Of product and process innovation

From pillar to post

Michael Palin, of the Monty Python parrot skit fame (remember “he’s probably pining for the fjords”?), went on another of his global tours in 1991, which was broadcast as the BBC travel documentary from Pole to Pole in 1992. Heading south from the North pole (well, whichever way you go from the North pole, you are headed south) along longitude 30 degrees east, he visited the Soviet Union shortly before it all came crumbling down. There are lots of theories about why it collapsed. I am only guessing that there must be since I have not read much in that area. However, that does not stop me from advancing my own theory. Wild conjecture it is not, however. It has to do with something that was illustrated in an encounter that Michael had in Moscow.

Russian Vodka

Michael goes to a government run food shop which he finds “is entirely uncontaminated by any food.” Looking around he spots a counter which has a line of people buying vodka. He joins the line and when he tries to buy a bottle, and after a bit of back and forth due to language difficulties, learns that to buy vodka one needs not just rubles but a specific stamp too. More back and forth to figure out where and how to buy the stamp. He tries to buy a stamp from other shoppers in the store with no luck. Finally, he joins another line in another part of the store to buy the stamp.

Stamp in hand, he goes back to the first line to buy his bottle of vodka. Triumphant at last, clutching his bottle of vodka, he says, “Vodka is just what you need after a long hard day’s work of buying a bottle of vodka!” Fun and laughs for him and his viewers but don’t you feel sorry for the poor sods that had to go through such insanity for perhaps everything that they bought, not just vodka, and did it for years on end?

I have never been to Russia (thank god) but I have a pretty good idea of how frustrating it must be over there. After all, I’m Indian. Nehru was mightily impressed with the socialism of the USSR and imported it lock, stock and barrel.

India was so thoroughly soaked in the spirit of Russian socialism that its hangover persists all over India even after nearly 20 years of having feebly attempted to sober up.

Every day in India in the ordinary course of living, I can point to no less than a dozen instances of absolute mindless procedures and processes that go to make life a little more difficult, that make getting things done a little more cumbersome and frustrating.

Socialism stresses employment, not production. The primary objective is to maximize employment, production be damned.

At the gate

The gate of the housing complex I live in, a cluster of about 300 apartments, is manned by four security guards. Two of them sit at a desk noting the names of people going in and out. [1] The other two, open and shut the steel gate. The gate is about 10 feet wide but they keep one half closed permanently, and the other half they open and close by hand incessantly. Traffic is nearly continuous but they don’t keep even half the gate open for even a few seconds. Any car or two-wheeler approaching the gate has to stop and then when the gate is pulled open, has to squeeze through slowly mindful not to hit the gate.

I have stood watching them for extended periods to see if they figure out that since traffic is heavy, they should just open both sides of the gate and leave them open. I even tried to reason with them that they are not helping things one bit and that they would save themselves a lot of effort, and others a lot of bother, if they would just get out of the way. All they said was that we have been ordered to keep the gates closed and that was that. If I wanted to complain, I could go to the their boss.

Just busy work

Too many people doing nothing much productive. Worse still, their job appears to be to throw as much sand as they can into the machinery. The processes are made by stupid people and followed mindlessly by half-literate employees. They lack the capacity to think how it can be made simpler and easier. They are so mentally handicapped that they would not even try to figure out how to do less work. Or perhaps it is for the little power that they can wield over others in their otherwise very powerless lives.

Electricity woes

Talking of power, here’s another example. The state electricity board goofed up and in their recent electricity bill they did not credit the last payment. So all bills were sent out incorrectly showing the past amount due. I usually pay my bill through a corner grocery shop which, for a small charge, takes care of submitting the check. I guess they take a whole bunch and get them done together. So when I went to tell them that the bill was incorrect, the shop said that it is a known problem and that to straighten it out, I will have to go personally to the state electricity office. Could the shop not just take a whole bunch of the incorrect bills and have them fixed, I asked? No, they tried to do that but the officer in charge at the state electricity office demanded that customers have to come personally to get the problem fixed.

Here’s what you do, I told the shop keeper. It will take nearly two hours for me to get it done. I will happily pay Rs 50 to get it taken care of. Since there are about 300 other customers similarly placed, even if 200 of them want to have this done by you, you will get Rs 10,000. Now go to the officer and tell him that you would bribe him Rs 2,000 or whatever it takes to get him to process the whole bunch through you. He tried but the man at the electricity office refused.

I went over to the electricity board office. I waited in line for a peon to examine my previous paid bill and the recent incorrect one. When it was my turn, the peon copied all sorts of information into a register and then wrote a small note with a reference number and attached it to the bill. Then I waited for the officer to call me into his room. He then initialed the bill. I brought it back to the shop and they will now take my adjusted payment and submit it.

Thousands of hours of productive or leisure time wasted for nothing. It is a government organization. They supply electricity — at least some of the time. You don’t have a choice as they are the only show in town. If you argue too much, they will cut even the erratic supply. And to top it all, here’s another thing. A newspaper item of July 25th announced — “Big cities in Maharashtra face 5 – 8 hours power cuts“. The state demand was around 15,000 MW and the supply was only 9,000 MW. These days, we have around 5 hours of power cuts daily.

The state electricity corporation is unable to meet the demand. Electricity is nothing new. Though it takes a few years to install additional capacity, demand projection is fairly easy and can be reasonably planned for, provided someone cares. The bureaucrats that command the electricity board should have been hauled up and punished for their incompetence in not projecting demand and installing capacity. But guess what is the command from up on high? Punish the users of electricity! Here’s how that newspaper item concludes: “… IT industries and high tension consumers have been asked to reduce power consumption by 10 percent, failing which action can be instigated against them.”

Government perversity

Indian industries cannot produce much, as is evident from the fact that Indians don’t have much manufactured stuff. Besides, whatever they produce is high cost because the cost of their inputs — notably electricity — is higher compared to other nations. The perversity of the government is truly astonishing. They monopolize important sectors like power and don’t deliver adequate power. As a result, industry suffers and economic growth is retarded. Persisting over decades, this impoverishes the population. And how does the government respond to its ineptitude? It lectures Indian industry about corporate social responsibility.[2]

At the HDFC bank

HDFC is a huge bank. You can’t miss it in India. But it is a nightmare getting things done there. An NRI friend wanted my help in getting a couple of statements from his HDFC accounts. I made about two dozen visits to my local branch over three weeks before I got the statements. The first day I went there on the errand, I was told that they would give me the statements the next day. Then we went into some sort of a loop. I would show up. They would tell me that it will be done any time now. I would return the next day. Same promise made without the least embarrassment. And so on it went. The sense of accomplishment was massive when I finally got the statements. All told I must have spent at least half a day’s worth of time just to get a couple of statements. In the US, it takes just about ten minutes at a bank to get whatever document one wants.

The Nehru Diktat

There’s a much longer story that is still unfolding between me and HDFC. For over a year I have been trying to get myself an HDFC credit card. It’s important to have a domestic credit card because merchants such as airline companies are understandably wary of accepting foreign credit cards.

HDFC is the only Indian bank account I have and I have been a customer with them for nearly five years, ever since I have been in India after California. My pay — which you must imagine must be very huge considering that I am the chief economist — is deposited directed into my account. Seriously though, the bank knows that I am not exactly destitute. Yet they have not been able to give me a credit card. [3]

Anyhow, back to my HDFC credit card. They tell me that the credit card has been refused. Why? Well, they cannot tell me that. Their policy is that they don’t disclose the reason for refusal to the customer. Go figure. We will not give you a card and we will not tell you why. In the US, they not only tell you, they will send you a free credit report to you if you were denied one due to some item on the credit report.

India is a socialist economy. There are mysterious powers that control one’s fate. The relationship between them and you is one of master and serf. Bowing and scraping in front of them is what you are supposed to do; they are not obliged to respond. Thus has Nehru decreed it and thus it shall be for evermore.

At the bazaar

Now you might say that HDFC is after all a quasi-government bank. It would not happen at a private bank. But it does. Citibank in India is one of the most incompetent banks I have had to deal with. It is not the institution but rather the general atmosphere in India that is poisoned by socialism. Let me tell you my final story about getting things done in India.

There’s a much celebrated retail chain called “Big Bazaar.” The head honcho is a fellow called Kishore Biyani. He even wrote a book about his success story. I have not read the book but I have bought a lot of stuff from his stores. For those of you who have not been to one (and know what a typical K-Mart in the US looks like), let me put it to you this way: a Big Bazaar is sort of like a K-Mart (“K-Mart sucks,” to quote Dustin Hoffman’s character in Rainman) but only a lot more cramped and disorganized. It generally takes a good half hour or so to check out even though they have electronic cash registers and optical scanners. The problem is that the systems are not well thought out.

Being an economist, I have observed very carefully US retailers. I am a huge fan of Costco and Trader Joe’s. I have been a member of Costco for over 20 years! It is interesting to compare the processes in a store like Costco with a store like Big Bazaar.

To shop at Costco, you have to be a member. Annual membership is $60 and it takes only a few minutes to become a card-carrying member. You have the entire year to “return” your membership for a full refund of the membership dues. If for any reason you wish to discontinue your membership, they will cheerfully refund your dues in full even if you have used the privileges for the whole year. How long does it take? A few minutes at the customer service desk at the store. They ask to see proof of identity (in case you are not carrying your card) and they cancel the card and hand you $60 in cash.

Now we move on over to Big Bazaar. I became a member of “Anmol” — a sort of a privileged shopper — in November 2006. There is no annual membership fee but there is a Rs 10,000 deposit which is returnable upon termination of membership. So I guess the implicit membership cost is Rs 800 per year (if you consider that the return on fixed deposit to be around 8 percent a year.) As an Anmol customer, you get special discounts on specific items.

How does one terminate membership? I recently found out since they have discontinued the scheme a couple of months ago. I have to write an application on plain paper, hand in my Anmol card, give them back a certificate (a piece of paper that was given to me at the time I got the membership) and produce the cash register receipt from the time that I had paid the Rs 10,000 deposit. If I do all these things, they will process the request and return the money within 3 months.

I explained to the manager at the store that I generally don’t carry a certificate with me all the time on the remote chance that one day when I end up at their store, they would have canceled the program. And their cash register receipts have thermal printing on them and generally become plain pieces of paper in about six months. So even if I had retained the receipt for nearly two years, it would not be useful.

Well, in that case the manager said, the refund will longer than the 3 months. Why, I asked. Wasn’t the fact that I had a card and I had proof that I was indeed who the card holder, and their system must have the fact that I had not asked for any refund yet, sufficient for them to process my request and refund my money? No.

So what was I to do, I asked. They said that they will take my card and my application and get back to me in a few weeks. I wrote the application and handed in my card. I asked for acknowledgment that they have received my card and the application. They said that they will give me a receipt. When? They will send the card to their head office and the head office will issue me a receipt in a few weeks that my card and my application has been received.

I tried reason with the store manager. I asked, “So how do I show someone that I have handed over the only proof I have that I had been an Anmol member and that my refund is pending if you take the card and I don’t get any acknowledgment in hand right now? What if you misplace my card and when I show up in a few weeks to ask for the status of my application, someone tells me that they have no recollection of my having given back the card?”

I spent a good half an hour without making any progress. I walked out without handing them the card and with the thought that I would write to Mr Kishore Biyani. He wrote a book “It happened in India.” I would write and tell him that it indeed did happen in India–and how.

Why

When you consider what it is that determines how successful an economy is, the most important factor is transaction costs. You may consider that it is all transaction costs once you have accounted for a bit of material, energy and labor that goes into the direct production of stuff. (See “It’s transaction costs all the way — Part 2” from July 2004.)

Little drops of water, little grains of sand
Make the might oceans, and the pleasant land

Like drops of water and grains of sand, little transaction costs add up into one huge big costly blunder. Productivity — a measure of how much a person produces — sinks and in the end the combined production of the economy is low enough that the average share is dismally low. That is what poverty means — that the income on average is too little to provide for a decent standard of living.

I compare the systems in the US to that of India’s, two countries I know intimately. I have lived and worked in both of them as an ordinary person. I think that it is important to note the word “ordinary.” Being an ordinary person affords a particularly important perspective that is not available to those who are at the top of the heap and who generally make the rules.

In some sense I know more about Big Bazaar than Kishore Biyani does. I know its faults and I know what should be done to make it a better retail store because I have been a shopper not only at his store but also for decades have been an ordinary customer at stores that are generations ahead of where Big Bazaar is today. Biyani never has been an Anmol member and he cannot fathom the misery that ordinary Anmol members faced in dealing with his store.

Biyani is not alone. Most of the bureaucrats and politicians of India have little understanding of what processes they have instituted and institutionalized in India. Even the least self-serving of the top bureaucrats and politicians (and I am merely assuming that are well-intentioned members of those groups) have little practical experience living in the world they direct. They are shielded from the effects of their folly and insulated from the reality they impose on others. If they have to have any chance of making the system work better — or even make it work at all — they have to experience how it feels.

Mr Manmohan Singh has to try to run a small business for a few months, a small corner grocery store perhaps. He will soon enough know more about the mis-governance that pervades India than by reading tons of reports that are published by the World Bank and the IMF.

Mr Biyani should try to get some shopping done in his store and then spend a few days shopping in a bunch of US retail stores. The managing director of the state electricity board should go house to house and talk to the people and find out what they have to say about the electricity supply.

Processes and Products

In the past, one could explain the poverty of poor economies by pointing to the fact that they did not have the technology to be more productive, that they did not have access to things. That is what is called the objects gap. Now we live in a more interconnected world, a globalized world. In this world, products don’t face barriers. It is a borderless world. Every gadget or machine, from iPhones to Airbus 380s, is available in poor countries almost as rapidly as it is available anywhere else. The objects’ gap is almost eliminated. What remains is the ideas gap. That gap is much more difficult to bridge. It is not simply a matter of importing machines and things. It is a bit more complicated.

That difficulty arises from a difference between products and processes. Products can be imported but processes have to be followed. Product innovation anywhere is available to anyone; process innovation requires a change in mindset. Products cost money as they are hardware and are private goods (as economic terms) but processes are software and are public goods (again in economic terms.)

Importing processes does not cost money, like importing products does. But processes cannot be imported costlessly: it involves changes which affect the real bottom line, the line along which one thinks.

Product innovation is good and great. But at the foundation of production innovation is the ability to admit process innovation. Process innovation happens only in suitable cultures. A culture which does not allow or encourage people to think for themselves is not one which will see much in terms of process innovation.

The NRI puzzle

Anyone familiar with the NRI story will agree to this. Indians are not very successful in creating innovative companies in India but the number of Indians who have done remarkable things in the US is pretty impressive. Was there something in the water of the US that makes them different from their country cousins?

I believe it is the processes that NRI’s find in the US that determines their success in the US, even after accounting for the effects of selection bias. To start a corporation in the state of California (the state that I am familiar with) takes only a few hours. I am sure that the founders of Google did not spend more than half a day to incorporate their company. In the US, they are simply more efficient, their transaction costs are lower. Why?

Why because they have process innovation. They ask themselves, “how can we make this less painful? How can we eliminate this or that step without materially affecting the outcome?” I have noticed that in India, the general attitude is that “we are told what we have to do and we have to do it because we have been told and we will not do it any other way.”

It is a matter of attitude. The attitude one has is of course dictated to a very significant extent by the environment. By nature, humans are infinitely adjustable. People who grow up in a socialist economy achieve a socialist mindset. Where we are born is a random draw and the outcome is pretty much determined for us. People born in an environment of free-thinking become free-thinkers. The transmission of religious views across the generations is just one example of this general phenomenon.

The conclusion

It is depressing to reach this conclusion: process innovation matters more than product innovation. That is the same as saying that the ideas gap matters more than the objects gap. The depressing thing is that process innovation is more difficult than product innovation. So if it is the lack of process innovation rather than the lack of products that hold back the progress of poor economies, the task of development is harder than it would have been had it been a matter of simply importing products.

An example: if education in India could be fixed by importing a couple of hundred million laptops, it would have been a cake walk compared to what needs to be done if what India really needs is process innovation in education. Just as an aside I should mention that I am a great admirer of the product OLPC (One Laptop Per Child) but I am afraid that it will be as useful in the Indian educational system as a bicycle to a fish.

How to induce process innovation? That is a pretty good question. I will have to write about that later.

Laters, dudes and dudettes.

NOTES:

1. This is a common procedure in Indian cities. I used to favor names like “Rajesh Khanna” and “Amitabh Bacchan” but for the last few years I have abandoned them for bigger favorites such as “George Bush,” “Sri Sri Ravi Shankar,” “Rajiv Gandhi,” and “Manmohan Singh.”

2. That is true perversity. The government fails on its mandate to deliver social services and then demands that industry do it. And this demand is made after making it deliberately difficult for industry to actually do what industry is supposed to do: produce goods and services.

For more on corporate social responsibility, see “Fake PM’s Speech — Part Yuck“, and “Profits are Corporations’ Social Responsibility“.

3. In the US, one receives a couple of offers for credit card in the mail every week. It is fun to take a minute to fill in some minor details and send it off in the postage paid envelope. In a week or so, one gets yet another no annual fee credit card in the mail. I had collected about a hundred free gold and platinum credit cards at one point. Most had a cash advance limit of $10,000 and a purchase limit of $25,000. If I wanted to, I could have bought about $2.5 million in merchandise and taken about $1 million in cash advance and skipped town. That shows what an honest guy I am 🙂

Anyway, better sense prevailed and I canceled all the cards. The chances of fraudulent use of cards go up the more cards you have that you don’t use regularly.