Big data’s potential just keeps growing. Taking full advantage means companies must incorporate
analytics into their strategic vision and use it to make better, faster decisions.
          
Is big data all hype?

To the contrary: earlier research may have given only a partial view of the ultimate impact. A new report from the McKinsey Global Institute (MGI), The age of analytics: Competing in a data-driven world, suggests that the range of applications and opportunities has grown and will continue to expand. Given rapid technological advances, the question for companies now is how to integrate new capabilities into their operations and strategies—and position themselves in a world where analytics can upend entire industries.

A 2011 MGI report highlighted the transformational potential of big data. Five years later, we remain convinced that this potential has not been oversold. In fact, the convergence of several technology trends is accelerating progress. The volume of data continues to double every three years as information pours in from digital platforms, wireless sensors, virtual-reality applications, and billions of mobile phones. Data-storage capacity has increased, while its cost has plummeted. Data scientists now have unprecedented computing power at their disposal, and they are devising algorithms that are ever more sophisticated.

Earlier, we estimated the potential for big data and analytics to create value in five specific domains. Revisiting them today shows uneven progress and a great deal of that value still on the table (exhibit). The greatest advances have occurred in location-based services and in US retail, both areas with competitors that are digital natives. In contrast, manufacturing, the EU public sector, and healthcare have captured less than 30 percent of the potential value we highlighted five years ago. And new opportunities have arisen since 2011, further widening the gap between the leaders and laggards.






Leading companies are using their capabilities not only to improve their core operations but also to launch entirely new business models. The network effects of digital platforms are creating a winner-take-most situation in some markets. The leading firms have remarkably deep analytical talent taking on various problems—and they are actively looking for ways to enter other industries. These companies can take advantage of their scale and data insights to add new business lines, and those expansions are increasingly blurring traditional sector boundaries.

Where digital natives were built for analytics, legacy companies have to do the hard work of overhauling or changing existing systems. Adapting to an era of data-driven decision making is not always a simple proposition. Some companies have invested heavily in technology but have not yet changed their organizations so they can make the most of these investments. Many are struggling to develop the talent, business processes, and organizational muscle to capture real value from analytics.
The first challenge is incorporating data and analytics into a core strategic vision. The next step is developing the right business processes and building capabilities, including both data infrastructure and talent. It is not enough simply to layer powerful technology systems on top of existing business operations. All these aspects of transformation need to come together to realize the full potential of data and analytics. The challenges incumbents face in pulling this off are precisely why much of the value we highlighted in 2011 is still unclaimed.

The urgency for incumbents is growing, since leaders are staking out large advantages, and hesitating increases the risk of being disrupted. Disruption is already happening, and it takes multiple forms. Introducing new types of data sets (“orthogonal data”) can confer a competitive advantage, for instance, while massive integration capabilities can break through organizational silos, enabling new insights and models. Hyperscale digital platforms can match buyers and sellers in real time, transforming inefficient markets. Granular data can be used to personalize products and services—including, most intriguingly, healthcare. New analytical techniques can fuel discovery and innovation. Above all, businesses no longer have to go on gut instinct; they can use data and analytics to make faster decisions and more accurate forecasts supported by a mountain of evidence. 


Original source :  Mckinsey Global Institute

Former Reserve Bank governor D Subbarao today termed demonetisation as "creative destruction and the most disruptive policy innovation since 1991 reforms" that has helped destroy blackmoney.
"On November 8, the Prime Minister (Narendra Modi) and the Reserve Bank have demonetised 86 per cent of currency in circulation overnight, which is what is arguably the most disruptive policy innovation in India since the 1991 reforms," he said.

"Demonetisation, in that sense, is creative destruction.

But it is a very special type of creative destruction. Because what it has destroyed is a destructive creation -- blackmoney.

So, you can understand that demonetisation is creative destruction of a destructive creation," Subbarao said.

He was addressing an international conference organised by the Institute for Development and Research in Banking Technologies (IDRBT) here.

He further said demonetisation is "arguably" leading to a flurry of innovations in Indian financial sector by way of digitisation of payments.

"There are two perspectives. Extension of a global trend of financial technology which is upending the finance industry and discontinuous change in a low-income country from cash incentive economy to a less-cash economy. Either way, we will have disruptive innovations in India's financial sector," he explained.

Subbarao said that though cost and benefit of this demonetisation exercise is a very contentious debate, the subject of policy innovation is not contentious.


According to him, the country witnesses a lot of disruptive innovations in finance in payment system.
The model of traditional banking has access to low-cost deposits and has an advantage over other financial institutions, including fintech companies, according to the former governor.

No popular idea ever has a single origin. But the idea that the sole purpose of a firm is to make money for its shareholders got going in a major way with an article by Milton Friedman in the New York Times on September 13, 1970.

As the leader of the Chicago school of economics, and the winner of Nobel Prize in Economics in 1976, Friedman has been described by The Economist as "the most influential economist of the second half of the 20th century...possibly of all of it". The impact of the NYT article contributed to George Will calling him “the most consequential public intellectual of the 20th century.”

Friedman’s article was ferocious. Any business executives who pursued a goal other than making money were, he said, “unwitting pup­pets of the intellectual forces that have been undermining the basis of a free society these past decades.” They were guilty of “analytical looseness and lack of rigor.” They had even turned themselves into “unelected government officials” who were illegally taxing employers and customers.

How did the Nobel-prize winner arrive at these conclusions? It’s curious that a paper which accuses others of “analytical looseness and lack of rigor” assumes its conclusion before it begins. “In a free-enterprise, private-property sys­tem,” the article states flatly at the outset as an obvious truth requiring no justification or proof, “a corporate executive is an employee of the owners of the business,” namely the shareholders.

Come again?

If anyone familiar with even the rudiments of the law were to be asked whether a corporate executive is an employee of the shareholders, the answer would be: clearly not. The executive is an employee of the corporation.

An organization is a mere legal fiction

But in the magical world conjured up in this article, an organization is a mere “legal fiction”, which the article simply ignores in order to prove the pre-determined conclusion. The executive “has direct re­sponsibility to his employers.” i.e. the shareholders. “That responsi­bility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while con­forming to the basic rules of the society, both those embodied in law and those embodied in ethical custom.“ 

What’s interesting is that while the article jettisons one legal reality—the corporation—as a mere legal fiction, it rests its entire argument on another legal reality—the law of agency—as the foundation for the conclusions. The article thus picks and chooses which parts of legal reality are mere “legal fictions” to be ignored and which parts are “rock-solid foundations” for public policy. The choice depends on the predetermined conclusion that is sought to be proved.

A corporate exec­utive who devotes any money for any general social interest would, the article argues, “be spending someone else's money… Insofar as his actions in accord with his ‘social responsi­bility’ reduce returns to stockholders, he is spending their money.”

How did the corporation’s money somehow become the shareholder’s money? Simple. That is the article’s starting assumption. By assuming away the existence of the corporation as a mere “legal fiction”, hey presto! the corporation’s money magically becomes the stockholders' money.

But the conceptual sleight of hand doesn’t stop there. The article goes on: “Insofar as his actions raise the price to customers, he is spending the customers' money.” One moment ago, the organization’s money was the stockholder’s money. But suddenly in this phantasmagorical world, the organization’s money has become the customer’s money. With another wave of Professor Friedman’s conceptual wand, the customers have acquired a notional “right” to a product at a certain price and any money over and above that price has magically become “theirs”.

But even then the intellectual fantasy isn’t finished. The article continued: “Insofar as [the executives’] actions lower the wages of some employees, he is spending their money.” Now suddenly, the organization’s money has become, not the stockholder’s money or the customers’ money, but the employees' money.

Is the money the stockholders’, the customers' or the employees’? Apparently, it can be any of those possibilities, depending on which argument the article is trying to make. In Professor Friedman’s wondrous world, the money is anyone’s except that of the real legal owner of the money: the organization.

One might think that intellectual nonsense of this sort would have been quickly spotted and denounced as absurd. And perhaps if the article had been written by someone other than the leader of the Chicago school of economics and a front-runner for the Nobel Prize in Economics that was to come in 1976, that would have been the article’s fate. But instead this wild fantasy obtained widespread support as the new gospel of business.

People just wanted to believe…

The success of the article was not because the arguments were sound or powerful, but rather because people desperately wanted to believe. At the time, private sector firms were starting to feel the first pressures of global competition and executives were looking around for ways to increase their returns. The idea of focusing totally on making money, and forgetting about any concerns for employees, customers or society seemed like a promising avenue worth exploring, regardless of the argumentation.

In fact, the argument was so attractive that, six years later, it was dressed up in fancy mathematics to become one of the most famous and widely cited academic business articles of all time. In 1976, Finance professor Michael Jensen and Dean William Meckling of the Simon School of Business at the University of Rochester published their paper in the Journal of Financial Economics entitled

“Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure.”

Underneath impenetrable jargon and abstruse mathematics is the reality that whole intellectual edifice of the famous article rests on the same false assumption as Professor Friedman’s article, namely, that an organization is a legal fiction which doesn’t exist and that the organization’s money is owned by the stockholders.

Even better for executives, the article proposed that, to ensure that the firms would focus solely on making money for the shareholders, firms should turn the executives into major shareholders, by affording them generous compensation in the form of stock. In this way, the alleged tendency of executives to feather their own nests would be mobilized in the interests of the shareholders.

The money took over…

Sadly, as often happens with bad ideas that make some people a lot of money, shareholder value caught on and became the conventional wisdom. Not surprisingly, executives were only too happy to accept the generous stock compensation being offered. In due course, they even came to view it as an entitlement, independent of performance.

Politics also lent support. Ronald Reagan was elected in the US in 1980 with his message that government is “the problem”. In the UK, Margaret Thatcher became Prime Minister in 1979. These leaders preached “economic freedom” and urged a focus on making money as “the solution”. As the Michael Douglas character in the 1987 movie, Wall Street, pithily summarized the philosophy, greed was now good.

Moreover an apparent exemplar of the shareholder value theory emerged: Jack Welch. During his tenure as CEO of General Electric from 1981 to 2001, Jack Welch came to be seen–rightly or wrongly–as the outstanding implementer of the theory, as a result of his capacity to grow shareholder value and hit his numbers almost exactly. When Jack Welch retired, the company had gone from a market value of $14 billion to $484 billion at the time of his retirement, making it, according to the stock market, the most valuable and largest company in the world. In 1999 he was named “Manager of the Century” by Fortune magazine.

The disastrous consequences…

So for a time, it looked as though the magic of shareholder value was working. But once the financial tricks that were used to support it were uncovered, the underlying reality became apparent. The decline that Friedman and other sensed in 1970 turned out to be real and persistent. The rate of return on assets and on invested capital of US firms declined from 1965 to 2009 by three-quarters, as shown by the Shift Index, a study of 20,000 US firms.










The shareholder value theory thus failed even on its own narrow terms: making money. The proponents of shareholder value and stock-based executive compensation hoped that their theories would focus executives on improving the real performance of their companies and thus increasing shareholder value over time. Yet, precisely the opposite occurred. In the period of shareholder capitalism since 1976, executive compensation has exploded while corporate performance declined.

There is only one valid definition of a business purpose: to create a customer.


– Peter Drucker, The Practice of Management (1954)

When pressures are mounting to deliver short-term results, how do successful CEOs resist those pressures and achieve long-term growth? The issue is pressing: low global economic growth is putting stress on the political and social fabric in Europe and the Americas and populist leaders are mobilizing widespread unrest. “By succumbing to false solutions, born of disillusion and rage,” writes Martin Wolf in the Financial Times this week, “the west might even destroy the intellectual and institutional pillars on which the postwar global economic and political order has rested.”

The first step in resisting the pressures of short-termism is to correctly identify their source. The root cause is remarkably simple—the view, which is widely held both inside and outside the firm, that the very purpose of a corporation is to maximize shareholder value as reflected in the current stock price (MSV). This notion, which even Jack Welch has called “the dumbest idea in the world,” got going in the 1980s, particularly in the U.S., and is now regarded in much of the business world, the stock market and government as an almost-immutable truth of the universe. As The Economist even declared in March 2016, MSV is now “the biggest idea in business.”

The Birth Of A Bad Idea

Why did the idea arise? MSV was a well-intended effort by firms to survive in a “VUCA” world, namely, a world that is increasingly volatile, uncertain, complex and ambiguous. In this more difficult context, in which power in the marketplace has steadily shifted from firms to customers, firms focused more sharply on what is immediately profitable. This was presented as a better approach than the then-prevailing view that a firm should seek to meet the needs of an array of stakeholders—customers, employees, shareholders and society. The misguided hope, articulated by Milton Friedman in September 1970, was that if a firm focused on solely on shareholders, everyone would be better off through the supposed “magic of the marketplace.”

The result has been the opposite. MSV led to a vicious cycle of value extraction and economic decline.



To be sure, companies often said that their goal is long-term shareholder value. Indeed, esteemed business school professors defend shareholder value in this way, as in an article in Harvard Business Review in August 2016. The professors seek to reclaim MSV by suggesting that shareholder value has been “hijacked by those who incorrectly believe that the goal is to maximize short-term earnings to boost today’s stock price. Properly understood, maximizing shareholder value means allocating resources so as to maximize long-term cash flow.”

But since calculating the long-term cash flow of any particular action is an impractical guide for day-to-day decision-making in a firm, once shareholder value of any kind becomes the firm’s goal, it’s the impact on the current stock price that in practice becomes the basis for day-to-day decision-making. This in turn leads inexorably to a focus on the short-term.

Short-term Incentives Are Larger Than Previously Understood

Inside the firm, enhancing short-term shareholder value is what most CEOs are currently paid to do. Stock-based compensation is the main reason why the “hijacked version” of MSV—that the goal of a firm is shareholder value as reflected in the current stock price—has become so pervasive. By focusing CEO attention on the current stock price, stock-based compensation is often at odds with long-term growth.

CEO stock-based compensation is even more massive than previously understood. Research published in 2016 in The Atlantic and Harvard Business Review by Professor William Lazonick, shows that the CEO–to-median-worker pay ratio is not, as commonly estimated, in the order of 300:1, with average CEO compensation in the order of $10-15 million, which is already shocking.
Lazonick’s new research shows that the actual CEO–to-median-worker-pay ratio of the 500 highest paid executives is almost 1000:1 or $33 million, with 82% from stock-based pay. Over several decades, executive compensation has increased more than 1000%. 

Creating long-term sustainable value through investment in market-creating innovation can have huge payoffs both for the shareholders and for the economy. But it usually takes years of hard work and is full of risk, with possibly no payoff during the tenure of the current chief executive. There are two much easier avenues available to the CEO to boost the stock price. One is cutting costs. The other is boosting the share price through share buybacks. Both are relatively easy and the results in terms of an enhanced share price are immediate, with practically no short-term risk. It is done in private with the stroke of a pen. Is it any wonder that CEOs give more attention to cost-cutting and share buybacks than to investment in risky slow-gestating innovation?

Massive share buybacks are a relatively recent phenomenon. Prior to 1982, large stock buybacks were illegal because they constituted obvious stock price manipulation. But the SEC in the Reagan administration introduced a new rule—Rule 10b-18—which creates “a safe harbor” for firms to buy back as many shares as they like. This effectively opened the floodgates. The Economist has called the practice “a resort to corporate cocaine”. Reuters has called it “corporate self-cannibalization.”

The SEC seems to consider itself powerless to do anything about the ensuing stock price manipulation. Thus in July 2015, when Senator Tammy Baldwin (D-WI) directly asked the SEC head in the Obama administration, Mary Jo White, to look into the issue of stock price manipulation resulting from share buybacks, White replied in effect that the SEC could not consider the issue because the protection offered by Rule 10b-18 was absolute. The prospects of changing that ruling in the investor-friendly Trump administration seem even more remote.

Lazonick’s recent research also shows how SEC rules currently enable executives to time the granting and vesting of their own shares so as to maximize their own compensation, despite the blatant conflict of interest.

As a result, CEOs have pursued lavish share buybacks with abandon, despite disastrous financial, economic and social consequences. As Upton Sinclair pointed out long ago, “it is difficult to get a man to understand something when his salary depends on not understanding it.”

Share Buybacks Are Gargantuan In Scale

The current scale of share buybacks is breath-taking. Over the years 2006-2015, Lazonick’s latest research shows that the 459 companies in the S&P 500 Index that were publicly listed over the ten-year period expended $3.9 trillion on stock buybacks, representing 54% of net income, plus another 37% of net income on dividends. Much of the remaining 10% of profits was held abroad, sheltered from U.S. taxes.

The total of share buybacks for all US, Canadian, and European firms, for the decade 2004-2013 was $6.9 trillion. The total share buybacks for all public companies in just the U.S. for that decade was around $5 trillion.

Buybacks might make some sense when a stock is undervalued, but Lazonick’s research shows that most buybacks occur when the stock is overvalued, thus enabling firms to mask other business problems. Contrary to the stated goal of enhancing shareholder value, the net result of share buybacks executed at the top of the market is to systematically destroy real shareholder value.


As Robin Harding in the Financial Times concludes, it is “time to stop thinking about corporate governance and executive pay as matters of equity and to regard them instead as a macroeconomic problem of the first rank.”

‘The Stock Market Made Us Do It’

Outside the firm, it is the stock market that acts as the enforcer of the MSV religion. As Dennis Berman in the Wall Street Journal points out, decisions are often driven by the C-suite’s perception that they are under “the threat from shareholder activists, who now patrol the market like prison guards with billy clubs. Overspend and get whacked.”

These perceptions are not far from reality. Take the case of Timken Steel, a company in Canton Ohio which has been making steel and bearings for almost a hundred years. It’s the kind of firm where “making things still matters.” Unlike other companies in the region, like Goodyear Tire & Rubber or the Hoover Company, Timken has not tried to cut costs by moving production to other countries where labor is cheaper. Instead Timken has made huge capital and social investments in Canton Ohio. Over the last decade, its share price had kept pace with the stock market, but that was no protection against “activist shareholders,” formerly known more accurately as “corporate raiders.”

In 2013, Timken was attacked by Relational Investors, in partnership with the California State Teachers’ Retirement System, (CalSTRS), which represents some 236,000 teachers and other retirees in California. Relational applied its usual modus operandi: acquiring stakes in the company, pressuring it to make changes to “unlock value”, insisting that the firm load itself up with debt, buy back their own shares, return assets to shareholders and drive their share prices higher. Relational then cashes in its profits with no thought for the financially fragile state in which it leaves the company it has attacked or the jobs that it might have destroyed.

Using CalSTRS as a PR shield to deflect criticism, Relational was successful in its raid on Timken. All told, Relational acquired its stake at about $40 a share and sold it at around $70, reaping a 75% gain — $188 million — in just over two years. Relational sold all its shares after the quick profit and moved on to the next victim.

Since then, the results for Timken have been less happy. Loaded with debt and split into two firms, its share price has declined by more than 60% and its long-term viability is uncertain.

In making its profit, Relational created no jobs and generated no products or services for any real people. It simply extracted money that had been created over years by the hard work of Timken’s management and workers and left Timken in a weakened state.

Timken is just one example of the noxious effects of the doctrine of MSV by which activist shareholders extract value and disturb the creation of long-term value. The Timken case is part of a broader pattern of attacks by activist shareholders on public firms that depress investment in innovation.

In fact, it looks like another record breaking year for shareholder activism activity, “both in the number of campaigns (more than 230 campaigns in the United States alone in 2015) to the size and iconic nature of the companies targeted (e.g., AIG, DuPont, General Electric and General Motors).” While some long-term investors are having second thoughts about shareholder activism, since “it cannot be the case that 'divest and distribute' is the right strategy for shareholder value as often as is advocated by activist funds relative to other ideas,” nevertheless the raids continue to increase with ever bigger and bolder campaigns. 2016 is also on track to be a record year for activism outside the United States.

The Cost Of Shareholder Activism

What is the cost of shareholder activism? The impact of the stock market on investment has been quantified in a brilliant study by economists from the Stern School of Business and Harvard Business School, Alexander Ljungqvist, Joan Farre-Mensa, and John Asker, entitled “Corporate Investment and Stock Market Listing: A Puzzle.“ The study compared the investment patterns of public companies and privately held firms.

The study found that “keeping company size and industry constant, private US companies invest nearly twice as much as those listed on the stock market: 6.8 per cent of total assets versus just 3.7 per cent.”

In other words, public firms invest roughly half as much as those private firms that are relatively free from the pressures of MSV. As Matthew Yglesias at Slate concluded: “We are reaping the bitter fruits of the ‘shareholder value’ revolution.”

Double Whammy: The Link To Bureaucracy

But wait, it’s not just shareholder value alone. MSV is a double whammy. Shareholder value forms a sinister partnership with top-down bureaucracy—a devastating constraint in a world in which a motivated workforce producing continuous innovation is a necessity for survival.

Thus when a firm embraces the goal of making money for the shareholders and its executives, it can’t inspire its staff to pursue that goal with any commitment or passion. Making money for the boss at the expense of the customer doesn’t put a spring in anyone’s step or excite anyone to give his or her very best. The goal is inherently dispiriting.

So once a firm commits to MSV, it has little choice but to manage itself with strict command-and-control to force employees to pursue a goal that they don’t really believe in. So MSV and top-down bureaucracy fit together in a perfect interlocking relationship, like a hand and a glove. If a firm tries to move away from bureaucracy, for instance by introducing Agile team practices, then the goals, prescriptions and metrics of MSV kick in to undermine the change and force a reversion to bureaucracy. So once firms embrace MSV, they are doomed to a state of suboptimal equilibrium with lackluster bureaucratic management.

The sorry current state of the work force has been measured by Gallup. It found that only 33% of U.S. corporate employees are engaged in their work, while 17% are disengaged and actively involved disrupting the firm. Deloitte’s studies show that only 11% of the workforce is passionate about what they do. The result is a workforce that is ill-adapted to producing the market-creating innovation that is urgently needed, thus making cost-cutting and share buybacks ever more attractive to the CEO.

Macroeconomic Impact

The impact of these management practices are now everywhere apparent. For instance, as shown in Deloitte’s Shift Index the rates of return on assets of U.S. firms continue their half-century decline that has been independent of political parties, recessions, bubbles, and major world events.




 Work done by the Kauffman Foundation and the Institute for Competitiveness & Prosperity shows that over the last twenty five years, companies more than five years old were net destroyers of jobs, not job creators.



Meanwhile workers wages have stagnated for decades. Since the advent of MSV in the 1980s, the benefits of productivity gains have flowed to shareholders, including the executives, not to workers who created those gains.






A Wider Set Of Issues For Society

Thus we know how to resist the lure of short-termism. The question is: when will firms get on and do it?

It is of course theoretically possible that CEOs and their boards of directors will awaken tomorrow morning and commit themselves to creating value for customers rather than extracting value for shareholders.

It’s theoretically possible that investors will awaken tomorrow and refocus their attentions on firms that create real long-term value.

It is theoretically possible that the new head of the SEC will remove Rule 10b-18 which enables massive stock price manipulation.

Realistically though, these things won’t happen unless and until there is a sea change in the wider political, social and organizational context. Thus the current situation is one of fundamental institutional failure across the whole of society. The behavioral breakdown is mutually reinforcing.

CEOs are extracting value from their firms, rather than creating it. CFOs are systematically enforcing earnings-per-share thinking in decisions throughout their organizations. Business schools are teaching their students how to do it. Hedge funds and activist shareholders are gambling risk-free with other people’s money to take advantage of it. Institutional shareholders are complicit in what the CEOs and CFOs are doing.

Regulators remain indifferent to systemic failure. Rating agencies reward malfeasance. Financial analysts applaud short-term gains and ignore obvious long-term rot. Politicians stand by and watch. In a great betrayal, the very leaders who should be fixing the system are complicit in its continuance. Unless our society as a whole reverses course, it is heading for a cataclysm.

Thus change in behavior is needed in a whole set of institutions and actors: CEOs, CFOs, investors, legislators, regulators, rating agencies, analysts, management journals, thought leaders, business schools and politicians—all need to think and act differently.

A Moment Of Truth Has Arrived

We are thus at a critical point in a vast societal drama. We have reached that key moment, which Aristotle famously called “anagnorisis” or “recognition.” This is the theatrical moment in a drama when ignorance shifts to knowledge. Just as King Lear in Shakespeare’s play eventually recognized that his apparently virtuous daughters, Goneril and Regan, were a really bad lot, and that his apparently disrespectful daughter, Cordelia, truly loved him, so society is learning that much of ‘the talent’ it thought were adding value have in fact been extracting value for themselves.

As usual with anagnorisis and the shock of recognition at a disturbing, previously-hidden truth, there is a disquieting sense that the accepted coordinates of knowledge have somehow gone awry and the universe has come out of whack. This can lead to denial and a delay in action, even though the facts are staring us in the face.

If the recognition of our error comes too late, as in Shakespeare’s Lear, the result will be terrible tragedy. If the recognition comes soon enough, the drama can still have a happy ending. We are about to find out in our case which it is to be.

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Marketers spend a lot of time—and money—trying to delight consumers with ever-fresher, ever-more-appealing products. But their customers, it turns out, make most purchase decisions almost automatically. They look for what’s familiar and easy to buy. This package explores that idea and the science behind it, offers a counterpoint, and includes conversations with the cochairman of the LEGO Brand Group and the chairman of Intuit. 

Late in the spring of 2016 Facebook’s category-leading photo-sharing application, Instagram, abandoned its original icon, a retro camera familiar to the app’s 400- million-plus users, and replaced it with a flat modernist design that, as the head of design explained, “suggests a camera.” At a time when Instagram was under a growing threat from its rival Snapchat, he offered this rationale for the switch: The icon “was beginning to feel…not reflective of the community, and we thought we could make it better.”

The assessment of AdWeek, the marketing industry bible, was clear from its headline: “Instagram’s New Logo Is a Travesty. Can We Change it Back? Please?” In GQ’s article “Logo Change No One Wanted Just Came to Instagram,” the magazine’s panel of designers called the new icon “honestly horrible,” “so ugly,” and “trash,” and summarized the change thus: “Instagram spent YEARS building up visual brand equity with its existing logo, training users where to tap, and now instead of iterating on that, it’s flushing it all down the toilet for the homescreen equivalent of a Starburst.”
It’s too soon to tell whether the design change will actually have commercial consequences for Instagram, but this is not the first time a company has experienced such a reaction to a rebranding or a relaunch. PepsiCo’s introduction of its aspartame-free Diet Pepsi was—like the infamous New Coke debacle—a botched attempt at reinvention that resulted in serious revenue losses and had to be reversed. The interesting question, therefore, is: Why do well-performing companies routinely succumb to the lure of radical rebranding? One could understand the temptation to adopt such a strategy in the face of disaster, but Instagram, PepsiCo, and Coke were hardly staring into the abyss. (It’s worth noting that Snapchat, whose market share among young users is now particularly strong, has assiduously stuck to its familiar ghost icon. Full disclosure: A.G. Lafley serves on the board of Snap Inc.)

The answer, we believe, is rooted in some serious misperceptions about the nature of competitive advantage. Much new thinking in strategy argues that the fast pace of change in modern business (perhaps nowhere more obvious than in the app world) means no competitive advantage is sustainable, so companies must continually update their business models, strategies, and communications to respond in real time to the explosion of choice that ever more sophisticated consumers now face. To keep your customers—and to attract new ones—you need to remain relevant and superior. Hence Instagram was doing exactly what it was supposed to do: changing proactively

.
That’s an edgy thought, to be sure; but a lot of evidence contradicts it. Consider Southwest Airlines, Vanguard, and IKEA, all featured in Michael Porter’s classic 1996 HBR article “What Is Strategy?” as exemplars of long-lived competitive advantage. A full two decades later those companies are still at the top of their respective industries, pursuing largely unchanged strategies and branding. And although Google, Facebook, or Amazon might stumble and be crushed by some upstart, the competitive positions of those giants hardly look fleeting. Closer to home (one author of this article is part of the P&G family), it would strike the Tide or Head & Shoulders brand managers of the past 50 years as rather odd to hear that their half-century advantages have not been or are not sustainable. (No doubt the Unilever managers of long-standing consumer favorites such as Dove soap and Hellmann’s mayonnaise would feel the same.)

In this article we draw on modern behavioral research to offer a theory about what makes competitive advantage last. It explains both missteps like Instagram’s and success stories like Tide’s. We argue that performance is sustained not by offering customers the perfect choice but by offering them the easy one. So even if a value proposition is what first attracted them, it is not necessarily what keeps them coming.

In this alternative worldview, holding on to customers is not a matter of continually adapting to changing needs in order to remain the rational or emotional best fit. It’s about helping customers avoid having to make yet another choice. To do that, you have to create what we call cumulative advantage.

Let’s begin by exploring what our brains actually do when we shop.

Creatures of Habit

The conventional wisdom about competitive advantage is that successful companies pick a position, target a set of consumers, and configure activities to serve them better. The goal is to make customers repeat their purchases by matching the value proposition to their needs. By fending off competitors through ever-evolving uniqueness and personalization, the company can achieve sustainable competitive advantage

An assumption implicit in that definition is that consumers are making deliberate, perhaps even rational, decisions. Their reasons for buying products and services may be emotional, but they always result from somewhat conscious logic. Therefore a good strategy figures out and responds to that logic.

But the idea that purchase decisions arise from conscious choice flies in the face of much research in behavioral psychology. The brain, it turns out, is not so much an analytical machine as a gap-filling machine: It takes noisy, incomplete information from the world and quickly fills in the missing pieces on the basis of past experience. Intuition—thoughts, opinions, and preferences that come to mind quickly and without reflection but are strong enough to act on—is the product of this process. It’s not just what gets filled in that determines our intuitive judgments, however. They are heavily influenced by the speed and ease of the filling-in process itself, a phenomenon psychologists call processing fluency. When we describe making a decision because it “just feels right,” the processing leading to the decision has been fluent.

Processing fluency is itself the product of repeated experience, and it increases relentlessly with the number of times we have the experience. Prior exposure to an object improves the ability to perceive and identify that object. As an object is presented repeatedly, the neurons that code features not essential for recognizing the object dampen their responses, and the neural network becomes more selective and efficient at object identification. In other words, repeated stimuli have lower perceptual-identification thresholds, require less attention to be noticed, and are faster and more accurately named or read. What’s more, consumers tend to prefer them to new stimuli.

In short, research into the workings of the human brain suggests that the mind loves automaticity more than just about anything else—certainly more than engaging in conscious consideration. Given a choice, it would like to do the same things over and over again. If the mind develops a view over time that Tide gets clothes cleaner, and Tide is available and accessible on the store shelf or the web page, the easy, familiar thing to do is to buy Tide yet another time.

A driving reason to choose the leading product in the market, therefore, is simply that it is the easiest thing to do: In whatever distribution channel you shop, it will be the most prominent offering. In the supermarket, the mass merchandiser, or the drugstore, it will dominate the shelf. In addition, you have probably bought it before from that very shelf. Doing so again is the easiest possible action you can take. Not only that, but every time you buy another unit of the brand in question, you make it easier to do—for which the mind applauds you.

Meanwhile, it becomes ever so slightly harder to buy the products you didn’t choose, and that gap widens with every purchase—as long, of course, as the chosen product consistently fulfills your expectations. This logic holds as much in the new economy as in the old. If you make Facebook your home page, every aspect of that page will be totally familiar to you, and the impact will be as powerful as facing a wall of Tide in a store—or more so.

Buying the biggest, easiest brand creates a cycle in which share leadership is continually increased over time. Each time you select and use a given product or service, its advantage over the products or services you didn’t choose cumulates.

The growth of cumulative advantage—absent changes that force conscious reappraisal—is nearly inexorable. Thirty years ago Tide enjoyed a small lead of 33% to 28% over Unilever’s Surf in the lucrative U.S. laundry detergent market. Consumers at the time slowly but surely formed habits that put Tide further ahead of Surf. Every year, the habit differential increased and the share gap widened. In 2008 Unilever exited the business and sold its brands to what was then a private-label detergent manufacturer. Now Tide enjoys a greater than 40% market share, making it the runaway leader in the U.S. detergent market. Its largest branded competitor has a share of less than 10%. (For a discussion of why small brands even survive in this environment, see the sidebar “The Perverse Upside of Customer Disloyalty.”)

A Complement to Choice

We don’t claim that consumer choice is never conscious, or that the quality of a value proposition is irrelevant. To the contrary: People must have a reason to buy a product in the first place. And sometimes a new technology or a new regulation enables a company to radically lower a product’s price or to offer new features or a wholly new solution to a customer need in a way that demands consumers’ consideration.

Robust where-to-play and how-to-win choices, therefore, are still essential to strategy. Without a value proposition superior to those of other companies that are attempting to appeal to the same customers, a company has nothing to build on.

But if it is to extend that initial competitive advantage, the company must invest in turning its proposition into a habit rather than a choice. Hence we can formally define cumulative advantage as the layer that a company builds on its initial competitive advantage by making its product or service an ever more instinctively comfortable choice for the customer.

Companies that don’t build cumulative advantage are likely to be overtaken by competitors that succeed in doing so. A good example is Myspace, whose failure is often cited as proof that competitive advantage is inherently unsustainable. Our interpretation is somewhat different.
Launched in August 2003, Myspace became America’s number one social networking site within two years and in 2006 overtook Google to become the most visited site of any kind in the United States. Nevertheless, a mere two years later it was outstripped by Facebook, which demolished it competitively—to the extent that Myspace was sold in 2011 for $35 million, a fraction of the $580 million that News Corp had paid for it in 2005.

Why did Myspace fail? Our answer is that it didn’t even try to achieve cumulative advantage. To begin with, it allowed users to create web pages that expressed their own personal style, so individual pages looked very different to visitors. It also placed advertising in jarring ways—and included ads for indecent services, which riled regulators. When News Corp bought Myspace, it ramped up ad density, further cluttering the site. To entice more users, Myspace rolled out what Bloomberg Businessweek referred to as “a dizzying number of features: communication tools such as instant messaging, a classifieds program, a video player, a music player, a virtual karaoke machine, a self-serve advertising platform, profile-editing tools, security systems, privacy filters, Myspace book lists, and on and on.” So instead of making its site an ever more comfortable and instinctive choice, Myspace kept its users off balance, wondering (if not subconsciously worrying) what was coming next.

Compare that with Facebook. From day one, Facebook has been building cumulative advantage. Initially it had some attractive features that Myspace lacked, making it a good value proposition, but more important to its success has been the consistency of its look and feel. Users conform to its rigid standards, and Facebook conforms to nothing or no one else. When it made its now-famous extension from desktop to mobile, the company ensured that users’ mobile experience was highly consistent with their desktop experience.

To be sure, Facebook has from time to time introduced design changes in order to better leverage its functionality, and it has endured severe criticism in consequence. But in the main, new service introductions don’t jeopardize comfort and familiarity, and the company has often made the changes optional in their initial stages. Even its name conjures up a familiar artifact, the college facebook, whereas Myspace gives the user no familiar reference at all.

Bottom line: By building on familiarity, Facebook has used cumulative advantage to become the most addictive social networking site in the world. That makes its subsidiary Instagram’s decision to change its icon all the more baffling.

The Cumulative Advantage Imperatives

Myspace and Facebook nicely illustrate the twin realities that sustainable advantage is both possible and not assured. How, then, might the next Myspace enhance and extend its competitive edge by building a protective layer of cumulative advantage? Here are four basic rules to follow:

1. Become popular early.

This idea is far from new—it is implicit in many of the best and earliest works on strategy, and we can see it in the thinking of Bruce Henderson, the founder of Boston Consulting Group. Henderson’s particular focus was on the beneficial impact of cumulative output on costs—the now-famous experience curve, which suggests that as a company’s experience in making something increases, its cost management becomes more efficient. He argued that companies should price aggressively early on—“ahead of the experience curve,” in his parlance—and thus win sufficient market share to give the company lower costs, higher relative share, and higher profitability. The implication was clear: Early share advantage matters—a lot.

Marketers have long understood the importance of winning early. Launched specifically to serve the fast-growing automatic washing machine market, Tide is one of P&G’s most revered, successful, and profitable brands. When it was introduced, in 1946, it immediately had the heaviest advertising weight in the category. P&G also made sure that no washing machine was sold in America without a free box of Tide to get consumers’ habits started. Tide quickly won the early popularity contest and has never looked back.

Free new-product samples to gain trial have always been a popular tactic with marketers. Aggressive pricing, the tactic favored by Henderson, is similarly popular. Samsung has emerged as the market share leader in the smartphone industry worldwide by providing very affordable Android-based phones that carriers can offer free with service contracts. For internet businesses, free is the core tactic for establishing habits. Virtually all the large-scale internet success stories—eBay, Google, Twitter, Instagram, Uber, Airbnb—make their services free so that users will grow and deepen their habits; then providers or advertisers will be willing to pay for access to them.

2. Design for habit.

As we’ve seen, the best outcome is when choosing your offering becomes an automatic consumer response. So design for that—don’t leave the outcome entirely to chance. We’ve seen how Facebook profits from its attention to consistent, habit-forming design, which has made use of its platform go beyond what we think of as habit: Checking for updates has become a real compulsion for a billion people. Of course Facebook benefits from increasingly huge network effects. But the real advantage is that to switch from Facebook also entails breaking a powerful addiction.

The smartphone pioneer BlackBerry is perhaps the best example of a company that consciously designed for addiction. Its founder, Mike Lazaridis, explicitly created the device to make the cycle of feeling a buzz in the holster, slipping out the BlackBerry, checking the message, and thumbing a response on the miniature keyboard as addictive as possible. He succeeded: The device earned the nickname CrackBerry. The habit was so strong that even after BlackBerry had been brought down by the move to app-based and touch-screen smartphones, a core group of BlackBerry customers—who had staunchly refused to adapt—successfully implored the company’s management to bring back a BlackBerry that resembled their previous-generation devices. It was given the comforting name Classic.

As Art Markman, a psychologist at the University of Texas, has pointed out to us, certain rules should be respected in designing for habit. To begin with, you must keep consistent those elements of the product design that can be seen from a distance so that buyers can find your product quickly. Distinctive colors and shapes like Tide’s bright orange and the Doritos logo accomplish this. 

And you should find ways to make products fit in people’s environments to encourage use. When P&G introduced Febreze, consumers liked the way it worked but did not use it often. Part of the problem, it turned out, was that the container was shaped like a glass-cleaner bottle, signaling that it should be kept under the sink. The bottle was ultimately redesigned to be kept on a counter or in a more visible cabinet, and use after purchase increased.
Unfortunately, the design changes that companies make all too often end up disrupting habits rather than strengthening them. Look for changes that will reinforce habits and encourage repurchase. The Amazon Dash Button provides an excellent example: By creating a simple way for people to reorder products they use often, Amazon helps them develop habits and locks them into a particular distribution channel.

3. Innovate inside the brand.

As we’ve already noted, companies engage in initiatives to “relaunch,” “repackage,” or “replatform” at some peril: Such efforts can require customers to break their habits. Of course companies have to keep their products up-to-date, but changes in technology or other features should ideally be introduced in a manner that allows the new version of a product or service to retain the cumulative advantage of the old.
Even the most successful builders of cumulative advantage sometimes forget this rule. P&G, for example, which has increased Tide’s cumulative advantage over 70 years through huge changes, has had to learn some painful lessons along the way. Arguably the first great detergent innovation after Tide’s launch was the development of liquid detergents. P&G’s first response was to launch a new brand, called Era, in 1975. With no cumulative advantage behind it, Era failed to become a major brand despite consumers’ increasing substitution of liquid for powdered detergent.
Recognizing that as the number one brand in the category, Tide had a strong connection with consumers and a powerful cumulative advantage, P&G decided to launch Liquid Tide in 1984, in familiar packaging and with consistent branding. It went on to become the dominant liquid detergent despite its late entry. After that experience, P&G was careful to ensure that further innovations were consistent with the Tide brand. When its scientists figured out how to incorporate bleach into detergent, the product was called Tide Plus Bleach. The breakthrough cold-cleaning technology appeared in Tide Coldwater, and the revolutionary three-in-one pod form was launched as Tide Pods. The branding could not have been simpler or clearer: This is your beloved Tide, with bleach added, for cold water, in pod form. These comfort- and familiarity-laden innovations reinforced rather than diminished the brand’s cumulative advantage. The new products all preserved the look of Tide’s traditional packaging—the brilliant orange and the bull’s-eye logo. The few times in Tide history when that look was altered—such as with blue packaging for the Tide Coldwater launch—the effect on consumers was significantly negative, and the change was quickly reversed.
Of course, sometimes change is absolutely necessary to maintain relevance and advantage. In such situations smart companies succeed by helping customers transition from the old habit to the new one. Netflix began as a service that delivered DVDs to customers by mail. It would be out of business today if it had attempted to maximize continuity by refusing to change. Instead, it has successfully transformed itself into a video streaming service.
Although the new Netflix markets a completely different platform for digital entertainment, involving a new set of activities, Netflix found ways to help its customers by accentuating what did not have to change. It has the same look and feel and is still a subscription service that gives people access to the latest entertainment without leaving their homes. Thus its customers can deal with the necessary aspects of change while maintaining as much of the habit as possible. For customers, “improved” is much more comfortable and less scary than “new,” however awesome “new” sounds to brand managers and advertising agencies.

4. Keep communication simple.

One of the fathers of behavioral science, Daniel Kahneman, characterized subconscious, habit-driven decision making as “thinking fast” and conscious decision making as “thinking slow.” Marketers and advertisers often seem to live in thinking-slow mode. They are rewarded with industry kudos for the cleverness with which they weave together and highlight the multiple benefits of a new product or service. True, ads that are clever and memorable sometimes move customers to change their habits. The slow-thinking conscious mind, if it decides to pay attention, may well say, “Wow, that is impressive. I can’t wait!”

But if viewers aren’t paying attention (as in the vast majority of cases), an artful communication may backfire. Consider the ad that came out a couple of years ago for the Samsung Galaxy S5. It began by showing successive vignettes of generic-looking smartphones failing to (a) demonstrate water resistance; (b) protect against a young child’s accidentally sending an embarrassing message; and (c) enable an easy change of battery. It then triumphantly pointed out that the Samsung S5, which looked pretty much like the three previous phones, overcame all these flaws. Conscious, slow-thinking viewers, if they watched the whole ad, may have been persuaded that the S5 was different from and superior to other phones.

But an arguably greater likelihood was that fast-thinking viewers would subconsciously associate the S5 with the three shortcomings. When making a purchase decision, they might be swayed by a subconscious plea: “Don’t buy the one with the water-resistance, rogue-message, and battery-change problems.” In fact, the ad might even induce them to buy a competitor’s product—such as the iPhone 7—whose message about water resistance is simpler to take in.

Remember: The mind is lazy. It doesn’t want to ramp up attention to absorb a message with a high level of complexity. Simply showing the water resistance of the Samsung S5—or better yet, showing a customer buying an S5 and being told by the sales rep that it was fully water-resistant—would have been much more powerful. The latter would tell fast thinkers what you wanted them to do: go to a store and buy the Samsung S5. Of course, neither of those ads would be likely to win any awards from marketers focused on the cleverness of advertising copy.

CONCLUSION

The death of sustainable competitive advantage has been greatly exaggerated. Competitive advantage is as sustainable as it has always been. What is different today is that in a world of infinite communication and innovation, many strategists seem convinced that sustainability can be delivered only by constantly making a company’s value proposition the conscious consumer’s rational or emotional first choice. They have forgotten, or they never understood, the dominance of the subconscious mind in decision making. For fast thinkers, products and services that are easy to access and that reinforce comfortable buying habits will over time trump innovative but unfamiliar alternatives that may be harder to find and require forming new habits.

So beware of falling into the trap of constantly updating your value proposition and branding. And any company, whether it is a large established player, a niche player, or a new entrant, can sustain the initial advantage provided by a superior value proposition by understanding and following the four rules of cumulative advantage.

Reproduced From Harvard Business Reveiw

Feeling "humiliated" by events since demonetisation, RBI employees today wrote to Governor Urjit Patel protesting against operational "mismanagement" in the exercise and Government impinging its autonomy by appointing an official for currency coordination.

In a letter, they said autonomy and image of RBI has been "dented beyond repair" due to mismanagement and termed appointment of a senior Finance Ministry official as a "blatant encroachment" of its exclusive turf of currency management.

"An image of efficiency and independence that RBI assiduously built up over decades by the strenuous efforts of its staff and judicious policy making has gone into smithereens in no time. We feel extremely pained," the United Forum of Reserve Bank Officers and Employees said in the letter addressed to Patel.

Commenting on "mismanagement" since November 8, when note ban was announced, and the criticism from different quarters, the letter said, "It's (RBI's) autonomy and image have been dented beyond repair."

At least two of the four signatories --- Samir Ghosh of All India Reserve Bank Employees Association and Suryakant Mahadik of All India Reserve Bank Workers Federation --- confirmed the letter. The other signatories are C M Paulsil of All India Reserve Bank Officers Association and R N Vatsa of RBI Officers Association.

The forum represents over 18,000 employees of the RBI across the ranks, Ghosh said.
The letter said appointment of an officer to coordinate currency management is a "blatant encroachment" on the exclusive jurisdiction of the RBI on currency and accused the Government of "impinging on RBI autonomy".

"May we request that as the Governor of RBI, its highest functionary and protector of its autonomy and prestige, you will please do the needful urgently to do away with this unwarranted interference from the Ministry of Finance, and assure the staff accordingly, as the staff feel humiliated," it said, soliciting "urgent action".

The RBI has been discharging the role of currency management for over eight decades since 1935, it said, adding the central bank does not need "any assistance" and the interference from FinMin is "absolutely unacceptable and deplorable".

The letter comes days after concerns about RBI's functioning being raised by at least three former Governors -- Manmohan Singh (former PM), Y V Reddy and Bimal Jalan. Former Deputy Governors, including Usha Thorat and K C Chakrabarty, have also voiced their concerns.

The letter said the RBI staff has carried out its job excellently following the move to ban 87 per cent of the outstanding currency by the government.

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The IMF today cut India's growth rate for the current fiscal year to 6.6 per cent from its previous estimate of 7.6 per cent due to the "temporary negative consumption shock" of demonetisation, days after the World Bank also decelerated India's growth estimates.

"In India, the growth forecast for the current (2016-17) and next fiscal year were trimmed by one percentage point and 0.4 percentage point, respectively, primarily due to the temporary negative consumption shock induced by cash shortages and payment disruptions associated with the recent currency note withdrawal and exchange initiative," the International Monetary Fund (IMF) said in its latest World Economic Outlook (WEO) update released today.

The IMF said that after a lacklustre outturn in 2016, economic activity is projected to pick up pace in 2017 and 2018, especially in emerging market and developing economies.

The global growth for 2016 is now estimated at 3.1 per cent, in line with the October 2016 forecast.
Economic activity in both advanced economies and emerging market and developing economies (EMDEs) is forecast to accelerate in 2017-18, with global growth projected to be 3.4 per cent and 3.6 per cent, respectively, again unchanged from the October forecasts, it said.

As per new IMF projections, India's growth in 2016 is now estimated to be 6.6 per cent as against 7.6 per cent earlier forecast.

In 2017, IMF has projected a growth rate of 7.2 per cent as against its previous forecast of 7.6 per cent.

The Indian economy is likely to revive to go back to its previously estimated growth rate of 7.7 per cent in 2018, according to the WEO update.

The cut in India's growth rates comes days after the World Bank decelerated India's GDP growth for 2016-17 fiscal to 7 per cent from its previous estimate of 7.6 per cent citing the impact of demonetisation. But forecast issued on January 11 said that India would regain momentum in the following years with a growth of 7.6 per cent and 7.8 per cent due to a reform initiatives.
Despite IMF's downward revision of India's growth rate and a slight upward revision of China's growth projections, India continues to be the fastest growing countries among emerging economies.
But in 2016, China with 6.7 per cent has edged past India (6.6) with 0.1 percentage point.
The growth forecast for 2017 was revised up for China (to 6.5 per cent, 0.3 percentage point above the October forecast) on expectations of continued policy support, the IMF said. India's growth rate in 2017 as per the latest IMG projections is 7.2 per cent.

In 2018, China's growth rate is projected to be 6 per cent against India's 7.7 per cent.
IMF said, in China, continued reliance on policy stimulus measures, with rapid expansion of credit and slow progress in addressing corporate debt, especially in hardening the budget constraints of state-owned enterprises, raises the risk of a sharper slowdown or a disruptive adjustment.

These risks can be exacerbated by capital outflow pressures especially in a more unsettled external environment, the IMF said.

IMF said global activity could accelerate more strongly if policy stimulus turns out to be larger than currently projected in the US or China.

Notable negative risks to activity include a possible shift toward inward-looking policy platforms and protectionism, a sharper than expected tightening in global financial conditions that could interact with balance sheet weaknesses in parts of the euro area and in some emerging market economies, increased geopolitical tensions, and a more severe slowdown in China, it said.

Maurice Obstfeld, Economic Counsellor and IMF Research Department Director, at a news conference here, said among emerging economies, China remains a major driver of world economic developments.

"Our China growth upgrade for 2017 is a key factor underpinning the coming year's expected faster global recovery. This change reflects an expectation of continuing policy support; but a sharp or disruptive slowdown in the future remains a risk given continuing rapid credit expansion, impaired corporate debts, and persistent government support for inefficient state-owned firms," he said.

In light of the US economy's momentum coming into 2017 and the likely shift in policy mix, IMF has moderately raised its two-year projections for US growth.

"At this early stage, however, the specifics of future fiscal legislation remain unclear, as do the degree of net increase in government spending and the resulting impacts on aggregate demand, potential output, the Federal deficit, and the dollar," Obstfeld said.



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Startups in developing economies are addressing local problems through creative technologies and solutions. For large global companies, the prospect of working with such startups is appealing — and complicated.

For large global companies, forging effective partnerships with high-potential startups is easier said than done. The very traits that make such startups potentially complementary as partners also make it difficult for large companies to engage with them in the first place. Multinational corporations often struggle even to identify promising potential startup partners; startups, for their part, find it difficult to identify and reach the relevant decision makers within the often-confusing hierarchies of gigantic multinational companies.

The challenge, for both sides, is all the more vexing in emerging markets. Furthermore, most academic studies of the challenges that large companies and entrepreneurial ventures face in partnering — and the solutions the studies suggest — focus on mature markets, such as the United States and Europe. Far less is known about how multinational corporations should engage with startups in emerging markets such as China and India — even though those markets already boast the presence of prominent multinational companies such as Amazon, Google, IBM, Microsoft, and SAP.

To understand how multinational companies have partnered successfully with startups in emerging markets, we undertook a study in three major emerging market economies: India, China, and South Africa. (See “About the Research.”) Our research uncovered four key factors that multinational companies confront in such partnerships in emerging markets. We also unearthed four strategies — one corresponding to each of the factors — to help global companies engage with startups in emerging markets more effectively. (See “Key Factors in Partnerships With Startups in Emerging Markets.”) While some factors may be more potent than others for a given multinational corporation, all four of these strategies are worth paying attention to. They are mutually reinforcing, interrelated strategies and should be viewed holistically rather than in a piecemeal fashion.



About the Research

We conducted more than 30 interviews between September 2015 and March 2016 with entrepreneurs and managers from six multinational corporations in the information technology sector across three emerging markets: China, India, and South Africa. At three of the multinational companies (IBM Corp., Microsoft Corp., and SAP SE), we conducted interviews in all three markets; at two (Amazon Web Services Inc. and Google Inc.), we conducted them in China and India; and at one (VMware Inc.), we conducted interviews in China only. These multinational companies varied in terms of their age.

Three were established pre-internet (IBM, Microsoft, and SAP) and three in the internet era (Amazon, Google, and VMware). Additionally, two corporate venture capital managers — one from Intel Corp. and another from Qualcomm Inc. — were interviewed, to obtain a complementary point of view from an equity-based engagement perspective. Our focus in the study, however, was on non-equity partnering through startup engagement programs such as Microsoft’s BizSpark, IBM’s Global Entrepreneur Program, and SAP’s Startup Focus program. We deliberately chose to study multinational companies with a strong record of startup engagement. The purpose of the interviews was thus not to compare more versus less successful multinationals but rather to understand how successful ones adapted their startup engagement strategies in 
emerging markets. 

Strategy 1: Compensate for the immaturity of the entrepreneurial ecosystem. The first key factor is the immaturity of the entrepreneurial ecosystem. Specifically, most emerging markets are afflicted by constraints and “voids” in their institutions. One of the people we interviewed referred to this as the “last mile” problem: Getting things done is a challenge in nations with poor access to reliable information, weak property rights, and unsound governance. In these settings, competition is potentially dysfunctional — and can be lacking in fair play. Weak institutions make contract enforcement unreliable and necessitate the development of trusting relationships to ensure that partners deliver on their promises. What’s more, the lack of a robust entrepreneurial ecosystem makes it harder for multinational companies to identify high-quality startups; compared with their counterparts in mature markets, startups in emerging economies more often lack the legitimacy or resources to gain access to multinational corporations.

In general, multinational companies that want to partner with startups in emerging markets must bear a greater burden to compensate for deficiencies in the entrepreneurial ecosystem. Notwithstanding some remarkable success stories in China and India, emerging market startups generally need some hand-holding from global multinational partners, given their lower levels of technical know-how. Several global companies we studied provide this support by supplementing their global startup programs with localized content that was tailored to the particular emerging market. A case in point is IBM’s Global Entrepreneur Program in China. An important facet of the Global Entrepreneur Program around the world is free access to various IBM software technologies. In China, IBM localized this feature by also providing access to training — helping developers boost their skills to global standards.

Another worldwide feature of IBM’s Global Entrepreneur program is its SmartCamp initiative, a contest that provides startup entrepreneurs with the opportunity to make a pitch to prospective investors. In China, this feature is localized in several ways: For example, startups also receive introductions to reputable incubators. In addition, IBM uses China-specific social media tools such as Sina Weibo and QQ in its community-building efforts. What’s more, there’s a separate Global Entrepreneur module for monthly activities in China. These include forums on particular vertical markets (say, health care or education), company visits, and face-to-face mentoring sessions with technical experts.

Indeed, mentoring startups is an important component of a number of multinational corporations’ startup engagement programs. High-quality mentors are scarce in emerging markets, so some multinationals make a strong effort to cultivate mentor networks — and contribute to the mentoring process themselves. Microsoft’s enhanced BizSpark program in South Africa is one example. Globally, BizSpark provides young startups with free access to Microsoft technology; in South Africa, which has a comparatively weak entrepreneurial ecosystem, Microsoft augments this offering by providing mentoring support, tailored to startups according to their stage of development.

Key Factors in Partnerships With Startups in Emerging Markets

THE ISSUE	KEY FACTORS IN EMERGING MARKETS	STRATEGIES TO ADDRESS THEM	EXAMPLES
Many multinationals are engaging with startups. But how should they do so in emerging markets, given the special constraints and opportunities of these settings?	1. Immaturity of the entrepreneurial ecosystem	1. Compensate for deficiencies	IBM’s enhanced startup program in China
	2. Appetite for entrepreneurship	2. Commit resources to tapping the entrepreneurial energy	Microsoft Ventures’ accelerator programs for startups in emerging markets
	3. Outsider status of Western multinationals	3. Work with local groups	Amazon Web Services’ support of an incubator initiative in China
	4. Access to novel innovations	4. Coinnovate with startups	SAP’s coinnovation labs in emerging markets

Strategy 2: Commit resources to tapping the entrepreneurial energy in emerging markets.

A second key factor is the appetite for entrepreneurship in emerging markets. Notwithstanding their constraints, emerging markets have opportunities aplenty. In some cases, innovative, successful growth companies have spawned startup ecosystems in emerging markets; consider the agglomeration of software and gaming startups in Hangzhou, China, in the vicinity of the well-known e-commerce company Alibaba Group Services Ltd. The increasingly mainstream appetite for entrepreneurship in emerging markets was apparent when NDTV, one of India’s leading television news channels, announced that six startups with $1 billion valuations (so-called “unicorns”) were its collective “Indian of the Year” for 2015. Another factor contributing to increasing interest in entrepreneurship in emerging markets is the role of returnees from mature markets. One study found that a sizable proportion of returnees coming from the United States back to China and India intended to start new businesses.

Perhaps also relevant is the inevitable slowing of growth in emerging markets, including China, which makes the potential for self-employment through entrepreneurship important. Notable in this regard is China’s entrepreneurship policy initiative, announced in 2014 by Premier Li Keqiang. The title of the policy roughly translates to “entrepreneurship by the populace, innovation by the masses.”
Some multinational companies are responding to this opportunity by prioritizing emerging markets. For example, in 2012, when Microsoft launched its Microsoft Accelerator initiative, a program providing support and training for high-potential startups, the program included a focus on emerging markets: Two of Microsoft’s first four accelerators were located in Bangalore and Beijing. Microsoft’s focus served as signals of commitment and interest to local startups in emerging markets. Importantly, the actions led to meaningful measures in these locations to bolster entrepreneurship.

In Bangalore, for example, Microsoft Ventures has leveraged the “10,000 Startups” initiative of the National Association of Software & Services Companies (NASSCOM), a trade association for the software industry in India. Specifically, Microsoft Ventures has become a sponsor of the “10,000 Startups” program, along with prominent peers such as IBM, Google, and Amazon Web Services. Furthermore, in addition to its own accelerator in Bangalore, Microsoft Ventures has an extended portfolio of activities in India through its #CoInnovate program.

The #CoInnovate program has three elements.

First, a “partner in acceleration” initiative helps other actors, including key Microsoft customers, with their own startup engagement. For instance, there is now a GenNext Innovation Hub in Mumbai that is a joint initiative between Reliance Industries Ltd., a Mumbai-based conglomerate, and Microsoft Ventures. Second, a “market access” program facilitates go-to-market strategies within key verticals, where promising startups participate in events targeting the CIOs and CTOs of key Microsoft clients. Third, a “high-potential” program enables venture capitalists or corporate partners to nominate high-potential startups to participate in the #CoInnovate program. CanvasFlip, a startup based in Hyderabad, India, which creates fast, clickable prototypes for mobile apps, is a case in point. A venture capitalist brought this startup to Microsoft’s attention, resulting in its entry into the Bangalore accelerator.

Strategy 3: Work with local groups to overcome the limitations of outsider status.

The third factor is the outsider status of Western multinational companies. While multinationals normally face unfamiliar conditions in foreign markets, the deficits in their knowledge base vis-à-vis local conditions are magnified in emerging markets.10 This challenge can be compounded by ignorance at corporate headquarters if headquarters executives fail to heed warnings from local subsidiary managers about the importance of understanding local conditions.11 Another challenge is the multiplicity of stakeholders that Western multinationals face in emerging markets, where they are often held to higher standards than domestic companies are — and expected to produce socially relevant outcomes, not merely economic ones.12 The upshot is this: Western multinationals usually find it takes longer for them to shed their outsider status13 in emerging markets than it does elsewhere. Consequently, it is a greater challenge to screen and identify allies in general — and startup partners in particular.

What’s the solution? Amazon Web Services Inc., which entered China later than other well-known Western multinationals such as IBM and Microsoft, decided to partner with DreamT incubator, a newly established organization working closely with local governments in Shanghai, Beijing, and Chongqing. DreamT is run and managed by an independent entrepreneurial team, with some government support and incentives. It is branded as being “powered by” Amazon Web Services. For Amazon, this is a China-specific initiative that helps signal a commitment to the Chinese market — but does not require Amazon to build the support infrastructure from scratch, all by itself. Moreover, the effort is aligned with the Chinese government’s priority to support entrepreneurship. In addition to common incubator services — mentoring, marketing support, and introductions to venture capitalists — startups in the DreamT incubator gain access to Amazon cloud technologies and business services, as well as training to make the most of these technologies.

Multinational companies that are relative newcomers to an emerging market could take a page from Amazon’s playbook, using existing actors to build a bridge between themselves and local startups. In other words, multinationals can combat the challenge of outsider status by building upon and complementing the work of reliable local actors.






Reproduced from the MIT Sloan Management Review

The Chinese telecommunications company Huawei recently has made significant inroads into European markets using a strategy of innovation partnerships with customers and governments.




What can Chinese multinationals do to overcome Western barriers to entry in strategically important technology industries in which “Made in China” or “Designed in China” are viewed as negatives? What dynamic innovation capabilities — or, put another way, what culturally specific processes — should companies focus on to gain acceptance in the competitive global marketplace?

To answer these questions, I studied Huawei Technologies Co. Ltd., the Chinese telecommunications company that has recently made significant inroads in Europe’s mature and strategically important telecommunications industry. (See “About the Research.”) Huawei, which is based in Shenzhen, is one of the first Chinese multinationals to be competitive in the West in a strategic technology industry, making it a potential role model for companies in China and other parts of Asia that hope to transition from being a follower to being a market leader.

To achieve its position, Huawei has aggressively pursued a strategy of joint innovation with leading European customers and governments. In this article, I will discuss how Huawei worked closely with European customers to develop joint innovation capabilities. In the process, the company was able to emerge as a leader in telecommunications in Europe.

About the Research

This article is based on a five-year study of how Chinese technology companies have upgraded their capabilities in the European Union.i Not only had Huawei become a leading telecommunications equipment provider and a leader in terms of its number of patent applications, competitors were recognizing its innovation collaborations with European telecom operators as best practice. To understand the origins of Huawei’s success, I studied the company’s development from 1987 through its emergence as an influential competitor in the European Union. With the help of two research assistants, I conducted 56 semistructured interviews with Huawei managers, competitors, policymakers, lobbyists, and customers in China, the European Union, North America, and Latin America, and reviewed materials such as company histories, annual reports, internal documents, and other reports. We explored how Huawei managers were able to convince customers in China and Western Europe to choose their services and products over those of established competitors and how it developed its innovation capability.

Reproduced from MIT Sloan Management Review

India is ranked at the sixth spot, behind China and Japan, in a list of eight great powers for the year 2017 by a leading American foreign policy magazine which is topped by the US. The list is topped by the US, whereas Chin and Japan are at tie for being on the second spot. Russia (fourth) and Germany (fifth) are the other two countries ahead of India. Iran is ranked seventh and Israel is on the eighth spot. "Like Japan, India is often overlooked in lists of the world's great powers, but it occupies a rare and enviable position on the world stage," The American Interest magazine said in its latest annual report of eight great powers.

India is the world's largest democracy, home to the second-largest English-speaking population in the world and boasting a diversified and rapidly growing economy, it said. On the geopolitical front, India has many suitors: China, Japan and the United States are all seeking to incorporate India into their preferred Asian security architecture, while the EU and Russia court New Delhi for lucrative trade and defence agreements, it noted. "Under the leadership of Prime Minister Narendra Modi, India has deftly steered its way among these competing powers while seeking to unleash its potential with modernising economic reforms," it said.

According to the magazine, despite internal problems in the aftermath of demonetisation, and the Pakistan scare, India found its footing elsewhere in 2016. "Long hesitant to pick sides, New Delhi took several clear steps this year to deter a rising and aggressive China, announcing that it would fast-track its defence infrastructure projects in the Indian Ocean, amid fears that China was trying to encircle India with a 'string of pearls'," it said.

"Likewise, Modi explored new naval cooperation with both the US and Japan, and signed a host of defence deals with Russia, France and Israel to modernise the Indian military," it observed. "From the Middle East and East Africa to Southeast Asia, India is making its presence felt in both economics and security policy in ways that traditional great powers like Britain and France only wish they could match," The American interest said.

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