Technology, Innovation & Domestic MarketsA Presentation by

KR. Gnanasambandan,Vice President - TANSTIA

National Policy Conference on

Learning from Recession, Saving an EconomyTowards an MSME AgendaCochin, June 4, 2009.

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

Innovation Lesson from 1930’s

History suggests that even the deepest downturns can create huge opportunities for companies with money and ideas.

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).

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?

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.

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.

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.

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

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 withlocal market.

Within two months every factory in North India was on the verge of closure.

Their sales were dropped by 80% within two months!

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?

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?

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?

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

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

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

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

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”

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

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

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

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

Strengths of a Firm

Products Technology Processes Image Links with clients Personnel ?????? Do all SMEs have this? Innovation – required

everywhere

Constraints on Growth

Competition Lack of trained personnel Saturated markets Working capital Lack of time ? Why not we compliment each

other instead of competing?

Why Grow?

Survival Increased profit Utilization of capacity Preserve market share Prestige Make business more attractive

Growth Strategies

Increased market penetration – domestic markets?

Diversification Product Geographic

Technology Electronic Commerce

Growth Strategies II

Partnerships Merger Acquisition Limited term cooperation Internationalization

Choosing a Growth Strategy Capitalizing on strengths and

avoiding weaknesses Degree of change Commitment to change Time frame Risk

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

Organizational Change

Restructuring New lines of communication New methods of control Personnel to be hired and

trained New relationships with

environment

Determinants of Success forSmall Business Growth

Owner’s attitude Prior planning Appropriate information flow Employee flexibility Adequate capitalization (not

justmonetary)

External perspective

Owner’s Attitude

Toward change Toward employees Toward failure Towards old business

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

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

Indicators of Distress

Delinquent accounts payable Downgraded debt ratings Large share price declines Late inventory deliveries Lower-quality goods or

materials.

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.

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.

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.

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.

Thanks! Any Questions? I will be happy to answer!!!

KR. Gnanasambandan,Vice President – TANSTIA,

Mobile: 094437 11495

E-Mail:

attma_04@yahoo.com