Innovation and moving up the value chain

Earlier, in this series of articles, we mentioned that we will be addressing the issue of reducing the adverse effect of macroeconomic factors such as rise of domestic inflation and currency appreciation against the dollar on diminishing profits. We addressed some remedies to counter strengthening rupee and rising domestic inflation in by suggesting some short to medium term plans.

Now let us take a close look at some of the long term strategic options. Before I start, I would like to quote Peter Drucker, the famous marketing guru, who said “Business has only two basic functions – innovation and marketing”. Although marketing have significantly evolved in the post-Drucker time, and technologies especially those relating to the World Wide Web are redefining the boundaries and scope of modern day marketing, the statement surely holds power.

As we pointed out in earlier articles, macroeconomic factors such as domestic inflation and currency appreciation become survival threatening concerns if businesses compete on price. This may be specifically true for Indian businesses since as compared to China, Indian manufacturing is certainly not the cheapest. Inflation and currency fluctuations are routine phenomenon in capitalistic and democratic economies such as India. The point here is that smart businesses should learn to build long term strategic safe guards so that every time currency appreciates or inflation rises, profits don’t have to take a beating.

In other words, if the core competency of a business is price, then any fluctuation that affects price, affects profits.

This is not to suggest that competing on price is a crime. But to successfully do so, companies need robust, well established and operationally efficient supply chains. Building such supply chains, such as one owned by world biggest retailer, Wal-Mart has a learning curve and needs economies of scale. But in today’s world, to achieve such a feat, companies need to be in a commanding position which is thoroughly challenging.

What is the Solution? Reduce dependency of business on price and command significant margins to insulate the bottom lines from frequently changing macroeconomic factors. Here is where, we think Drucker’s advise will come in Handy.

To put this view in perspective, we will look at “Innovation” from the point of view of establishing sustainable competitive advantage. Further, we will take up marketing in the context of redefining your target audience.

For smaller set ups, there may be innovative ways of achieving sustainable competitive advantage and command a reasonable premium on their products. Innovation doesn’t limit itself to creating new products, but also includes new ways of managing business. Some of the ways we know in the context of Indian textile manufacturing are:

1) Design expertise
2) Customer intimacy
3) Higher quality standards
4) Supply chain stability

Competing on other factor such as design expertise, customer intimacy, higher quality standards, and supply chain stability is far more challenging than competing on price and essentially involves top management since these are strategic and long term.

In our next article, we will address each of these strategic options and how they can help businesses command a premium. Watch out for this space for insights into managing textile manufacturing business in India.