Letter I

Independent Director: An outside director or non-executive director, who does not have interests that affect the exercise of independent judgment, while taking decisions on behalf of the company. A sufficiently large number of independent directors on the board is considered desirable from the point of view of corporate governance. In the US, institutions like New York Stock Exchange and the Securities & Exchange Commission have prescribed various tests of independence. But independence alone does not guarantee good corporate governance. Many of the American companies, which collapsed a few years back, including Enron had a large proportion of independent directors. The real issue is the willingness and ability of the independent directors to impose checks and balances on the top managers. That calls for both competence and the right mental predisposition. (See Corporate Governance)

Industry: An industry can be viewed as a collection of firms that offer similar products or services, i.e. products that customers perceive to be direct alternatives for one another. A strategically distinct industry encompasses products where the sources of competitive advantage are similar. Many discussions of competition are based on very broad industry definitions. These are not meaningful definitions because the nature of competition and the sources of competitive advantage vary a great deal within them. Consider a firm in the PC industry. Does the industry include printers? Color monitors? Modems? These are the kinds of questions that executives face in defining industry boundaries.

Defining industry boundaries enables executives to determine the arena in which their firm is competing, the key success factors and address some important questions:
• Which part of the industry corresponds to the firm's goals?
• What are the key success factors in that part of the industry?
• Does the firm have the skills needed to compete effectively? If not, can it build those skills?
• Does the company have the skills to exploit emerging opportunities and counter future threats?

The industry structure may change over time because of the following reasons:

• Demand patterns may change due to demographic factors, changes in lifestyle, tastes, social conditions, substitutes, complementary products, market penetration, product innovation, etc. New buyer segments may emerge while existing segments may disappear.
• As buyers become more knowledgeable, the scope for differentiation reduces and products tend to become commodities.
• The uncertainties with regard to technology, buyer segments, industry growth and industry size may reduce over time. Simultaneously, there is a great degree of imitation as successful strategies are imitated and failed ones abandoned.
• Because of diffusion of knowledge, proprietary advantages tend to erode over time. The rate of diffusion of proprietary technology, however, depends on the particular industry.
• Accumulation of experience can often result in declining unit costs. An early mover may be able to reap significant benefits.
• Changes in cost or quality of inputs can affect the industry structure.
• Product innovations can expand the market, promote industry growth and create opportunities for product differentiation. They can also create mobility barriers.
• Marketing innovations can influence the industry structure. New advertising media and distribution channels can facilitate the targeting of new customers and increase the scope for differentiation. Sometimes, marketing innovations may also cut costs drastically.
• Process innovations may influence the economies of scale, proportion of fixed costs and the degree of vertical integration. This can make the industry more or less capital intensive.
• Changes in suppliers' and customers' industries can result in changes in industry structure.
(See Blue Ocean Strategy, Five Forces Model, Industry Shakeout, Substitutes, Value Innovation)

Industry Shakeout: Marks a discontinuity or turning point, as the industry goes through a major upheaval. Some of the greatest risks which companies face are during times when the industry is witnessing a shake-out. George S Day has provided some useful insights on industry shake-outs. Day refers to two kinds of shake-out: the boom-and-bust syndrome and the seismic-shift syndrome.

The boom-and-bust syndrome typically applies to emerging markets and cyclical businesses. The dot com industry in the late 1990s is a good example. During the boom, many companies entered the industry leading to excess capacity. As competition intensified and prices fell, many players found the going tough. The successful companies focused on operational excellence and cut costs ruthlessly.

The seismic-shift syndrome is more applicable to mature industries. Such industries enjoy prosperity for years together in a protected environment, with minimal competition and decent margins. A seismic shift takes place when these factors disappear. Deregulation, globalization and technological discontinuities are some of the factors that can cause a seismic shift. A good example is the pharmaceutical industry before the emergence of managed health care. In a physician driven environment, price was not an important factor. Physicians did not hesitate to prescribe expensive medicines which drug companies gleefully marketed. The emergence of HMOs has reduced the importance of physicians. HMOs recommend the use of generics wherever possible and control costs wherever they can. Drug companies are struggling to adjust to this new environment.

Managers need to develop antennae that can sense a shakeout before their competitors do so. Scenario planning can focus attention on change drivers and force the management team to imagine operating in markets which may bear little resemblance to the present ones. Studying other markets which have already seen a shakeout, which are similar in terms of structure and are susceptible to the same triggers can also be of great help. Examining how the same industry is evolving in other countries and regions can also provide useful insights.

Day refers to survivors from a boom and bust shakeout as adaptive survivors and those from a seismic shift syndrome as aggressive amalgamators. Adaptive survivors impose discipline in operations and respond efficiently to customer needs and competitor threats. Dell is a good example of an adaptive survivor. During the initial shakeout in the PC industry in the 1980s, Dell survived due to its lean build-to-order direct selling model. In the early 1990s, Dell stumbled when it entered the retail segment and its notebook computers failed to get customer acceptance. Founder, Michael Dell did not hesitate to make sweeping changes in the organization. He put in place a team of senior industry executives to complement his intuitive and entrepreneurial style of management. Dell became the largest manufacturer of PCs in the world, emerging as an adaptive survivor in an industry, which saw the exit of several players.

Aggressive amalgamators show an uncanny ability to develop the right business model for an evolving industry. They usually make one or more of the following moves: rapidly acquire and absorb smaller rivals, cut operating costs and invest in technologies that increase the minimum scale required for efficient operations. Mittal Steel is a good example. The company’s appetite for acquisitions and global consolidation is legendary.

For companies which find it difficult to become adaptive survivors or aggressive amalgamators, there are alternative strategies to survive a shakeout. These include becoming niche players, joining hands with other small players through strategic alliances and finally selling out and getting the best price possible.
(See Scenario Planning, Strategic Inflection Point)

Innovation: The most effective way to compete in a changing environment is to churn out new products and services rapidly according to the needs of the market. Innovation helps a company to stay ahead of the pack and move into less crowded areas. No wonder all companies are talking about innovation these days. Very often, innovation is misunderstood as invention. Invention is creating new things. But innovation is all about taking new ideas to the market place. History is full of examples of many companies that developed a new technology or product but failed to take it to the market. For example, Xerox developed many of the concepts associated with the modern day PC but failed to make a commercial proposition out of them.

Peter Drucker refers to innovation as the effort to create purposeful focused change in an enterprise's economic or social potential. Innovation must begin with an analysis of opportunities, in a systematic and organized way. The starting point in innovation is identifying the scope for improvement with respect to customers, suppliers and internal processes. Innovations must be market focused. Opportunities to innovate are provided by new customer segments which are just emerging; customer segments that existing competitors are neglecting or not serving well, new customer needs which are emerging and new ways of producing and delivering products to customers.

In his book “Innovation and Entrepreneurship,” Drucker has listed seven sources of opportunity for innovative organizations. Four are internal to the enterprise and three external. In order of increasing difficulty and uncertainty, they are as follows:
Unexpected success or failure
Understanding the reasons for the unexpected success or failure of a product generates opportunities to innovate. Take the case of IBM, which wanted to sell accounting machines to banks, but discovered that it was libraries that wanted to buy these machines. IBM’s Univac, designed for advanced scientific work, became popular in business applications such as payroll. Unexpected product failures can also give companies new ideas that may help them to come up with something that the market likes.
The incongruity between what actually happens and what was supposed to happen
If things are not happening as they should, there is scope to innovate. For example, in industries which are growing, but where the margins are falling, there is tremendous potential for innovation. Similarly, when companies continue to work at improving something to reduce costs but fail to do so, an innovator can look at other options to cut costs. This is exactly how container ships emerged by focusing on the ship’s turnaround time rather than fuel efficiency.
The deficiencies in a process, that are taken for granted
If a process is inefficient or suffers from a big gap, there is scope to innovate. Sometimes, a process that is widely used may have certain deficiencies. An innovator, by thinking out of the box, may come up with a new idea that removes this deficiency. Pilkington’s float glass manufacturing process, for example, paved the way for the development of glass with a smooth finish.
The changes in industry or market structure that catch everyone by surprise
The emergence of new, fast-growing segments provides scope for innovation. Innovators can serve the needs of these segments. The success of the small floppy disk drive manufacturers had much to do with the emergence of new customer segments who wanted smaller and lighter disk drives. According to Drucker , “New opportunities rarely fit the way the industry has always approached the market, defined it, or organized to serve it. Innovators therefore have a good chance of being left alone for a long time.”
Demographic changes
Demographic changes result in new wants and new lifestyles that call for new products. The Japanese pioneered robotics because they anticipated the rising levels of education and the consequent shortage of blue-collared workers. In recent years, the ageing of Japan and Europe has put pressure on governments to control healthcare expenses. This has fuelled the rise of generic drugs. Demographic changes provide innovation opportunities that are the most rewarding and the least risky, as the trends are easier to predict.
Changes in perception
By changing the common perception of people, new needs can be created. For example, capitalizing on people’s concern for health and fitness, a booming industry has emerged for exercise and jogging equipment.
The changes brought about by new knowledge
New knowledge can be used to develop innovative products. Innovations of this sort usually combine many sorts of knowledge. The development of the computer, for example, was facilitated by a combination of binary arithmetic, calculating machine, punch card, audion tube, symbolic logic and programming. Such innovations are also risky, because there is usually a gap between the emergence of new knowledge and its conversion into usable technology and another gap before the product is launched in the market. Drucker has mentioned , “Contrary to almost universal belief, new knowledge is not the most reliable or most predictable source of successful innovations. For all the visibility, glamour and importance of science-based innovation, it is actually the least reliable and least predictable one.”
(See Innovator’s Dilemma)

Innovator's Dilemma: A term coined by the innovation guru, Clayton Christensen of Harvard Business School. Many successful companies fail not because they neglect customers but because they take them too seriously and continue to pamper them by adding more features. An excessive focus on satisfying existing customers prevents the current market leaders from creating new markets and from finding new customers for the products of the future. In the process of adding new features to please their existing customers, the product or service becomes overpriced, going beyond the reach of customers, who might be looking for a simpler, cheaper product.

According to Christensen, many successful companies face the innovator's dilemma. Keeping close to existing customers may make sense in the short run. But long-term growth and profitability need a totally different approach. When the successful players are not prepared to embrace a new business model, they lose market share to more nimble or entrepreneurial companies, which are not encumbered by any baggage.

For example, PCs, when they entered the market, were not superior to minicomputers. But mini computer manufacturers like Digital Equipment lost their market share rapidly, when standalone workstations and networked desktop computers emerged and successfully targeted a totally new customer segment.
(See Clayton Christensen, Innovation)

Institutional Investor: A financial institution with shareholdings in listed companies. Institutional investors include pension funds, investment trusts, mutual funds (or unit trusts), insurance companies and banks managing investment portfolios for clients. Institutional investors across the world are playing an increasingly important role in equity markets. Through the buying and selling decisions they make, institutional investors not only move markets but also have an impact on corporate governance.
(See Corporate Governance)

Intrapreneurship: Intrapreneurship is the practice of developing entrepreneurial skills and approaches by or within a company. In companies which encourage intrapreneurship, employees are encouraged to behave as entrepreneurs by being given enough freedom and resources to experiment with new ideas.
(See Entrepreneurship)