Customer Centricity vs. Innovation

I can’t count the number of times I have heard an organization or company claim itself to be completely customer centric and brag about how everything they do revolves around the customer. The first question that comes to my mind in such situations is whether that organization can be innovative at all in any meaningful way.

Sure, focusing on making customers successful is critical to sustaining and growing any business. Driving the adoption of your products by customers, delivering on the promise of the brand and helping customers realize the value proposition communicated to them are all equally important.

However, being excessively customer centric has its own set of problems. In a majority of cases, customers typically demand fixes to product issues or at best suggest incremental improvements. In software, for example, changes requested could be performance or reliability improvements, making the user interface more user friendly, extensions to platform support and so forth. These are evolutionary ideas that make your products more mature, usable and stable.

But, you can’t rely on customer input to come up with the next revolutionary idea. This is the gap that product managers have to fill. Unfortunately though, many product managers seem to have cultivated the habit of taking every proposal, small and large, to their favorite set of customers for advice. This is useful for minor improvements, but doesn’t work at all for grander ideas. In the latter case, customers are most likely to be dismissive of the idea and may suggest that you focus on stabilizing your current product portfolio before venturing into newer areas.

This observation seems to be true across a variety of industries; from software to fast food. The President of Yum! Restaurants International (Yum! Is the parent company of KFC, Pizza Hut and Taco Bell), Graham Allan, who was a guest speaker in one of my International Marketing classes shared his observation that market research studies conducted prior to launching a new concept in a new market were of very limited value. For example, consumers in the Middle East did not respond favorably when asked about their opinions about launching Pizza Hut in that region, but once the chain opened, they simply couldn’t get enough and the concept has subsequently been a roaring success. These same consumers now regularly provide feedback to the restaurants about ideas for new toppings etc. – the same kind of incremental improvements that they are best at suggesting.

Moral of the story: Do your due diligence, but don’t be dissuaded by less than enthusiastic feedback from prospects when bringing disruptive or revolutionary products to market. There is no substitute for your own judgment in such cases.

Your thoughts?

The Indian Paradox

I recently had the opportunity to meet and attend a talk by R. Gopalakrishnan at Berkeley. He is the Executive Director of Tata Sons, one of the largest industrial conglomerates in India with annual revenues of over $22 billion, Chairman of Rallis India and Vice Chairman of Tata Chemicals. The talk was titled “Mega Trends in India” and the tag line was “India is more than just IT”. I found his insights extremely impressive and thought provoking.

The central theme of the talk was how unconventional the Indian story is and about how most things in India seem so topsy-turvy. He focused on explaining what is going on in India as a set of paradoxes that completely defied logic and conventional wisdom.

Paradox #1
Even though India is a developing country, the consumption patterns of the domestic population actually mirror those of developed western economies. Nearly 60% of India’s GDP is attributable to consumption, resembling the spending behavior of the Americans. The growth in India is actually fueled by domestic consumption and spending, defying the conventional wisdom that the road to prosperity for developing nations has to pass through a phase of heavy focus on building an export oriented economy. This is also in stark contrast to the other strong success story in Asia, namely that of China that continues to run massive trade surpluses through solid exports, low domestic consumption and high personal savings rates. A marketer’s dream is a society that consumes.

Interesting fact: India Inc. has spent more money buying foreign companies than the total foreign direct investment that has flown into India, which again defies the perception of India as a poor, developing, agriculture-based economy.

Paradox #2
Urbanization in India has been through the transformation of villages into towns and towns into cities; not as much driven by migration of villagers into larger urban areas, as has been the case with other developing countries. Mr. Gopalakrishnan attributed this to the entrepreneurial spirit of the common man in India and the technological progress that has leveled the playing field and opened up new opportunities to people in even the remotest corners of the world.

He also added that studies have shown that when urbanization reaches 50%, there is usually an acceleration in the subsequent rate of growth and development. India is apparently just about 3 years away from this tipping point.

Paradox #3
The reform process that today’s developed countries have progressed through apparently went through the following stages:

Land/Agriculture > Light Manufacturing > Infrastructure > Heavy Industries > Services

While the rest of the developed countries went from left to right, India is traversing in exactly the opposite direction. The services sector is already quite mature with the presence of large players in financial services, insurance etc. Heavy manufacturing is just beginning to take off with the consolidation of steel and automobile manufacturing plants, for example. The focus is also shifting to infrastructure improvements with the government targeting to spend almost 8% of GDP in this area compared to the current 3% level.

Paradox #4
The final paradox he talked about had to do with the stages of evolution that societies in developed countries went through. He noted the following sequence of evolution:

Capitalism > Constitutional Liberalism > Full Franchise Democracy

Constitutional Liberalism here refers to things such as property rights, intellectual property protection etc.

The argument here was that countries such as the United States and Great Britain progressed from left to right (for example, women did not have voting rights until 1920 in the U.S. even though there were fully functional capital markets in place), whereas India is making the journey from right to left.

Overall, it was a fascinating event and time well spent. Mr. Gopalakrishnan is an intellectual and an unusual combination of a savvy businessperson, inspiring speaker, pragmatic optimist, a true patriot (without being jingoistic) and a social reformist all combined into one single package. India could definitely use more people of his caliber.

Relative valuation techniques for nations?

After recently wrapping up a class on Financial Information Analysis that I took this Spring, I began to wonder whether the valuation techniques used to value financial assets could be applied in a broader setting, perhaps to value entire national markets. To begin answering this question, I decided to pick two countries that I am most familiar with and compare some broad economic attributes.

With the current weakness in the U.S. dollar and the corresponding strengthening of the Indian rupee, the total market capitalization of all stocks listed on the Indian capital markets crossed the 1 trillion dollar mark for the first time. Coincidentally, the country's GDP also exceeded the 1 trillion dollar level at about the same time. With this rise, India is now one of the top 12 nations in the world with aggregate annual national income greater than 1 trillion dollars.

In the valuation world, P/S is a popular ratio which expresses the price of an equity asset as a multiple of the sales of the firm. This is similar to the even more popular P/E ratio which compares the price of the stock with the earnings of the company. P/S is particularly popular in M&A transactions and most commonly used in situations where the target company has negative earnings. The P/S ratio for the Indian markets is 1 because both the total market capitalization (equivalent to the price of the stock) and the GDP of the country (equivalent to the sales of a company) are approximately $1 trillion.

Now, let's do the numbers for the Unites States. The total market cap of all public companies traded on American exchanges is somewhere in the 27-28 trillion dollar range. The GDP number for the U.S. as of 2006 stood at $13.24 trillion. So, P/S for the U.S. is roughly 2, twice that of India.

Similarly, the ratio for China is a little more than 1.

The P/S ratio itself has a lot of flaws. It is an inconsistent ratio because it compares the price an equity investor is willing to pay with the sales of the company which all stakeholders including lenders (not just equity holders) have a claim on. Applying this to countries may be even more flawed, but it is an interesting exercise nevertheless.

Taking this one step further is even more interesting. When we factor in growth, it is easy to see that the PEG ratio (which measures the PE multiple investors are willing to pay per unit of growth) for the U.S. is 2/3 or 0.667 and the ratio for India is about 1/9 or 0.11. From valuing stocks, we know that lower the PEG ratio the more attractive the stock, all other things being equal.

These quick calculations seem to suggest that the U.S. markets are over-valued compared to the markets in China and India. Time to short the U.S. markets and go long in India and China?

Interesting fact: The total global market capitalization was $51.225 trillion in March 2007.