CHANGE OR PERISH:  THE  NEED FOR CREATIVITY AND INNOVATION

MANILA, October 21, 2005
 (STAR) By Napoleon Nazareno (President and CEO, PLDT and Smart Communications, Inc.) Good morning ladies and gentlemen!

About three years ago, I gave a speech about how much entertainment now influences the way we do business. It’s called the "e-factor" and its growing importance is actually an irony of sorts. We business executives like to think of ourselves as serious people who are not easily charmed by the glitter of the entertainment world. In real life, we are suckers for celebrity. In fact, we rely a great deal on the drawing power of megastars to sell our products and shape our image.

Today’s conference is a demonstration of the e-factor at work. Just look at our theme: "Change or Perish!" It sounds like a movie title. So much danger and drama! You get this sense of utmost urgency. Like, "if you don’t listen carefully to my speech, you will die!"

In this case, though, the sense of drama is actually warranted. Businesses do need to wake up. We all need to act with a greater sense of urgency. The globalizing economy poses so much danger and opportunity.

To be sure, disruptive change has always been part of doing business. But never has the world been in such turmoil. Technology and markets are moving with breathtaking speed. Industries are going through wrenching structural shifts. Old business models are being demolished and replaced with new ones. Competition is relentless, ruthless and ubiquitous.

Today, there are no safe businesses anymore. Everyone — big or small — is feeling the heat. The garlic and onion farmers of northern Luzon are besieged by imports from Taiwan and China. The toyo and patis makers of Malabon and Navotas must now fight for shelf space against products from Thailand.

The world’s largest corporations are invading each other’s space. Consumer electronics giant Sony — which made the Walkman an icon of the 20th Century — has been upstaged by a computer company. Apple, the makers of the popular Ipod, is now the leader in handheld digital music players.

Apple subsidiary Pixar is now the world’s hottest animated film maker and is competing with its former partner Disney. The Internet portal giants — Yahoo!, MSN and Google — as well as cable TV companies are all moving into the telephony business. Meanwhile, the big US telephone companies are offering online TV and video on their broadband networks.

What do all these tumultuous changes mean for us?

For most of us in this room, the old ways of doing business are falling apart. Everyone’s margins are getting squeezed. Products are becoming commoditized. Differentiation is disappearing.

It used to be enough to provide a product or service that works well, is durable, easy to use and, at the same time, affordable. Today, that will not do any more. Competition is such that, after a while, many others can duplicate your quality and price. So, today, you need something more. You need an "X" factor to make your product and company really stand out.

This brings me to a subject close to my heart. I’ve spoken of this in the past and will keep doing so because I think this is the direction of change that our companies must take. I refer to the need for us to aggressively pursue creativity and innovation. Or, if you will forgive the double pun, in this era of global change, we Filipinos must find smarter ways of doing business.

Take a look at this recent issue of the US magazine BusinessWeek. This came out in August and it has an eye-opening special report on what it calls the "Creativity Economy".

You see, up till recently the Americans thought that their superiority in the "Knowledge Economy" would keep them ahead of the rest of the world. The belief was that knowledge-intensive businesses — the high-tech, high-value industries like computers, nanotechnologies and bio-sciences — were at the top of the economic food chain. In this information-driven world, the US enjoys a big edge in science and technology, with their great universities and research institutes and their huge pool of very smart people.

But these days, the Americans are having second thoughts. In recent years, they’ve seen bigger and bigger chunks of their manufacturing being outsourced to Asia and elsewhere. Worse, even engineering, software development and design and all sorts of high-tech jobs are migrating to India, China and, yes, even the Philippines. Suddenly, the Americans have realized that there are plenty of smart engineers, scientists and other bright people outside their borders. And yes, these folks are getting to be pretty good at knowledge jobs that used to be the exclusive territory of Americans, Europeans and Japanese. And, yes, they work for a fraction of US salaries.

As journalist Thomas Friedman wrote in his book "The World Is Flat", "the global competitive playing field [ is ] being leveled."

To compete in this flattening world, companies cannot be content being experts in the "hard" side of business. It is no longer enough to be great in process control, financial engineering, product design and development — all the skills that are usually associated with the "rational", "left side" of our brains. Today, successful companies need to be "right-brained" too. They also need to master the "soft" side of the business. Companies must be creative, imaginative and innovative.

What difference does creativity make? The best way to answer this question is to give a few examples.

Let’s go back to Apple’s Ipod. Take a look at the recently released Ipod Nano. (In fact, I have a Nano right here with me.) I understand that it’s had some quality control problems. But the Nano, the latest of a series of Ipod variants, is definitely a hit. Last week, Apple CEO Steven Jobs announced yet another Ipod model — this time a device that lets you watch video plus something like 15,000 songs.

For Apple’s competitors in the MP3 player business, the Ipod’s phenomenal success is a source of continuing frustration. Other companies have come up with MP3 players that have better technical features than the Apple product at a lower price. But the Ipod has held on to something like 70 to 80% of the global market. This is partly due to the Ipod’s being so user-friendly and Apples’ skillful marketing. But there is something more, an "X" factor. Apple has produced a device that has established a strong emotional connection with its customers. Ipod has "it", that elusive, transitory quality of being "cool".

Creative is by definition "cool".

Take a look at another example. This is your everyday, garden variety wet mop. This product has been with us for God knows how long. Then along came P&G, which by the way is one of the pioneers of the growing "creativity movement" in the US. P&G asked a design company to come up with a better mop. Imagine — getting a design company to tinker with mops.

Well, they did a lot of research. They looked at how real people used wet mops. And they found out that wet mops tend to just slop the dirt around. In contrast, dirt tends to stick to dry mops because of electrostatic attraction. So, they came up with a new product — a dry mop — called the Swiffer. P&G is betting that this new product will shift the paradigm of house cleaning.

So, what does all this have to do with us in the Philippines? We Filipinos aren’t pursuing world domination. We just want to survive bird flu and fix the government deficit.

But creativity is just as relevant to us Filipinos as it is to everyone else. When Thomas Friedman said the "World is Flat", he also meant that if your business does not shape up, if you don’t become creative and innovative, you will be flattened.

Companies trying to be more creative are now developing different skills. The new buzz word is "consumer-centric innovation". Instead of business schools, the hot thing now are "D-schools" or design schools. In D schools, people learn how to combine the disciplines of sociology, anthropology with business management to produce innovations that are based on an intimate knowledge of consumers and consumer culture.

Mastering consumer culture will enable you to attain the new Holy Grail of innovation. This is the ability to create products that address the "unmet, unarticulated needs of consumers". Let me repeat that. We are talking here of the ability to find out what people want even before they can express it. This sounds a bit like mass mind-reading. Having this ability will enable you to create not just products, but "consumer experiences".

At this point, I will do a bit of mind reading myself. And I can hear some of you telling yourselves that all this new jargon is plain rubbish. This "creativity chuu-vaah" is the latest management fad being peddled by consultants out to snare gullible clients.

As a matter of fact, a new tribe of consultants has emerged as part of this creativity revolution. The new innovation gurus are "design experts". They include architects, social scientists, academics — in short, a distinctly non-MBA crowd. Leading companies are now deploying these design experts to work with their product development teams. Many speak a common language. They look at their jobs as "telling a story and emotionally connecting with people".

The Creativity Economy may yet turn out to be another fad. But I wouldn’t bet on it. Leading companies worldwide are saying innovation is increasingly important to their continued growth.

On the other hand, some of you may be saying: Creativity and innovation sounds great. But how can Philippine companies compete? We don’t have the resources to play in that ball game.

On the contrary, Philippine companies need to and can play the creativity game. The scarcity of our resources makes creativity and innovation all the more vital to our survival. And yes, we do have the creative talent. The question is: Are we using that talent? We see so many of our creative people working abroad.

I know a little about that because we at Smart have been unwittingly part of the creativity revolution. We didn’t have a catchy name for what we were doing. But we have made "market-shaping innovation" the heart of our business strategy.

Early on, we grappled with a dilemma: How do you develop and sell services that are so new the public has little or no prior experience to help them see the value in it? We found out from trial and error that the key was this: the new product or service needed to find the right fit with the lifestyles of customers.

We’ve had our share of hits and misses. Let me share our experience with just one success story — a very large success story. I am talking about Smart Load or e Load.

For those of you still unfamiliar with e-load, this is how it works. You go to a Smart Load retailer. Pay for the amount of load you want — it can be as low as P30 and as high as P500. Then, the retailer transfers load to you by texting a specially formatted SMS message using his phone. All this just takes a few seconds.

Electronic loading is now the standard way of selling airtime. And since over 90% of cellular phone users are prepaid, this is a tectonic shift for the mobile phone business.

Today, we handle over three million Smart Load transactions daily. We handle another three million Pasa Load transactions everyday. Pasa Load enables prepaid subscribers to transfer small amounts of their airtime loads to their friends and relatives. Taken together, these two sister services make up the most lively and extensive consumer mobile commerce system in the country. Largely on account of e-Load transactions, our Smart Money mobile commerce platform now handle over 120 million pesos of transactions every day.

Smart Load has sparked a revolution not only in the cell phone business but also in retailing. We have recruited over 700,000 Smart Load retailers nationwide. Many run sari-sari stores. Others are students, office workers, housewives. Many have built lucrative micro-businesses or sidelines with this service.

My own cook in the house — her name is Delia Pasion — is one of the biggest Smart Load retailers in my neighborhood. Delia is doing so well that she likes to kid me that what she earns from Smart Load is more than the salary I pay her as a cook. And I tell her that the quality of cooking in the house is now inversely proportional to her earnings from Smart Load.

Smart Load has worked so well because it is well suited to the lifestyle of Filipinos in at least two important ways.

First, by offering micro top ups as low as 30 pesos, Smart Load fits the cash flow situation of most Filipinos. The vast majority of our people count their earnings in daily terms. At any given point in time, they have only so much disposable cash on hand.

This is telecom in sachets. And just as sachets have worked for shampoos, soaps and food sauces, micro top ups have greatly expanded the market for cellular services by making it more accessible for more low-income people.

Second, Smart Load has created a lucrative micro-business for a lot of people. As I said earlier, we now have 700,000 retailers.

Here is a picture of what looks like a typical sari sari store. This one is in Bgy. Batasan Island — a narrow strip of land about a kilometer long, 15 minutes off the coast of the municipality of Tubigon in Bohol — which happens to be the hometown of my father. There are about a thousand people on the island — and five stores selling Smart Load.

Indeed, you will have a hard time finding a barangay in this country where Smart Load is not sold. That’s because people have found that they can make money selling this product. In fact, surveys have shown that Smart Load is the single most profitable product for many sari sari stores. When you help a lot of people earn a living, you get plenty of people out there pushing your product. This is what we mean by market-shaping innovation. It not only changes the rules of the game for the industry, it impacts on the lives of consumers.

These days, we at the PLDT group are working hard to put in place another innovation that will reinvent our business. It will also help boost our economy and improve the lives of many Filipinos. We have begun to wage a broadband revolution. Our vision is to make broadband Internet access a basic communications service all over the country. This will open up numerous opportunities for dramatic improvements in education, business and employment.

There is plenty of competition in this field. Many operators are rolling out their own broadband services. And this of course will be great for consumers. For our part, we at PLDT will use next generation networks to offer high-speed Internet services using both wired and wireless technologies. Smart Communications, for example, has already rolled out a nationwide infrastructure to offer broadband Internet wireless at less than a thousand pesos.

Why is broadband so important? Just ask my friend Mon Dimacali. For the past few years, Mon has been preaching the gospel of BPO. He says business process outsourcing is great chance for Filipinos to set up new businesses and provide good-paying jobs. Making broadband much more widely available in the country will open up many more BPO opportunities here.

One example is the case of a Manila-based computer school — the Asian College for Science and Technology or ACSAT. ACSAT recently decided to set up a medical transcription business. For those of still unfamiliar with this business, medical transcription works this way. US doctors dial a special number and dictate their medical notes into the phone. The dictation is automatically converted into a digital voice file that is e-mailed to the Philippines. Here, trained people type out the notes and send these back just in time for the next office day in the US.

ACSAT is new in this business. They have a start up operation in Manila and will set up another in Dumaguete. We still don’t know how they will fare, but they do have an interesting idea. The idea is that once their people have acquired experience and need less supervision, they can work at home. All they need is a PC — and a broadband Internet connection. For the company, this means less expense for office space, utilities, etc. For the employees, it means they are spared the expense and effort of tangling with Manila traffic every working day. They have more time for their families and can enjoy home-cooked meals.

Working out of homes — or home sourcing — is not such a wild idea. Flight reservations of Jet Blue — one of the few profitable US airlines — are handled largely by middle-aged ladies working out of their homes. Jet Blue prefers this system because home-based workers can handle up to 30 percent more reservations than their office-based counterparts. And they are happier.

But creating such life-changing innovations is hard work. Speaking from experience, I can tell you this is something that cannot be delegated. You can’t just hire a pack of design consultants and then go off to the golf course. The CEO himself has to be directly involved in a sustained effort to keep listening to the market, and to help figure out what customers need and want — even before they can articulate it.

But this work can be a lot of fun. One part of my job that I enjoy is doing the rounds. Together with other Mancom members, I make it a point to visit malls and other marketplaces all over the country. This is a reality check. We get to talk to our people in the field and to dealers and retailers who actually sell our products, and, to customers who buy them.

Such field trips help stimulate the right side of your brain and give you an intuitive feel of what’s happening in the market. This helps you make sense of the market studies and the sales and operations numbers that your organization churns out.

In the end, that is the greatest source of creativity and innovation. We need to have a good feel for the market. We need to know how people live in the real world. If you combine your first-hand observations with a sixth sense born of experience, you can acquire the insights that lead to market-shaping innovations. In that way, you become an integral part of people’s lives.

Indeed, creativity is the key to changing our fortunes. And that, I’d like to think, is really cool.

Thank you and good day!

(Keynote speech delievered during the Management Association of the Philippines CEO Conference 2005 at the Shangri La Manila Hotel in Makati City on Oct. 17, 2005, Makati City.)


Chief News Editor: Sol Jose Vanzi

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