How to scale $1.25 to a billion dollar business – Essilor’s disruptive strategy in India

Eye-Mitra_Essilor_India

Emerging markets present a tremendous opportunity for enterprises to grow their business. At last week’s “Emerging Markets” class at the Nanyang MBA, we studied how the French ophthalmic lens manufacturer Essilor has successfully managed to penetrate the Indian market and provide spectacles to millions of under-served citizens. Most interestingly, their strategy to partner with local providers has turned out to be an amazing CSR story.

Spectacles have for many years been reserved for consumers with stable incomes, thus excluding millions of people living in extreme poverty to the possibility of owning a pair. According to the United Nation’s Millennium Development Goal (MGD) programme, in 2012, 270 million or 21.9% of 1.2billion Indians lived below the poverty line of $1.25 a day. The total market for vision correction in India is estimated to be 500 million people, which makes it a very attractive market.

Corrected vision may not seem so important on the surface. However, let’s look at it from a economic perspective. Blurred vison affects productivity, which has a negative impact on one’s ability to work themselves out of poverty. This makes vision correction extremely important. One of the challenges facing the demographics at the bottom of the pyramid is that they depend on working every day to sustain their living. Because opticians most often are located in towns far away from the villages, it is simply not an option to miss even a day’s worth of income to go get an eyesight examination. Furthermore, the consultation as well as the price of the spectacles would not be affordable for people of the villages.

If the customer won’t come to you, you must go to the customer

In 2003, Essilor together with local partner Sankara Nethralaya, launched the Mobile Refraction Van initiative that provides affordable eye care in rural India. In a matter of hours, a patient would have undergone a full eye examination and been provided with a brand new pair of spectacles starting at merely $1.

Another initiative is the Eye Mitra, which is a training program aimed to train unemployed rural youth to become opticians and set up local micro enterprises which provide door to door eye care services and sell locally manufactured spectacles embedded with Essilor technology.

Doing business in Emerging Markets

One of the main challenges of doing business in Emerging Markets is to deal with local governments and regulators. Volatile governments can with no warning nationalize your business and/or freeze your assets in the country. Seeking a strong relationship with the local authorities is therefore an essential strategy for foreign investors.

Essilor’s Eye Mitra initiative is a local jobs creator and helps strengthen Essilors relationship with the local authorities.

Why pursue the bottom of the pyramid?

There are several strategic reasons for pursuing the bottom of the social economic pyramid:

  • Creating future customers
    By serving the bottom of the pyramid, Essilor is establishing a whole new market of customers. Before the Mobile Refraction Van initiative, rural citizens didn’t know that they needed vision correction. What Essilor has realized is that the poorest citizens are leapfrogging the pyramid and improving their economic situation rapidly to move up the social economic ladder. The belief is that these future powerful consumers will remember Essilor and show brand loyalty when purchasing their first $50 Spectacles.
  • Blue Ocean: A large under-served market
    Serving the bottom of the pyramid means that you must pursue an “economies of scale” strategy. The 500 million people that are estimated to need vision correction represent a billion dollar market. Entry into this market can be considered a blue ocean strategy, since no existing lens manufacturer is servicing this market. In other words it is totally under-served and available for Essilor to grab.
  • Strong CSR
    Naturally Essilor’s cash cow is in the developed markets, where they are charging upwards of $1000 for a pair of lenses. A strong CSR profile helps attract customers and help justify the steep price points. Essilor is heavily using its initiatives in India for branding purposes and have succeeded in creating a very strong CSR profile.
  • Disruptive innovation
    Serving a low end segment requires new innovation. Not in terms of features, but in terms of price. Essilor has invested in new manufacturing methods that allow them to manufacture lenses at a cheaper price point. This technology can as well be applied for production in the developed markets  to improve profit margins in those markets.

Valve: How to retain talent?

Last week I attended an intensive strategy course taught by Patrick Gibbons, Academic Director at Michael Smurfit Graduate School of Business UCD, where we discussed a series of Harvard Business cases among one was how Valve Software successfully had manged to attract and retain top talented game developers. I found the case study very interesting and super relevant for any leader aspiring candidates on LinkedIn.

Background:
Valve is the software company behind the gaming platform Steam and popular titles like Half-Life, Counter-Strike, Left 4 Dead and Dota 2. Valve was founded in 1996 on the notion that making video games was hard and that most titles would fail, but a few blockbusters would be remarkably profitable. The question was if blockbusters was randomly distributed and hitting that lucrative profitable success was just a matter of chance, in which you just wanted to bet on as many horses as possible.

The perception at Valve was that people who had created a blockbuster before would do it again. With other words blockbusters wasn’t just random chance, it was all about attracting and retaining the right talent that would give a predictable success.

If you want to read the Harvard Business School case study, you can find it at hbs.edu

Valve Software Talent Management Process
Valve Software Talent Management Process

Who to hire?
Valve was looking for T-shape profiles that could contribute across functions in different teams, but had a unique and specialized skill that could be the core of a project. Attracting entrepreneurial profiles that had created a successful game previously was at the core of Valves recruitment strategy, because previous success ensured a higher predictability of future success.

Attracting successful entrepreneurs
How do you attract game developers that have already made a successful game and potentially earned good money doing so? The challenge was that Valve was looking for entrepreneurs that had showcased that they could be stars on their own, and now Valve wanted them to take a job working for somebody else. What Valve came up with was a unique organizational structure that allowed people to work on exactly their preferred project. There would be no hierarchy and no one telling you what to do. Everyone would be involved in strategic decision making, ensuring that everyone had a saying in which projects Valve would be working on. Naturally everyone would be paid well, so there wouldn’t be a direct monetary incentive in leaving.

Retaining talent
Retaining talent is important for any organization. The nature of Valves flat organisational structure would allow for good utilization of peer evaluation and behaviour based compensation. Everyone would be rating each other’s contribution and success of the final project would be affecting compensation.

What made Valve really unique was the fact that Valve would increase every single employee’s chance of delivering the next big blockbuster. As an employee at Valve you would be working across multiple projects at the same time. If you did a good job on someone’s project it was more likely that you could attract talented employees to work on your own project. Remember everyone had the freedom to work on whatever project they liked. Furthermore, by working on several project at the same time you would be spreading your risk. One project might fail as another one would be a success. This way you would still make good money. Similar to managing an investment portfolio and spreading risk across different securities.

The secret source
The secret to Valves successful talent management strategy is how they manged to embed its employees:

  • It was extremely hard for the employees to monitor the size of their contribution to a project. There was no way for an employee to claim 100% ownership of a blockbuster, because so many talented people would have been involved in the project.
  • Every employee was almost guaranteed to be part of a success, working across multiple projects by that hedging their exposure to failure.
  • Every project group was unique, so the risk of a whole team leaving would be minimal, as each individual would have stakes in different projects.

All over Valve was successful in creating an organization that would attract the very best talent and ensure that no employee would be thinking about leaving.

Lessons learned from the LEGO turnaround

Lego_marina_bay_sands

As part of my Strategic Management course at the Nanyang MBA, I did a strategy report on LEGO’s turnaround in 2004. I grew up building LEGO and I have been following LEGO’s business for many years. When it came to pick a topic for my strategy report LEGO seemed like the natural choice.

LEGO is a fantastic case study of a successful turnaround of a failing organisation, attributed to selecting the right strategy. The LEGO management took less than 5 years to almost bankrupt what had taken 3 generations 70 years to build. In 2014, the LEGO group announced record net profits of DKK 7 billion after having turned around a net loss of DKK 935m and DKK 1931m in 2003 and 2004 respectfully.

These are my main findings and the key lessons learned from studying the LEGO turnaround.

If you are not familiar with the background of the LEGO turnaround, Economist and expert in Corporate Strategy John Ashcroft has done a very nice case study which is free to download online. www.thelegocasestudy.com

  • Know your core competencies and keep perfecting them. You core competences should be your competitive advantage and you don’t want to forget that. In the late 1990s LEGO experienced stagnating sales and stated to divest into new areas outside of its core competencies. The new product lines generated short term sales {DKK8,379m in 2000 DKK10,116m in2002 DKK9,475m in 2001}. However, the massive divesting was followed by large costs {DKK(9,000m) in 2000, DKK(8,554m) in 2001, DKK(9,248m) in 2002}. When the short term sales eventually failed to DKK 7,196m in 2003 and DKK6,704m in 2004, LEGO was carrying costs that it couldn’t bear.
  • Stay focused on your core business and ensure that your core business will always be your main attention. In case of divesting, don’t lose track of your cash flow and what puts money in your pocket. LEGO didn’t lose because it divested, but because it lost track of its core business.
  • Ensure you have the right measures to manage your business. LEGO’s accounting standards deceived the management and didn’t provide them with the necessary information to make strategic decisions. Instead of tracking the performance of individual product lines, the management was deceived by tracking country specific performance, hereby hiding alarming performance results of new product lines.
  • Listen to your consumers, but keep retailers first. LEGO has experienced impressive growth by constantly being close with their consumers. However, they don’t forget to keep their retailers happy with good margins and a well-structured supply chain. By ensuring that you vendors have the right quantity at the right time, you save them money and they will be happier customers.
  • Control you value chain. The value chain is where you create value for your customers and your consumers. Keep improving and optimizing your value chain to stay ahead of the competition.
  • Keep your organisation transparent and encourage communication. LEGO’s management was acting on wrongful information, due to lack of communication. As Jorgen Vig Knudstorp says: “a CEO needs every avenue to the truth that he or she can find”.