Technology, Innovation & Domestic Markets

1. National Policy Conference on Learning from Recession, Saving an Economy Towards an MSME Agenda Cochin, June 4, 2009. Technology, Innovation & Domestic Markets A Presentation by KR. Gnanasambandan, Vice President - TANSTIA

2. Aims of the Presentation • Describe the impact of Economic Recession on some of the Regional and Cluster level SMEs. • Discuss the implications and find suitable strategies to overcome • Discuss the role of Technology & Innovation • Stress the importance of Domestic market

3. Innovation Lesson from 1930’s • History suggests that even the deepest downturns can create huge opportunities for companies with money and ideas.

4. Fascinating Lessons from Great Depression • Recent turmoil in global financial markets and its spillover into the real economy have generated considerable interest in the Great Depression. • There’s much to be fascinated with, • both in the parallels (banking failures, a large spike in real-estate foreclosures, and global uncertainty, for example) and • the points of contrast (such as the speed and coordination of the response of central banks and finance ministries in 2008).

5. Today’s priorities • Can the business practices of the 1930s yield useful lessons for executives setting priorities in today’s uncertain and evolving environment? • For investments to promote innovation, the answer may be yes. • Executives are often told to maintain investment during downturns. • Is the typical behavior of executives—act cautiously and delay investment projects until confidence returns—the wiser course?

6. Companies hesitated to innovate during the 1930s • The growth rate of US patent applications by companies with R&D laboratories was considerably lower during the 1930s than in the preceding decade. • On the whole, corporate executives considering plans for research investments preferred to wait and see.

7. Companies devoted to innovation • Yet several successful companies did not delay such investments. • One was DuPont. In April 1930, a noted DuPont research scientist, Wallace Carothers, recorded the initial discovery of neoprene (synthetic rubber). • Although the company’s price levels and sales fell by roughly 10 and 15 percent, respectively, that year, DuPont boosted R&D spending to develop the new technology commercially.

8. New Technology companies • Hewlett-Packard and Polaroid—that became leading innovators later in the century were established as entrepreneurial start-ups during the 1930s. • Radio Corporation of America, the high-tech company whose stock was bludgeoned during the Great Crash, returned to profitability in 1934 as it shifted its innovation efforts from radio to the nascent television market. • In total, US companies founded at least 73 in-house R&D labs each year from 1929 to 1936.

9. The other side of the Depression • Downturns are destructive, but, they can also have an upside. • The Depression-era economist Joseph Schumpeter emphasized the positive consequences of downturns: the destruction of underperforming companies, the release of capital from dying sectors to new industries, and the movement of high-quality, skilled workers toward stronger employers. • For companies with cash and ideas, history shows that downturns can provide enormous strategic opportunities

10. Mind your own business?Scenario #1 • Two years ago small HDPE woven fabric and bag manufacturers met with a problem. • Nepalese HDPE woven bags were cheaper by 25% and played a havoc with local market. • Within two months every factory in North India was on the verge of closure. • Their sales were dropped by 80% within two months!

11. Mind your own business?Scenario #2 • A large number of small manufacturers that consumed any of the raw materials as iron and steel, aluminum, copper and PVC, have seen their profits disappear in thin air. • The demand remains either steady or rising and though the cost of raw material increased, they have not been able to push up the price of the finished products. • It used to be a simple game earlier; whenever the prices of the raw material were increased, markets absorbed the increase in the prices of their finished products also. • No more so. What happened?

12. Mind your own business?Scenario #3 • During the same period, Indian exporters chiefly the small and medium enterprises, came across newer challenges in the foreign markets. • A large variety of Indian exports were increasingly subjected to trade barriers : Leather goods, Chiffon skirts, Iron and Steel, Castings etc. in US; • Leather products, carpets, gray cotton etc. in EU, garments in Turkey, the list is expanding day by day. • Why India?

13. Mind your own business?Scenario #4 • During last few years, one after another, instances of cheap imports hurting domestic manufacturers came to light. • Diesel Engines, hand tools, electric fittings and decorative lights, locks, sports goods, pencil cells, stationery, the list kept increasing and gave sleepless nights to the small manufacturers • China, wherefrom most of this stuff emanated, became a scary dream. • How China raced ahead of India?

14. Problems of the Small is perennial • The gloomy atmosphere is set even before the Economic recession set in. • The recession has added fuel to the Fire • However, recession has taught us a Lesson to cut cost and become innovative not only in products but also in production, administration and delivery

15. Raising Challenges of Sustainability • Micro & Small units are unable to sustain itself not only because of recession, but due to various factors • Obsolete Technologies • Unable to face Globalized competition • Too small and Fragile in nature • Lack of Professionalism • Absence of MSME friendly policies in Government procurements

16. Sectors/Regions affected • Jacquard Towels at Madurai • Kitchen garments at Karur • Knitted fabrics/garments at Tiruppur • Processed Fish at Tuticorin • Gerkins (cucumber) from Tamilnadu and Karnataka • Tourism and Hospitality Industry all over India • Auto/Light Engineering at Hosur • Textile Mills in Coimbatore

17. Products got affected • Consumer Desirables • Tertiary level of Food Processing • Handicrafts and Fair Trade Produces • Non conventional energy (wind mills) equipments and its accessories • Auto Ancillaries • Construction Industry as a whole

18. Untouchables • MSMEs supplying to Government and Quasi Government organisations got very much affected due to Policy change • All major projects are awarded on Turn Key basis – Only large Corporates and MNCs are able to bid • MSMEs are made as “Untouchables”

19. Products/Areas which did not have much Impact • Conventional Power generation and its ancillaries – BHEL • Basic food Processing (Primary and Secondary) • Pharmaceuticals • Education related Products • Inland Tourism • Transport other than Air Travel

20. Role of Central Government • Come out with a firm procurement policy • Increase the share of MSME’s in all departments including Defense • Facilitate Technology transfer • Implement NMCP in letter and spirit • Avoid Red Tapism • Maintain reduced level of Excise Duties and increase the time duration for payment of duty to 60 days • Allow an Interest free Loan on Excise Duty as in the case of Sales Tax/VAT

21. Role of State Governments • Establish a “Land Bank” and provide Land to MSME’s at affordable price • Ensure uninterrupted Power supply • Provide more number of days to pay VAT • Reserve 20% of Govt. procurement for MSMEs. • Do not treat Micro & Small units on par with Large Industries for Labor Laws • Play a Facilitators role and help Small units to become Pollution free instead of an Implementing Role

22. Role of FIs • Right from the then Prime Minister, A.B. Vajpayee, leaders discuss about “Below PLR” but in vain • Bankers should not take the financial parameters of the 2008-09 balance sheets • Term Loans have to be rescheduled and only interest to be collected • Though Limits are available Combined DP will be less at this juncture due to poor performance, bills removed from cover etc. Bankers should be liberal in arriving at the DP

23. Strengths of a Firm • Products • Technology • Processes • Image • Links with clients • Personnel • ?????? • Do all SMEs have this? • Innovation – required everywhere

24. Constraints on Growth • Competition • Lack of trained personnel • Saturated markets • Working capital • Lack of time • ? • Why not we compliment each other instead of competing?

25. Why Grow? • Survival • Increased profit • Utilization of capacity • Preserve market share • Prestige • Make business more attractive

26. Growth Strategies • Increased market penetration – domestic markets? • Diversification • Product • Geographic • Technology • Electronic Commerce

27. Growth Strategies II • Partnerships • Merger • Acquisition • Limited term cooperation • Internationalization

28. Choosing a Growth Strategy • Capitalizing on strengths and avoiding weaknesses • Degree of change • Commitment to change • Time frame • Risk

29. Strategies for Small Business Success • We are experiencing a “structural shift” in which “information technologies have begun to alter the manner in which we do business and create value, often in ways not readily foreseeable even five years ago.” -1999 • “And even when [technologies] are anticipated, their effect on economic growth is difficult to predict, in part because their pace of diffusion and application is so uncertain.” -2002 -Alan Greenspan, Chairman, Federal Reserve Bank

30. Organizational Change • Restructuring • New lines of communication • New methods of control • Personnel to be hired and trained • New relationships with environment

31. Determinants of Success forSmall Business Growth • Owner’s attitude • Prior planning • Appropriate information flow • Employee flexibility • Adequate capitalization (not just monetary) • External perspective

32. Owner’s Attitude • Toward change • Toward employees • Toward failure • Towards old business

33. Steps to Successful Growth • Know why you are growing • Choose appropriate strategy • Construct detailed, flexible plans • Have your plans externally reviewed • Prepare personnel (including the boss) • Remain flexible during execution • Know when to consolidate

34. Strategic Planning • Depending on how events unfold, the industry could make radically different moves • The company’s strategy, in short, must account for many more contingencies • The effectiveness of such a strategy depends on an organization’s ability to adjust rapidly as the fog starts to lift

35. Indicators of Distress • Delinquent accounts payable • Downgraded debt ratings • Large share price declines • Late inventory deliveries • Lower-quality goods or materials.

36. Look beyond the crisis • Given the vastness of the economic change now under way, the temptation for many will be to gaze, mesmerized, at the unfolding crisis • That’s a mistake, for at least two reasons.

37. Fundamentals will not rollback • First, devastating as the current downturn may be, it cannot roll back fundamental market trends—such as the aging of consumers in Europe and North America or the continued economic development of Brazil, China, India, and Russia—which will continue to create strategic opportunities and threats • MSMEs must focus their eyes—and resources—on these trends no matter what happens.

38. Evaluate the effectiveness of Current Strategies • Second, although the crisis may force companies to suspend or redirect some of the existing strategies, others will remain relevant even in the changed environment. • Sort out which current strategies the crisis has helped, hurt, or failed to affect and ensure that a system and metrics are in place to track their performance • While all this may sound like common sense, extreme uncertainty makes it easy to overlook.

39. Lead through the Turbulence • Despite the challenging times, the strategic-planning process need not be an exercise in anxiety or futility • Developing scenarios in greater depth, monitoring strategies more rigorously, and remaining focused on the long term will all help • Create plans that can lead the companies through the turbulence.

40. Thanks! Any Questions? • I will be happy to answer!!! KR. Gnanasambandan, Vice President – TANSTIA, Mobile: 094437 11495 E-Mail: attma_04@yahoo.com