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ITC: Enduring Value

Sab Saath Baadhein

Media Centre


How innovation really works 12 May 2010

Business Today

A business model that allows a company to procure agri-products directly from farmers, and which allows farmers online access to faraway markets; a newspaper that's customised to meet regional requirements from Day 1 itself; a company that extended beyond its manufacturing and tech capabilities to build a distribution network, offer content at never-before price points and in the process build a sustainable brand in the home video space. Those are just three examples of outstanding innovation— and you will read more about them in the pages ahead. They're not just new products or service offerings—if me-toos can swiftly come in and do the same, then that wouldn't qualify as innovation in the first place.

So what then qualifies as an innovation? For starters, not everything that is new counts as innovation. It has to be path-breaking, potentially disruptive and sustainable. How can companies do this? One way is to use what Monitor calls the Ten Types of Innovation(TM)  a proprietary framework that helps broaden the drivers of value of a particular innovation along a much wider spectrum than just what the product or service "does". Breakthrough innovations almost always include multiple types of innovation: at least 3-4 out of the 10 types in the Monitor framework.

FIVE MYTHS OF INNOVATION

  • Innovation is about creating a hot new product... New products are swiftly copied and rarely enjoy sustained profits.
  • Innovation comes from being creative... It is far likelier to come from being disciplined.
  • Innovation is expensive, demanding lots of resources... Failure to innovate is what is costly.
  • Create hundreds of ideas because of high failure rates... Fewer, bolder ideas based on your company's capabilities and unmet customer needs you discover work best.

Early financial analysis is key to approving concepts... Nearly always wrong—build prototypes instead  How does the "Ten Types of Innovation" framework apply to Indian examples? To find answers to such questions, Business Today and the Monitor Group jointly interviewed key leaders at eight innovative organisations to study the reasons behind the success of their innovations. Each of the eight organisations exhibited four or more of the Ten Types of Innovations. Each illustrates how true breakthroughs are usually a set of innovative elements that work together as a holistic system and reinforce the competitive strength of the new product or service.

Innovation is about creating and capturing value through nontraditional approaches. It isn't only for rapidly changing, technology companies either—the traditional brick and mortar companies included in our study, from agri-commodities to print media, have each realised market success and impact in their industries from innovation.

BT-Monitor has selected eight organisations to profile in this study. Though they come from many industries—and even the social and government sector—each has demonstrated outsize impact in India based on its innovation. We carefully edited the selection to include only those companies whose efforts have not been recently or extensively reported (like the Tata Nano or the Aravind Eye Hospital). What's more, it's easy to confuse sundry launches and claims of differentiation and a competitive edge with innovation, and BT and the Monitor team looked at several examples of innovation before deciding on the final eight.

Understanding the 10 types is the first step toward being able to use them in your own innovation efforts. The remainder of this article defines each of the 10 types—broadly broken into four heads of finance, process, offerings and delivery—and provides illustrations.

Profound innovation was observed around business model, network, product performance, and customer experience. However, there is markedly less innovation among Indian companies around product system, service, channel or brand. Product systems and service (post-purchase) can enhance customisability and cement ties with customers by engaging with them throughout the ownership cycle, not just at purchase.

'Finance' Innovation:
Re-inventing business models and creating extended networks

Innovative companies are the ones who succeed by defining new economic models and create a more permeable sort of enterprise: One that aligns incentives across a broader network to creating and capture new value.

For instance, Moser Baer created a disruptive change in the Indian home entertainment industry by changing the basis of competition along with its economic model.

Companies can also be radically successful innovators when they reconsider the role they play in the ecosystem of their industry.

Innovative companies are finding new ways to position themselves within a non-linear network. Networks provide a way for companies to leverage each other's offerings, customers, and capabilities. Network and alliance innovations reflect a clear definition of each partner's strength and weaknesses, have well-crafted shared operating processes and technology, and rocksolid governance.

During the study we found compelling examples of organisations in India using networking innovations to gain sustainable competitive advantage. Fabindia draws its strength from close financial and operational ties to 17 community-owned companies which form the supplier base for its hand-crafted products. Through these tie-ups, Fabindia is able to deliver high quality products and make artisans a part of the wealth it helps create, aligning incentives with entities beyond the formal boundaries of Fabindia as a company.

We also observed organisations using networks to accomplish two other important goals. First, networks can act as a direct source of revenue especially in B2B, short for business to business, arrangements, as with the case of ITC's e-Choupal platform. Second, we saw organisations leveraging the technical expertise of network partners to create open innovation networks. Tata Consultancy Services (TCS) has created an "extended co-innovation network" which constitutes, apart from employees, Tata group companies, academic institutions and other strategic partners. This network has helped TCS create numerous marketable innovations.

'Process' Innovation:
Guts and imagination

The activities a company performs or the capabilities it leverages in order to deliver its product or service are categorised into two types: Enabling Process innovations and Core Process innovations.

Enabling Process innovation supports the enterprise's primary work, value delivery, and workers. Good enabling process innovation can help attract talent to the organisation and help people do their work faster, more easily, more efficiently, and more profitably. These processes are often the "infrastructure" that enables market-facing processes and offerings, and deliver streamlined support.

The research-intensive approach adopted by Dainik Bhaskar to launch its Gujarati daily provides a good example of how enabling processes can positively affect the outcome. Whereas most media companies rely on internal expertise to develop the content strategy for their offerings, Dainik Bhaskar used a form of "crowdsourcing" to get inputs from a large number of potential consumers in order to structure the content of its new newspaper. This not only enabled the creation of a successful product but also helped in building a customer connect that subsequently resulted in high circulation .

Core Processes are the capabilities proprietary to an enterprise that others can't duplicate. For product companies, this often involves their R&D, manufacturing, and marketing capabilities. Core process innovation typically involves dramatic changes in "business as usual".

Gyan Shala, a one of its kind budget private school in India, has innovated significantly in its core process: pedagogy. It creates detailed teaching manuals with step-by-step instructions for each minute of each day, including answers to probable questions that students may have. Gyan Shala's model is demonstrating the impact of core process innovation in even the perennially challenging arena of education.

'Offering' Innovation:
Breakthrough change, not continuous improvement

Changes to the functionality of the product/service are nearly always where conventional innovation teams start. And there is an important role to play for incremental innovation— refreshing a product or service on an annual or more frequent basis can keep customers returning and take advantage of continuing technology advances. However, companies that aim to conquer a new market or radically reshape their position need to think bigger—and differently.

In the organisations studied, BT-Monitor found that companies that innovated substantially on product performance started with a deep understanding of customer needs or industry shortcomings. They showed a willingness to look outside of the company's internal capabilities, and beyond their existing customer base. Since this often means trying to deeply understand the needs of new audiences that are not currently served by the company, this challenge may require an explicit mandate to be set forth internally since it's typically no one's job to try to understand people who are not current customers.

In our study, this is illustrated by how the financial services business unit of TCS started out by striving to understand the banking requirements of the rural Indian. Later, by leveraging its extended co-innovation network, it was able to create a branchless banking platform that was scalable in rural areas with poor infrastructure and connectivity to bricks and mortar facilities.

Product System innovation demonstrates the ways in which several individual products connect with one another to create a larger system, which can lead to enhanced functionality. These innovations often bridge the needs gap between constraints imposed by production complexity, and helping individuals fulfil unique requirements.

ITC e-Choupal's recent improvements to its well-established village kiosk model of agri-commodity procurement creates a platform that offers new consumer goods partners a cost effective way to "plug in" to the rural consumer. At the other end, the resulting wide range of products helps address a number of unmet needs of farmers. The system spans the offerings of multiple companies, linked together by a distribution model that leverages ITC'S proprietary channel.

Companies also innovate on the value they provide to customers that follows the purchase of the core product. This is the domain of service plans, customer service, information and education, and warranties/repairs. Service innovation is typically focussed on helping customers receive the full value of the products they purchase and use. For example, FedEx not only promised reliable overnight delivery, it innovated around the entire usage context to create automated tracking and integrated billing.

In India, we see relatively fewer companies innovating around postsale service. Premium products such as watches, hotels, and high-end consumer electronics are beginning to be sold along with opportunities to join customer loyalty programmes, receive guarantees, and interact around personalised information. However, there is clearly room to offer a wider audience a rewarding, full lifecycle experience.

'Delivery' Innovation:
The customer connect

How a company gets its product to the customer is the domain of delivery. There are three facets of delivery where innovation can yield disproportionately better results—Channel, Brand and Customer Experience.

Channel innovations encompass all the ways that a company gives a customer access to its offering. Successful channel innovations use an ideal mix (retailers of all sorts, wholesalers and warehouses, distributors, call centres, catalogs, Internet, home delivery, etc.) to permit customers to buy what they want, when they want it, and how they want it. For example, Nike has created eye-wateringly expensive retail cathedrals called NIKETOWN stores to use as product showcases. What most people don't know is that these get their primary use as training facilities after closing!

Brand innovations are ways that companies use their brand in novel and powerful ways. ITC e-Choupal is able to regularly add and successfully market new product and service categories through network partnership.

For this, it leverages brand e-Choupal which has, over time, built cache in the rural economy.

Finally, how your customers/consumers feel when they interact with your company and its offering can be a powerful source of differentiation that creates a long lasting emotional attachment.

Moser Baer was able to reduce the home movie release window from six months to 10 days in some cases — a feat that exceeded prevalent customer expectations.

The BT-Monitor initiative sought to define more precisely than before exactly what innovation is, and provide an analytical framework and common language that senior executives can use when thinking about and acting on innovation. The examples — drawn from the corporate, social and government sectors — demonstrate the value of the framework and the messages for professionals: get beyond products, use many types of innovations to make them defensible, start with a market and customer-centric view, and challenge orthodoxies.

TEAM MONITOR AND…

  • Nikhil Prasad Ojha is the Managing Partner for India at Monitor Group. His work is focussed on growth and transformation agenda at Indian businesses.
  • Parijat Ghosh is a Partner at Monitor Group with extensive experience in Innovation, Corporate & Business Unit Strategy and Capability Development.
  • Sarah Stein Greenberg is a Senior Project Manager based in Monitor Group's Delhi office focused on innovation and consumer research for new offerings. She has worked on innovation across the US, East Asia and India.
  • Anurag Mishra is a Senior Consultant with the Delhi office of Monitor Group. He has worked on large restructuring and growth strategy projects.

…THE BT TEAM THAT WORKED ON THE PROJECT:

E. Kumar Sharma, Suman Layak, T. V .Mahalingam, Shalini S. Dagar, Shamni Pande, Puja Mehra and Kushan Mitra

Innovation Special — ITC e-Choupal

From Mandi to Market

When tobacco giant ITC flagged off its agri-business in 1988, it was operating in a protected economy, procuring agri-products from mandis and exporting them. However, the '90s saw the opening up of the Indian economy, bringing opportunity for many—along with more than a few challenges.

According to S. Sivakumar, Chief Executive, ITC Agri Business, it was a tense situation and the challenge was to innovate or perish. "We did not have the resources to compete with the global majors with multiorigin sourcing capabilities and neither did we want to follow the business model prevalent in the unorganised sector, which gets its margin through contract defaults and tax evasions."

ITC realised that by owning the agri-product procurement value chain, they could serve the needs of the end customer better and reduce their "true cost of contract." Because ITC maintained oversight of the goods for a broader part of the chain, buyers were able to realise substantial savings in their true cost of contract, which included, apart from the product cost, other elements like quality variability, cost of delays, warehousing, packing and shipping costs.

Key Challenge

To build a unique and competitive channel to reach farmers, which is different from the model used by unorganised players and MNCs.

Innovation

An Internet-based two-way platform to procure from and sell to farmers, which has evolved into a mobile-based channel that offers services too.

This was the birth of e-Choupal—a shift in the business model of procuring from mandis to directly procuring from farmers. It led to substantial reduction in procurement costs, and also brought consistency and predictability in the supply chain.

Today, there are some 6,500 e-Choupal centres and all of 4 million farmers who use the e-Choupal platform across 40,000 villages in 10 states. However, fewer people are aware of the extent to which the agri business division of ITC has continued to innovate around the original model, evolving it to its current form as a true platform for engaging rural consumers and producers. Because platforms typically host an array of commercial partners and serve a wide range of customers, they cross many types of innovation; this is certainly true of e-Choupal.

For ITC, e-Choupal was originally a channel innovation that was able to extend its reach through a VSATbased IT network, even in villages with no proper road connectivity. In each village, a trusted community member is appointed as a sanchalak to man the e-Choupal; this helps faster awareness of e-Choupal brand through word-of-mouth. Since the sanchalak is equidistant from ITC and the rural community, he plays a different role than a typical channel partner such as an end-retailer or a distributor would. However, the innovation did not stop here.

ITC realised that to earn greater profits from the channel infrastructure it had built and better protect the business model, it could create a more dynamic, two-way flow of goods through that channel. Between 2005 and 2007, e-Choupal began offering third-party access to rural India. Currently, there are 160 partners from domains as diverse as seeds, consumer products, finance, insurance and employment who sell their products to rural consumers through e-Choupal's channel. ITC leverages brand "e-Choupal" to promote these partners.

Charging for access to the platform helps ITC recover substantial costs of infrastructure and operations. Second, coupling its core offering of "terrain expertise" (which was initially built through the commodity procurement chain) with "domain expertise" of its network partners, e-Choupal is able to offer new products/services to its village customers, which broadens their access to useful goods and opportunities. For the network partners, e-Choupal is a cost-effective way to access the rural consumers without building their own distribution channel. This was e-Choupal.

But the innovation did not end there: The procurement network that was transformed into a product platform is now getting amplified into a service platform. e-Choupal is actively looking at employment, training and agriculture services business (productivity enhancement options that could double yields, respond to climate change, etc.) as new anchor businesses.

As the model evolves, it is equally conscious of the need to address the most pressing problem in the agri-space: producing abundant food that is safe and healthy, yet climate-friendly. The next level of innovation that ITC e-Choupal is engaged in focusses on ways to align small farmers with the war against climate change.

At ITC, the innovation imperative has come from two sources. The external environment (like when the Indian economy began opening up or, more recently, the negative effect of high food prices and the resultant government intervention on e-Choupal's anchor procurement businesss) has caused ITC to learn how to adapt quickly and innovate under duress. At the same time, the internal approach to innovation—multi-dimensional, quick to leverage internal capabilities in a cross-functional way and learn how to apply them in new situations— gives the e-Choupal team the conviction to try radical new ideas over time.

The impact of this model is widespread. Other than its wide reach, the e-Choupal model has led to 4-7 per cent reduction in the true cost of contract for different buyers in the commodities business. For ITC, there has been a 40 per cent reduction in transaction costs of procurement. This channel throughputs more than Rs. 2,000 crore in sales for ITC and its partner companies. Through e-Choupal, which will personalise crop management advisory for farmers, crop yields could potentially double.

MONITOR'S TEN TYPES OF INNOVATION FRAMEWORK: ITC e-CHOUPAL

1. Business Model: Bypassing mandis from the procurement process by directly connecting with farmers. Transforming the procurement channel to a distribution channel building a services platform.

2. Networking: Transforming e-Choupal network into a platform to partner with multiple agencies to provide value-added services.

3. Enabling Process: Leveraging the established credibility of the sanchalaks to play a specific role in building up the original e-Choupal channel.

4. Core process: Setting up a wide IT and logistics infrastructure even in remote places.

5. Product performance: Reducing cost of contract (buyers), offering value-added services (farmers): Low-cost access to rural India (network partners).

6. Product systems: Offering a range of products/services to address farmers' needs. Offering network partners the ability to easily "plug in" to the network.

7. Brand: Leveraging brand "e-Choupal" to promote sales of its FMCG and network partners' products/services.

8. Customer experience: Bringing transparency and ease to farmers, both as suppliers of agri-products and as customers of ITC's value-added products/services.
Organisations that achieve breakthrough innovation usually cover at least 3-4 types of innovation included in the framework. ITC e-Choupal fulfils eight.

To read the other innovation stories please Click Here

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