TECH TALK: My Mental Model: SMEs and India

Recently, Tech Talk completed three years. That is, more than 750 daily columns of about 500 words each. For me, the Tech Talk columns have been a constant feature of a weekly writing schedule (normally Sunday mornings). It has instilled a discipline of reading, researching, thinking and writing. For this Tech Talk series, I thought it would be a good idea to some of the key concepts that shape my current writing, thinking and business life.

Much of my writing has centred around two topics: the first deals with small- and medium-sized enterprises (SMEs), and the other with India. The two questions addressed: how can SMEs grow, and how can we build the new India? Over time, the second topic has become more specialised – for India to be transformed, it is important to consider how rural India can be developed. At one level, both the challenges seem very different and far removed from each other. But if one starts thinking conceptually about the two issues, there are a lot of similarities, as we shall see later.

I first started thinking about the SME problem more than two-and-a-half years ago. At that time, I was keen to create a low-cost eBusiness suite for SMEs, which could be made available for the equivalent of a few hundred rupees per person per month. I could relate to at least some of the problems faced by SMEs because I had been running just such an enterprise for many years. As I looked at SMEs more closely, I realised that the more fundamental problems that needed to be addressed were two: how to get total cost of ownership of computing low enough that they could use computers, and how to help them grow their business enough so that they could make the investments in technology. These are the twin traps of technology and marketing that we needed to get SMEs out of.

And thus, I embarked on a journey where the components of the solution have come together over a period of time. What I had thought was a simple, software problem (which could be solved by using open-source software) turned out to have many layers in it and is much more complex. The solution did not lie in just providing cheap software (after all, SMEs could as easily pirate what is currently available and thus get the software for zero cost). It was also not about only trying to provide cheaper computers (refurbished PCs). The problem needed to be thought from a much wider perspective. There were many elements of the value chain that all needed to come together – for example, user education, distribution, support, financing also needed to be addressed.

I also think a lot about India, and how it is changing. Our generation has been fortunate enough to witness a near miracle in the past decade. From an isolated, self-contained mass of a billion people, we are now being spoken of as one of the two biggest markets of the world, with China. Our people, long seen as a liability, are now being seen as our biggest strengths. As China becomes the manufacturing capital of the world, India is being thought of as the services destination. As incomes rise, the landscape in urban India is changing. The heady mix of better roads (even some expressways!), malls, brands and cheap credit are fuelling a consumer spending boom in a growing part of urban India. More importantly, the mindset of people was changing to a belief that tomorrow will definitely be better than today. The government still has its mysterious, illogical policies which hold some sectors back, but that is now becoming less so. Just one indicator of this transformation: India will add more phone users this year than in the first five decades after Independence in 1947.

Tomorrow: The Rural India Conundrum

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TECH TALK: My Mental Model: The Rural India Conundrum

Even as a “shining India” aims to reach China-like growth levels, there was one realisation which was clear to me: our growth will not happen unless something is done to bridge the digital divide. While we are now paying a lot of attention to the physical infrastructure of the country, not enough thought has been given to then digital infrastructure. It was this thinking that led me to put together some ideas on what a called “India 3.0” – a digitally bridged nation, not just in its urban locales but also in the rural areas, which is where 70% of the populace lives. My SME thinking had helped create a framework wherein one could also think of providing affordable computing and communications solutions for the other, languishing India.

My approach in solving problems has always been that of a technologist. I tend to put technology at the centre, and then see how it can be applied in different scenarios. For me, rural India offered yet another market opportunity for the ideas that I had been thinking about for the SME segment. But, I was making the same mistake that I did when I had started thinking about the solutions for SMEs. Technology could not be the end goal – it was only a means to the end. This was made amply clear, thanks to a fortuitous connection made via my weblog.

As I was undertaking this journey of interlinked thought and action, I was introduced to Dr Atanu Dey by Reuben Abraham, who happened to be reading my weblog on some thoughts on transforming rural India. This series had come about as a precursor to a visit to Madhya Pradesh to see what role could technology play in rural development. My solution – setting up TeleInfoCentres in every village – seemed like a good way to sell a lot of computers! But I had missed out one key point: distributing the resources would make it very expensive (the cost of providing reliable power via battery packs could be as much as half the cost of the computers themselves), complex (providing support at the village level would be difficult), and at times, simply impractical (lack of connectivity would make it harder to provide updates).

This was the time when I read Atanu’s paper on RISC (Rural Infrastructure and Services Commons). [The paper can be downloaded from Vinod Khosla’s web page.] Atanu had looked at the same problem of rural development but had a very different way to address it – the solution lay not in providing computers at the village-level, but in concentrating resources and investment to create top quality infrastructure to service about 100 villages and a population base of 100,000 people within a bicycle-commute distance of about 15 kilometres from the centre. Essentially, it was about creating the equivalent of an operating system (the infrastructure of 24x7 power, broadband connectivity, air-conditioning, sanitation, water) so that various application developers (service providers) could use the standardized interface to offer their solutions (banking, insurance, agriculture extension, education, market making, healthcare, entertainment) to the rural population.

Tomorrow: Making Connections

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TECH TALK: My Mental Model: Making Connections

As I interacted further with Atanu, I began to see the commonalities in the SME and rural spaces. Both are large, invisible markets (opportunities), both are victims of co-ordination failures, both can leverage technology for their betterment but need much more than just ICT (information and communication technologies), and in both cases, entrepreneurial ventures can start in India and then be expanded to other similar emerging markets.

As I thought further, I started trying to build a mental model which could address both of these problems. Therein lay an interesting process of thinking on how to actually solve a problem. The key lies in looking at the totality of the problem – getting to the root. What are the core causes of the problem? Here, one needs to separate the effects from the causes. Then, start thinking about the solutions that need to be implemented to address the causes. Finally, put in place a roadmap to implement the solutions. It is not as easy as it sounds! Thinking broadly and deeply is perhaps one of the hardest things to do – we tend to want to start doing something quickly, rather than spend time contemplating on what to do. But unless we have thought enough and come up with solutions to address the core cause, we are not going to get anywhere.

This is where my weblog has come in useful. Ever since I started the weblog in May 2002, it has become a platform for me to think and air my views on different topics. I started the blog for a selfish reason – to force me to make reading a daily part of my life. This is one mistake I had done in the years that I was managing IndiaWorld – my reading had become narrower and narrower as time progressed. I did not want that to happen again. So, I decided that if I had to write and link to interesting articles every day, it would also put the discipline of reading. And that is exactly what has happened.

Along the way, something else happened. People started reading my weblog, and writing back. This started a feedback process for the ideas. More importantly, it become a way to meet up and share ideas with people. Today, the blog posts, including the Tech Talks, have become the single most important platform for both meeting new people and generating fresh ideas, both of which help refine the models that are being created to address the two problems that I have discussed.

There has been another theme I have touched upon often in my writings – that of entrepreneurship. It is entrepreneurs who make dreams come true, as they imagine worlds beyond the resources that are available to them. They are willing to climb over slippery rocks in their quest of creating a new future, one that is yet unknown to others, but which is clearly visible to them. Enterprise is what built America, and enterprise has the potential to rebuild a new India. The SME and rural markets present opportunities for entrepreneurs to come up with solutions.

Tomorrow: Open-Source Ideas

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TECH TALK: My Mental Model: Open-Source Ideas

Much of my writing and thinking is influenced by another dimension: the feedback mechanism caused by business actions. What I am writing about here is exactly what I seek to implement in my entrepreneurial venture, Netcore Solutions. This thread connects the vision and ideas to the marketplace, putting in place a self-correcting mechanism. It is also why I believe that every entrepreneur should have a weblog. Let me explain.

The concept is what I call “open-source company”. A willingness to honestly and transparently share one’s ideas in the open with a larger, interested set of people can help in creating non-linear external response and influence on the ideas and actions. By sharing one’s ideas and actions in the public domain, entrepreneurs lend themselves to feedback which is otherwise a significant, missing component in their actions. It is what can cause people to be blind-sided. There are many smart people out in the world who have different perspectives. By willing to discuss openly one’s ideas, the entrepreneur can engage the brains of the very best minds, thus reducing the risk inherent in the venture – in very much the same way that the world of open-source software is considered to be more secure because there are so many eyes looking at the code and even if there are bugs, they are caught and fixed very rapidly.

What the weblog does for an entrepreneur is give the platform for sharing ideas and building a community – a kind of “brains trust” – around the ideas. In a marketplace where part of the battle is for mindshare, the weblog can provide a very powerful tool for entrepreneurs to get exposure to and feedback from people whom they would not normally have encountered in their regular lives. That is why I call it non-linear. There are so many people we interact with in our personal and professional lives – these are normally friends of friends, or business associates. What the weblog does is create “weak ties” – readers who spend a few minutes every so often thinking about what one has written. There is no other association or engagement – the readers can as easily go away and stop, as they can be drawn into what the writer says. What the entrepreneur needs to do is leverage the strength of these weak ties – they open up worlds across industries, across geographies in ways which are otherwise nearly impossible to do.

All of this has a strong influence of what the entrepreneur thinks and does. As we will see, a lot of our actions and ideas need to combine and build on the best business models and practices of others. Having people point out some of these to us compensates for the limited learning that we have had in our academic careers, where the focus has been more on vertical specialisation rather than broader perspectives.

What I have found is that some of the best ideas and refinements to one’s core thinking comes from unintended interactions: meetings with near strangers, comments on an unrelated topic which sparks off a connection, reading something very different. Diversity is very important as one seeks to put in place these few key governing concepts and principles which make action easy and obvious. This happens over a period of time. And, even though it can never guarantee success, it surely can reduce the risk of failure by orders of magnitude.

Tomorrow: The Outline

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TECH TALK: My Mental Model: The Outline

As we think about possible solutions, it helps to have some simple models in which one can fit things in. As Charlie Munger of Berkshire Hathway said (Outstanding Investor Digest, December 29, 1997 – my thanks to Chetan Parikh for pointing this out):

I've long believed that a certain system – which almost any person can learn – works way better than the systems that most people use. What you need is a latticework of mental models in your head. And you hang your actual experience and your vicarious experience (that you get from reading and so forth) on this latticework of powerful models. And with that system, things gradually get to fit together in a way that enhances cognition.

And you need the models – not just from one or two disciplines, but from all the important disciplines. You need the best 100 or so models from microeconomics, physiology, psychology particularly, elementary mathematics, hard science and engineering [and so on].

You don't have to be a huge expert in any of those worlds. All you've got to do is to take the really big ideas and learn them early and well.

It is very hard to do what Charlie Munger says. That is why there is only one Berkshire Hathway, only one Warren Buffet, and only one Charlie Munger.

What I've tried to do is to evolve a few basic principles for my work life (of which this writing is a key part of). These have evolved slowly over the past couple of years, and are probably evident in much of the Tech Talk writings. What I want to do in this series is to distill out the key elements of my thinking so that the context of what I write here and on my weblog becomes clearer. This also gives a framework on how to think about possible solutions on the two sets of problems of SME growth and rural transformation.

So, here is my thinking in one sentence: Creating disruptive innovations for the bottom of the pyramid requires ecosystems of integrated solutions with local distribution to bridge divides.

The words are not as complicated as they seem! Over the coming columns, I will explain each of the phrases I have used here in detail. Individually, they may mean a little. Taken together, they present – I think – a rich array of opportunities for envisioning and creating the future. They offer a platform for not incremental change, but a 10X revolution, which is what we need to make up for the lost time. Like the brave little hobbit, Frodo, in “The Lord of the Rings”, it is possible for a few to change the course of history. What is needed is a mix of vision and passion as we move into unchartered territory, equipped not with maps, but with a compass.

Next Week: My Mental Model (continued)

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TECH TALK: My Mental Model: Creating Disruptive Innovations…

I like to focus on the next markets. Imagine how the world of tomorrow will be, and try to create solutions for the next set of users. Better still, pick up those who are non-consumers. This ensures that one does not have to worry about competition – for at least a while, till one gets the various elements right. Our ally in this quest is Clay Christensen and his theories on disruptive innovations. A must-read is his recent book, co-authored with Michael Raynor: “The Innovator’s Solution: Creating and Sustaining Successful Growth”.

In Christensen’s world, there are two types of innovations: sustaining innovations and disruptive innovations. The sustaining innovations are those which focus on established markets and bring better products and services to the user base. So, Microsoft’s bringing Windows XP and Office 2003 to market are examples of sustaining innovation. By contrast, disruptive innovations focus on two possibilities: low-end disruptions address overserved customers with a lower-cost model, and new-market disruptions compete against non-consumption. Linux is an example of a disruptive innovation which is giving overserved customers (in comparison with Microsoft Windows) a cost-affective alternative.

As we think, it is useful to apply the litmus tests for disruptive innovations that Christensen and Raynor outline in their book:

Executives must answer three sets of questions to determine whether an idea has disruptive potential. The first set explores whether the idea can become a new-market disruption. For this to happen, at least one and generally both of two questions must be answered affirmatively:

Is there a large population of people who historically have not had the money, equipment, or skill to do this thing for themselves, and as a result have gone without it altogether or have needed to pay someone with more expertise to do it for them?

To use the product or service, do customers need to go to an inconvenient, centralized location?

The second set of questions explores the potential for a low-end disruption. This is possible if these two questions can be answered affirmatively:

Are there customers at the low-end of the market who would be happy to purchase a product with less (but good enough) performance if they could get it at a lower price?

Can we create a business model that enables to earn attractive profits at the discount prices required to win the business of the overserved customers at the low end?

Once an innovation passes the new-market or low-end disruption test, there is still a third critical question to answer affirmatively:

Is the innovation disruptive to all of the significant incumbent firms in the industry? If it appears to be sustaining to one or more significant players in the industry, then the odds will be stacked in that firm’s favor, and the entrant is unlikely to win.

This is a good set of questions for every entrepreneur to answer.

Tomorrow: Creating Disruptive Innovations (continued)

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TECH TALK: My Mental Model: Creating Disruptive Innovations…(Part 2)

How does one extract growth from nonconsumption? Christensen and Raynor write in their book about the four elements of new-market disruption:

1. The target customers are trying to get a job done, but because they lack the money or skill, a simple, inexpensive solution has been beyond reach.

2. These customers will compare the disruptive product to having nothing at all. As a result, they are delighted to buy it even though it may not be as good as other products available at high prices to current users with deeper expertise in the original value network. The performance hurdle required to delight such new-market customers is quite modest.

3. The technology that enables the disruption might be quite sophisticated, but disruptors deploy it to make the purchase and use of the product simple, convenient and foolproof. Is the “foolproofedness” that creates new growth by enabling people with less money and training to begin consuming.

4. The disruptive innovation creates a whole new value network. The new consumers typically purchase the product through new channels and use the product in new venues.

Disruptive Innovations are a fundamentally different way of thinking. It is not just about making a better mousetrap, but rethinking the job-to-be-done, and coming with completely different options. For example, if our objective is to provide computing to the non-users in small- and medium-sized enterprises (SMEs), then instead of thinking about thick desktops, one could look at thin clients and server-centric computing, along with open-source software to present a price point which would be 70% or more lower. This is a solution which will not appeal to the power users who are accustomed to having all the processing power and storage on the computer they use. But the solution would be attractive to people who otherwise face the prospect of not using computing at all.

When I started IndiaWorld (India’s first Internet portal) in March 1995, I did not understand the theory of disruptive innovations. But as I look back on the success of our venture, it was in no small measure due to the fact that we targeted a nonconsumption market – Non-Resident Indians (NRIs) – with our product (news and information about India) via a convenient, alternate distribution medium (the Internet and web browser, rather than print or television). Being able to get India news a couple times a day with a few clicks was a huge change from reading India Today delivered a week late or watching the news roundup on TV on the weekend. Most of the NRIs (especially in the US) had reasonably fast connections to the Internet from work or their university. So,even though our product was not good enough as compared to reading the daily newspaper, it delighted the NRIs because now for the first time they could know almost-immediately what has happening in India.

Creating disruptive innovations are what I think offers entrepreneurs the greatest potential for success. Answering Christensen’s questions makes entrepreneurs focus on what of their ideas and solutions are actually disruptive innovations.

Tomorrow: …for the Bottom of the Pyramid…

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TECH TALK: My Mental Model: …for the Bottom of the Pyramid…

The inspiration for the next phrase comes from CK Prahalad, who has been championing the opportunity of the underserved markets at the bottom of the population pyramid – the poor in countries like India and China who earn USD 1-2 a day. This is the essence of what Prahalad says, in a paper with Stuart Hart:

Consider the 4 billion people at the bottom of the pyramid. Their annual per capita income — based on purchasing power parity in U.S. dollars — is less than $1,500, the minimum considered necessary to sustain a decent life. For well over a billion people — roughly one-sixth of humanity — per capita income is less than $1 per day.

This extreme inequity of wealth distribution reinforces the view that the poor cannot participate in the global market economy, even though they constitute the majority of the population. In fact, given its vast size, they represent a multitrillion-dollar market.

The perception that the bottom of the pyramid is not a viable market also fails to take into account the growing importance of the informal economy among the poorest of the poor, which by some estimates accounts for 40 to 60 percent of all economic activity in developing countries.

To appreciate the market potential of [those at the bottom of the pyramid], MNCs must come to terms with a set of core assumptions and practices that influence their view of developing countries. We have identified the following as widely shared orthodoxies that must be reexamined:

Assumption #1: The poor are not our target consumers because with our current cost structures, we cannot profitably compete for that market.
Assumption #2: The poor cannot afford and have no use for the products and services sold in developed markets.
Assumption #3: Only developed markets appreciate and will pay for new technology. The poor can use the previous generation of technology.
Assumption #4: The bottom of the pyramid is not important to the long-term viability of our business. We can leave Tier 4 to governments and nonprofits.
Assumption #5: Managers are not excited by business challenges that have a humanitarian dimension.
Assumption #6: Intellectual excitement is in developed markets. It is hard to find talented managers who want to work at the bottom of the pyramid.

I have two twists on Prahalad’s pronouncements: focus first on the top of the bottom of the pyramid, and also think of the enterprise pyramid.

The bottom of the pyramid, by definition, will always be the majority of the market. The numbers are vast. For example, in India, if we look at the rural markets, there are 700 million Indians living there. In China, there are a billion people in the rural areas. But is not possible to create solutions or focus on each one of them. The first goal should be to tap those at the upper edge: the top of the bottom of the pyramid. By creating solutions for this segment, we make it possible for those best equipped to understand and leverage the innovations to first do so. Over time, the more entrepreneurial among them will automatically create opportunities for the others lower down in the pyramid. Even the top 10% of the rural markets in India and China account for 170 million people.

The second variation on the bottom of the pyramid principle applies to the enterprise segment. There are nearly 50 million small- and medium-sized enterprises (SMEs) in the world. By and large, technology has only had a limited impact on this segment – because they are small, scattered, less IT-mature, hard to reach, and even harder to support and please. Appropriate solutions are what they need.

Thus, if we put the first two phrases together, what I am driven by is “creating disruptive innovations for the (top of the) bottom of the pyramid”. It is a market full of nonconsumers, invisible to the big players with their high cost structures (think: no competition!), but one rich with promise and opportunity, and waiting to be delighted with products and services which are good enough.

Tomorrow: …requires Ecosystems…

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TECH TALK: My Mental Model: …requires Ecosystems…

One of the things I have realised – with the expense of some time and cost – that it is not good enough to just have an innovative product or service. When one is targeting nonconsumption markets, just solving one problem may not be good enough. Let me explain with an example, and then we will get to the deeper learnings.

When I started thinking about the SME growth problem, my initial belief was that what they needed was a low-cost eBusiness software – just like the big enterprises. But as I looked deeper, I realised that even if I created the “mini-ERP” software, there were not enough computers in the enterprise to ensure they made optimal use of it, and more importantly, for me to make money – at that time, the plan was to rent the software to them because they would probably not have interested in (or would have been incapable of) making a single, large upfront payment. So, now, I had to look at both the computer penetration and enterprise software problems.

As time elapsed, we created a solution for the computer penetration problem – thin clients, server-centric computing, open-source software and remote management. We also developed an integrated server-software solution, to ensure that the backend infrastructure for messaging and security would be good. We were ready to sell our software to SMEs. So, who would do the selling?

It was then that I understood that the problem was much bigger than I had anticipated as a technologist. There is no software distribution network for SMEs. There is no way for SMEs to be educated on the potential for using computers to their full potential. There is a channel, but it largely consists of hardware resellers, who are not sophisticated enough to talk to end-customers about the solutions for their business growth. The realisation slowly dawned on me that we needed an “SME Penetration Ecosystem”, rather than just the hardware-software bits that I was trying to put together.

I could have saved myself quite some trouble had I been a student of economics or read Bhaskar Chakravorti’s book “The Slow Pace of Fast Change”. In economics, there is a concept of “co-ordination failure”. This is dealt with by Debraj Ray in his Economics textbook “Development Economics”.

This insight came to me as I understood Atanu Dey’s plan for transforming rural India by setting up RISC (Rural Infrastructure and Services Commons) centres to concentrate investment from multiple infrastructure providers to create a common platform for service providers. The way to address the co-ordination failure in rural India was to bring all the entities together at the same time, and demonstrate how they could all benefit if each of them did exactly what their business was.

Tomorrow: …requires Ecosystems… (continued)

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TECH TALK: My Mental Model: …requires Ecosystems…(Part 2)

Debraj Ray writes in his book “Development Economics” on co-ordination failure:

Pervasive complementarities (the fact that a single individual takes some action increases the incentives for others to take the same or similar action) might lead to a situation where an economy is stuck in a “low-level equilibrium trap”, while at the same time there is another, better equilibrium, if only all agents could appropriately co-ordinate their actions to reach it…According to this view, economic underdevelopment is the outcome of a massive co-ordination failure, in which several investments do not occur simply because other complementary investments are not made, and these latter investments are not forthcoming simply because the former are missing!

Adds Chakravorti: “Getting an innovation to market requires two thresholds that the innovation must cross on its path to impact. The first occurs at the status quo, the situation that the innovation is attempting to improve; the second is that the new outcome that the innovation seeks to create, where a significant portion of its adopters are made better off. These thresholds share a characteristic that fundamentally captures the way choices are made in an interconnected environment. This is the notion of equilibrium.”

The SME technology market – as also the rural market – suffers from a co-ordination failure. Organisations see the segments on their own and conclude that since no one else is present (or no other services exist), it is not worth their while to enter the segment. Individually and independently, they are all correct. The result is a low-equilibrium situation, one that is not beneficial to anyone, but one which is nevertheless an equilibrium. Life goes on – year after year, with a low and slow pace of change.

How does one change the situation? Writes Bhaskar Chakravorti: “[A way] into the market is to bring about a multiplier effect by assembling an alternative network. To accomplish this, an innovator devises a business model – that is, a value sharing scheme – that helps co-ordinate the incentives of players in three interlinking categories: those who enable and add to the benefits of the innovation, those who can distribute it to users, and those who actually benefit by adopting it. The first two categories of players are on the supply side of the network to be created; the last is on the demand side. The purpose, of course, is to synchronize the choices of these players in a mutually reinforcing way.”

In other words, all of the problems need to be tackled simultaneously. This requires the creation of alternate ecosystem of entities (or a single co-ordinating entity, as we shall see shortly), each of which moves in tandem with the other, to move the system to a higher equilibrium. This is exactly what both the SME and rural markets need.

Next Week: My Mental Model (continued)

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TECH TALK: My Mental Model: …of Integrated Solutions…

The story so far: Creating disruptive innovations for the bottom of the pyramid requires ecosystems. But how do these ecosystems get created? My next learning is that to bootstrap the process, one entity has to put together the whole solution. Others will join in when they see that entity become successful, but not initially. This means that someone has to take the plunge and demonstrate that there is indeed a business opportunity in which we want others to participate.

But before we go ahead, we need to understand product architectures and interfaces and the interplay between interdependence and modularity, as explained by Clay Christensen and Michael Raynor in their book “The Innovator’s Solution”:

A product’s architecture determines its constituent components and subsystems and defines how they must interact – fit and work together – in order to achieve the targeted functionality. The place where any two components fit together is called an interface. Interfaces exist within a product, as well as between stages in the value-added chain.

An architecture is interdependent at an interface if one part cannot be created independently of the other part – if the way one is designed and made depends on the way the other is being designed and made…Interdependent architectures optimize performance, in terms of functionality and reliability.

In contrast, a modular interface is a clean one, in which there are no unpredictable interdependencies across components or stages of the value chain. A modular architecture specifies the fit and function of all elements so completely that it doesn’t matter who makes the components or subsystems, as long as they meet the specifications.

When product functionality and reliability are not yet good enough to address the needs of customers in a given tier of the market, companies must compete by making the best possible products. In the race to do this, firms that build their products around proprietary, interdependent architectures enjoy an important competitive advantage against competitors whose product architecture are modular.

Think back to the computer industry in the 1970s. The likes of IBM, Digital, HP and Apple were all integrated companies – they did everything in-house. As performance improved and overshot what customers wanted, the basis of competition shifted and the industry modularized into the sub-systems, which greatly benefited two of the component makers: Intel in chips and Microsoft in software.

We will take these ideas from Christensen and apply them in our context, to see how the disruptive innovations need a single entity to provide the whole solution, as a precursor to building the ecosystem.

Tomorrow: …of Integrated Solutions… (continued)

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TECH TALK: My Mental Model: …of Integrated Solutions… (Part 2)

Even as the goal of building the ecosystem stays – that is the only way for long-term growth of the new industry, in the early days, it is very important for a single entity to provide the “whole solution”. This is because of two reasons: the customers want a whole solution (the assembled car, and not the sum of the parts), and trying to co-ordinate and convince various other players and making them see the future through the eyes of the entrepreneur can be extremely difficult.

So, even as the entrepreneurial firm is trying to build an ecosystem, its strategy needs to consist of two stages: the first, in which it leads the way through pilots or prototypes to show how the whole solution can open up the new, invisible markets; and later, by allowing specialised service providers to offer specific parts of the solution as the industry modularises, since that is the only way to achieve rapid scale and growth.

Putting the whole solution together may seem like a bad idea, because it calls for the firm to do things it is not necessarily good at. But there is no choice at the outset. Customers need a solution that is complete, even though it is much easier to delight them because they are nonconsumers at this point of time, and thus their expectations from the product are not very high. So, a good-enough whole solution is the need, rather than a perfect sub-system. Over time, as others start seeing the new markets being created, they will start coming into the market with their expertise, and that is the time when the innovator needs to be focus on its core strengths and working to build out the ecosystem.

Let me give two examples in the context of SMEs and rural markets. In the case of SMEs, it is my belief that the need is for an IBM-type organisation which can be the single interface to the end customers. Be it hardware, software, support or services, this firm should be able to offer all the services that the SME wants, and not require the SME to assemble the services from a multitude of options. This is because the channel which should be playing the role of aggregating the services is not doing it – it is stuck in a low-equilibrium situation. As the channel starts seeing the customer demand, it will rise to the occasion, driven purely by a profit motive, which is when the innovating firm should step back and leverage the channel to multiply reach. The key point to remember here is that the channel will not help the firm become successful, but will want to ride on the coattails of the success.

It is much the same with the rural market as we seek to propagate the idea of RISC. I have reached the conclusion that we will have to build, own and operate a few centres to demonstrate to the various entities who should be joining that there is money to be made. The upfront costs of co-ordination and convincing, in terms of time and effort, are simply too high. Once the RISC centres are built, then we will have multiple players who will be interested. But if we do not take up the initial role of creating the solution in an integrated manner, the idea will remain just that.

Tomorrow: …with Local Distribution…

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TECH TALK: My Mental Model: …with Local Distribution…

I have often underestimated the important of distribution. My belief in the past has been: build it and they will come. It is not always the case. For many years, I focused more on the technology that we were trying to aggregate on the Linux-based messaging front, rather than worrying about the distribution. This was a mistake. When one part of the chain is commoditised, the differentiating factor moves elsewhere.

Look at what has happened in computing. As hardware has become standardized, the winner has been Dell, which has focused on distribution. Now, as software too becomes commoditised, the essence of building out a successful business will shift to distribution. After all, if we are all using the same open-source software components (no alternative there, since the proprietary software is way too expensive for our bottom of the pyramid markets), how we get the software across to the end-customers will become increasingly important – given the fact that there is a significant nonconsumption segment.

My belief is that for cracking open the SME technology market, even in this age of the Internet and virtual-everything, we will need a physical presence close to the customers. This is because we are trying to demonstrate the solutions to them, and also give them the confidence that we are there “in the neighbourhood” to help. This presence in the proximity of the customers is part of the integrated solution that we discussed earlier.

In the case of the SMEs, this can be accomplished through the equivalent of “Tech 7-11s”, neighbourhood convenience stores which showcase technology and also provide local co-ordination for the channel, training and support. We underestimate the need to touch-and-feel things before they are purchased. In emerging markets like India, computers are not so ubiquitous that they will be bought over the Internet. Software is even more invisible, because few SMEs pay for it, and thus we have either non-usage or piracy of a few key applications. What the Tech 7-11 needs to do is to demonstrate how the complete IT solution can help in making SMEs more productive.

The same is the case in rural markets, where the RISC becomes the distribution point for information and services. In fact, local distribution – which we can also think of as the last mile bridge – is more important than we give it credit for. As technology-driven entrepreneurs, the focus tends to be on creating “the next new thing” rather than thinking about how it can get to the intended customers.

The same need for “local distribution” creates another interesting opportunity. What is needed is the equivalent of an information marketplace, organized by neighbourhood in a city. Currently, the bottom of the pyramid in the retailing value chain are the local shops. They have no easy way to publicise their offerings in a few kilometres radius of where they are. Their current options are flyers in newspapers and ads on local cable channels. If there was a way for them to notify the people in their vicinity of the new things they have in their shops or the sales they have on the weekend, they could grow their business. This is the opportunity for an information marketplace, built around weblogs and RSS-enabled syndication of microcontent. Information may be a commodity, but distributing it to the right people at the right time still presents an excellent business opportunity.

Tomorrow: …to Bridge Divides.

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TECH TALK: My Mental Model: …to Bridge Divides.

I see innovations as mechanisms to build digital bridges. This is not the same as saying that I want to bridge the digital divide. The digital divide is an effect, not the cause. Information Technology is a means to an end, even though we mistake it as the end in itself. Consider for example the activity in rural India which seems to focus on making available information kiosks connected to the Internet, with the mistaken belief that just by putting these computers there we will be able to solve all the problems that are there.

There are many divides across enterprises and people. More important than the digital divide are the income divides, the social divides, the education divides, the opportunity divides. The two divides that are perhaps more important than any other are the Credit Constraint Divide and the Information Divide. What technology can do is to bridges these divides by reducing transaction costs.

A point once made by Atanu to me was that if there was one problem which lay at the root of the problems in rural India it was that of the credit constraint. If only people had access to credit, then they could create more opportunities for themselves. For example, the lack of an education hampers people all their lives. If, however, they could be given loans with long-payback periods and low interest rates, then they could educate them in specific vocations and use their increased income to repay the loans over time. The lack of credit is one of the root causes of the development trap that rural India finds itself in.

Just as urban India is discovering the magic that access to credit can do (one can buy homes, cars, appliances and pay for it via monthly installments), so also rural India needs access to credit to bridge the opportunity divide that exists. A few innovations applied correctly in the system can have a dramatic amplifying effect across the chain. What the disruptive innovations need to do is to create options and opportunities so that people can start dreaming of a better future. This is happening in the new India that is emerging in the cities. It also needs to extend to the rural areas if India needs to maintain and increase its growth rates.

In the case of SMEs, while credit is a challenge, the information divide is a killer. I have seen this first-hand. The search costs of finding customers for one’s products are just too high. This is where electronic marketplaces need to play a role – in helping SMEs connect to other SMEs, so they can find new customers for their products. Perhaps, one way to consider getting around the credit problem among SMEs for the adoption of new technology is to consider the equivalent of “SME Credits”, a barter system which helps SMEs buy within the network. This way, there is a greater velocity for solutions which can make SMEs more productive.

These are some of the challenges that the innovations needs to address. The endgame is growth and development, and the middlegame is more than just creating hardware or software or a few services. Whole solutions that can focus on a key critical issues and elevate the entire value chain with appropriate bootstrap measures will create the next markets and entrepreneurial successes.

Tomorrow: The Road Ahead

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TECH TALK: My Mental Model: The Road Ahead

So, here is the model I have outlined and discussed so far: Creating disruptive innovations for the bottom of the pyramid requires ecosystems of integrated solutions with local distribution to bridge divides.

It has taken me some time to get a wider and fuller perspective of the challenges that need to be addressed. This period has not been easy, since I am also trying to ensure that we run a profitable business, and that hasn’t always been the case. Balancing the short-term and the long-term is what business is about.

What I am convinced about is that the essence of this model is now reasonably complete and can be applied to the two markets that are of interest to me: SMEs and rural India. This is what I have been doing for the past few months. For example, in the SME segment, I have realised the need that we have to coalesce many innovations together to build an integrated solution:

An integrated server-software solution to provide the backend infrastructure

A thin client for Rs 2,500, which can be the foundation for a Rs 5,000 computer (including a refurbished monitor)

Server-centric computing which uses a new desktop as a server and does all the processing and storage for the client computers

Use of open-source software to make computing affordable – legally, and not via piracy

Remote management of the IT infrastructure, thus obviating the need for a local support engineer

Business applications which can be easily customized to the needs of the business, along with best process libraries

A website that is easy to update and provides an RSS feed for others to syndicate

An information marketplace which can help SMEs connect with each other

A physical presence in the form of a “Tech 7-11” for local distribution

End-user education on technology and business, and support by leveraging college students

Solutions for the credit constraint in the form of monthly rental payments for the IT infrastructure, bank financing as an option, and “SME Credits” for diffusion of products and services from other SMEs

I call this framework “1:1 Computing” to enable the “1:1 Enterprise” – one employee, one computer; one customer, one view; one business, one server.

Now, the challenge is to take these ideas and solutions to market, and build the complete ecosystem in the coming months. Easier said than done! But at least the theoretical foundation on which the solution is built seems to make sense to me.

Similarly, on the rural side, our goal is to set up one pilot RISC centre in the next few month, and then the experience gained therein to raise capital to build 8-10 prototypes later. Our belief is that there is business to be done in rural India, and there is money to be made by removing inefficiencies and capturing a part of the increased wealth in the area. As with the SMEs, it is now show time: the theories need to be tested on the ground.

For me, the mental model helps in testing ideas and making sure that we stay on the right path. Writing it out in these columns helps me clarify my own thinking. The icing on the cake is the feedback that I get from you, my readers.

As Tech Talk enters its fourth year, I will continue to chronicle my thinking and also write more generally on entrepreneurial opportunities in the emerging markets of the world by applying technology suitably for doing good and doing well.

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