Tag: innovation

Leapfrogging Indian Labor Laws

A lot of ink gets spilt on the intractable nature of Indian labor laws. Indian labor laws are considered by many as a retarding factor of growth. Inflexible labor market regulations are believed to be hindering large-scale investments, technology absorption, productivity enhancement and high employment growth in Indian manufacturing. Inflexible labour market could also be one of the reasons for the share of manufacturing in Gross Domestic Capital Formation hovering around 30% since 1970s, and growth in share of services sector in GDCF from 39% in 1970 to 51% in 2010.

hiring and firing

However, what if, we have reached a point where it doesn’t matter anymore?

robots per 10000 employees in manufacturing

Indian labor laws exist to protect current employees. But what if entire new production lines are setup without having to employ labor at all?

What if, instead of this:


We start with this:


Industrial robot manufacturers are reporting between 18% and 25% growth in orders and revenue year on year.

Even newspaper articles are being written by algos. An algorithm called Quakebot is programmed to extract relevant data from USGS earthquake reports and plug it into a pre-written template. The story goes into the LAT’s content management system, where it awaits review and publication by a human editor. Narrative Science, a company that trains computers to write news stories, predicts that in the next 15 years, 90% of news would be written by computers.

Connecting the dots, we can imagine a future where our existing idea of a “corporation” might appear quaint.

Corporations can be thought of as information-processing feedback loops. They propose products, introduce them into the marketplace, learn from the performance of the products, and adjust. They do this while trying to maximize some value function, typically profit.
So why can’t they be completely automated? I mean that literally. Could we have software that carries out all those functions?
The CEO of an automatic corporation will be a devops engineer: fixing software bugs, writing “features” (i.e. new ways for the corporation to behave), watching performance dashboards (imagine all the pretty graphs!), and providing some vestige of human input to tune parameters used by the software. Eventually they can take their hands off the steering wheel, having configured everything to run on auto-pilot, and set up alerts to page their phone if something really goes wrong.

Why bother our netas and babus for reforms when we can directly leapfrog in to the “Automatic Corporation”?


Malls Leapfrogged


Emerging markets’ lagging technology adoption is considered an advantage. They are less inhibited by entrenched intermediate technology and can leapfrog to a state-of-the-art technology. For example, in India, mobile phones have substituted traditional fixed networks. Orissa electrified approximately 2,000 villages using decentralized solar power, biomass, wind power and a variety of small-scale hydropower projects. Why has retail commerce lagged behind?

Before the internet, malls offered the convenience of having a whole bunch of shops in one place. People can drive to a mall, park their cars, take breaks during shopping, probably even have a meal and then drive back home. What sounds like a typical American suburban ideal is a nightmare in the Indian context. Drive, park, deal with pesky salesmen, have junk for lunch, and then drive back? No thanks!

The leapfrog

Decline of malls in America

During the past few years, foot traffic in retail shopping malls has been declining. More American consumers are busier than ever and have less free time to shop in stores. Smartphones, tablets, conference calls, email, social networking, and video streaming all help to provide more efficient communication, but at the same time contribute to the limited capacity of the U.S. consumer for other endeavors. More and more, consumer preferences are shifting toward what can be done quickly and efficiently, and, ideally, what can be done from home or on the road when it comes to shopping.

Source: Have you been to the mall lately?


“Within ten to fifteen years, the typical U.S. mall, unless it is completely reinvented, will be a historical anachronism—a sixty-year aberration that no longer meets the public’s needs, the retailers’ needs, or the community’s needs.”

Source: Are Malls Over?

Is Costco losing the millennials?

A member of the millennial generation is highly unlikely to be a Costco customer. A car is all but a necessity for the typical “stock up” visit to Costco, and compared to older generations, millennials tend to not own cars and don’t seem to want to own cars. Most Costco stores are in suburban locations, while millennials tend to prefer urban living, and even if they are among the relatively few of their peers who could afford to buy a home, home ownership is less important to them than it was to their parents and grandparents as young adults. So … if you don’t have a car, and you don’t have the money or interest to stock up on two years’ worth of paper towels or mustard, and you wouldn’t have the space in your apartment to store this kind of stuff even if you wanted to, then there’s not much sense in shopping at Costco.

Source: Will millennials kill Costco?

e-commerce > malls?

An estimated 120 new malls have come up in the country over the last two years, of which 30-40 have either shut down or became non-functional due to poor footfalls and poor management. Meanwhile, capital continues to pour into e-commerce companies. Since Jan 2013, e-tailers have raised about Rs. 5,190cr.

Source: Over two dozen failed malls up for sale in metro cities

Will India leapfrog malls to e-commerce? We already give a puzzled look when people give us land-line numbers, will malls soon become a similar anachronism?

Shark-fin Innovation – Part II

A recent post on our innovation series discussed how the low cost of technology innovation is impacting incumbent industries. We also highlighted the acquisition of Simple, an online only bank by Spain’s BBVA.

Its not only BBVA that is worried about new entrants dis-intermediating traditional banking roles. Now J.P. Morgan’s CEO, Jamie Dimon has joined the chorus: “When I go to Silicon Valley… they all want to eat our lunch. Every single one of them is going to try.” (WSJ)

J.P. Morgan, the biggest Kahuna in the most tightly regulated industry is worried about Silicon Valley. That says a lot.

Prakash brought out an interesting point in our comments thread on our shark-fin post:


Shouldn’t individual investors diversify for themselves? Isn’t it beyond the mandate of the firm’s management and board to invest in startups?

This article on Techcrunch sums up the argument for corporate VC investments:

“Over the last few decades one of the things that has definitely been happening with corporations is that they’ve moved to an open innovation model or outsourced R&D. They’re doing less basic research in house and essentially looking to bring that in through acquisitions,” Hochberg said.

With the cost of developing new technologies coming down so dramatically, it makes sense for corporations to take smaller bets on new technology offerings, according to Hochberg and her peers.

“A lot of what startups are about is experimentation. [Now] you can experiment at a cost of about a tenth of what it was a decade ago,” Hochberg said. “[Businesses] can actually go out and get a sense of whether these things are going to be successful a lot more quickly and at a much lower cost.”

It kills a lot of birds with one stone:

  1. Attracting quality talent into a large organization is always a challenge.
  2. Most startup-founder remuneration is back-ended – bonus only if the experiment succeeds.
  3. #2 lowers the total cost of R&D for large organizations. They lose lesser amounts on things that don’t pan out – of which there are many.
  4. Most companies may not have R&D in their DNA and are better off outsourcing it.
  5. Making seed/early-stage investments is an insurance against “big bang” disruption.

#4 should make readers reflect on the recent experience of Infosys. Their turn-around strategy is to refocus on services and hive off products into a separate company. They tried version 3.0 but decided to stick with version 2.0. (ET)

#5, along with the fact that ten-year VC returns have trailed S&P-500 (WSJ) could mean that corporate VCs might be modeling these investments as an insurance policy.

The jury is still out there on whether individual investors derive economic benefit from the VC activity of a corporation. But it is prudent risk-management in the face of “big bang” disruption.

[stockquote]INFY[/stockquote] [stockquote]NAUKRI[/stockquote]

When the bell-curve meets the shark-fin

To be good at long-term investing, it is essential to understand the impact of innovation (previous posts.) Previously, we discussed how banking, one of the most highly regulated industries, is getting disrupted. There is a bigger under-current at play here. Accenture’s Larry Downes and Paul Nunes have this to say in their book Big Bang Disruption: Strategy in an Age of Devastating Innovation.

The new disrupters attack existing markets not just from the top, bottom, and sides, but from all three at once. By tying their products to the exponential growth and falling costs of new technologies, their offerings can be simultaneously better, cheaper, and more customized. Not just for one group of users, but for all (or nearly all) customers. This isn’t disruptive innovation. It’s devastating innovation.


Earlier research into innovation had modeled it in terms of a bell curve – you have your early adopters who pay a premium for a less-optimal product. This helps you finish up the product for a wider audience, aka “crossing the chasm.” However, innovation in the age of cloud computing, social networks and always-on internet should be modeled as a “shark fin.”

shark fin innovation

Traditionally, incumbents have been able to stave-off disruption by observing what their competitors were up to. For example, if Panasonic caught wind that Sony was working a high-def portable system, then it too would embark on a research project to head-off Sony. But increasingly, innovation is coming “sideways.” For example, Google Maps did not intend to kill off the map making industry, it was just collateral damage caused by Android + phone GPS + 3G network.

These “big bang” disruptions also have a tendency to tail off just as suddenly as they show but, but not without completely throwing the existing incumbents in to disarray. One of the competitive responses has been to buy off the disrupter. But this could end badly if there is no easy answer to the questions “What next?”

zynga omg

Case in point: Zynga’s acquisition of OMGPOP for $180M

But that is not to say all acquisitions are doomed. Consider Google’s acquisition of Waze for $1B in 2013. The company itself was founded just 5 years ago in 2008 but had 50M users at the time of its acquisition. Instagram’s user base grew from 30 million users when it was acquired by Facebook in 2012 and over 150 million by the end of 2013. And let’s not forget Google’s acquisition of Youtube and Cisco’s strategy of “accretive acquisitions.”

Some Indian tech companies, recognizing that innovation is increasingly occurring outside their walls, have remade themselves into venture capital firms. Case in point: Info Edge and Persistent Systems. If the key to Big Bang Disruption is to run a large number of small experiments, then their strategy of making small investments into teething companies might allow them to drive the disruption rather than become victims of it. As the era of “big iron” gives way to on-demand-computing, my money would be on these two to overtake the present-day incumbents in the Indian IT space.

[stockquote]NAUKRI[/stockquote] [stockquote]PERSISTENT[/stockquote]


The Facebook National Bank

Amid all the hoopla surrounding Facebook’s acquisition of Whatsapp, this gem of a news item didn’t get the attention it deserved:

BBVA buys banking start-up Simple for $117M

Founded in 2009, based in Portland, and having opened its (online) doors in July 2012, Simple just crossed the 100K customer mark – it has no physical branches and does not offer paper checkbooks. It has no fees and offers customers slick apps with which they can monitor spending activities. The bank’s main revenue stream is from intercharge fees from debit card usage. (SA)

The thought process for this deal was outlined in FT by the CEO of BBVA back in December thus:

Some bankers and analysts think that Google, Facebook, Amazon or the like will not fully enter a highly regulated, low-margin business such as banking. I disagree. What is more, I think banks that are not prepared for such new competitors face certain death.


The competitive response is believed to be rooted in big-data:

Yet while this is disconcerting for banks, the good news is that we still have one significant advantage, which is the vast array of financial and non-financial data that we accumulate. This information reveals a lot about habits, tastes, needs and aspirations. Banks need to turn it into knowledge and use that knowledge to provide users with exactly what they want, precisely how and when they need it.


The fact of the matter is that this disruption is already under way. China’s Alibaba became a $16 billion lender in less than three years, and China’s largest seller of money market funds in only seven months. Accenture estimates that competition from non-banks could erode one-third of traditional bank revenues by 2020. (HBR)

The risk for banks is that new competitors will consign them to a limited role as back-office utilities.

The competitive landscape

Payments: PayPal, Square and Stripe.
Retail: nearly one-third of domestic Starbucks revenues are paid through its own loyalty cards.
Debit card: Google Wallet. Walmart’s prepaid card that functions like a debit account captured more than a million customers in less than a year.
Checking account: T-Mobile launched a new checking service with a smartphone app and ATM card.

The competitive response

As non-banks stake claim to traditional banking functions, will banks move in to the retail turf?

Coupons: Garanti, one of Turkey’s largest banks, offers a free mobile app that gives customers personalized offers and advice based on their location and past spending.
Loyalty: Bank of America analyzes transaction data to give customers cash back on transactions at frequently used merchants.
Information: BBVA has long made available to its US customers information on the actual selling price of cars (as opposed to list prices)

The Indian scenario

An FT article back in November had this to say:

The RBI also plans to grant more regular licences for a broader range of financial institutions, providing what Mr Rajan described as a “substantial change” to bank structures.

“We could have wholesale banks, we could have mobile [phone] companies doing some banking activities, within certain constraints. We could have small banks, which we currently don’t allow, and we could allow co-operative banks,” Mr Rajan said.

Connecting the dots, I think its time we have a VC funded online-only bank – aka, The Facebook National Bank.