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Differentiation Wins

Is there some way India's IT firms can differentiate their services out of trouble?

Nardvana: The goal

Noticed something peculiar? While India's exports - clothes and software - are rather price-elastic (quantity demand highly responsive to price changes, that is), its imports are not.

Blame it on the legacy of a closed economy. In the days of exalted self-sufficiency, India imported only essentials, such as crude oil (a dependence that should have wrecked self-sufficiency theory right at the start). The result was a painfully rigid currency adjustment mechanism. When the trade deficit grew, the rupee had to be devalued. While this spurred exports (price elastic as they were), it did not commensurately reduce Indian demand for imports (price-inelastic as they were).

Those days are gone, and India now runs a current account surplus, exporting more than it imports. But has the asymmetry of the price elasticity really disappeared? Strangely not. Indian exports continue to suffer demand drops when they turn relatively 'uncompetitive' (on price that is), and India's imports continue to be largely insensitive to price changes.

Economists recommend that imports of non-essentials be encouraged, but somehow, this solution doesn't seem to work so well. The essentials-only mindset is deeply engraved even amongst consumers, it seems.

The other question to ask is why can't Indian exports turn more price-inelastic?

Ah, now that's a question that Indian software exporters (and perhaps garment exporters too) need to think long and hard about. And they would have to think less like exporters of commodity services, and more as marketers.

In other words, they'd have to think of 'differentiation', as Azim Premji and N.R. Narayana Murthy - India's top two software moguls -- have been hinting these past few weeks. You may add Rajesh Hukku's name to the list as well, except that he has not been hinting anything of the sort. His company, iFlex, has gone ahead and demonstrated the power of packaged software (FlexCube), and more importantly, software that is differentiated in consumer perception.

Differentiation is not just 'value-addition' (which as a term suggests a sort of isolation from competitive realities of the marketplace). Rather, it is an inherently competitive strategic exercise that endows the firm's services with uniqueness that appeals to the market and commands a premium.

Are Indian software services differentiated?

Some claim that they already are, at least as offered by the better firms (forget the dozens of tailwind players). The top firms have already eliminated many of the preconceptions that overseas customers may have had about the gulf between the 'binary West' and the 'fuzzy East'. Other myths lie bust, too. There'll be more to come.
But the proof, frankly, would be in sustaining and expanding sales even as the rupee rides up, complexities multiply and business risks grow (firewalls are getting penetrated these days). And that could mean egging minds on in new directions, easterly or otherwise.

'Hasta la vista, software'? Nerdvana-seekers might want to modify that a bit.

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