service can be delivered through the application of a common process. Automated teller machines at banks, self-service check-in at airports and eBay auctions are good examples; the process is standardised, but the transaction details differ. In each case, a standardised process allows for the building of service inventory. This, in turn, facilitates selfservice by the customer, quickly and at low cost. By concentrating on what is common across the various service requests, the rms can build service inventories with the knowledge that they will, in fact, be used. Another market factor favouring service inventory is the presence of frequent users who value customisation. Marriott maintains signicant service inventory in the form of information on repeat customers, and it uses the customer data to adapt from one guest to the next. Because the service inventory revolves around regular customers, it is likely to be used over and over. High levels of service inventory are also justied if it is cheap to maintain, store and augment. Controlling Access to Increase the Value of Service Inventory Once a rm has created service inventory, it is important to encourage as many customers as possible to use it. For example, having a check-in kiosk provides little value to an airline if most passengers continue to wait in line for customer service

insight | June 2007

representatives. Some rms have responded to this challenge by forcing customers to access service inventory before placing demands on more expensive resources. For example, American Airlines usually allows domestic passengers to access its counter personnel only after they have used a selfservice check-in terminal. In other settings, rms have built-in proles for identifying complex transactions that cannot be handled using service inventory. For example, lenders might develop automated rules to create three groups of loan requests accept, reject and further processing. Only the requests that require further processing nd their way to a person. One way to direct customers to service inventory and away from expensive resources is to impose different costs. The difference may simply be a higher price. When the goal of service inventory is to increase customisation or to provide additional services, access policies can be designed to reward the most valuable customers and to encourage retention. For example, Marriotts At Your Service programme is available only to frequent

guests. In this example, service inventory increases the customer s perceived value of the service. Focussing on the push-pull boundary provides a distinct and novel way to think about service management. In evaluating where to set the boundary, service providers should think of service inventory as providing structure and support to the service encounter. The relevant questions for companies are: What do customers value? Do they want a simple, fast process, or do they want a single point of contact that can deliver a range of services? The former favours using service inventory to offer speed through ample, cheap capacity; the latter favours using service inventory to enhance the productivity of skilled resources. A focus on the push-pull boundary can help guide rms in designing their service processes. They can identify which process steps to complete in advance in order to move the push-pull boundary closer to the market and to elevate performance to higher levels. Reprint (No. 47112), MIT Sloan Management Review, Fall 2005, Vol.47, No.1.

One way to direct customers to service inventory and away from expensive resources is to impose different costs. The difference may simply be a higher price.

How Service Inventory Improves Performance Along Service Attributes

Service Attribute Ways in Which Service Inventory Can Improve Performance Quality Provides for consistency Facilitates service recovery Speed Reduces amount of work needed after customer arrival Allows provider to expand capacity Reduces handoffs Customisation Applies standard process to individual inputs Allows greater customer control Price Facilitates self-service Allows use of cheaper resources Enhances resource productivity Customers provide unique inputs to a standard process Customers value exercising greater control Signicantly reduces resource costs Increases staff productivity Allows higher resource utilisation Customers value transactional conformance Enables simple, standardised response to common service failures Allows for signicant capacity expansion Eliminates need for handoffs Reasons to Build Service Inventory

Service inventory can impact performance on the competitive attributes of quality, speed, customisation and price. A desire to improve in any one of these dimensions can justify an investment in service inventory.

June 2007 | ISB

insight | 9

C O V E R

S T O R Y

Rural Supply Chain Networks:

The Future
The author, N Viswanadham, Executive Director of Centre for Global Logistics and Manufacturing Strategies (GLAMS) at the ISB, and a Clinical Professor in Operations, explains that the future belongs to the rural supply chain networks, and India has the opportunity to become a leading global food supplier.

ural supply chains are the next big issue for researchers and businesses in India and China. The reasons are simple: the urban areas are congested with deteriorating quality of life and saturated markets. Nearly 60 per cent of Indias population live in rural areas, and forecasts indicate that these numbers will remain the same, even in 2050. There would be 800 million people living in Indian rural areas in the 2040-50s, providing the scale and the markets for commodity supply chains to thrive. Thus, there is a need for transforming rural India into a group of sophisticated vibrant activity centres. Innovations in every layer products, processes, business models, and service models are fundamental for this transformation process to happen. Businesses need to be reinvented with high technology tools that can provide employment and services for millions of rural dwellers at an affordable cost. In this article, we provide an integrated framework, and also a glimpse of those technologies and models that might work in rural scenarios.

N Viswanadham, Executive Director of GLAMS and Clinical Professor of Operations, ISB. 10 | ISB

Introduction What is global, urban, and rural? The difference between urban centres and rural areas may seem so obvious. The criteria used include population size and density, and availability of services such as communication, education, healthcare and

nance. Different population thresholds are used for different countries: for African nations, it is 5,000 inhabitants, while for Latin American and European nations, it is 2,000 or 2,500, or even less. A large proportion of settlements classied as rural in China and India would fall within the urban category, if these population thresholds are adopted. Investments in services and infrastructure tend to concentrate on urban areas. MNCs choose cities with good logistics and IT, educational and nancial infrastructure, and power and water facilities for FDI. As a consequence, investments for betterment of rural areas are generally done by governments. Thus, rural supply chains dealing with agro-products, handicrafts, toys, textiles and apparels emanate from villages and small towns with not so sophisticated infrastructure and lifestyles. The rural areas host the tail-end of very important food and apparel supply chain networks, whether they are rural, urban or global. Global supply chains cross countries and can originate either in urban or rural areas, depending on the product. For example, American and European retailers source fruits, vegetables, meat, leather and apparel products from rural areas in low-cost countries. Also, supply chains migrate from local to global, urban to rural, and vice-versa. The rst wave of supermarket revolution occurred extremely fast in urban areas,

insight | June 2007

with high sales growth rates. The second wave starts with diffusion into secondtier areas and the third wave starts when super markets move in to rural areas. Rural retailing is portrayed as the next sunrise segment in retailing space. Strategies and development initiatives have been implemented all across the world to alleviate rural areas from these inictions by formulating revenue generating programmes. For example, in the US, agricultural prospects of different regions have been identied and a cluster mechanism has been adopted. In South Africa, policy measures have been taken to alleviate the Negro community by providing agricultural lands on grant basis. In Thailand and Japan, the concept of One Village One Product has evolved, which improved the prosperity of rural communities in these countries. The model of Grameen Banks in Bangladesh gave birth to the concept of Micro-credit. In India, there were several public and private sector initiatives in the areas of agriculture, aquaculture, and also for supplying farm inputs to the farmers. For example, the Bharat Nirman project, with an allocation of Rs. 1.76 trillion aims to build roads, provide electricity to 100,000 villages, extend irrigation to 10 million hectares, or 24.7 million acres, and build 6 million houses by 2009. Across the country, companies like HLL, Godrej Aadhar, DCM Hariyali Kisaan Bazaar, Triveni Khushhali, ITC Sagar Choupal and Tata Kisan Sansar are helping farmers earn a better livelihood.

The Indian rural areas host two kinds of supply chains: food products and apparel; and furniture, leather items and toys. In agri-business sector, the food processing industry is small and factories are located nearer to demand centres, i.e., in big cities or their outskirts. Integrating the agribusiness and SME sectors into the global value chain is high priority item for India for the following reasons: India has 12.4 million SMEs, contributes 7 per cent of GDP , 35 per cent of exports, over 29.5 million employed. In India, 51 per cent is cultivable land. India is ranked in the top-ve list in many agricultural produce like vegetables, fruits, milk, animal husbandry, etc. But the revenue generated from these resources does not match its optimal potential. With growing importance for processed foods, the food processing industry in India still remains at 1.6 per cent, while in countries like Thailand and Brazil, it is 65-75 per cent. The wastage that goes into the agri-produce is almost 30 per cent. Retail in India is another vibrant story that is least saturated with global markets. Currently there are 12 million retail outlets employing 21 million (7 per cent of total work force) people, and these provide no entry barriers for big players. Organised retail segment in India is small now, but has tremendous market size in urban and rural areas. Thus, the priority in India today is to

develop its local rural and urban supply chains and integrate them into the global value stream. The Rural Supply Chain Network Figure 1 presents an Input-Output representation of a rural supply chain. An integrated rural supply chain network (IRSN) (see Figure 2) is a group of independent companies, often located in different regions, forming a strategic alliance with the common goal of designing, manufacturing, and delivering right-quality products and services to customer groups, faster than others. They compete with similar cooperating networks. The IRSN is an integration of three different welldesigned sub-networks for handling transfer of goods, information and funds: a logistics network, an information technology network and a nancial network. The logistics network provides a streamlined material ow among all partners, cutting down lead time and cost of moving raw materials, sub-assemblies, and nished goods to their destinations. An extranet a secure and reliable communications network linking all companies of the enterprise provides information integration enabling efcient logistics and effective decision-making. There is also a secure nancial network that connects nancing, insurance and creditrating agencies, and all other stakeholders and nancial institutions. Thus, we see that the eco-system that enables an agile rural supply chain has players from farming,
S T O R Y I C O V E R

Figure 1: Input-Output Representation of Rural Supply Chain Network

Resource Management & Marketing Skills Policies Logistics Financial Services

Farm labour Farm-inputs Fertilisers, seeds etc. Non-farm Community

Rural Supply Chain Network

Agriculture & Small Scale Industries
Value added Products

Processing Industries Technology

June 2007 | ISB

insight | 11

We need to reinvent rural supply chain networks using high technologies, keeping in mind the inefciencies and constraints imposed by the infrastructure and economic environment.

manufacturing, retailing, nancing and nally from the customers. This is an ideal rural supply-demand-nancial chain and the current state of the Indian rural chains is far from it. Currently in India, there are attempts to connect stakeholders information networks through messaging, wireless phones, Internet kiosks, etc., but these attempts are for supply of information rather than for efcient control of the supply chain or for supplydemand matching. The logistics network is the one that is often blamed for bad roads, lack of cold chain, manual handling, slow transport such as bullock-carts or tractors. Rural nancial networks exist with the support of organisations such as the World Bank. The aim of rural supply chain in India is to reach the ideal described above, using Internet and other technologies, to create agility in networks. The rural supply chain stakeholders and researchers can learn from the welldeveloped industrial goods supply chains. The idea is to transform the way agriculture works and create a business orientation among farming community. Reinventing the Rural Supply Chain We need to reinvent rural supply chain networks using high technologies, keeping in mind the inefciencies and constraints imposed by the infrastructure and

Rural Supply Chain Flow of Goods

economic environment. To do this, we have identied two value-delivery processes in the food supply chain for re-engineering: the production and sale of commodities by farmers, and rural retail network. First, we present a decomposition of rural food supply chain into its component valuedelivery processes. Value Delivery Processes in the IRSN: Operationally, the IRSN has four core valuedelivery processes. It is important that all four processes are managed to work in harmony for the entire supply chain to be competitive. The core business processes in a rural production organisation are as follows: Procurement (procurement of farminputs, procurement of fresh produce) Production of basic agriculture products (farming and non-farming) Processing (processing of fresh produce grains, fruits, vegetables) Retailing (rural and urban retailing) The support processes assisting the above core business processes can be identied as follows: technology, transportation including coldchain, mobile communications technology, knowledge processes pre-harvesting and post-harvesting techniques, handling, packaging, and processing techniques, resource management and marketing, and nally nancial services.

Figure 2 : Integrated Rural Supply Chain Network

Information Network

Food Manufacturer

Farmers

Logistics Network Logistics Hub

Distributor

Farmers

Retailer

Service Provider

Financial Network Banks

12 | ISB

insight | June 2007

Production of Basic Agriculture Products (Farming): A New Model The ISB Kisanbandhu (IKB) model has been developed by the faculty of Centre for Global Logistics and Manufacturing Strategies (GLAMS). A proof of concept experiment and also a total supply chain design study are currently under way at the Centre. The primar y function of IKB is to enable farmers to sell their produce at a fair price. It consists of a cyber intermediar y (information and business exchange), a commodity exchange, and logistics provider, quality grading teams, finance and insurance agencies. The cyber intermediar y maintains an updated database of registered farmers, logistics providers, brokers, retailers, mandi managers, food manufacturers and exporters. It also has real-time market information, commodity exchanges information trading different goods, and other marketing information useful to the farmer. The IKB is a sophisticated exchange, with natural language processing capabilities, and farmer can deal directly using his cell phone and transact in his native language. The farmer can get feedback on processing of the transaction on TV channel at prescribed timings. The IKB can also be used for procurement of inputs for farming.

Rural Retailing In India, rural retailing can get support from omnipresent post office. The rural retail group places an order with the call centre via post office, which communicates the order to the State Distribution Centre (SDC). The SDC will pass on the details of the order to the district/local distributor located near the village. Depending upon the type of order, goods can be delivered. All consumer durables can be delivered by post office mobile vans. Perishable and FMCG goods can be delivered by road transport to the post office, who can distribute it to the village retail group. The payment for goods will be handled by post office. Thus, IT enabling the post office, which is both a deliver y channel, as well as bank, will provide much needed supply chain visibility in rural supply chain networks, in general, and retail networks, in particular. Small Scale Industries in Rural Areas There are several garment manufacturing and export centres Ludhiana, Tiruppur, Bangalore, Mumbai, Chennai, Jaipur and Delhi exporting to USA, UAE, UK, Germany, France and other EU countries. Major competitors are China, Bangladesh, Indonesia, Sri Lanka, Pakistan and other Southeast Asian countries.

There is a huge opportunity both in exports and domestic markets for textile SMEs in Punjab, provided there is attention to supply chain aspects like knowledge and information, services like logistics and nance, and resource management. The Orchestrator model (gure 3) is a widely popular model, based on the supply chain practice of several MNCs, with a strong hold in the businesses of export sourcing, distribution and retailing. In the above model, groups of SMEs, with competencies in several production activities, necessary for manufacture of garments, fabrics, etc., partner and coordinate with the product cycle. The supply and demand sides are bridged by an orchestrator, who will pool the customer requirements and monitor production activity, ensuring that there is appropriate matching between market needs and supply. Conclusions The future belongs to rural supply chains. With more than four billion people living in rural areas, there is a tremendous need to focus attention on issues of product designs, production, marketing and retail of food, and other electric and communication items in rural areas at affordable prices. India has a huge opportunity to become a leading global food supplier, as well as global garment suppliers, if correct strategies are put in place and encouraged.

Figure 3: Orchestrator Business Model

Planning, Coordination and Overall Responsibility

Orders Orchestrator Payment Plans Material Flow Operational Status

Supplier 3PL Contract Mfg 3PL End Customer

Supplier Execution

3PL

Contract Mfg

3PL

June 2007 | ISB

insight | 13

C O V E R

S T O R Y

S T O R Y

Information, Incentives,
and Supply Chain Contracts
The authors, Professors Milind Sohoni and Aditya Jain, explain the signicance of information-sharing and aligning incentives to sustain global competitiveness and achieve the right supply chain coordination.

C O V E R

Aditya Jain, Assistant Professor, Operations, ISB

anaging a supply chain efciently requires the integration of three ows material, information, and nancial across all the partners in the supply chain. Traditional transactionbased intra-organisational coordination is giving way to alliances and partnerships, between supply chain members, where information and processes are shared and key decisions are made jointly. Moreover, with the globalisation of businesses, interorganisational coordination is becoming strategically important for rms to increase responsiveness while simultaneously maintaining supply chain efciency. Coordinating a supply chain typically implies inducing partner rms to work towards maximising the overall objective of the supply chain. The availability of cost-effective information technologies has increased the potential for such coordination through information sharing and collaborative decision-making across members of a supply chain. As simple as the idea of information sharing and supply chain coordination might seem, getting partners across a complex supply network to do so, is an extremely daunting task. These challenges primarily arise due to misaligned incentives of rms in a supply chain. In reality, rms have their own priorities and act asynchronously, thus adversely affecting the responsiveness and cost efciency of the entire supply chain. This article focusses on the following: (1) benets of sharing information in supply chains, (2) misaligned incentives, and (3) mechanisms to align incentives.

Throughout this article, we use the following two-level supply chain, shown in Figure 1, as an example to illustrate the issues related to coordination. The simple supply chain consists of a car manufacturer who sells her cars through a dealership. The car manufacturer relies on the dealer s effort to increase her sales. Because exerting sales effort is costly, the dealer, too, must decide how best to allocate his effort and resources so that he maximises his own prot. Supply Chain Coordination Through Information Sharing: Sharing relevant information in a supply chain is benecial in coordinating the supply chain. For example, shared information increases a rms ability to make better decisions about resource utilisation and cost minimisation, avoids unnecessary build up of inventory, reduces stock outs, levels demand, and increases consumer satisfaction and service levels. All these benets, eventually, contribute to increasing the supply chain surplus. Lee and Whang1 provide several industrial examples where information sharing has resulted in better coordination. These examples include supply chains from the automotive industry, semiconductor manufacturing, and service industries. Although deciding the ideal set of shared information across a supply chain is difcult, we list a few common pieces of data that several rms are beginning to share. Sharing information about inventory levels at various stages of the supply chain is fairly common in many industries.

14 | ISB

insight | June 2007

Figure 1: A simple supply chain

Supply chain ows: information, material, nancial

Customer Car manufacturer Upstream Dealer Downstream

Sharing such information allows better coordination of production and ordering schedules while simultaneously reducing the total inventory level in the supply chain. This, in turn, reduces cost and makes the supply chain more efcient. In practice, sharing inventory information is implemented through different schemes such as Vendor-Managed Inventory (VMI) or Continuous Replenishment Programmes (CRP). Typically, in such schemes, the vendor rm is responsible for maintaining the appropriate inventory level of the buyer rm while the latter shares inventory level data with the former. In traditional supply chains, an upstream rm (see Figure 1) is only able to observe a downstream rms orders and not the actual sales. While the order information is partially useful to an upstream member for planning future production schedules, actual sales (and customer demand) information is much more valuable. However, this information is severely distorted due to the actions of the downstream member. Research has shown that, in supply chains with many levels, the distortion is continually amplied as one moves upstream. This distortion, resulting in a large variation in orders placed upstream, is called the bullwhip effect and adversely affects the cost efciency and responsiveness of a supply chain. Lee, Padmanabhan, and Whang,2,3 identify several reasons for the bullwhip effect including (1) forecasting techniques used by downstream members, (2) rationing, when downstream members inate order sizes, (3) batching, when downstream members

order in large batches to save xed costs, and (4) promotion schemes, by upstream members which result in erratic order patterns by downstream members. One way to smoothen the distortion is to make demand data and point-of-sales (POS) data available to upstream members. Sharing such information allows better inventory management, smoother production planning, and reduces the need for multiple intermediate forecasts. In fact, sharing demand information is an important aspect of the Quick Response technique used to increase the responsiveness of a supply chain. Common sales forecasts for the entire supply chain are typically achieved by programmes such as Collaborative Forecasting and Replenishment (CFAR) and VMI. While downstream members control the information on demand and sales, the upstream members control the information on supply conditions such as production and delivery schedules. This information is benecial to downstream members in managing customer expectations and demand levelling. Other pieces of information shared to improve coordination include order status (tracking information), lead-time and delay information, product quality, and capacity planning information. It is easy to argue that a supply chain works well if rms are open to sharing information. However, misaligned incentives are one of the major hurdles in getting rms to open up. Next, we examine some of the reasons why incentives could be misaligned.

Milind G Sohoni, Assistant Professor of Operations and Management Science, ISB June 2007 | ISB

insight | 15

C O V E R

S T O R Y

The primary motive of supply chain contracts is to ensure that partners make the right choice of private actions and reveal information truthfully to achieve maximum benet for the partnership.

Why are Incentives Misaligned? While economists and operations researchers have argued that it is possible to simultaneously increase the prot pie for the entire supply chain as well as its individual members, it is rather difcult to convince supply chain members to act accordingly. If the prots, costs of doing business, and associated risks are not allocated appropriately among the supply chain members, then coordinating across all members of a supply chain becomes difcult. Some factors that make supply chain coordination extremely difcult include unobservable actions of supply chain members, private information held by its members, lack of trust between partners, and badly designed incentives. Consider our simple supply chain shown in Figure 1. While the car manufacturer would like the dealer to exert maximum effort to sell her cars, the actual effort exerted by the dealer is not observable. This is a case of unobservable action. Similarly, in situations where only the dealer observes local demand for cars, he has an informational advantage and may choose to conceal this private information. Even if the manufacturer can observe the dealer s total sales, she is unable to decipher if sales in a particular season are high because the dealer exerted a high sales effort to increase the demand or because the inherent demand was high and the dealer slacked off. In case the manufacturer simply decides to compensate the dealer for his sales effort, the dealer gains by concealing his private information and pretending to exert a high effort. Competition between rms and possibility of information leakage,4 exploitation by larger partner rms, and lack of trust, are other reasons why rms are unwilling to reveal private information. Designing appropriate incentive mechanisms to achieve coordination is a difcult task. If not done right, a badly designed incentive can achieve undesired results and lower prots of the rm offering the incentive. Consider a situation when a

manufacturer of a consumer product, with a stable demand, offers a promotional discount to a retailer with the intention of increasing consumer sales. Suppose the discount offered is large enough such that the retailer nds it benecial to stock up at the discounted price. While the retailer may purchase in bulk, creating a surge in intermediate inventory, consumer sales are marginally affected because the entire discount never passes through to the end consumer. Sometimes, incentives, though welldesigned to achieve a particular motive, result in other undesirable and unexpected consequences. To illustrate this point, let us consider the quota-based (thresholdbased) incentive widely used in the auto industry to increase expected sales. Once again, consider the simple supply chain shown in Figure 1. Under a quota-based contract, the manufacturer pays the dealer an additional amount per unit when sales exceed a threshold value. Typically, when such threshold-based incentives are offered over multiple time periods, such as a quarter, they result in a sudden rise in sales effort (and sales) towards the end of the incentive period. Essentially, the dealer, who faces a random demand, holds off on exerting effort until the last time period, when most of the uncertainty is resolved. This sales spike impacts the manufacturer s inventory and production decisions.5 One reason, for such a sales spike, is the manufacturer s inability to observe the underlying demand signal and link the threshold to the underlying variance of the demand signal.6 So, how should supply chain members work towards aligning their incentives? Aligning Incentives and Supply Chain Contracts: The primary motive of supply chain contracts is to ensure that partners make the right choice of private actions and reveal information truthfully to achieve maximum benet for the partnership. However, designing such self-enforcing contracting mechanisms continues to be

16 | ISB

insight | June 2007

a challenging task for both researchers and practitioners. Some advantages of such contracts are that they are easy to monitor and provide a way of achieving better coordination and information sharing through monetary rewards and penalties. Furthermore, such contracts also ensure that the rms are better off by engaging in the contract than independently nding other alternatives. Researchers have shown that simple contracts such as buy-back contracts, revenuesharing contracts, and options contracts achieve the desired coordination when the partner rms wish to maximise product availability, individual prots, and the total supply chain prots. Essentially, these simple contracts allow the supplier to effectively balance the overstocking and under-stocking risks. These contracts have been implemented in several industries including the video rental business, semi-conductor manufacturing, utilities, and retail. In more complex settings, where a rm attempts to extract private information truthfully or attempts to coordinate a partner s private action, contracts tend to be complicated. One way to get around these hidden information and hidden action problems is to observe and monitor proxies for hidden information and hidden action. However, this additional proxy information is also imperfect and could cause additional monitoring problems. An alternative is to observe information correlated with the hidden information. For example, consider the quota-based contract we discussed in the earlier section. Since the manufacturer is unable to observe the underlying demand signal, dampening the sales effort spike, over all the time periods included in the incentive horizon, is difcult. But, if the manufacturer is able to observe the average sales of other dealers (may be in geographically dispersed areas) and link the threshold (quota) level to the average sales, she can effectively control the sales spike. Essentially, she is observing a correlated market signal and linking her contract to the correlated information.

While formal contracting mechanisms are one way of coordinating supply chains, building trust between partner rms, use of technology, and third-party coordinators are other ways to enforce better, and truthful, information exchange. Institutionalising trust is a challenging task but it may be possible to build a better relationship by jointly considering risks and establishing joint performance metrics with appropriate rewards and penalties. Shared, and transparent, process governance of such relationships can be crucial in enhancing trust between partners. Use of intermediaries, or thirdparty coordinators, can be crucial in situations where trust between partners is difcult to build. Contract manufacturers, such as Li & Fung, are examples of rms that are able to facilitate truthful information sharing between geographically separated partners. In some instances, the third-party could be replaced by an automated system that allows seamless information exchange between partners.1 Examples of intermediaries that allow better supply chain coordination through greater information visibility across the supply chain are logistics solutions providers, such as UPS, FedEx, DHL, and BAX Global. Typically, such rms offer single-source multi-modal logistics solutions to rms, which let rms decide the mode of transportation from the solution provider s offerings of air, ocean, rail, or road transportation modes. Greater visibility across the supply chain facilitates transportation decisions based on the latest information. Conclusions: As supply chains become global, sharing information truthfully and quickly will become even more necessary to maintain competitiveness. Sharing the right set of information and aligning incentives will be necessary to achieve the right level of supply chain coordination. To achieve these goals, supply chain managers will have to focus on designing the right supply chain contracts, building trust, involving the right set of intermediaries, and using technology. Furthermore, they will continually need to evaluate these incentives as supply chains transform and businesses grow.

Supply chain managers will have to focus on designing the right supply chain contracts, building trust, involving the right set of intermediaries, and using technology.

Foot notes 1 Lee, Hau L., Seungjin Whang. 1998. Information sharing in a supply chain. Research paper 1549, GSB, Stanford University. 2 Lee, Hau L., V. Padmanabhan, S. Whang. 1997a. The bullwhip effect in supply chains. Sloan Management Review 38(3) 93-102. 3 Lee, Hau L., V. Padmanabhan, S. Whang. 1997b. Information distortion in a supply chain: The bullwhip effect. Management Science 43(4) 546-558. 4 Li, Lode. 2002. Information sharing in a supply chain with horizontal competition. Management Science 48(9) 1196-1212. 5 Chen, Fangruo. 2000. Sales-Force Incentives and Inventory Management. M&SOM, 2(2), 186-202. 6 Sohoni Milind, A. Bassamboo, S. Chopra, U. Mohan, N. Sendil. 2007. Threshold incentives and the sales hockey stick. Working paper, Indian School of Business. insight | 17

June 2007 | ISB

Casting Off the Chains

ystein Fjeldstad is Telenor Research Professor of International Strategy and Management at the Norwegian School of Management, and a former manager with Andersen Consulting.

Espen Andersen is Associate Professor of Strategy at the Norwegian School of Management and European Research Director for The Concours Group, an international research and advisory consulting company. He is also a Visiting Faculty at the ISB.

The Value Shop and the Value Network are two additional models of value creation, allowing managers to re-think some familiar strategic insights. The world has changed. From 1960 to 1999 manufacturing companies workforce and share of GNP in the US went from 30 per cent to 15. Managers still use the tools and language of the manufacturing organisation, however most commonly Michael Porter s Value Chain (Figure 1). This is an excellent model for describing and analysing manufacturing companies, but is it still valid in a non-manufacturing setting? In this article, we offer two additional models of value creation the Value Shop and the Value Network. We argue they make description of the value creation process easier and offer insights into what drives the knowledge and network economy. The Call for New Models The Value Chain model describes value creation as a series of sequential steps, transforming raw materials and components into products. It has helped managers make fundamental strategic decisions about supply chain integration, outsourcing, technology and co-ordination within the organisation and with customers and suppliers. Anyone who has tried to use the Value Chain to describe a telecommunications company or a consulting rm, however, will nd it difcult to categorise activities and draw useful conclusions about strategy. Customers are both suppliers and customers to a telco, for instance, and a consulting rm

trying to mimic the production line of a manufacturing rm is unlikely to make its customers very happy. Managers need models of value creation that are linked to the economics that drive the performance of their rms. We need alternatives to the value chain. We offer two: The Value Shop and the Value Network. Value Chains, Shops and Networks Value Chains compete in a production economy, where the emphasis is on selling as many products as possible with the highest possible margins to the right customer segments. An excellent Value Chain company invests in product and process development that improves its cost or differentiation position. The Value Shop (Figure 2) creates value by using knowledge to solve problems for clients. This model describes consulting companies, engineering companies, law rms, hospitals, research pharmaceuticals and other companies that do not know the solution to the clients problem a priori. Value Shop companies compete in the knowledge economy, where value is created on a caseby-case basis by identifying and solving problems on behalf of customers. Their primary activities are: Problem nding and acquisition (problem identication, diagnosis and case contracting); Problem solving (development and evaluation of alternatives); Choice; Implementation (of the chosen alternative) and Monitoring and Evaluation of the results. These activities are not sequential, but interruptible and recurring. If a chosen approach does not

ystein Fjeldstad, Telenor Research Professor of International Strategy and Management, Norwegian School of Management 18 | ISB

insight | June 2007

resolve the problem, a new round is started, usually with different resources committed. A doctor, for instance, will initially try simple and inexpensive diagnostic methods and treatments and then scale up both diagnostics and treatments until the patient is well or no longer a patient. A Value Network company (Figure 3) creates value by allowing customers to exchange goods, information and/or capital. These are the stock exchanges and brokers, nancial services, telecommunications, airlines, credit card companies, parcel services and other transportation companies. They compete in a network economy, where value is created by linking customers together through the contract set and infrastructure. A Value Network company competes on the size of its network, the degree to which the nodes have exchanges with each other, and the types of exchanges that can be organised. The Value Network company competes by balancing scope of network with the range of services. Just like Value Chains and Value Shops, Value Networks have primary and secondary activity categories. These reect those of a club and, indeed, some of them have a history of being clubs. Promotion and Contract Management recruits members and manages contracts that determine member privileges and obligations, e.g. size of credit lines, or bandwidth and the cost associated with use. Service Provisioning assists customers in making the exchange, be it of money, information or goods. Infrastructure Operation maintains access points and basic capacity. Contrary to Value Chains and Value Shops, there is no sequence between the activities they are performed and developed in parallel. Why are these Value Networks and

Value Shops companies interesting now? In addition to the move away from manufacturing, Value Shop companies tended to be closely held in partnership arrangements, regulated (such as hospitals), and small-scale, so that their value creation logic largely escaped the notice of management theorists. The consolidations in consulting, healthcare and investment banking and the experimentation with new ownership structures such as Accentures move from partnership to listed company have made these rms more visible. Deregulation of the telecommunications, nance and airline industries has made Value Network rms competitive dynamics visible and has highlighted both the difculty in executing strategies and the time it takes before an industry understands its own dynamics. Managing the Shop and Network The differences in value creation logic affect the management of protability, marketing, and efciency. Managing Protability The typical Value Chain rm seeks product protability as an intermediate step toward company prots. Value Chain analysis starts by relating costs accrued in key activity categories to product units as they pass through the transformation and logistic chain. Value Shops seek people protability. A Value Shop creates valuable people through training and by choosing projects that develop their experience and invests heavily in it, through formal training and by attaching junior people to seniors in an apprenticeship relationship. As people

Espen Andersen, Associate Professor of Strategy, Norwegian School of Management

The Value Shop and the Value Network are two additional models of value creation, allowing managers to re-think some familiar strategic insights.

Figure 1: The Value Chain

Infrastructure
SUPPORTING ACTIVITIES

Figure 2: The Value Shop

Supporting activities (see Figure 1)

Human resource management Product and process development Procurement Inbound logistics Production Outbound logistics Sales and marketing Service
Primary activities

Problem search and acquisition

Problem search and acquisition Problem search and acquisition

PRIMARY ACTIVITIES

Problem search and acquisition

Problem search and acquisition

Source: Porter, M.E., (1985), Competitive Advantage: Creating and Sustaining Superior Performance, New York: Free Press.
June 2007 | ISB

insight | 19

A Value Network company creates value by allowing customers to exchange goods, information and/ or capital.

become more valuable their cost increases through a promotion system from junior to senior. Strategic goals are tied to longterm competence development rather than particular product-markets. Senior managers, rather than a specialised sales force, make decisions about what projects to take on. A good project is one that provides learning opportunities, reputation building and billing of available personnel. A good market is a group of customers who can use related competencies and where the value of good solutions greatly exceeds the cost of providing them. Value Networks seek network protability. Costs come from acquiring members for the network and from operating the infrastructure and the services that connect them. Value is tied to the size and the composition of the network. High xed cost means that protability on individual connections takes a back seat to protability of the whole network. Differentiation means pricing individual connections by their impact on the overall network what airlines call yield management. All value networks do it: Telecommunications companies offer complicated subscription plans, banks offer network-specic fee structures. Customers benet from being able to connect to the nodes they are interested in. Customers exchange goods, information, money and ownership with a limited network of compatible customers. Network size increases the probability of a desired node being available through a particular network, but strategies that go for immediate size can be very expensive. Much of the network effect can be captured if Value Network rms initially recruit the customers that are more connected than others. Really good networks allow customers to increase their network of personal and business relations. Managing the Market Value Chains manage the market by promoting their brand customers expectations about the product into segments of similar customers.

Value Shops manage the market by promoting their reputation the customers expectation about the problems the company can solve. For important problems like heart surgery, corporate tax management, and rm strategy, the pay-off to the client from small increases in the competence applied to their problem far outweighs the increased cost. Knowledge is expensive because the cost of ignorance is huge. Reputation and past experience guides the customer when choosing between rms. Reputation is self-sustaining, since smart people want to work with the most promising rm. Reputation can be built or acquired by association. Successful Value Shops, in addition to assuring that all visible jobs end well whatever it takes also engage in pure reputation-building activities, such as research and conferences. Value Networks market by promoting netspectations (customers expectations about whom they can interact with through the network). They do this by changing network size and composition to attract the members they want. In some networks, the nodes are the customers themselves and the connections are their interactions with each other telecommunications, for example, or payment services. In others, such as with airlines, the customers themselves are moved through the network and the nodes in the network are the destinations. To build a network, you need to offer customer value a killer community, product, content until the value is in the network itself. eBay, the Internet auction rm, was developed to serve Pez gure collectors who wanted to trade their gems (killer community). Intuits electronic checking network came started as an inexpensive personal account balancing software package called Quicken (killer product). Customers to AOLs chatrooms were initially recruited by exclusive material about celebrities and the ability to post messages to them (killer content). Once a network business has gathered its crowd, it can turn on the network effects and they can be formidable. An important difference between Value

20 | ISB

insight | June 2007

Networks and Value Chains is that Value Networks manage customer communities rather than segments. A community is a group of people that are compatible they do, or want to do, something together. A segment, however, is a group of people who are similar in some measurable dimension, such as age, income, geography. Managing Efciency The Value Chain is an efcient producer balancing volume versus differentiation under conditions of capacity utilisation. The Value Shop is an effective problem solver, a machine for understanding the problem and mobilising the resources to solve it. The managerial trade-off is between the breadth of problems the rm can solve and the depth of specialty it can offer. Value Shops use growth to align incentives. Growth enables prots to accrue to senior partners (owners) by the same mechanism as a pyramid scheme. A Value Shop that does not churn new recruits literally gets old and, eventually, poor. The Value Network is an extensive connector, establishing connections and providing services to support the exchanges customers want to make across them. Managers trade-off reach (network size) and richness (capacity and services), between whom you can connect and what you can do for them. Costs, largely xed, are associated with attracting customers to increase the value of membership and building necessary infrastructure and services. Managers must manage the revenue yield of the whole network, not the individual connections. Principal strategies involve optimising pricing, increasing the number of relations that can be facilitated over the network, and Figure 3: The Value Network
Supporting activities (see Figure 1) Marketing & contract management
Primary activities

Conclusion The Value of Perspective Strategic frameworks are not one-size-tsall recipes. They must be differentiated enough to t the company one seeks to analyse, and general enough to facilitate abstractions. Applying Value Chain logic to problem solving rms can do harm. It creates undue focus on standardisation rather than knowledge development, encourages cost-based rather than value pricing, and undermines organisational learning efforts. Many a consulting company has inadvertently turned itself into a sweatshop renting out problem solvers by the hour, alienating customers who feel their unique problems are misunderstood. Many a hospital has misguidedly focussed on measures of local efciency at the expense of patient well-being. Applying Value Chain logic to network rms can do harm. It creates undue focus on product protability rather than lifetime customer value, focusses on market share rather than customer to customer interaction, and wrongly segments customers into groups that look alike (say, the teenagers or a certain income bracket) rather capturing transaction sets. The world has indeed changed. We hope two additional models offered will give managers a tool to aid their understanding of how value is created in their companies and to better shape strategies for this changed world. Abridged from European Business Forum (EBF), Issue 14, Summer 2003.

References G Stabell, C. B. and . D. Fjeldstad, (1998), Conguring Value For Competitive Advantage: On Chains, Shops and Networks, Strategic Management Journal 19: 413-437. G Katz, M.L. and C. Shapiro, (1994), Systems Competition and Network Effects, Journal of Economic Perspectives 8 (2): 93-115. G Economides, N., (2001), The Impact of Internet on Financial Markets, Journal of Financial Transformation 1(1): 8-13. G Evans, P . and T. S. Wurster, (1999), Blown to Bits: How The New Economics of Information Transforms Strategy, Boston, MA: Harvard Business School Press. G Fjeldstad, . D., & Haans, K.B., (2001), Strategy Tradeoffs in the Knowledge and Network Economy, Business Strategy Review, 12(1): 1-10. G Hopper, M. D., (1990), Rattling SABRE New Ways to Compete on Information, Harvard Business Review (May-June): 118-125. G Holland CP , Lockett G, Richard J-M, Blackman I., (1994), The Evolution of a Global Cash Management System, Sloan Management Review 36(1): 37-47.

Service provisioning Infrastructure maintenance & evolution

June 2007 | ISB

insight | 21

C O V E R

internalising transactions to avoid paying fees to other networks.

S T O R Y

Harnessing Technology
For Efcient Supply Chain Management
Industry executives from P&G, Wipro Technologies, Dr. Reddys, and Spencers Retail share their views and ideas on how Indian companies can harness technology effectively to improve Supply Chain Management (SCM) practices and put India on par with other global companies.

What is the role and scope of modern technology in efcient SCM practices in India? Do you see any further scope for innovations in SCM using the state-ofthe-art technology?

Srinivas Sai Supply chains need to collaborate effectively with suppliers, customers and stakeholders worldwide, within a single network, enabling cost and service level optimisation throughout the supply chain. Indian companies in various sectors have forged ahead through collaboration with their stakeholders across the supply chain. CMIE indicates that approximately 22 per cent of aggregate sales, amounting to over USD 25 billion, are trapped in inventories in India. This will bring about increased focus in supply chain innovations. Major scope for innovation is in integrating internal functional areas like engineering/ manufacturing, sourcing, and distribution. Extended enterprise visibility and execution will also see multiple innovations. Sachin Mirashi Technology can create cost-effective, exible and agile consumer-focussed supply network. In SCM, it is critical to retain individualised customer service of yore while embracing future technology. Technology can be effectively leveraged in SCM in India in operational excellence, business growth, decision-making, mergers/acquisitions and in unearthing new opportunities. India has made good headway to leverage technology in value chain and there is huge scope for leveraging it further to deliver future SCM innovations.

Kalyanakrishnan: Modern technology can play a very major role in improving the efficiency of SCM practices in India. Today, the technology is so advanced, including mobile technology, RFID, Palmtops, etc., which can be leveraged in various ways in different SCM areas. Most companies today are working on integrated ERP systems to have basic data in place. Having stabilised the systems, some companies are now looking for optimisers and packages like SRM (Supplier Relationship Management) and CRM to integrate the supply chain at both ends. Indranil Majumdar Technology is the biggest enabler in modern supply chain. One with better technology has a big head-start over the rest. In retail, the key differentiator is supply chain efficiency. Today, technology can be used everywhere IT systems, forecasting future sales, RFID tags, installing vehicle-tracking mechanisms, state-of-the-art warehouse, etc. Almost everyday technology is used to make SCM process more robust. The use of technology gives higher speed, greater accuracy, increased productivity, and reduces unit cost. The single biggest innovation in the usage of any technology is in making it scalable.

Sachin S Mirashi, Country Head, Customer Services, and Logistics Leader, P&G India

22 | ISB

insight | June 2007

Srinivas Sai Nidadhavolu, Global Practice Head, SCM, and eProcurement, Wipro Technologies

Sachin Mirashi Supply chain analytics is used to optimise total system costs in supply chain. In FMCG, its used to design supply networks and take decisions on daily operating strategies for warehousing and replenishment, e.g. crossdock and pick-by-line. Many companies, globally, have effectively used Six Sigma principles to get supply networks to high service levels, at optimum costs, e.g., Motorola, Nokia, Wipro, Infosys, etc. Some Western companies are using Virtual Communities and Blogging data as input to forecast newto-world product initiatives, apart from conventional statistical forecasting tools for Srinivas Sai India is primed to harness new technologies in SCM to realise tremendous benets. With many Indian companies vying for international markets, there is sharper focus on enabling supply chains through effective use of technology. SCM practices tend to have a regional avour to encapsulate local regulatory intricacies, labour, market, distribution and sourcing dynamics, enabled by technology. The large SME sector in India is spawning a new and attractive technology business model around SaaS (Software as a Service), which reduces initial investments in technology, maintains focus on core business, and enables data ow and synchronisation. The entire infrastructure is maintained by third-

Indranil Majumdar Today, data availability is generated every moment. However, the same cannot be said about data usage/analysis. Few companies have well-laid process of data analysis. Indian companies are lagging here. This is true not only for SCM, but across all disciplines and organisations. Supply chain analytics normally involves a three-step process: converting a real life problem into a statistical problem; analysing the statistical problem with various tools to give a statistical solution; and converting the statistical solution back to a real life solution. The rigour of six sigma forces one to harness the power of processmapping, data analysis and interpretation. This methodology allows identifying wastes, and once eliminated, the entire process looks agile and lean. party vendors, with the responsibility to stay current with technology trends and be pricecompetitive. Sachin Mirashi Indian companies, unlike others, are using technology for cost efciency, and are not leveraging it for business growth, end-toend data-based decision-making, and for unearthing new opportunities. With retail environment in India highly fragmented, getting affordable reliable retail information system, is key concern for most companies. Hence, in outbound supply chain good examples of leveraging technology is nil. Developed Western markets vastly leverage technology in ow through replenishments
June 2007 | ISB

How are SCM practices in Indian companies different from international companies in fully harnessing the power of technology for efcient management of supply chain?

insight | 23

C O V E R

How do you see the role of supply chain analytics (Online Analytical Processing, Six Sigma, etc.) in delivering enterprise-wide value/ efciency?

Srinivas Sai Amidst global competition, enterprises will be forced to move away from traditional operating models and product-centric supply chains and focus on optimisation at every level design, planning, execution, control and monitoring. Their success is associated with planning and responding to real-time supply/ demand. Armed with cutting-edge technology, enterprises are trying to reduce response times, increase supply/demand visibility and improve collaboration across suppliers. Analytical tools empower supply chain decision-makers by providing access to real-time demand/supply uctuations and capacity utilisation. Supply chain analytics provide value-added services across business functions, enhance visibility and information and right decision-making. It supports critical data reporting, what-if scenarios, cross-functional analysis, multidimensional analysis and plan archiving.

Kalyanakrishnan Supply chain analytics is going to play a major role in delivering enterprise-wide value efciency. The existing practice of LAG indicator tracking is being replaced by LEAD indicators. Taking proactive measures to make the operations exible/responsive is the present requirement. This can be achieved only by having online data capture at all points of the SCM, which assists in populating early warning signals, thereby enabling early actions to improve value and efciency.

S T O R Y

base business. In India, supply chain analytics and aforesaid technology innovations are in nascent stage, and restricted to Static Analytic modelling and/or simple heuristic models.

(smart cards/barcodes, RFIDs, etc.), CPFR and CRM. There has been good progress by Indian companies in Supplier Relationship Management, e-sourcing, and developing e-enabled partnerships, matching global counterparts. Concepts like Reverse Auctions, b2b exchanges (e.g. Transora) and Buyers Desktop are used in leveraging technology with global suppliers for inbound cost and service advantages (e.g., Copra commodity buying through esourcing at MARICO, vendor development initiatives at TATA Motors, etc.) Kalyanakrishnan SCM practices in Indian companies are far less technology-driven than international companies. Indian companies deal with lot of uncertainties and are more tolerant than international companies, due to which many times technology is over-ruled by manual methods. Also, the infrastructure support in material tracking, etc., and unexpected happenings (strikes, etc.), make the supply chain unreliable and force manual interventions. However, times are changing, and many Indian companies are

moving from manual systems to technologydriven systems. Indranil Majumdar For long, logistics/SCM in India was considered the sick mans bay. Historically, SCM was a sub-department, and rarely supervised directly by top management, leading to its mediocrity. The FMCG MNC companies brought in a lot of global best practices, reducing the gap. In India, many SCM inefciencies get hidden in growth phase, resulting in overlooking of process and details. Indian companies need more process-orientation in SCM for long-term results. Excess time is spent on managing results than processes. With warehouse management and real estate cost spiralling northward, there is a huge need to introduce more technology across SCM processes. In Indian SCM, most companies rely on a few mens experience and knowledge base of what works and what doesnt. These men are rarely techno-savvy, resulting in new technology ideas always being viewed suspiciously

C O V E R

S T O R Y

How can technology be used to reduce inventory levels, while minimising/ eliminating counterfeit merchandise in supply chains, leading to safe and genuine products in the retail market?

Srinivas Sai Inventory control has been one of the topresearched areas in recent times. With technological advancements and increased computational capabilities, best-of-breed SCM vendors are encapsulating various Operations Research/mathematical models and heuristics into products. Increased global competition has led to counterfeit products proliferating the supply chain, thus affecting market penetration and resultant bottomlines. Companies are using technology to create unique and denitive ways to make copying difcult and impossible. Manufacturers use RFID, hallmarks (holograms), logos, bar-codes, patented colours and stickers for protection. Manufacturers and retailers are jointly trying to ensure counterfeit products are not freely available. The Indian government has also forced all manufacturers to follow safety, grading, and quality standards (ISI, AGMARK) through Bureau of Indian Standards (BIS). Sachin Mirashi Technology can be leveraged to give companys products unique identity through bar

codes/smart-chips/RFID, to track inventory across supply chain, and use ow through replenishment models to ll up buffers across the echelons of network through pull-based system. This can also eliminate counterfeit/private label issues. In China, counterfeiting is a huge issue, and technologyaided supply solutions are used to counter them and ensure safe/genuine products in retail market. In developed Western markets, product shrink (theft) is a key concern area, and technology is leveraged to eliminate defensive merchandising devices at stores (CCTVs, etc.) to enable shoppers touch and feel the product, minimising theft! Wal-Mart has successfully implemented technology interventions by leading competition in retail industry. IT and connectivity is used to match wholesale purchase with changing consumer demand and deliver competitive advantage through low prices. Kalyanakrishnan Its difcult to predict inventory levels lying across supply chain today due to two major reasons. Firstly, there are many layers distributors, wholesalers, retailers in the

24 | ISB

insight | June 2007

system, who have their own way of keeping inventory policies, and accounting mostly through manual systems or small software packages. Secondly, none of these data is integrated and available at a single point, due to which most decisions today are taken with available data. Due to this, huge inventories in the system are mostly not fully visible. If technology is used to capture that data across the chain, inventories can be planned better and minimised in the whole chain. Using RFID technology (in nascent stage even worldwide) can eliminate counterfeit merchandise. However, proper visibility of inventories across the chain through technology can help in tracking counterfeit merchandise to a large extent. Indranil Majumdar The right metric for inventory reduction is: inventory reduction without impacting customer service levels. Inventory is reduced

by simplifying the process, and identifying and eliminating buffers/wastes. Technology can be a big enabler, and do better planning than human. Efcient organisations rely on planning software for production and dispatch plan, resulting in buffer-free planning. With better IT process, one can have end-to-end visibility. Extra stocks happen when inventory is built in anticipation. The same visibility can be extended to suppliers and customers, reducing inventory across the chain. Similarly, with better transportation management, goods-in-transit can be shrunk, and companies can keep inventories closer to production centres for efcient distribution. There are no foolproof ways to minimise/ eliminate counterfeit merchandise in SCM, but good process control can identify defects. Counterfeit products may get into the system during transportation. To avoid this, one must have strong processes and door seal control mechanisms.

What major hurdles (technological or otherwise) are generally confronted by Indian companies in the delivery of goods through the SCM process?

NH Kalyanakrishnan, Senior Director, Supply Planning, Dr. Reddys

Srinivas Sai The paradigm shift from traditional supplydriven to demand-driven manufacturing is encouraging leading manufacturers to relook at existing supply chains and focus on reducing costs at various stages by applying just-in-time (JIT) and lean methodologies. Large enterprises worldwide are deploying state-of-the-art tools/ technologies to manage supply chain complexities, leveraging industry knowledge and solutions that meet customer satisfaction goals, while maximising protability. In India, upstream and downstream logistics and transportation is one of the key factors that impacts cost of goods, adding an average overhead of 20-30 per cent, compared to global peers. Manufacturers and retailers face challenges in transportation, including lack of visibility of assets, control of goods and collaboration with transportation service providers. Due to inexpensive labour in India, technologyadoption has never been the rst choice for most manufacturers, but a drastic reversal is being witnessed. Sachin Mirashi The major hurdles in SCM process across industries in India are silo mentality across key supply chain stakeholders/functions within company; poor logistics infrastructure; taxation/transportation permits structure;

security concerns in specic geographies; lesser understanding of best in class SCM practices in business; leadership teams (focus on costs vs. service); large and unorganised supplier, and customer base leading to barriers in technology adoption; poor forecasting accuracies; fast growing economy; ever-changing consumer habits; and poor reliability of third-party logistics providers. Key barriers faced by Indian companies in embracing technology in SCM are: too much of data but too little information; availability of right low-cost technology supply network solutions developed locally; leaderships apathy towards choosing long-term payout right technology solutions in pursuit of ash gains; risk-averse nature of Indian companies compounded by a fear factor that new technology will eliminate jobs; and comfort level of employees with legacy systems. Kalyanakrishnan: One of the major hurdles is the mindsets of people and change management issues that prevent implementation of good SCM processes. Traditionally, we like to operate the same way we did earlier without taking much risks and leveraging technology. Secondly, SCM is relatively new, and only recently, many companies have started recognising it as a major process/function that will improve efciencies of operations. Even today, most companies
June 2007 | ISB

insight | 25

C O V E R

S T O R Y

feel SCM is only a purchase function, whereas it encompasses the entire chain from procurement to delivery, including planning. However, awareness of SCM is catching up rapidly, and many organisations are working in all areas of SCM to make it more efcient, effective, and responsive. Indranil Majumdar India is a land of extremes from SCM perspective a booming economy with poor infrastructures, extremely different weathers, frequent oods and fog, varied taxation policy, and a volatile political climate. Each region invariably poses different challenges to

SCM. All these have to borne in mind while designing the supply chain architecture and working with it. Very few service providers are efcient and cut across geographies (one reason why there are no major 3PL success stories). In the back-end of supply chain, the story is similar. Above all are the challenges of mindset and a lack of service attitude. Non-adherence to production deadlines and below 100 per cent service levels exert unnecessary strain on SCM network, leading to adverse impact on delivery of goods to end-customer. While these problems will not be eradicated overnight, the future of SCM is brighter than before. suppliers located across India, as a substitute to FTF negotiations. Kalyanakrishnan Its only a matter of time before infrastructure in India improves. Its already improving rapidly. For instance, today, the number of mobile users getting added in a period is highest in India than any country. Many companies are going for integrated packages/ ERP , and are also trying to connect to customers on one side and supplier on the other. All technology companies worldwide are already competing in India, proving that infrastructure is denitely going to improve faster than expected. The companies, who are going to start leveraging technology for SCM early, are denitely going to reap the advantages in the long-run. Indranil Majumdar Nothing can compensate for lack of infrastructure in India. While information ow can be improved further with technology, its the material ow where the bottleneck lies. And, it is everywhere congested airports, ports, cities and connecting roads. Most vehicles and warehouses today are beyond upgradation. A large part of India is reeling under acute electricity crisis, without which most modern warehouses are worth less than the traditional one. Unfortunately, we havent also developed alternate modes of transportation (waterways and pipelines) for logistics movement, which could have eased congestion. However, very few issues can be cured by technology permanently. While technology might help in short-run, the real solution is in building up infrastructure supply side in medium to long-term.

C O V E R

S T O R Y

Given the poor quality of infrastructure in India, can the use of technology overcome infrastructural inefciencies?

Indranil Majumdar, General Manager, Spencers Retail

Srinivas Sai Given that most infrastructural inefciencies are known, the use of technology minimises the impact of these ails. Taking cognizance of these inefciencies in transportation, utilities and labour, one can build the same as constraints into planning and execution processes to overcome them. Use of technology aids the process of nding alternate solutions amidst uncertainties related to infrastructural inefciencies. However, these inefciencies place most Indian organisations at a disadvantage with respect to global competition, requiring government intervention to alleviate them. It is heartening that government is taking steps to correct this issue, with improvements in road infrastructure, aircargo handling, and rail freighting. On the other hand, private logistics players are also beeng up their own operations through effective use of technology and know-how brought in through overseas alliances. Sachin Mirashi Technology can be leveraged to overcome some infrastructural inefciencies in India that include the following: Use of GPS technology to design store coverage/distribution plans in FMCG/retail industry, enabling routemapping decisions and balancing/van optimisations/store replenishment from customer warehouses, etc., in local supply chains. Use of low cost GIS solutions for intransit tracking of road transport cargo. Use of Reverse Auction methods to manage e-buying across fragmented

26 | ISB

insight | June 2007

Mercer Management Consulting, Mercer Oliver Wyman, and Mercer Delta have come together with one name and a powerful promise: to provide unparalleled career possibilities. Join us.

At Oliver Wyman, more than 2,500 professionals combine unmatched industry knowledge with expertise in strategy, operations, risk management, organizational transformation, and leadership development, to create an exceptional, entrepreneurial environment with a focus on rapid professional development. Learn more about us at OliverWyman.com.

Atlanta Barcelona Beijing Boston Calgary Chicago Cleveland Columbus Lisbon London Madrid Melville Mexico City Houston Istanbul Leatherhead Portland Princeton San Francisco Sao Paulo Seoul Shanghai Pittsburgh

Dallas Detroit Dubai Dsseldorf Frankfurt Hamburg Hong Kong Milan Milwaukee Montral Munich New York Paris Philadelphia Singapore Stockholm Sydney Toronto Washington, D.C. Zurich

June 2007 | ISB

insight | 27

Inductive Thinking and

Collaboration Differentiate Us.

Carl Stern

Carl W Stern, Chairman of the Board, BCG, in a tte--tte with Ajit Rangnekar, Deputy Dean, ISB, talks on a host of issues ranging from creativity to logical thinking, outsourcing to technology revolution, acquisition to competition, and from talent management to knowledge management. Here are some excerpts.

Ajit Rangnekar: In your website, I saw Elliots quote that poetry keeps cleaning the schools of thought. Tell us more about this. Carl Stern: Our heritage is about exploring elds; we have been pretty good at looking widely, drawing analogies that are applicable to business. We were looking for another store of analogies to learn things from people who thought differently. We tied up with a very interesting lady from Oxford. It was amazing how often she was the one who came up with a case breaking idea. I think it is just a case of trying to explore other disciplines of thinking to see if there are learnings in there for us. We have always believed that diversity is important. We get many left-brain oriented, highly analytical, extremely bright, people. We wonder how we can identify the creative or different students. Its tricky. You can bring them in, but if they all then fail because of the grading and course work etc, which celebrate left brain stuff, then it wont work. That was the case of Stanford when I was there. Today, they have done a better job of attracting a broader mix of professors and designing courses to demand a broader mix of skills, but it can backre if you dont lay the ground carefully. Would supporting them initially with some quantitative classes help?

Thats the way Stanford was doing it in my student days. There were classes on Remedial Calculus to be taken before school started, but that is not really the answer. The rst step is to see if you can get the student to adapt to the curriculum, but actually, the curriculum has to adapt to students. Its the curriculum that has to broaden. It is difcult because you cant tell academics what to teach; you have to gradually change the mix. I know a little bit about this because I have been on the advisory council at Stanford, and we have argued quite a lot about it. How does a business school like us differentiate itself? Thats a great question. I served on Chicagos advisory council for 27 years, and they never seemed to be quite satised with their positioning and keep shifting it, which undermined their efforts. It is important to pick a positioning and stick with it. Chicago had obviously a strong position in nance. But then they got bored and said - what about leadership, what about marketing, what about this and that? They abandoned the segment in which they had an advantage in an attempt to be all sorts of things to all sorts of people. I think it set them back a ways. So, pick a positioning and really drive that home. We are positioned as a School focussing on

28 | ISB

insight | June 2007

INSIGHT SPECIAL

Carl Stern, Chairman of the Board, BCG, in conversation with Ajit Rangnekar, Deputy Dean, ISB

issues of fast developing economies which means that we need to solve the problems of the poorer sections of the society. We have made a beginning with research in Rural Food Supply Chain and Micronance. I do a fair bit of work for the World Food Programme. India, obviously, is surplus in food but the problem is in distribution. We did some work in Russia shortly after Yeltsin came in. It was an eye-opener for us. We went to a large city in the rural area. They had potatoes rotting in their warehouses; at the same time people were starving 60 kms away. It blew us away. Coming from Chicago it was particularly interesting I had heard stories about why Chicago became the trading centre, and people talk about the transportation hub issues, but we realised that the issue could also be about weights and measures. Russia had transportation; what they didnt have was agreed upon units of trade. So there was no trade. It was unbelievable. I am sure that there are similar, second order effect kinds of issues that you could add enormous value to. We have recently seen new business trends off-shoring, e-commerce, data mining, outsourcing, contract in pharmaceutical manufacturing, etc. For us, the big challenge is in recognising which one is a fad, which one will disappear in ve years time, and which is a long-term trend? How does one pick the

real winners from the false starts? That is a great question. I dont think there is a deductive way to do it. You are talking about a pattern recognition skill, which is, by the way, a right brained skill. In 1999, I became convinced that we were in a bubble. I did some reading and wrote the BCG partners. What I observed was that in all historical bubbles that were occasioned by revolutions in technology, you tended to have a stable roll out of technology over long periods of time. Somewhere along the way, a nancial bubble would come up and then collapse, but the original technology revolution, which was really an evolution, kept toddling along changing everything. The thing is to read history and observe the patterns so that you can tell one from another. A broad view on economics will be helpful in sussing out, which is which. For example, anything that relies on information is getting cheaper and cheaper, communication is getting cheaper, broadband is getting wider. Short of something cataclysmic, thats the kind of thing that will happen. After the Enron debacle, B-schools had a knee-jerk reaction and instituted Ethics courses. Do you see that continuing? What will actually happen is that people will tune into it and tune out of it, maybe over a ve or six year cycle with current events. I am seeing a lot of kids talking again with excessive

They (Chicago) abandoned the segment in which they had an advantage in an attempt to be all sorts of things to all sorts of people. I think it set them back a ways. So, pick a positioning and really drive that home.

June 2007 | ISB

insight | 29

use of rst person singular pronouns, about how they are going to get rich and all that kind of stuff. It is just like California in 1999. I guarantee that that will swamp the ethics thing for a while. There will be abuses, and we will refocus on ethics in reaction. History has a periodicity to it; it shouldnt, but it does. I am more encouraged about the environment. I think now there is enough agreement that we better do something about it. I am hopeful that will not fade in and out of the public consciousness. There is such a big gap between where we want to be and where we are. This will hopefully produce a constant pressure that would drive a monotonic trend.

We know that we have to come up with things that nobody else is doing if we are really going to create a defensible strategy. Our early interest in competitive advantage means we do our work differently, we focus on and look for different things.

Carl Stern at the ISB 30 | ISB

BCG has quite often been seen as being quite analytical. Everything is an equation. At the same time, what I am hearing is emphasising the right brain side. How do you differentiate yourself? To students, BCG or McKinsey seem to be the same but they are two very different institutions. How are you different, and how do you bring both left side and right side brain thinking to your consultancy? Your proposing that question by left and right brain thinking is very astute. One of the things that have always struck me when reading about the history of science is that 99 per cent of scientic activity resulted in no gain. Probably way less than 1 per cent represented the leaps that we are familiar with. And often, one person would be responsible for more than one leap. You get curious about what differentiates these people. What I have learned is that the number of leaps that are taken by people working outside their eld is way more than what you can explain by chance. I would infer, having done some reading on people like Pasteur, that they think differently from most people. They think inductively; we are back to pattern recognition. We are trained to think deductively. It is easy to do things deductively, standard scientic method being the analogy. Pasteur was a brilliant experimenter; he did rigorous scientic

analysis. But before that when at the stage of what hypothesis are we going to explore? instead of being limited by his own experience, he went through an inductive observation exercise. Historically, we did not truly invent the innovations attributed to us. More properly, we observed stuff and we applied pattern recognition to it. There was some interesting if this, then that sort of thinking. Just in time manufacturing saves costs; we noticed that the costs saved were overhead costs that are associated with variety. So its not just a manufacturing thing, its a marketing thing: low-cost variety. We have a history of doing our best work by thinking inductively. Our competitors, probably for scale reasons, nd it easier to train their people in methodologies and doing work deductively. We dont do that, we dont like that. We think industry best practices produce average results, at best. We know that we have to come up with things that nobody else is doing if we are really going to create a defensible strategy. Our early interest in competitive advantage means we do our work differently, we focus on and look for different things. I have done several hundred CEO interviews. Interviews of CEOs that have experienced all the competitors are very consistent about our strength in collaboration. It wasnt always so. In the 80s, we rethought our client service models from rst principles and came up with a few simple ideas, about how to engender real, genuine, collaboration with our clients so that the organisations that we serve learned. So those are the two things that our clients say differentiate us: inductive thinking and collaboration. How do you look for talent? I must say I am a bit of a dinosaur in that regard. These guys will tell you that they do case interviews and all that stuff. I refuse to do them. They are a complete waste of time, especially because they introduce an observable bias. It tends to be your case;

insight | June 2007

INSIGHT SPECIAL

you know exactly what you did. If somebody comes up with something that is brilliant but completely different, are you going to recognise it? Maybe yes, maybe no. I look for really three piles of things. On the intellectual side, is the person going to be right brained enough? How do you nd that? You might do that in a good interview if you are really skilled. I also try to gure out if they are curious. I nd that people who are insatiably curious about the world tend to have the qualities that go beyond the analysis. And some evidence that people give a damn about anybody but themselves. When I hear somebody talking about themselves in the third person they are not going to be hired by me. Its really annoying, but I dont know if Indians do that; but a lot of Americans do that. It really irritates me, because it demonstrates selshness. We are in an other oriented profession. And the third thing is, of course, I try to get a sense of intellectual honesty in the person. We read a lot about Mittal-Arcelor, the TataCorus acquisition and Indian companies acquiring companies abroad. Is this a bubble or a long-term trend? Whats happening now that was not happening earlier? Five years ago, if you talked to the CEOs here, everybody was going, WTO, oh woe is me, how am I going to be competitive, etc.? Today nobody questions whether they are going to be competitive; they know they are going to be competitive. So the questions that are in CEOs minds seem to be more I know I have to go global. How can I go global and still retain the Indian values by which the rm works? If I go global, do I really have to leave those behind?- which is a really big question. I dont know the answers to it. You dont want to imitate the Japanese, certainly. BCG and our main competitor are the only two rms that I know that are truly global, in the sense that their governance is in the same geographic proportion as their business. I believe that companies and competitive systems are strengthened by becoming truly global. But

the testosterone aspect of it is going to be disappointing; the notion of wow, we are out there, showing everybody that India can acquire big dinosaurs too. Some of them are going to work; some are not going to work. The notion of doing things in the greater glory of India strikes me as a really dumb strategy. Some of the press coverage is absurd. I am sure that is not what is in these guys minds; they are very good business people. Some of the underlying condence, aggressiveness, and so forth that are symptomatic of this is great; it is healthy. You create knowledge. What are some of the challenges that you nd in ensuring that your people are continuously up to speed? I am not sure that I would claim to speak for the rm on this; so I am going to speak for myself. We have invested quite substantially in knowledge management systems just like everybody else. We have one that is incredibly comprehensive, incredibly cost-effective. We are very proud of it. For our sub-scale ofces, its a lifeline, however. It is an unbelievably inefcient way of communicating knowledge. I think you have got to talk with people. Its got to be a constant two way - oh well if this is it, why dont you look at that? Thats something that an experienced person can help a less experienced person with. It would take about two minutes. It would have taken that guy hours, days, months, and maybe he would never have found the exact thing otherwise, that this guy would have pointed out. If you accept the notion of pattern recognition being the core of what we do, then you also have to accept the phrase apprenticeship business. There are all sorts of articial ways you can supplement peoples stores of personal experience patterns knowledge management, training sessions, various opportunities for vicariously experiencing cases here at school. But, at the end of the day, there is no substitute for a mentor-mentee, apprentice-master sort of relationship. Thats when the most knowledge is shared.

The notion of doing things in the greater glory of India strikes me as a really dumb strategy. Some of the press coverage is absurd.

Ajit Rangnekar June 2007 | ISB

insight | 31

C O V E R

S T O R Y

Financing Firms
in India
The Centre for Analytical Finance (CAF) at the ISB, recently co-hosted a conference on Indias Financial System, along with the Financial Institutions Center (FIC) at the Wharton School, and the Swedish Institute for Financial Research (SIFR) at Stockholm. Professor Sankar De, Executive Director, CAF, discusses the paper he presented at the Conference.

F I N A N C E

Sankar De, Executive Director, Centre for Analytical Finance, and Clinical Professor of Finance, ISB 32 | ISB

nderstanding mechanisms that contribute to sustainable long-term growth has long been one of the central missions for economists. In recent years, several related strands of literature in law, nance and economic growth have signicantly advanced our knowledge of growth mechanisms. In this paper, we examine the legal and business environments, nancing channels and governance mechanisms of rms in India. At the end of 2005, with a population of almost 1.1 billion, India had the worlds fourth largest economy measured in Purchasing Power Parity (PPP) terms. During the period 1990 to 2005, Indias GDP (in PPP terms) had an annual growth rate of 7.9 per cent, second highest among the worlds largest economies. With its English common-law origin, legal protection of investors in India is one of the strongest on paper in the world. For example, India has a perfect score on the Creditor Rights index (4 out of 4),1 and scores 5 out of 6 for the Anti-Director Rights index, the highest among more than 100 countries studied in Djankov, La Porta, Lopez-de-Silanes, and Shleifer (2005; hereafter DLLS). Moreover, India has had a British-style judicial system and a democratic government for a long time. Given the implications from the law and nance literature, it is perhaps natural to attribute Indias recent economic performance to its superior investor protection by the law. However, we nd that the level of effective legal protection

is weak in India due to corruption and inefciencies within its legal system and government.2 In order to understand why weak investor protection and institutions have not slowed down growth at rm-level and economywide in India, we examine large samples of rms of various types, including surveys of private rms from two regions in the small and medium enterprises sector (SME). We nd that Indian rms, especially those in the SME sector, rely on informal mechanisms, such as those based on reputation, trust and relationships, rather than formal mechanisms, to resolve disputes and overcome corruption, while the nancing of rm growth is predominantly based on nonmarket and non-bank channels, including trade credits and other relationship-based sources. Overall, our results suggest that formal legal protection and institutions have played a limited role for rms in India, while informal mechanisms, serving as institutional substitutes, have been much more effective behind the success of Indian rms and economy. Our empirical results on the ownership structure, nancing channels, corporate governance, and growth of Indian rms are based on two data sets. The rst is a sample of over 2,700 non-nancial rms compiled from the Prowess database of Centre for Monitoring Indian Economy (CMIE), comprising large (mainly state-owned and/ or listed) corporations and large SME rms. We nd that the equity ownership is highly concentrated within the founder s family

insight | June 2007

Understanding mechanisms that contribute to sustainable long-term growth has long been one of the central missions for economists.

Participants at the Wharton Conference

and/or the controlling shareholder, similar to that of rms from other Asian countries (e.g., Claessens, Djankov, and Lang 2000; Claessens, Djankov, Fan, and Lang 2002). When compared to listed rms studied in LLSV (2000, 2002), the dividend payout and valuation (as measured by market-tobook ratios) of Indian rms are much lower compared to similar rms operating in countries with strong investor protection, but similar to those listed rms in countries with weak protection. The characteristics of large corporations versus smaller, SME rms within the Prowess sample also reveal the existence of a dual economy in India. For example, as compared to large rms, the SME rms are, on average, much more closely-held, rely (proportionally) less on internal nancing and more on trade credits, indicating limited access to formal nancing. They also have considerably lower dividend payout ratios than the larger rms. Overall, SME rms exhibit stronger signs of those from a low investor protection regime than the large rms. However, SME rms have recorded signicantly higher growth rates (both in terms of sales and size of assets) than large rms, and this nding holds in both manufacturing and services industries. The contrast between the SME sector and large rms prompted us to conduct a more in-depth analysis of nancing, governance, and growth mechanisms within the SME sector. To overcome the lack of publicly available rm-level data for most of such rms, we conduct surveys among

213 entrepreneurs and executives of SMEs located in and around the southern Indian city of Hyderabad (76 rms) and the DelhiGurgaon area in northern India (136 rms). Our survey rms operate in manufacturing industries, with the median size of (book) assets in the range of $0.22 to $1.1 million. These rms range in age from less than 1 year to 85 years (median is 19 years), and employ 2 to 350 workers (median is ten). Our survey evidence demonstrates that rms rely mostly on informal nancing sources such as the rms founders and executives families, friends, and business partners, often without a formal contract, to nance their investment, operations, and growth. The results from Ordered Probit regressions show that the proportion of informal nance to total nance increases signicantly as the costs of accessing formal nancing (as measured by the requirements and contingency conditions for receiving bank and institutional credit) increase. Not surprisingly, smaller rms depend more on informal nancing than larger rms, consistent with evidence from other countries (e.g., see Petersen and Rajan (1994) and Berger and Udell (1995, 1998) for evidence on small U.S. rms). Our survey evidence also indicates that informal mechanisms are much more important than legal remedies and formal institutions in resolving disputes and enforcing contracts. For example, when asked about the consequences of delay or cessation of payments and breach of contracts, the respondents rank loss of

future business opportunities, reputation and personal assets as main concerns, while fear of legal remedies is the least important. When asked who would be the best mediator for disputes (multiple choices allowed), 46 per cent of the respondents specify mutual friends and business partners and 26 per cent specify a non-government organisation like a trade association as their top choice, and only 20 per cent of respondents choose going to courts. When asked how a rm ensures payments, 53 per cent of the respondents screen their business partners carefully so that such issues do not occur, while 59 per cent say they would go to courts but would leave the option of negotiations open. Finally, when asked about government regulatory authorities (e.g., obtaining a licence to start a business), our survey indicates that corruption is part of doing business. The two most common methods to overcome corruption are bribes and using friends of government ofcials. Our paper contributes to and extends the literature on law, institutions, nance, and growth. Our results indicate that India provides a signicant counter-example to most of the existing literature. First, India provides a case study that protection in practice can be very different from protection on paper; more importantly, rm-level evidence reveals that strong legal protection is not necessary for growth as long as there exist effective institutional substitutes. Second, proponents of institutional development argue that a country s institutions, in particular, those
June 2007 | ISB

insight | 33

Magnus Dahlquist, Director, Swedish Institute for Financial Research (SIFR)

political economy institutions restraining the government and powerful elites, determine the country s long-run economic growth (e.g., Rajan and Zingales 2003b; Acemoglu and Johnson 2005). However, the cost of improving these formal institutions (and the legal system) can be prohibitively high for emerging countries during early stages of growth.3 In this regard, our evidence from India shows that high growth is possible without well-functioning political economy institutions. Finally, in contrast to the nance and growth literature, our evidence on the relative importance of nancing channels illustrates that formal nancing channels based on markets and banks are not necessary for rm growth, as long as informal nancing sources pick up the nancing slack. Many existing studies use cross-country data sets and examine one or two dimensions of the sample countries legal and nancial systems with the focus on formal governance mechanisms and nancing channels, and in the process treat each country on an equal-weight basis. We might expect that, compared to large and diverse countries (e.g., India and China), small homogeneous economies (e.g., Hong Kong and Singapore) could have more effective formal legal and nancial institutions because they can be tailored to these countries needs at low costs. By contrast, our paper provides a more comprehensive view of the nancial system within India, and nds that many results based on existing cross-country studies to a large degree do not apply to India. In particular, informal governance mechanisms and nancing channels, ignored in most of the existing studies, seem to be the main driver for growth in India.

Recently, other single-country studies have helped us better understand the complex relationships among law, institutions, and nance in a given country.4 In particular, Allen, Qian, and Qian (2005, hereafter AQQ) demonstrate that China has one of the largest and fastest growing economies despite its poor legal and nancial systems and a corrupt and autocratic government. On the one hand, our study on India complements the AQQ (2005) paper in that alternative nancing channels and informal governance mechanisms, rather than legal protection and political institutions (e.g., lack of government corruption) documented in most of the existing literature, have supported the growth of private rms in both of these countries. Given the status of these two countries (as of 2005, China and India have a combined population of 40 per cent of the world and their combined GDPs in PPP terms equal to 19 per cent of the world total), the ndings from both papers call for more research to better understand whether similar substitute mechanisms that work well in China and India have also supported the growth of rms in other economies where formal mechanisms are ineffective. On the other hand, our paper differs from the AQQ paper in part because India presents a distinctively different case from China, which had no formal legal system and associated institutions in place when its economy began to take off in the 1980s. Endowed with the English commonlaw origin, Indias formal legal and nancial systems are among the best in the developing world. Yet, our paper shows that the formal systems are of limited importance for the majority of rms in the country.

F I N A N C E

Franklin Allen, Co-Director, Financial Institutions Center, The Wharton School, University of Pennsylvania

Foot notes 1 This score was revised from 4/4 in LLSV (1998), which was based on the Companys Act (1956), to 2/4 in DMS (2005), which was based on the Sick Industrial Companies Act (1985). 2 Other studies also document this. For example, DLLS (2005) construct the anti-self-dealing index (control of corporate insiders) for more than 100 countries. Indias score of 0.55 (out of 1) is lower than the average (0.67) of English common-law countries. 3 For example, Djankov, McLiesh and Shleifer (hereafter DMS, 2005) nd that, despite apparent signicant economic benets from reform, there is very little time variation of creditor rights over the past 25 years around the globe. 4 For example, Franks et al. (2005) study the evolution of investor protection, equity nancing, and corporate ownership in the U.K. over the 20th century and conclude that formal regulations had little impact on equity issues and dispersion of ownership and that nancial development in the U.K. relied more on informal relations of trust.

34 | ISB

insight | June 2007

On Indias Financial System At A Global Forum

Does good Corporate Governance matter? Does the entry of a foreign bank improve credit access? How do Indian privatisation initiatives and pension reforms fare? Do anti-corruption crusades have negative side-effects? These were some of the deliberations at the Global Conference on Indias Financial System, organised by the FIC at the Wharton School, jointly with the CAF, at the ISB, and the Stockholm-based SIFR. Shamika Ravi, Assistant Professor of Economics and Public Policy, at the ISB, who was present at the conference, sums up interesting take-aways.

Academic studies in the past have shown that Corporate Governance rules can affect share prices, composition of shareholders, size of the stock market, and the way managers behave. A majority of these studies have been cross-country comparisons, and there is little work to show the impact on companies of specic changes in governance requirements. Vikramaditya S Khanna from University of Michigan Law School and Bernard S Black from University of Texas Law School attempted to tease out the effect of a specic rule by looking at Clause 49 a set of governance reforms proposed in India in 1999. Exploiting the natural experiment setting of this reform, the researchers displayed that stronger rules do in fact boost stock returns. They found that stock prices of large rms rose by 4 per cent immediately after the reforms were announced. The authors also compared Clause 49 reform in India with the 2002 Sarbanes-Oxley (SOX) law in the US. Indians, they concluded, saw Clause 49 as a major step forward, given the relative lack of such rules in India. In the US, however, strong regulations were already in place and investors felt that SOX was more of an added expense rather than an improvement. Two papers at the conference looked at the slow pace of reforms in India, specically in the realm of pension reforms and privatisation of big government-owned companies. The New Pension Scheme (NPS) in India was launched in 2004, which covered new employees of the central government. Though this reform is a step in the right direction, Helene K Poirson from the IMF claimed that it is plagued with many shortcomings. The lack of a guaranteed programme like Social Security may cause the NPS investment mix to be too conservative, said Poirson. This in turn might lead to returns that are too low to make this a success. Also, the limited focus on civil servants leaves vast number of workers uncovered, and therefore might fail to stimulate further development of the nancial markets. The paper by Nandini Gupta (Indiana University) and Serdar Dinc (North Western University) highlighted the role of politics in privatisation of government-owned enterprises. Like many previous studies, they found that privatisation makes companies more efcient and protable. They, however, argued that interest groups such as workers of public sector units (PSU) oppose privatisation, as they fear layoffs and perceive this as inequitable and corrupt transfer of assets to private owners. The authors looked at data from 250 PSUs, including 49 that were privatised. They compared the political conditions in areas where they are located, and concluded that it is easier for large rms to issue equity. Thus, by selling protable rms early, governments placed a greater emphasis on increasing sale proceeds and building public support for privatisation than

Our survey indicates that corruption is part of doing business. The two most common methods to overcome corruption are bribes and using friends of government ofcials.

Shamika Ravi, Assistant Professor of Economics.

June 2007 | ISB

insight | 35

F I N A N C E

F I N A N C E

There is a problem with the incentive system that gives little reward to lending ofcers, who make successful loans, but confronts them with severe penalties in the case of default.
on achieving efciency. They also found evidence that politicians fearing a backlash from privatisation were less likely to go ahead with it in regions with close elections, or where party in power held a slim majority. Corruption was another topic of interest at the conference. Monitoring is typically viewed as a key to reducing inefciencies in credit markets. But, as Abhijeet Banerjee (MIT), Shawn Cole (Harvard University) and Esther Duo (MIT) showed in their work, it is possible that sometimes the remedy could well be worse than the ailment. They found evidence that vigilance activities in Indian banks resulted in reduced lending. The amount of credit declines sharply, if there has been a corruption inquiry in a bank branch or in neighbouring branches. The underlying idea being that, there is a problem with the incentive system that gives little reward to lending ofcers, who make successful loans, but confronts them with severe penalties in the case of default. The authors looked at 2,000 cases of corruption at the public sector banks, where bank employees were subject to strict anti-corruption rules enforced by the Central Vigilance Commission. Bank ofcers are mostly wary of resolving default cases for fear of being charged with corruption. This has perhaps led to India having one of the highest default cases in the world, concluded the authors. Analysing RBI data of 43,000 bank branches, they compared the volume of lending at banks subject to fraud investigation with the volume at branches that were not affected. They found that relative to an unaffected branch, a branch where an ofcer is facing a corruption probe experiences a 20 per cent decline in credit over a period of two years. There are also spillovers to the neighbouring branches. The effect is accentuated by the fact that once a probe begins, loan ofcers are extremely risk averse and lend money mostly to less risky ventures. Key Speaker and Economist, Anne Kruger, set the right tone for the event as she declared that India has done a lotbut theres a lot more to be done. Outlining the highs, she pointed out the dramatic increase in growth rate, the inow of capital into the country and the ease with which the rupee is exchanged for other currencies. But India was still at a very early stage of development by any measure, she cautioned. Stagnating agriculture, which still employs the largest share of workforce, being a major concern. According to Kruger, while the growth of services sector is good news and is in part triggered by less government regulation, it also reects what India could do in other sectors. She explained that industrial production is growing but much of this involves labour saving investments. This has lead to a dismal employment situation which requires urgent attention. Fiscal decit is another worry, she claimed, and this will get further aggravated due to inationary pressures. The governments heavy inuence in lending whereby 43 per cent of credit is directed makes matters worse. The political atmosphere and the antiquated infrastructure raise the cost of doing business in India. However, ending optimistically, she noted that unlike other emerging economies, where reversals are common, in India, economic advances tend to stick.
36 | ISB

insight | June 2007

Focus on
Financial Economics
Ramana Sontis paper, Good IPOs Draw in Bad: Inelastic Banking Capacity and Hot Markets, which formally models the market for Initial Public Offerings (IPOs), was recently accepted for publication in the Review of Financial Studies, a top-tier journal in Financial Economics. Sonti is Assistant Professor of Finance at the Indian School of Business. A PhD in Finance from the Michigan State University, his research interests span from Corporate Governance to Institutional Investment

time of the offer, they increase investments in the former and reduce in the latter. IPOs During Hot Markets and Good Governance In a recent paper on IPOs, we posit a theory of why IPOs are more under-priced during hot markets. We conjecture that good quality investment banking labour is in xed supply in the short-run. When IPO demand increases, this labour is strained, and does a poor job in screening the quality of each offer. Investment bankers cannot hire good people. However, they know that some bad IPOs will slip in, and will under-price IPOs by a greater amount. This encourages bad IPOs to enter the market, concluding that under-pricing and the number of IPOs is correlated across time. I am just venturing into another very topical area Corporate Governance. There has been a surge in research interest in this area, largely an academic by-product of the major accounting scandals and subsequent bankruptcies of highly visible companies (Enron and Worldcom). A key research idea is that good governance causes rm shareholder value to increase. While this idea seems fairly benign, its also enormously difcult to test, or understand. Good governance and better rm values might be caused by some other fundamental factors which academic research cannot measure accurately. The questions that persist are: why dont badly governed rms increase their rm value by simply switching to better governance? How do we measure the goodness and badness of governance? Maybe, all rms choose the mechanism that works best for them. After all, we would

expect a steel company to be governed differently than a mutual fund company! Hence, what we are labelling good and bad mechanisms are good or bad only because we are limited in our measures of governance. In the current research, I am deeply exploring the basic idea that one size does not t all. The Road Ahead I am interested in researching issues specic to India, for instance, why we have such a large and pervasive, informal, or black, economy; whether the real estate industry is currently in a bubble, etc. I am also very interested in exploring traditional Indian models of capitalism, i.e., examining the idea that capitalism and private enterprise is not new to India. Indeed, the supply of interesting research ideas in Financial Economics is essentially innite.

Behaviour. Says Sonti, I have always been interested in several things at one time, and one of the biggest perks of being an academic is the freedom to set ones own agenda. He has just begun, he says, and refuses to be slotted into xed categories.

Tracking Institutional Investor Trends My earlier research focussed on institutional investor behaviour. I explored conditions under which large investors choose to exhibit herd behaviour in investments, disregarding their own private information. I examined how institutional investors react to rms undertaking seasoned equity offers (to raise capital oated by already-listed rms). It is known that the average seasoned offer portends a decline in stock price, and operating performance for the rm. Our question was simple: if such offers are bad news, how do institutional investors react? We found that institutional investors are smart enough to separate the better future performers from the worse ones. During the

New Avenues Ramana Sonti, Assistant Professor of Finance, ISB.

June 2007 | ISB

insight | 37

F A C U L T Y

E N T R E P R E N E U R S H I P

The New Spirit of

Entrepreneurship Teaching
Interest in Entrepreneurship as a career option has grown dramatically in recent years. There is a growing demand for developing Entrepreneurship as an important subject in management education. The ISB introduced Entrepreneurship as a core subject in its curriculum right from its inception. Recently, the Wadhwani Centre for Entrepreneurship Development (WCED) at the ISB ran a Certicate Programme in Entrepreneurship Teaching (CPET), to train high quality teachers for teaching Entrepreneurship as a fulledged course in their respective institutions. Professor K Ramachandran, ISB, Professor Phillip H Phan, Lally School of Management and Technology, USA, and Professor Rama Velamuri, IESE, Spain, conducted this programme. Here is an excerpt from their discussion on the subject of Entrepreneurship education.

Ramachandran: In India two major dimensions support entrepreneurship - the booming economy and the opportunities available, especially in the IT and service sectors. Entrepreneurship is no longer considered a taboo, primarily because of the IT boom of the 90s, where the cost of failure is small, and intellectual capital is the primary resource. Velamuri: IT entrepreneurs such as Narayana Murthy and his co-founders, and Jerry Rao, have also served as powerful role models. They have shown that rst generation entrepreneurs with no contacts in business or government can make it big by leveraging their intellect and capacity for hard work. The impact of these IT entrepreneurs on the Indian business landscape is immense and goes far beyond the shareholder value they have created or the foreign exchange earnings they have brought in. Phan: Getting into the IT business is not as onerous as well. One does not need permits; you do not have to jump the usual bureaucratic hurdles that you would if you were setting up a factory. In the US, it has been demonstrated that you could become wealthy within a very short period of time by going out on your own. This is the time when 20 year old kids go out and build a company in their dorm room and then turn it into a billion-dollar enterprise. For a very long time, people associated entrepreneurship with small businesses. It was perceived that you were into it because you could not get a job with a big company. In the late 90s, with the internet boom, the

mindset changed. It became cool, almost counter-cultural, to be the next founder of Google or Skype. Parents sent their children to universities so that they would come out as engineers or doctors, and work for IBM. But kids rebelled against the idea saying, I am going to go out and start my own company, and if I have to live on pizza and coke for three years, I am going to do that. In a way, youth found their identity in this movement. Ramachandran: One major reason for the rise of the IT industry is that the government didnt know anything about it and didnt have a department to legalise it. The counter-cultural aspect has a major impact on the emerging economies. Now, not only the youth, but across society parents, the government, other institutions have started paying attention to it. We still have large number of constraints. There are not many faculty members who understand or can teach entrepreneurship. This is something new something they did not learn in college. Phan: You are very polite. If you look at a typical university, people who have been faculty for a very long time have a set paradigm and the idea of entrepreneurship as a serious form of study is foreign. Paradoxically, faculty are resistant to change, they are loath to retool and learn new things; they are not entrepreneurial. It has been a huge struggle over 15-20 years to get entrepreneurship accepted as a legitimate eld of research; to ensure that it is not just small business. Only very recently, research journals in entrepreneurship have become

38 | ISB

insight | June 2007

Parents sent their children to universities so that they would come out as engineers or doctors, and work for IBM. But kids rebelled against the idea saying, I am going to go out and start my own company, and if I have to live on pizza and coke for three years, I am going to do that. In a way, youth found their identity in this movement.
K Ramachandran, Clinical Professor of Entrepreneurship, ISB and Phillip H Phan, Professor of Management, Lally School of Management and Technology, New York.

well-cited and received legitimacy. Having government backing and money from alumni are a big help, but faculty are seldom concerned about money. They are concerned about the legitimacy of their academics. Velamuri: In the US, there has also been a shift away from universities using experienced entrepreneurs and investors as adjunct professors to teach entrepreneurship. Almost every mainstream university now has full-time faculty members with PhDs, teaching and researching entrepreneurship. This has also enhanced the legitimacy of entrepreneurship as a field of research. Ramachandran: In an emerging economy like India, where faculty members are few and awareness is low, there is a huge need to create interest and awareness that this is good for a career, income or a bright future; that this is where opportunities are. WCED has taken an initiative and has established the Society of Entrepreneurial Educators (SEE), a forum to support and enhance entrepreneurship education. But you need more initiatives, considering the magnitude of the challenge. Phan: It is interesting that these initiatives are private, managed by a single individual or a small group of people. That is the way it starts. One person can have a big impact, if they put their passion to it. The idea of seeking faculty from different universities independent of bureaucracy and evangelists is a great way of leveraging whatever little resources one has. This is social entrepreneurship.

Velamuri: I agree with Phil. The kind of capacity-building that CPET is undertaking has the potential of having a very high impact. Ramachandran: The Department of Science and Technology and its National Science and Technology Entrepreneurship Development Board (NSTEDB) are doing several things. Interestingly, NSTEDB is led by an IIM-A graduate and his team of management graduates; they bring a totally different perspective. Simultaneously, the leadership of the network of scientic and industrial research institutions across the country is trying to push these institutes to be more industry-focussed. There is an increasing pressure for cultural change within the Department of Science and Technology. Phan: Do you think that the universities respond or care? Ramachandran: There are small pockets of response. Also, it has become fashionable to talk about entrepreneurship. There is an acceptance of the counter-revolution taking place in society and the head of an institute does not want to be treated as the old guard. The younger generation is driving entrepreneurship education. Velamuri: As is the case with new ideas and practices, entrepreneurship education will diffuse slowly beyond the business schools, and into universities and other institutions of higher learning. This need not be of concern to us, as long as there are early adopters, who are enthusiastic about entrepreneurship. Once they show

Ramakrishna S Velamuri, Assistant Professor of Entrepreneurship, IESE Business School (Spain) June 2007 | ISB

insight | 39

E N T R E P R E N E U R S H I P

There is an acceptance of the counter-revolution taking place in society and the head of an institute does not want to be treated as the old guard. The younger generation is driving entrepreneurship education.

the positive impact of entrepreneurship teaching, other institutions will follow. Phan: That is certainly the case in the US. It is demand-driven rather than pushed by supply. That is important because when it is socially-driven, it tends to be more sustainable, much more powerful and it keeps going in spite of whatever barriers, whether it is bureaucracy or intellectual reticence. Ramachandran: Another interesting trend is building in co-curricular activities in the curriculum. It may be business plan competitions, entrepreneur lectures or a variety of fun-lled activities. They lead to several opportunities for relating with great entrepreneurs. It is mostly driven or championed by students, with some support from the faculty. Do you nd a similar trend in the US? Phan: Maybe 15 years ago that was the case. We are now where India would probably be in another few years. If you look at the kind of activity that tends to be typical of entrepreneurship curriculum, they are very practical and fun. For students, it is tangible, valuable and meaningful, because it helps them see that what they are learning is not a waste of time. When this kind of demand started becoming more evident across campuses, the administrators started taking notice and formally began to build a curriculum. Thus, the structure came after a big demand was noted. Right now, in the US, in terms of growth in the number of business-related programmes in universities and in chaired professorships, entrepreneurship is by far the leader. Out of every ten chair professorships that is available in the market, nine are entrepreneurshiprelated. I started to see this trend in South East Asia about three to four years ago, after the Asian crisis. When things started getting better and people began to rethink their priorities, they wanted to become more socially active. So rather than give money for a specic HR sort of programme where money is used to provide a service they

gave money to promote entrepreneurship. Ramachandran: You now have a feel for India, Singapore, and South East Asia. Do you nd any interesting patterns emerging? Phan: Probably, the biggest difference is that, in India, interest in entrepreneurship is built in terms of curricular practices, in spite of the government, whereas in South East Asia, it is happening because of the government. India reminds me very much of Taiwan. In Taiwan, 8 per cent of the economy is entrepreneurial, in spite of the government. The government really had no policies, no tax breaks; nothing that they did encouraged entrepreneurship. You could argue that entrepreneurial economy arose probably because of the difculty that people had in dealing with the government bureaucracy in doing business. People learnt how to be innovative. Maybe it is the same for India. Of course technology made a difference, but technology is not sufcient if you do not have the skills. Ramachandran: Are people ready for it? Phan: That is the paradox. If the government gets involved, people get suspicious. The desire for entrepreneurship is demanddriven. It starts with an individual thinking that this is the best option they have for getting rich or to full a life-long dream. In countries where government has been heavy-handed, people begin to depend on it to make decisions. On one hand, we have the government saying, here are all the facilities; we want entrepreneurship, and on the other, people get so used to government telling them what to do, that the purpose gets defeated. Ramachandran: This is where teachers have a great role to play. What we are doing at the ISB is signicant and timely. But, we need more such waves to make entrepreneurship a powerful movement that will transform the economy. Lets hope that this will happen soon.

Almost every mainstream university now has full-time faculty members with PhDs, teaching and researching entrepreneurship. This has also enhanced the legitimacy of entrepreneurship as a eld of research.
40 | ISB

insight | June 2007

Faculty Felicitations
Professors of the Year 2007 Professor Rakesh V Vohra from Kellogg School of Management and Professor Oded Sarig from the Wharton School of Business were chosen Professors of the Year by the Class of 2007. As a prelude to Graduation Day, outgoing students nominated their Professors of choice, a tradition at the ISB, where mentors are felicitated for the unequivocal impact they create on the student body. This award is in recognition not only for excellence in teaching, but also for the ability to motivate students and create a passionate interest in respective subjects. Professor Vohra was the students choice for the core courses and Professor Sarig for the elective courses. In response to the award, Professor Vohra said, The quality of faculty who teach at the ISB is rather high, so I was `gobstopped to be singled out in this way. The students are extremely competent full of re and hungry for understanding and that makes teaching fun. Professor Sarig, reacting to the award, said, It gives me great pleasure to be so honoured. I have enjoyed being with such a wonderful class and knowing that this was not just a onesided feeling is very gratifying. Appointed Thomas Schmidheiny Fellow Professor K Ramachandran, Associate Dean Academic Programmes, and Clinical Professor of Entrepreneurship at the ISB, has been appointed as the Thomas Schmidheiny Fellow of Family Business and Wealth Management. Professor Ramachandran has been working in the area of Family Business for over two decades and one of his key research areas is challenges of professionalisation of family business. Professor Ramachandrans appointment will help develop in-depth research and enable Indian families to learn about the subject, exchange best practices and prot from cutting-edge research. The appointment of the Fellow is yet another milestone in ISBs efforts to build up activities in the family business area, a fairly un-researched area yet, said the Professor. Hinting at the accompanying responsibilities, he said that the ISB would organise a major international conference on family business, one that will attract members from business families, researchers and consultants. Facultys Grid Computing Market Design Finds Place in Top-tier IS Journal Strengthening the acclaim to cutting edge research at the ISB, Professor Ravi Bapnas paper, A Market Design for Grid Computing, has been accepted for publication in the INFORMS Journal on Computing, a top-tier quarterly journal on Information Systems. Bapna is Associate Professor and Executive Director of Centre for Information Technology and Networked Economy (CITNE) at the ISB. In this paper (co-authored with Sanjukta Das, Robert Garnkel and Jan Stallaert), the authors develop a market-based resourceallocation model, that adds an economic layer to the current approach of treating resource allocation as primarily a scheduling issue. A value-elicitation and allocation scheme, that provides economic incentives for buyers and sellers of computing resources to exchange assets, is designed. Further the authors formulate the problem as a combinatorial call auction and a portfolio of three solutions is presented allocative efciency, incentive compatibility and fairness in allocation, with computational efciency.

Rakesh Vohra, Professor of Managerial Economics and Decision Sciences, Kellogg School of Management

Oded Sarig, Professor of Finance, Arison School of Business. June 2007 | ISB

insight | 41

F A C U L T Y

E T H N O G R A P H Y

When Creativity
Meets Commerce
During a debut course on Marketing and Design Ethnography, Professor Alladi Venkatesh, University of California, Irvine, spoke to Disha Asher and Shagun Labroo, students from the Class of 2007, on the role of design and visual communication in contemporary marketing practice. According to Venkatesh, design and aesthetics have shifted from surface quality to deeper content. The talk also geared towards associated cultural issues.

D E S I G N

The World of Design My fascination for design comes from my interest in aesthetics and consumer behaviour. I have always felt that one of the missing elements in literature is the notion of how aesthetics underlies a lot of marketing actions and decisions. Among its many aspects, marketing is an imageoriented enterprise, for it creates visual and sensory enchantment through product design, advertising, packaging and branding, and captivating retail environments. Obviously, there is a lot of visually-oriented design involved in marketing, but it seems we have not paid sufcient attention to this dimension. What is missing in all this is a systematic exposure of students to the world of design that we experience all the time. This led to the genesis of a course in Design Management in Business schools. Meeting customer needs is a critical element of marketing. However, design goes beyond that. It is transformational in nature, and aims to change consumer s environment and experiences in fundamental ways. Design-oriented marketing, in creating new visual images, cannot be supercial, but must be deeper. Design must be something that goes into the very recesses of any organisation. As Marco Susani, Head of Advanced Concepts in Motorola, says, design is the seed or the DNA of an organisation. This seed is what makes companies like Apple, Toyota, Google, and Tatas true innovators. The important question is: how do

products differentiate themselves? Differentiation implies that design is not a haphazard or an incidental exercise, but permeates the entire organisation, and one needs to have holistic approach to design. Design is a way of thinking, a state of mind; a human imagination, and not merely human intellect. Imagination is a higher expression of human activity. Intellect is an aspect of imagination. Imagination has no bounds, nor is it a preserve of any particular type of industrial activity. In general, when it comes to espousing a design philosophy and realising its material content, there is not any difference whether you are in a technology-oriented industry, or in fashion, food or music, or any kind of craft-oriented industry. Design permeates all types of activities and organisational forms. Design involves art and science. Art is very expressive, without limits, and gives an emotional appeal to products. Emotions are the basic elements of human engagement. When you want to give a gift to a friend or your loved ones, you think of two things: utility and more importantly, aesthetics. We make such emotional judgements because of the expressive or sentimental relationships we have with persons we interact with. A well-designed product responds to these demonstrative needs. Design Philosophy in Organisations I believe there is a clear distinction between customer-orientation and customerdriven strategies. Customer-orientation

42 | ISB

insight | June 2007

Design is transformational in nature, and aims to change consumers environment and experiences in fundamental ways.

is very important, as one must anticipate and respond to customer needs. But the rm cannot afford to be dictated by the customer as to what the product should be like. That is customer-driven. In such a case, creativity is completely curtailed. Customer is undoubtedly central to a project, and consumer testing is always important. I am not denying that. But creative process should come from the designer s imagination. Organisations need to develop a culture of design in a way that actually advances their position in a culturally competitive environment. What does it mean to organise around design? For example, in many companies, typically, designers are not involved in decision processes leading to product strategies. In many instances, designers are relegated to back-ofces. It is more customary for highlevel managers, nance experts and marketing executives to make decisions about product strategies based on matters of efciency and prots. I strongly feel that designer should not be left behind. They should be able to intervene and have some say. Often, we witness tensions between the designer and the organisation. My take on this is, there should be a philosophy of design in the organisation that pervades the entire organisation and everyone should have some ownership in this process. Proactive approach to design is an expression of design philosophy. That is what I mean by organisation alignment and ownership, and design should pervade all aspects of organisation.

Design in the Indian Context Design consciousness is certainly on the rise in India. Here are some examples. Fashion and Grooming Products: India has made a distinct place in the domain of fashion. Fashion is, by denition, very design-oriented. It also involves style. Some think style is not design and that it is merely something trendy. Trendy or not, fashion appeals to peoples aesthetic identity. Fashion is not just a supercial self-indulgent process; its a creative human endeavour. Fashion designers in India are as good, as or better than those in many other parts of the world. Food and Indian Cuisine: Another area where India scores high is in the variety of food and culinary products that it caters. Normally, one does not think of food as a source of design inspiration. Just look at the wine industry and how French wines are marketed. The whole wine industry in France is designed to convey the history of wine growing in France, dating back to several centuries. I believe Indian cuisine represents an extraordinary world of design. If we expand the symbolism of fashion, food, and linguistic modes, one begins to see the pervasive nature of cultural elements in the world of design. For example, Swedish or Scandinavian designs are known for minimalism; German designs for performance value; Italian designs for artistic delicacy; Japanese designs for aesthetic order and crafty miniaturisation,

Venkatesh Alladi, Professor of Management, University of California.

and so on. I believe that the strength of India is in its cultural complexity and plurality, its architectural beauty, its ornamental value and incredible display of regional colours, all of which should be part of the Indian design ideology. These distinct characteristics should enter the world of design. A New Methodology Design Ethnography The world of design is a world of adventure and creativity for it appeals to both intellect and emotions. To capture these two dimensions, I have introduced appropriate methodologies in design research. One such methodology is design ethnography, which is the art and science of design oriented inquiry that examines customer behaviours in their natural settings and looks both at the forest and the trees.
June 2007 | ISB

insight | 43

D E S I G N

E T H N O G R A P H Y

E T H N O G R A P H Y

D E S I G N

Creating Value Through Visuals

Many brand battles take place within the visual domain. Advertising, corporate reports, design, packaging, product catalogues, promotional materials, and web pages rely heavily upon the visual dimension to produce meaning and create value. The World Wide Web mandates visualising almost every aspect of corporate strategy, operations, and communication. Web design has brought visual issues into the mainstream of strategic thinking, and spurred research and thinking about perception and preference of visual information. Variously referred to as the attention economy, the aesthetic economy, and the experience economy, this visual turn in marketing may call for new perspectives and research approaches how do images communicate? In what ways do images create value? How does the handling of images in the allied elds of visual studies, art history, and photography shed light on the relationships between visual culture, marketing and consumption? From a consumer s perspective, visual experiences dominate the web, as they navigate through a computer-mediated environment, almost entirely dependent upon their sense of sight. Photography, including digital, lm and video which remains a key component of many information technologies, and digital incorporation of scanned photographic images helped transform the Internet into the visually-rich environment of the World Wide Web. Today, we live in a photographysaturated world. Photographic imagery enjoys higher circulation than ever, allowing users to post their photographs and videos on websites (Facebook, Flickr, Friendster, MySpace, and YouTube). Viewers make sense of visual images in numerous ways, some of which are automatic or without awareness. Many perceptual processes uctuate between conscious and unconscious control. For example, cognitive, as well as physiological, processes govern eye-movement, attention, and awareness. Perceptual codes inuence visual information-processing. Further, perceptual cues, such as relative size, shape, colour, and symmetry contribute to consumer cognition at a level at which most are perhaps only dimly aware. Representational conventions or common patterns of portraying objects, people, or identities work in conjunction with these perceptual and cultural processes in ways that often elude marketing studies. The visual culture approach reveals limitations in an information-processing model of consumer research, in which culture, history, and style are attenuated. For example, the white space of many advertising, promotional and website images the blank background, neutral surround, or white studio backdrop does not neatly t into cognitive models. From a strictly decision-making or persuasion perspective, this white space carries no information, it is lost amidst persuasive or rhetorical devices. In contrast, critical visual analysis helps point out how white space imbues images with meaning. In other words, white space is not nothing, it helps to situate subjects within images, and its use links images to a broader cultural world of aesthetics, luxury, and value.

Jonathan Schroeder, Professor of Marketing Management, University of Exeter.

44 | ISB

insight | June 2007

Visual analysis points to the cultural and visual context of ads within the ow of mass culture, underscoring the powerful role marketing plays in political economy and in the constitution of consuming subjects. A key element of critical visual analysis often entails constructing a visual genealogy of contemporary images, to contextualise and historicise them, and point to the cultural domain of contemporary visual consumption. An important issue to consider is how the representational conventions discussed affect viewer s perceptions. Most consumers are not necessarily visually literate, and art historical references and conventions may not consciously inform their viewing of an ad. Likewise, most language speakers have a limited awareness of the linguistic horizon that shapes their use of vocabulary, grammar and syntax. However, historical conventions shape communication. This does not imply that all consumers read images in the same way, but, rather that each image carries with it a historical and cultural genealogy that helps us understand how it produces, reects, and initiates meaning. The marketing researchers should engage their art historical imagination when considering how visual images work, why they draw consumer s attention, and how they help create brand value. To fully understand brands, managers must appreciate the cultural, historical and representational conventions that shape brand communication. If brands exist as cultural, ideological, and rhetorical objects, then brand managers require tools to understand culture, rhetoric, and ideology,

in conjunction with more typical branding concepts, such as equity, strategy, and value. Within the brand culture perspective, brand identity forms the strategic heart of the brand what the brand manager imagines brand to be. Brand image reects psychological aspects of brands how the brand rests within the minds of the consumer, gauged by consumer response. Brand culture refers to the cultural dimensions or codes of brands that inuence brand meaning in the marketplace. Greater awareness of associations between traditions and conventions of visual culture and production and consumption of brand images, helps to position and understand branding as a global representational system. Future research on images in brand culture must acknowledge images representational and rhetorical power, both as cultural artefacts and as engaging bearers of meaning, reecting broad societal, cultural, and ideological codes. Along with brand identity and brand image, brand culture serves as a necessary complement to understand brand meaning and brandcreation. Understanding the role that visual culture plays in consumer preference, cultural production, and value-creation, signals a step toward understanding how images inform and inuence basic consumer issues of attention, branding, identity, and meaning-making. (Professor Jonathan Schroeder teaches Marketing Management at the University of Exeter, and as Visiting Faculty at the ISB, taught a course on Marketing and Design Ethnography: Managing Design in a Marketing Organisation.)

Greater awareness of associations between traditions and conventions of visual culture and production and consumption of brand images, helps to position and understand branding as a global representational system.

June 2007 | ISB

insight | 45

D E S I G N

The marketing researchers should engage their art historical imagination when considering how visual images work, why they draw consumers attention, and how they help create brand value.

E T H N O G R A P H Y

G R A D U A T I O N

Walking The Graduation Aisle

Class of 2007
n old saying goes: All that stands between the graduate and the top of the ladder is just the ladder. That seemed perfect for all 416 students, in the Class of 2007, who graduated this year from the Indian School of Business (ISB). The Sixth Graduation Day Celebrations marked the end of an eventful academic calendar. The ofcial ceremony was a deserving salutation to each students achievements and milestones covered. The Class of 2007 walked towards the dais in a traditional procession, donning the symbolically coloured graduation gowns and mortarboards, all representing the sobriety of academic regalia. To add to dignity of the moment, the Chief Guest Montek Singh Ahluwalia, Deputy Chairman, Planning Commission, gave away certicates to the students for the Post Graduate Programme in Management, amidst cheering parents, visitors and friends. Addressing a visibly excited gathering, the Chief Guest said, The graduates are the stars of the convocation ceremony and I congratulate them on their outstanding feats and extraordinary placements. Ahluwalia imparted some invaluable advice to all the aspiring graduates As a general rule, whether its a rm or an individual, it has to be nimble and exible in order to cope with change. As you return to the real world, remember, seniority and experience will be of much less importance, than the way in which you can take risks and think out-of-the-box. Rajat Gupta, Chairman, Governing Board , ISB, added to the proud moment

Class of 2007 celebrating their success at Grad Day

ISB Graduates from Class of 2007

Scholars of Excellence 2007 V Subramanian and Suneet Gupta 46 | ISB

and said, Today is the beginning of the journey of a long road ahead towards new personal and professional goals. Always have a learning mindset and take every opportunity to go beyond your immediate job and lead with integrity. M Rammohan Rao, Dean, said, The Class of 2007 have performed extremely well in all areas of academic activity, as well as in extra curricular activities, leaving an indelible mark in the history of the School. He highlighted some of the achievements of the last academic year innovations in curriculum, exchange programmes, events, awards, placements etc. At the ceremony, the ISB Scholars of Excellence V Subramanian and Suneet Gupta were also honoured for their exceptional academic performance. On the penultimate day, an award function acknowledged the Young Leaders, Torch Bearers and ELP Peak Impact Awardees from the Class of 2007 those students who, during their one year, made a notable impact through their leadership qualities, commitment and quality of participation in student activities. Graduation Day is always a heady mix of nostalgia and anticipation, and at the ISB, it is incomplete without the quintessential Hat Toss and Gown Drop ceremonies. The day ended with cheers and applause, with memories and resolutions. M Rammohan Rao, Dean, quoted aptly from the Upanishads to sum up the spirit of the day: You are what your deep, driving desire is. As your desire is, so is your will. As your will is, so is your deed. As your deed is, so is your destiny.

insight | June 2007

Placements 2007
Thrill of Roles Over Numbers
lacement 2007 saw students clearly opting for motivating roles and off-beat job profiles, over cr unching figures and numbers. Unconventional sectors like real estate, microfinance, media, healthcare, etc, made unputdownable offers to the ISB Grads. Clearly, the trend this season was to take challenging roles head on. Obviously, hefty pay packets and international postings are pass . Ruchi Kalra opted for a consulting job, though coming from a research background. Prabkirat Sanghera made, what he calls, a paradigm shift in career From IT industr y to real estate, from an intangible sector of ser vices and products to a tangible one, the ISB helped me formulate this change in role, he said. Ali Potia made a similar conscious shift from advertising to management consulting. I have had a diverse work background before I joined ISB. Now the ISB edge will help me tie all of this into a nice little package and take it for ward, Ali noted.

Out-of-the-Box Recruitment Models This year, for the first time in the ISB, two groups of students were recruited as core management teams to run standalone businesses. The company offered CTC and equity stakes in the project, making it an attractive option for students with an entrepreneurial bent of mind. Homeward Bound This year saw a large number of students opting for domestic offers. Many ISB students come with international work experience and then are keen to develop careers in India. Increasingly, job content and location are overtaking other considerations. Dramatic Career Shifts As always, several students from the Class of 2007 have made dramatic career moves. From the automobile industr y to banking, from Transport Department to telecom, from being a doctor in the Armed Forces to a Fund financing NGO. To wrap up Placements 2007, V K Menon, Director, Career Advancement Ser vices (CAS), at the ISB, said, All the parameters be it number of international or national offers or kind of roles have shown a leap-frog growth, compared to last year. The acceptance of the ISB as a premier institute has probably prompted this batch to experiment with new roles and exciting offers.

Ace Roles Class of 2007 don new roles

Placement Trends This Year New Sectors on the Horizon While offers from Financial Ser vices sector and Consulting companies remained favourites, off-beat sectors like Real Estate, Oil and Energy, Media, Manufacturing, Microfinance, NGO, Education, Healthcare, etc. found enthusiastic takers.

The acceptance of the ISB as a premier institute has probably prompted this batch to experiment with new roles and exciting offers.
June 2007 | ISB

insight | 47

P L A C E M E N T S

E D U C A T I O N

Becoming a Global Entrepreneur

SMEs in India account for 95 per cent of establishment, 80 per cent of employment, anywhere from 50 to 60 per cent of GDP, and close to 35 per cent of exports. A sector as large as this till now has mainly been clothed and covered and concealed by various government policies, but it is all changing very fast.
hanges in the global competitive environment, along with liberalisation of the Indian economy, have resulted in new opportunities and challenges for Small and Medium Enterprises (SMEs) in India. Unlike the past, where SMEs operated in a protected, supplier-based market environment, today, they have to be prepared to confront global players head-on. To take advantage of attractive growth opportunities, SMEs must adopt a global outlook with regard to customers, suppliers, locations, employees, and sources of nancing. Said V Chandrasekar, Clinical Professor and Executive Director of the ISBs Wadhwani Centre for Entrepreneurship Development (WCED), SMEs in India account for 95 per cent of establishment, 80 per cent of employment, anywhere from 50 to 60 per cent of GDP , and close to 35 per cent of exports. A sector as large as this till now has mainly been clothed and covered and concealed by various government policies, but it is all changing very fast. To enable these SMEs compete with global giants, WCED and the Centre for Executive Education (CEE), in cooperation with the Wadhwani Foundation and the National Entrepreneurship Network, organised a programme called The Global Growth Entrepreneurship Programme (GGEP) in three metros, viz., Delhi, Chennai and Mumbai, from June 14-16, June 17-19, and June 20-22 respectively. GGEP was targeted at Senior Executives and Managers of SMEs, advisors to SMEs,

E X E C U T I V E

and entrepreneurs looking for global opportunities. Emphasising the need for such a programme, Chandrasekar said, SMEs are now evolving in sophisticated verticals like pharma, biotechnology, engineering design, and so on. Such sophisticated verticals require professional approach in management that would enable them to capture the best practices, work with international vendors and buyers, communicate effectively, and be a dynamic player with growth as a focussed strategy. GGEP was designed to benet key decision-makers engaged in growthoriented SMEs (automotive, textiles, food processing, pharmaceuticals, chemicals, and engineering). All participants were offered subsidy by way of partial scholarships, including tuition and course fee. The participants gained insights into several aspects such as formulation of a global strategy, determination of global competition, entering into global competitive arena, leveraging regional factors in a global network, identifying and evaluating global entrepreneurial opportunities, creating value by integrating global units, forging global alliances and partnerships, and launching a potentially global start-up. GGEP enabled the participants equip themselves better, and fully understand and analyse the global entrepreneurial opportunities presented by the global environment. It also helped them identify, evaluate, and explore opportunities for expanding their businesses globally.

48 | ISB

insight | June 2007

Participants learned the dynamics of global growth and managing SMEs as global businesses. GGEP sharpened their crosscultural negotiation skills and offered them scope for implementing various business models for globalisation, and leveraging value in global settings. The response to GGEP from the three metros reinforced Indian entrepreneurs hunger for global business initiatives and willingness to evolve structured growth strategies, based on learning. Excited about the programme, a participant, Parul Goyal, Wing Commander, Indian Airforce, said, ISB is an aspiration for me. With this programme, I am in sync with the entrepreneurial atmosphere in India. I want to develop myself as an entrepreneur in international trade. GGEP was delivered by distinguished Faculty, including from the London Business School, with hands-on industry experience. Mason Carpenter, the Pyle-Bascom Professor of Business Leadership at the University of Wisconsin-Madison, and one of the Faculty members who conducted the programme, said, Going global has three parts: the interest, the resources, and the experience. Im here to help the entrepreneurs to think about global opportunities and exploit them. Apart from being highly interactive and energised, the programme included a combination of presentations, case studies, and discussions with entrepreneurs. This is the rst time that any B-school organised such a programme in three cities, and at a subsidised fee for the public.

Gerry George, Ph D Gerry is Faculty Director of the Institute of Technology and Associate Professor of Entrepreneurship at London Business School. He is an expert on managing innovation in technology-based companies and has successfully launched start-ups in the biotechnology and service industries. He serves on the boards of high technology Gerry George companies and is actively engaged in guiding start-ups. An award-winning researcher and teacher, Gerry has published over 25 articles in leading scholarly journals including the Academy of Management Journal, Academy of Management Review, Industrial & Corporate Change, Journal of Business Venturing, and Research Policy among others on the topics of resource constraints, value creation, and innovation in large and small organisations.

Mason Carpenter, PhD Mason Carpenter is the PyleBascom Professor of Business Leadership at the University of Wisconsin-Madison. He works with the top management teams of public and private companies around the world regarding the formulation and execution of their organisations strategies, and the evaluation of new product and geographic market Mason Carpenter opportunities. An award-winning teacher in executive education, he also serves on the Executive Committee of the Business Policy and Strategy Division of the Academy of Management, and on the editorial boards of Academy of Management Journal, Academy of Management Review, Journal of Management Studies, and Strategic Management Journal.

June 2007 | ISB

insight | 49

E X E C U T I V E

Going global has three parts: the interest, the resources, and the experience. Im here to help the entrepreneurs to think about global opportunities and exploit them.

Faculty Prole: Truly World Class

E D U C A T I O N

E V E N T S

Sir Michael Arthur, British High Commissioner to India

ISB Happenings

Celebrating Kids at ISB

GSVC Semi-Finals

Kids Take Centre Stage On an evening, before the Graduation Day this year, 30 odd kids of ISB students, gathered at the School Recreation Grounds for an event. The event Honouring ISB Juniors acknowledged the invaluable contribution made by these children to life at the ISB, during the one year. The little ones, dressed in their best, collected their token mementos from Associate Dean, Savita Mahajan. A guitar recital by one of the children, an impromptu poetry recitation, and a magic show enthralled the audience. Truly, these children kept the campus vibrant through the whole year, while their parents toiled. The children are always a priceless contribution to the community-life present at the ISB, and keep the family-friendly spirit that thrives here, intact.

GSVC Asia Semi-finals Honour Innovation The Asia Semi-final round of the Global Social Venture Competition (GSVC) was hosted at the ISB this March. A panel of 12 eminent judges, comprising V Chandrasekar, Executive Director, WCED, and Reuben Abraham, Visiting Scholar, reviewed each of the 16 social venture plans on parameters of Financial sustainability and innovation. Project Dr Seed from Peking University and Project Verdacure from Thammasat University, Bangkok, were recommended for the finals. The home teams came up with innovative B-plans like the Media on Wheels which proposed to empower rural India through information access, using local idiom and dialect. Project Dawa Centre, an independent medicare unit to tackle lack of medical facilities in rural areas, was also noteworthy. A panel discussion on Business Strategies for Inclusive Economic Growth added significance to the event.

High Prole Visitors at the ISB A senior delegation from DuPont, the US multinational chemicals and healthcare company, visited the campus. Amongst the visitors were Richard Goodmanson, Executive Vice President and Chief Operating Ofcer, DuPont, Balvinder Singh Kalsi, President, DuPont India, and Homi C Bhedwar, Director, R&D, DuPont India. Another noteworthy visit was of a delegation from Motorola Inc., comprising Ron Sommer, Member of the Board of Directors, Motorola Inc., Pat Canavan, Senior Vice President, Global Governance, Motorola Inc., and Sammy Sana, Managing Director, Motorola Software Centre (India), who interacted with Ajit Rangnekar, Deputy Dean, ISB, and the faculty. Sir Michael Arthur, British High Commissioner to India, came to the ISB on a general visit, and met some senior ofcials. Arthur said that the ISB was a proof of the strong relationship between India and the UK, and expressed his keenness to fortify this relationship further. A four-member delegation from Pakistan, headed by Farrakh Qayyum, Secretary, Ministry of Information Technology (IT & Telecom Division), Government of Pakistan, visited the ISB. Qayyum stated that the ISB is an institution, developed with the collaboration and inspiration of the industry, and catered to industry needs.

Motorola delegation at ISB

50 | ISB

insight | June 2007

Undergrads visit the campus

Undergrads Spend a Day at the ISB As part of the ISB Youth Outreach Programme, which endeavours to increase awareness of management education and careers among undergraduates, students from across colleges like the IITs, Indian School of Mines, NITs, CMC Vellore, etc., spent a day at the ISB campus. They interacted with the ISB students and faculty and participated in various talk sessions. Above all, they got a feel of what a premier B-school is all about. Each of the visiting students agreed that the ISB experience helped them believe that potential has no boundaries.

New Goals Class of 2008 during Orientation

New Class, New Heights

The new Class of 2008 at the ISB epitomise exciting diversity. The batch boasts of journalists, architects, scientists, advertising executives, IAS officers, film producer, MTV Model-Hunt winner, chartered accountants, Armed Forces personnel, entrepreneurs, radio jockey, and a host of other professionals. There has been an increase in the number of doctors, and media and civil services personnel. We also have scientists, with several patents to their names! Another admission feat this year is increase in the number of women students, international students, and entrepreneurs. The new Class was ushered into the ISB echelon during Orientation Week. Various gyan sessions, talent nite, tug-of-war, Frisbee match, trivia quiz, relay across campus, and photography competition all helped the new class acclimatise with life at the ISB, and initiated the necessary camaraderie.

Student Recommendation Voted at Brussels Meet Students from the ISB among 30 other B-school students worldwide were invited to participate in a high-profile video conference consultation programme on Partnering to Combat Corruption and Improve Governance, organised by the World Bank Institute (WBI). The students recommendation was to complement the Brussels Conference, where heads of States and corporate leaders focussed on public-private partnerships, and on how to involve more private sectors in anticorruption agenda. The ISB students recommendation of leveraging technology as a medium of disintermediation to fight corruption was voted for presentation at the prestigious meet.

June 2007 | ISB

insight | 51

E V E N T S

Book Review
B
uilding Supply Chain Excellence in Emerging Economies, edited by Hau L Lee and Chung-Yee Lee, Springer 2007, 465 pages, is a timely publication, with 19 papers and preface by the editors. This volume has an interesting collection of articles from academics and consultants, mostly living in North America, except possibly Editor Chung Yee Lee. There are three articles on India, one from Mexico, one from Czech Republic, eight from China, and the rest, general articles all dealing with supply chain and logistics issues. Managing supply chain networks in rapidly developing new economies in China, India, Hungary, Vietnam, Costa Rica, Mexico, Brazil, etc., is a big challenge. Apart from issues relating to infrastructure, labour productivity and lack of industry inputs (such as power, water, etc), there are governmental regulations that one needs to address. Another factor is speed of simultaneous growth in more than one economic sector such as manufacturing and services, or agriculture and manufacturing, etc. These emerging economies are, in fact, growing faster than the established industrial economies of the world. This book is organised in three key sections. The section on Global Supply Chain: General Strategies and Framework has ve chapters developing the overall framework in managing global supply chains and developing strategies, given the infrastructural and cultural characteristics of the emerging economies. Section 2: Supply insight | June 2007 Chain Management in Emerging Economies: Challenges and Opportunities describes the challenges and opportunities in supply chain management of emerging economies the infrastructure constraints, the logistics inefciencies, and limitations in service operations and discusses how to create opportunities in such adverse conditions. There are six chapters in this section: one, dealing with India, and the other ve on China. The nal section on Building Supply Chain Excellence: Innovations and Success Cases is devoted to a number of industrial cases that showcase innovative approaches to gain excellence, and share insights and lessons from such experiences. It is worthwhile to compare this volume with the one edited by me on Achieving Rural and Global Supply Chain Excellence: The Indian Way, and released by the Honourable Prime Minister, Dr Manmohan Singh on Dec 5, 2006. We had four articles on what we call rural supply chains, which are the life-blood of emerging economies, and three on initiatives by the governments to attract FDI, such as special economic zones, infrastructure build up and nally attractiveness of Indian states. This book has India focus and all the articles are written by researchers from the Centre of Excellence, Global Logistics and Manufacturing Strategies (GLAMS). I hope that these two volumes will stimulate researchers to gain deeper understanding and develop methods in operating supply chains in emerging economies.
Building Supply Chain Excellence In Emerging Economies Edited by Hau L Lee and Chung-Yee Lee 2007 Springer International Series Reviewed by N Viswanadham, Executive Director of GLAMS and Clinical Professor of Operations, ISB.

52 | ISB

Painting by M F Hussain at the ISB main reception

Subscriptions: For details contact subscribe_insight@isb.edu