Subba’s Serendipitous moments

April 23, 2008

Why is the shift to Wave 3 going to be difficult?

I wish I could share Mr. Sudhakar’s optimism about Indian companies just operating a switch to change their mind set to becoming a thought leader from an order taker. As I responded to him (to his remarks that I have a low opinion of Indian companies) the mind set change is not easy.

I was talking to a couple of friends in the industry, when suddenly the brainwave stuck. My thesis is that there seems to be a particular “Indian mind set” just content with supplying raw material and not getting higher in the value chain. Let me elaborate with a few historical perspectives.

For centuries, India has been selling spices to the world. But do we dominate the food market? Someone packages the spices, gives it brand power and occupies the consumer’s mind share. And the market leader in that area is McCormick that has nothing to do with growing spices.

So has it been in several areas — be it textiles, silk, pharmaceuticals and now software. The pharmaceutical industry for one, have been preoccupied with supplying bulk drugs for decades and it is now that they are slowly venturing into branded drugs albeit reluctantly.Even now most pharma companies are happy to do clinical trials for MNC drug companies, or do contract research.

It is not that the spice traders, or the textile manufacturer or the pharma industry did not intuitively understand the Wave model. They did, they saw margins under pressure, they were hungry for more profits, but they were deeply stuck in their raw material or supplier mind set. I would opine that the same is being replayed in the software services space. One can argue that globalization and the newly discovered passion for success amongst Indian entrepreneurs have changed the equation, but that’s only to a point.

Here’s what I posit: Just because one does exceedingly well in a particular position in the value chain, doesn’t guarantee that one can transition to a higher level in the value chain.

Prof Yves Doz of INSEAD has an interesting framework that explains this. He defines 3 layers of business thinking — the adaptive layer, the experiential layer and the existential layer.

The adaptive layer is the layer, where it is purely supply of commodity goods, with very little value addition, and working on a cost arbitrage or sheer availability. The availability of spices and the availability of cheaper manpower for software services fall in this category.

In the experiential layer, the challenge is to step into the shoes of the customer and create valuable products and services. The classic example is of how Nissan creates a new car for the European market. I would also consider TATA’s introduction of the Nano in this category.

The existential layer is going one level deeper — stepping into the minds of the customer. An Apple or a Nike fully understands the consumer mind — and works backwards to create products or services.

Now, if all these layers can be seen as value chains, one can understand how difficult it is to make the transitions from one layer to another. I would reckon that the ability to go from one layer to another is like crossing the chasm, and simple evolutionary mechanisms would be inadequate.

I am not in any way making a value judgment of the superiority of one layer over the other; it is just that the organizational DNA that one needs to be playing in each of the layers are vastly different and people tend to underestimate the kind of effort, energy and risk as they move from one layer to another.

Prof Yves Doz’s theory is appealing, because it captures the locus of capabilities and limitations very well.

Just as an aside: Faced with a possible slowdown in the West, Infosys’ response has been a traditional Wave 2.1 approach than the Wave 3 approach which Mr. Sudhakar passionately advocates. So has TCS with its Latin America operations.

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  1. Dear Sudhakar and Subbaraman,

    Here’s my take:
    1. Sudhakar is confident about the ability of Indian companies in making the transition, with out explaining the ‘how’ of it. As Subbaraman says in his response, it is not as if we can throw a switch and bingo- we start functioning at Wave 3 level. It will be interesting to learn from Sudhakar as to how he sees his company Mastek managing this transition (if he finds it convenient to share those thoughts that is).

    2.Subbaraman, I quote from your blog:

    “Just because one does exceedingly well in a particular position in the value chain, doesn’t guarantee that one can transition to a higher level in the value chain.”

    It also does not make it impossible to transition to the next (higher?) level in the chain. In fact, if I am a leader at the Adaptive layer, while it is difficult to let go from the comfort zone, I also understand that it is imperative I make the transition or lose out. But being a leader gives me enough strength ( a war chest, traction with customers etc) to plan my transition in a phased manner.

    One might argue that there is a chasm between each layers, and as the old chinese saying goes, one can not hop, skip and jump over a chasm; one needs to leap over it.But is it always true?

    How about, say a firm like TCS or Infy (or Mastek for that matter), aiming for 20% revenues from Wave 3 work over the next 2-3 years, and increase that % to beyond 60% in 5-7 years?

    To do this, what kind of organizational and branding changes are required? Will it call for creating an SBU or two within the org that nurtures a different kind of DNA? Will it help to have a mechanism to identify Wave-3 capable talent from the existing org and retooling their skills?Will strategic acquisitions ensure a faster transformation?

    My point: Between the two of you, the problem statements have been defined very well.Please share some thoughts on the solution approaches, rather than defending your views.

    Thanks for an insightful discussion.

    Kumar Narasimha

    P.S.: Read your blog post and many of the archived posts here.Its a very readable blog with a wealth of useful information. I have bookmarked it and will visit regularly.Thanks.

    Comment by Kumar Narasimha — April 24, 2008 @ 2:01 pm | Reply

  2. Dear Kumar Narasimha:

    Thanks for your comment and your compliments:) I will deal with your substantiative questions in a separate blog post,however here’s a quick summary response:

    Sure being a leader with enough strength gives you the resource to take a risk. We have been talking of mind set change all along, so let’s leave the resource out of the picture. In fact, business history seems to indicate that resource constraints (not ample resources) often provides the right impetus to move from one layer to another.

    Since you listed a few options, here’s my quick take on that:

    Setting up a SBU far removed from the corporate HQ: IBM PC was developed not at Armonk but at Florida.
    Make a significant acquisition but keep it independent: 3COM’s acqusition of Palm and decision to keep it independent despite pressures to integrate it within 3COM. At one point the Palm market cap was higher than that of 3COM. On the contrary whenever the Indian IT services companies have made an acquisition (they have all been small though), there’s been a hurry to integrate that, rather than fund it, scale it and leverage it strategically.
    The ability of the CEO to create a “burning platform” to drive the shift. A new CEO often has the advantage to do so. I think Vivek Paul (ex CEO of Wipro) created a near “burning platform” for Wipro.

    As I said, the issues you raised and the possible solution to the issue deserve multiple posts. Once I have sufficient time, I will apply my mind and post it.


    Comment by Subbaraman Iyer — April 25, 2008 @ 12:27 am | Reply

  3. […] The classic example is of how Nissan creates a new car for the European market…. source: Why is the shift to Wave 3 going to be difficult?, Serendipitous […]

    Pingback by Why is the shift to Wave 3 going to be difficult? — IT advertising — April 25, 2008 @ 2:14 am | Reply

  4. […] The chances are very low, because while Indians or Chinese may be smart engineers; the kind of business thinking that needs to envision something novel is not there. Comments […]

    Pingback by Can a Susan Boyle happen in East Asia? « Subba’s Serendipitous moments — May 20, 2009 @ 11:30 pm | Reply

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