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4 lessons to learn from Tata's Nano

John Hagel and John Seely Brown, BusinessWeek.com | March 25, 2008 | 11:43 IST

T he announcement in January by Tata Motors of its newest car, the Nano, was revealing on many levels. The announcement
generated extensive coverage and commentary, but just about everyone missed the Nano's real significance, which goes far
beyond the car itself.

Inside the Tata group empire

But, OK, let's start with the car itself - particularly the price. At about $2,500 retail, the Nano is the most inexpensive car in the
world. Its closest competitor, the Maruti 800, made in India by Maruti Udyog, sells for roughly twice as much. To put this in
perspective, the price of the entire Nano car is roughly equivalent to the price of a DVD player option in a luxury Western car. The
low price point has left other auto companies scrambling to catch up.

Thinking outside the patent box

How could Tata Motors make a car so inexpensively? It started by looking at everything from scratch, applying what some
analysts have described as 'Gandhian engineering' principles - deep frugality with a willingness to challenge conventional
wisdom. A lot of features that Western consumers take for granted - air conditioning, power brakes, radios, etc - are missing from
the entry-level model.

More fundamentally, the engineers worked to do more with less. The car is smaller in overall dimensions than the Maruti, but it
offers about 20 per cent more seating capacity as a result of design choices such as putting the wheels at the extreme edges of
the car.

Tata unveils the world's cheapest car

The Nano is also much lighter than comparable models as a result of efforts to reduce the amount of steel in the car (including
the use of an aluminum engine) and the use of lightweight steel where possible. The car currently meets all Indian emission,
pollution, and safety standards, though it only attains a maximum speed of about 65 mph. The fuel efficiency is attractive - 50
miles to the gallon.

Hearing all this, many Western executives doubt that this new car represents real innovation. Too often, when they think of
innovation, they focus on product innovation using breakthrough technologies; often, specifically, on patents.

Tata Motors has filed for 34 patents associated with the design of the Nano, which contrasts with the roughly 280 patents
awarded to General Motors every year. Admittedly that figure tallies all of GM's research efforts, but if innovation is measured
only in terms of patents, no wonder the Nano is not of much interest to Western executives.

Measuring progress solely by patent creation misses a key dimension of innovation: Some of the most valuable innovations take
existing, patented components and remix them in ways that more effectively serve the needs of large numbers of customers.

A modular design revolution

But even this broader perspective fails to capture other significant dimensions of innovation. In fact, Tata Motors itself did not
draw a lot of attention to what is perhaps the most innovative aspect of the Nano: its modular design.

The Nano is constructed of components that can be built and shipped separately to be assembled in a variety of locations. In
effect, the Nano is being sold in kits that are distributed, assembled, and serviced by local entrepreneurs.

Tata: Master of the gentle approach

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As Ratan Tata, chairman of the Tata group of companies, observed in an interview with The Times of London: "A bunch of
entrepreneurs could establish an assembly operation and Tata Motors would train their people, would oversee their quality
assurance and they would become satellite assembly operations for us. So we would create entrepreneurs across the country
that would produce the car. We would produce the mass items and ship it to them as kits. That is my idea of dispersing wealth.
The service person would be like an insurance agent who would be trained, have a cell phone and scooter and would be
assigned to a set of customers."

In fact, Tata envisions going even further, providing the tools for local mechanics to assemble the car in existing auto shops or
even in new garages created to cater to remote rural customers.

With the exception of Manjeet Kripalani, BusinessWeek's India bureau chief, few have focused on this breakthrough element of
the Nano innovation.

This is part of a broader pattern of innovation emerging in India in a variety of markets, ranging from diesel engines and
agricultural products to financial services. While most of the companies pursuing this type of innovation are Indian, the US
engineering firm, Cummins demonstrates that Western companies can also harness this approach and apply it effectively.

A WiMAX breakthrough in India

In 2000 Cummins designed innovative 'gensets' (generation sets) to enter the lower end of the power generator market in India.
These modular sets were explicitly designed to lower distribution costs and make it easy for distributors and customers to tailor
the product for highly variable customer environments. Using this approach, Cummins captured a leading position in the Indian
market and now actively exports these new products to Africa, Latin America, and the Middle East.

'Open distribution' innovation

We have called this 'open distribution' innovation because it mobilises large numbers of third parties to reach remote rural
consumers, tailor the products and services to more effectively serve their needs, and add value to the core product or service
through ancillary services. Three innovations in products and processes come together to support 'open distribution':

increased modularity (both in products and processes)

aggressive leveraging of existing third-party, often noncommercial, institutions in rural areas to more effectively reach
target customers
creative use of information technology, carefully integrated with social institutions, to encourage use and deliver even
greater value.

Modular designs combined with creative leverage of local third-party institutions help participants to get better faster. Companies
such as Tata and Cummins are going far beyond 'customer co-creation' in the narrow sense of soliciting isolated ideas from
customers.

Instead, they are building long-term personal relationships with customers, enriched by the specialised capabilities of broad
networks of third parties that generate much deeper insight into customer needs and afford opportunities to tailor value.

Such innovations are quite different from those in the retail distribution systems pioneered by companies such as Dell and the
leading big-box retailers. These US companies developed completely self-contained and highly standardized facilities and
services for customers. But the open-architecture approach pioneered by Indian companies may offer much greater opportunity
to deliver more tailored value to customers than the closed-architecture US approach.

The techniques initially developed to reach poor and rural customers may have even greater potential when used to reach highly
demanding, affluent, urban customers in Western economies.

Welcoming users back into the design loop

The Tata Motors/Nano approach contrasts with the strategy of most other manufacturers. For more established automakers each
new model represents an advance in tight integration, with more and more of the functionality deeply embedded in electronics
that truly represent a 'black box' to the customer.

The days of customising cars to personalise them and push their performance limits are rapidly receding into distant memory for
the average customer. Yet, as Kathleen Franz, makes clear in her wonderful book, Tinkering: Consumers Reinvent the Early
Automobile, it was the open design of early automobile models that blurred the lines between consumption and invention and led
to a wave of innovations that were later embraced by the auto industry.

What are the broader lessons that Western executives should learn from this innovation story?

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E merging markets are a fertile ground for innovation. The challenge of reaching dispersed, low-income consumers in emerging
markets often spurs significant innovation. Western executives should be careful about compartmentalizing the impact of these
innovations on the edge of the global economy. As we suggested in Innovation Blowback, these innovations will become the
basis for 'attacker' strategies that can be used to challenge incumbents in more developed economies. What's initially on the
edge soon comes to the core.

F ind ways to help customers and others on the edge to tinker with your products. Modular and open product designs help
engage large numbers of motivated users in tailoring and pushing the performance boundaries of your products, leading to
significant insight into unmet customer needs and creative approaches to addressing those needs.

Pay attention to institutional innovation. Western executives often become too narrowly focused on product or process
innovation. Far higher returns may come from investing in institutional innovation - redefining the roles and relationships that
bring together independent entities to deliver more value to the market. Tata is innovating in all three dimensions simultaneously.

Rethink distribution models. In our relentless quest for operating efficiency, we have gone for more standardisation and fewer
business partners in our efforts to reach customers. As customers gain more power, they will demand more tailoring and
value-added service to meet their needs. Companies that innovate on this dimension are likely to be richly rewarded.

John Hagel and John Seely Brown are co-chairman and independent co-chairman, respectively, of the Center for Edge
Innovation, a part of Deloitte & Touche USA LLP.
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