Indian companies should focus on high value manufacturing: Vijay Govindarajan

Vijay Govindarajan, the Cox distinguished professor at the Tuck School of Business at Dartmouth College Image: Vikas Khot

In the early 80s, a young man from India joined the Harvard Business School as a faculty. At the time, faculty members were asked to do research on how information technology can affect the world of business and the discipline of management. Here we are in 2024, and all these years later, we are asking the same questions, says the young man, who is now in his 70s and an expert on strategy and innovation.  

Vijay Govindarajan, or VG, as he’s called, is the Cox distinguished professor at the Tuck School of Business at Dartmouth College. He is the author of best-selling books like Reverse Innovation and The Three-Box Solution.  

His new book, Fusion Strategy, is about how companies should fuse the physical and digital to create value and compete in the new age. The book says companies need to use real-time data to turbocharge their products, strategies, and customer relationships.  

VG also believes that AI should be ‘augmented intelligence’ instead of artificial intelligence because, according to him, intelligent humans and powerful machines in combination is what creates value.  

Edited experts from an interview on the From the Bookshelves podcast:

Q. What is fusion strategy all about?
In the early 80s, when we were asked to research how information technology would affect the world of business, the best piece of computer hardware we had was IBM PC with a green screen, which is probably in some museum right now. And the best piece of software we had was Lotus 123. We didn't know anything about computers getting connected. We didn't know anything about the Internet. We didn't know anything about mobiles or Gen AI.  

We have a lot more digital tools today, but the question remains the same. How would digital technologies affect the world of business. The real challenge today is physical asset-heavy companies. We are talking automobile companies, or a tractor, or an aircraft engine, where value is going to migrate from physical assets to data and AI. That is what we call fusion strategy, because we are essentially fusing the physical and digital to create value, as compared to the previous generation of digital transformation where the physical product disappeared.

Q. Take us through some of the interesting examples of fusion strategies you’ve come across in companies.  
The first company that comes to mind would be Tesla, because in the automobile industry, historically---if you think about [it] in the 20th century---a company like General Motors, it is a B2C brand (business to consumer). But their processes stopped B2B (business to business). General Motors only knew how many cars they sold to the dealer. Tesla put sensors and computer vision in the car so that they know how the end consumer is driving the Tesla every day. While General Motors only knows how many cars they have sold, Tesla knows what the consumer is doing with the car every day. That is what we call product-in-use data. Tesla takes this data and analyses it across customers.  

So if I own a Tesla, they can compare my driving with that of the two million other people driving Teslas on the road, and based on collective learning, they can deliver hyper-personalised solutions in real time. This is exactly what Netflix did in entertainment. The reason this is important is that when you become a data and AI company that makes automobiles, you have the possibility to expand your revenue beyond the automobile industry.  

Tesla, for instance, is now a player in auto insurance, because they can assess risk at an individual level.  I am almost 75 years old and a careful driver. So, they will quote me a lower auto insurance premium because they know my driving pattern. Whereas the auto insurance companies pool insurance based on demographics, so they will say someone who is 75 years old is a risky driver and charge me higher insurance. 

That is how Tesla and companies that have product-in-use data create value not just by making their products better, but by collecting data on the products and using that to solve customer problems.

Also read: Despite late start, can India make gains in global chip race?

Q. How are companies in India implementing fusion strategy?
I personally believe that fusion strategy may well be India’s strategy. I think in ‘India at 100’, in 2047, we can have the number one leadership in Gross Domestic Product (GDP) in the world. Today, we are number five, behind the US, China, Germany and Japan. The reason I say this is because, so far, we have digitised just the consumer sector. Google has changed the strategy in advertising, Netflix has changed how we watch movies, Airbnb has changed how we travel. That’s all we have digitised so far, but think of the value we have unleashed.

World’s GDP is $100 trillion today, when we have only digitised 25 percent, or the $20 trillion consumer sector. What has to be digitised is the industrial sector, which is $75 trillion. That opportunity may well be India’s opportunity because we need to make two-wheelers, cars and tractors, because those physical products will never become digital. Who is going to make them is the question.  

Historically, America has conceded manufacturing advantage thinking manufacturing is a low-cost operation. Therefore, they send manufacturing to Mexico, China, etc. Now China is clearly a manufacturing powerhouse, but given the US-China strained relations, we need another place to manufacture at scale.  

That can well be India. But we can't manufacture in the 20th century way. We have to manufacture in the 21st century way, which is smart industrials. Therefore, we must make connected cars, two-wheelers and tractors. India is well-positioned because we have a vibrant manufacturing sector and a vibrant IT sector. IT and manufacturing were moving in parallel. Now, we have to fuse the two.  

I have been talking to the CEOs of the Tata Group, Mahindra & Mahindra, TVS, they all recognise this opportunity. Therefore, I am bullish on India. This journey has just started, and no company can claim victory yet. CEOs must have a clear strategic intent of how they are going to win in fusion strategy by 2030 and put in place a roadmap to get there.  

Q. How can India go from low-cost manufacturing, which it is largely pursuing now, to more high value-added manufacturing?
India has very qualified software engineers and digital talent, so let’s not focus on low-cost manufacturing. We cannot win that battle because there are other countries that are lower cost than India, like Vietnam, Bangladesh and Pakistan. So, we have got to focus on high-value manufacturing. Already, because of the China problem, electronics manufacturing is coming into India. This is a higher value-addition, and we have to use this opportunity to push up the value chain.

Companies are recognising this. Be it TVS and Mahindra & Mahindra, or Tata and Reliance. In the US, we are a little hesitant to embrace AI wholeheartedly, because we believe that it will displace and disrupt white-collar jobs. In India, we do not have that problem because we do not have enough white-collar jobs. We do not have enough teachers or doctors. We will embrace AI fully to increase the productivity of our scarce white-collar jobs.  

I recommend that we need a coalition, we need policymakers, industrial houses, small startups, venture capitalists, educational institutions like the Indian Institutes of Technology (IITs) to come together to develop a blueprint for fusion strategy for ‘India at 100’, and say how India is going to become an economic leader by 2047. If we do not exploit this opportunity, it can also come back to haunt us, because today India’s working-age population is at the peak level. And every estimate I have seen, this population will be at the peak level until 2050. You cannot employ this working-age population in IT services only. You need a vibrant manufacturing.  

India, with its optimal working age population, is where Japan was in 1964. Today, they are an aging economy and have lost that edge. South Korea had this advantage in 1967 and China in 1992, now they are an ageing economy. So if India does not create a fusion strategy in the next 25 years, our demographic dividend will become a demographic curse, and we will not have an economic base to support them.  

Q. One of the practices that you’ve suggested to be core to fusion strategy is skilling and re-training of the workforce. So as India tries to capitalise on its demographic dividend, how important is it to train not only the youngsters coming in, but also the existing working population? Where does India stand when it comes to skilling?
It is vital that we re-skill the workforce because fusion strategy is not just a technology problem that you can delegate to a few in data science. It is everyone’s job, and a business issue. Therefore, everyone should be conversant in how to use data and AI to make better decisions. That doesn’t mean everybody should become a computer scientist, but everybody should have digital literacy. For that, we have to train people.

Q. What challenges do you see world over, but also particularly in India, with respect to adoption of fusion strategy?
It’s about business leaders recognising that value creation has changed fundamentally, from leveraging physical assets to leveraging data. That’s the starting point. They also need to understand what type of data to collect. We are not talking about big data, we are talking about smart data. Third is to build digital talent. Aggressively recruit and train people in data and AI.  

Q. You say that companies should start thinking about AI as augmented intelligence rather than artificial intelligence. Can you elaborate on that?
Ultimately, AI can augment human intelligence, it doesn't substitute. There will be transformation in jobs, but it is not going to result in mass unemployment. The kind of jobs humans do will change. I am a college professor; I have always taught in one way. AI can augment the way I deliver education. Intelligent humans and powerful machines in combination is what creates value.