no dawn for 'new dawn' the non-diffusion of an innovation

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http://ajc.sagepub.com/Asian Journal of Management Cases

http://ajc.sagepub.com/content/6/1/27The online version of this article can be found at:

DOI: 10.1177/097282010800600104

2009 6: 27Asian Journal of Management CasesAshish Kumar, Ravi Shankar and Kiran Kumar Momaya

No Dawn for 'New Dawn': The Non-Diffusion of an Innovation

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NODAWNFORNEWDAWN:

THENON-DIFFUSIONOFANINNOVATION

Ashish Kumar

Ravi Shankar

Kiran Kumar Momaya

This case describes events in the build-up to the diffusion of an innovation before it hasreached critical mass. The innovation in question is the large-scale use of renewable

energy to power telecom sites. A manager is passionate about this innovation, and it

seems to be a sound solution to an urgent business problem. However, he struggles to get

acceptance for his ideas from key stakeholders, and his proposal rides a roller coaster.

Keywords:Diffusion of innovations, renewable energy, telecom, mobile operators,

mobile communication.

In January 2008, Uday Kumar, the Key Account Manager of Mobile Network EquipmentManufacturing Organization (MNEMO) in NOIDA (a suburb of Delhi), arrived at the CellFoneTower Company (CTC) office for a meeting with the Head of Purchase and his friend,

Pawan Sharma. Kumar had been trying to get his first large purchase order for renewableenergy systems from CTC. Sharma had called him last night to give him the news thatCTCs Chief Executive Officer (CEO) had verbally approved a billion-rupee investment inthis sector. He asked him to come over and agree on the terms of the purchase order.

Kumar was so fired up that he did not notice anything amiss when he called Sharma for anappointment. However, the moment he walked into Sharmas office, he knew that somethingwas wrong. A subdued Sharma told him that after a discussion with the Chief FinancialOfficer (CFO), the CEO had put the project on hold. Kumar digested the news in silence,

This case was written by Ashish Kumar, Dr Ravi Shankar and Dr Kiran Momaya from the Depart-ment of Management Studies, Indian Institute of Technology, Delhi to serve as the basis for class

discussion rather than to illustrate either effective or ineffective handling of an administrativesituation.

All facts and figures in the case have been disguised. This material may not be quoted, photo-copied or reproduced in any form without the prior written consent of the Lahore University ofManagement Sciences.

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28 ASHISHKUMAR,RAVISHANKARANDKIRANKUMARMOMAYA


and then shrugged. In any case, lets have chai(tea), he said. On the surface, he maintained

his calm but considering all of his efforts in this area, he could not help but ask himselfif he should even be interested in the renewable energy sector at all?

COMPANYBACKGROUND

MNEMO was a mobile network equipment manufacturer with a long history. Originallypart of a century-old British engineering group, it had focused on telecom and IT since 1988and had grown into a major player in the telecom market within a span of four years. Ithad a global market share of 28 per cent and a 40 per cent market share in India. Themanufacturer had about 30,000 employees worldwide. In India, most of the major operatorswere its customers, but it had a special relationship with CellFone ever since the latter

became its first customer from the Indian Market in 1995.CellFone was one of Indias largest mobile operators. An Australian operator had recently

acquired a majority stake in the company. It had both GSM and CDMA networks in differentcircles, and with a pan-India presence, it was definitely a dominant player in the industry.It had a strong brand image and a good distribution network. It had several innovativeservice launches to its credit, including the use of Caller Ring Back Tones, money transferand voice-based SMS. Exhibit 1 shows CellFones growth trajectory in the Indian market.

MNEMO India was organized into customer units, which were almost like StrategicBusiness Units with their own profit and loss statements. The company made it a pointto have excellent resources working for CellFone, especially because of the strong globallinkages between the two organizations.

MNEMO ANDCELLFONEINNORTHINDIA

In 2005, Kumar was appointed Regional Manager for MNEMOs business with CellFone inNorth India. He had about 600 people reporting to him, and was responsible for sales, margins,operations and customer relationships. Launching the network in Jammu and Kashmir hadbeen a nightmare for both CellFone and MNEMO. They struggled in the harsh security andclimatic environment of Kashmir but succeeded in setting up a working network which wasa runaway hit in the supply-starved region. People queued up to buy mobile phone con-nections and MNEMOs equipment sales grew from nothing to a huge value within a year.MNEMO was also running the network until the final acceptance of the sites, and this

took a whole year.After the first flush of back slapping, the energy bills at the sites started coming inand the business heads of CellFone began turning the screws on Kumar and his boss.There were accusations of pilferage by MNEMO personnel, and unfortunately some of

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NODAWNFORNEWDAWN 29


them were proven true. The relevant people were immediately sacked and it was true

that both CellFone and MNEMO personnel had collaborated on the theft, but the damagewas done. The state of electricity supply in Jammu and Kashmir was pathetic, the siteshad to run nonstop on diesel and the cost of diesel was eating into the Earnings beforeInterest Depreciation and Amortization (EBITDA) margins of CellFone. This affectedthe personal bonus of CellFones CEO and this showed in his aggression in complainingabout the rising diesel bills.

The way the system worked was that there were diesel-filling companies (DFC1 andDFC2) which were paid a lump-sum amount per month to ensure that the sites kept going.They had Petrocards which they used to draw diesel from the oil company pumps intospecial vehicles. These special vehicles had a beat plan according to which they visitedthe cell sites and topped up the diesel in the diesel generator (DG) tank. At the end of the

month, the DFCs would submit a bill to MNEMO for the diesel consumed, MNEMO wouldcertify that the bills were good and CellFone would pay off the bills directly to the DFCs.

There were some issues with the system. Firstly, as a friend who worked for CellFonetold Kumar: DFCs arent run by gentlemen anywhere in India, not even in Delhi. Secondly,CellFone had entered the agreement without understanding the complicated supply chainaspects and negotiated the DFC payments to a very minimum rate. The DFCs could notmake money at these rates and therefore resorted to pilferage.

As a step to counter the pressure, Kumar led a project to pay the DFCs on the basis ofthe number of hours the cell sites had run on diesel generators (DGs). This input wascollected by a remote monitoring system. It had taken months of effort to first make thesystem tamperproof. This was followed by tough negotiations and field tests to sign off

on the diesel consumption normshow much diesel was consumed by different types ofDGs for different types of loads. With these two inputs in place, MNEMO and CellFonehad been able to bring some order into the processDFCs were paid on the basis of thenumber of hours of DG run and the agreed consumption norms.

RENEWABLEENERGYSYSTEMSFORTHETELECOMSECTOR

For Kumar, it was frustrating that in spite of being a telecom engineer with a good radioengineering background, he ended up giving most of his time to energy issues. Butthere was no doubt that these issues were extremely crucial for business. The electronicequipment manufactured by MNEMO had a Mean Time Between Failure (MTBF) rate1

1Mean Time Between Failures (MTBF) is a commonly used term in the electronics industry. It indicates

how reliable a product is. MTBF of three years means that the component will fail once in three years on

average under specified working conditions.



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of up to three years. The weak links in the network managed by his team were really the

power elements, especially the DGs and batteries, and the microwave transmission links.One day, while travelling past a state government office, he saw a bank of solar panels

and suddenly something clicked in his mind. He realized that people like him were doingan unusual thing, taking mobility into areas which did not even have regular water andelectricity. This called for unusual solutions.

Kumar started reading about solar and wind power and this was around the time whenglobal warming was being regularly highlighted in the media. There was enough materialto read. Very quickly, he found that the renewables sector was nowhere as professionallydeveloped as the telecom sector. There were a handful of large companies, some with aglobal presence, but most of the companies in India were organizations.

Most of the work being done did not address the need of the mobile network world either.

A lot of effort was being put into plants which could generate megawatts (MW) of electricityin one location. However, the problem for companies like MNEMO and CellFone wasthat their demand was completely decentralized. CellFones total demand was about100 MW, but it was distributed across 30,000 locations.

Kumar started going deeper into the subject of renewables, and then gradually gotmore and more interested in this area. Very soon, he had taken a proposal to CellFonesDirector and gotten it approved. The Director didnt see it as a key issue, and accordingto Sharma, he went along to humour Kumar.

Within a few months, CellFone had invested in a solar-wind-DG hybrid at a site whichdid not have any Electricity Board (EB) supply. There was a site inauguration function anda small splash in the media. That was two years ago.

Since then, he had given a little time every week in trying to develop the case for large-scaleuse of renewables on sites where there was no EB supply. But it had been a long journey.First of all, he had to convince some skeptics within MNEMO that this was worth investingin. There were some people at the global headquarters in London who were interestedin the Corporate Social Responsibility value of the project. However, that only irritatedKumarhe was clear that this was actually a business proposition.

The way he looked at it, the expense on diesel for a site which ran nonstop on DG couldbe around Rs 50,000 a month. Obviously, with newer mobile consumers having aver-age revenue per user of Rs 150 per month, it was going to be difficult to go out to smallvillages if the energy spent was not brought under control. The problem was that it tookupwards of two million rupees to put a solar-diesel hybrid system in place.

Kumar had to struggle to put together a loose partnership of solar and wind originalequipment manufacturers (OEMs). The suppliers had been very enthusiastic at first,



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NODAWNFORNEWDAWN 31


but over a period of time their interest levels had waned as they found that the pur-

chase order (PO) was not going to materialize until the next quarter. However, Kumarkept them motivated by promising business at a global level once they got started.

Kumar and Sharma had assessed the technology and economics of some renewableenergy sources. They wrote a joint proposal note to CellFones executive team (Exhibit 2

is an extract from that note).There were many questions that Kumar had to address. Some of them are listed below:

From MNEMO:Why should we do this? Is it our core competence? Will CellFonereally give us a PO? Wont they go straight to the Original Equipment Manufacturers?

How much resourcing will it take? When can we expect a customer PO?

From CellFone:What will happen if the solar panels get stolen? Why should we take thelead in this, instead of some other operator? Why dont you just ensure that the DGs

are better maintained instead of running around with these ideas? Is the govern-ment not planning to take electricity to all the villages in India? Dont solar panelstake up too much space?

From the OEMs:should we not sell directly to CellFone? Why are you looking atother technologies?

Though Kumar found his head spinning even now when he looked back and thoughtabout all these issues, he was proud that he had been able to motivate a diverse group ofpeople and put a credible offer on the table before CellFone. He had proposed the Project

New Dawn, under which MNEMO would put up 100 sites for CellFone. Sharma had beena supporter of the project.

Kumar and Sharma both believed that the concept was sound. During their first few

days together on the proposal, they put together a simple business case, which they calledVersion 0 (see Exhibit 3). It was deceptively simple. In fact, the norm for diesel consump-

tion for an hour itself was something which experts debated endlessly. Kumar was luckyto be able to rely on the norms which he had hammered out a while back. Later he wrylyrecalled how many additional layers of detail had seen this business case go from Version

0 to Version 8.One factor which had definitely helped Kumar was that the site he had championed

was up and running without a glitch. The DG on that site hardly ever ran at allit was

used for a few hours once in a while just to keep it in running condition. The first offerhad been submitted to CellFone within six months of the launch of the site.



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COMPANYPROBLEMS

After that, things started to spin out of control. First, there was a management change in

CellFone as the Australian operator bought out the promoters. It was one of the largestdeals that year. The employees had already made good money through stock options,and being part of a global corporation felt good. Kumar personally thought that many

of them who had acquired shares, which were now worth Rs 300 each as opposed to theearlier Rs 11, had become complacent. During the management change, decision makingcame to a halt.

Then, CellFone followed the others in the industry and hived off its tower businessinto a TowerCo called the CellFone Tower Company (CTC).To top it all, a new CFO from

a public sector bank joined CTC. He was very conservative. Kumar still remembers themeeting with this CFO, who had been very straightforward and blunt. He was an experi-enced person, very polite. He told Kumar and Sharma:

Look guys, I know you are interested in this area, but we are not an R&D organization.We are answerable to our shareholders. If I put money into a new site, I am investing

in my core business and I get my money back in two years. If I allocate money to yourproposal, you tell me I will get the money back in four years. But I personally I dontcount the depreciation benefit. Its already available under another section. I invest two

and a half million today, and save less than 500,000 per year over the next few years.Guys, money has a time value. Its just not attractive enough for me. The payback will

take more than five years!

Kumar used the opportunity to dig a little deeper into the projects viability and foundthat while calculating the payback, he could bring in savings in other running costs and

also factor in an estimated diesel price increase. Together, they helped to counter theissues raised by the CFO. He was able to show him through Version 8 of the business case

that the payback period was in fact 34 years, but by then opinions in both CellFone andMNEMO had been formed, and it was difficult to change them.

Kumar found it interesting that business cases were really a matter of taking a view. Spread-

sheets had become so much a part of business culture that people formed an opinion first,and then either put some figures in a spreadsheet together to support their own opinions,

or poked holes in others spreadsheets to refute their opinions.



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NODAWNFORNEWDAWN 33


CONCLUSION

The mix of management changes and the negative feedback from the CFO had proventoo much for Project New Dawn. Kumar was patient, but only up to a point. He was beingquestioned almost every week on when the project would be taken forward. He dis-cussed it within the team and decided to put Project New Dawn on hold for a while.MNEMO was not doing too well and this project had already consumed three millionrupees without anything to show for results. The engineers working on the project weregetting impatient. More than anything else, it was starting to be seen as a waste of time.It was important for Kumar not to lose his hard-earned credibility. As he was about tosend an e-mail regarding this to the management team that had supported Project NewDawn, he received Sharmas phone call.

Exhibit 1

CellFones Growth in the Indian Market

Source:Company documents.



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Exhibit2

SomeKeyAspectsofSolarPower,WindPowerandFuelCells

BusinessImpact

Positives/Advantages

Issues

SolarPowe

r

Nearzeroopex,highcapex

Largeinstalledbaseandgood

engineeringcapabilities,good

insulationinmostofIndia.

Shortageofsilicon,space

requirement(typically11sqm

perKWp).

WindPower

Nearzeroopex,medium

highcapex

LargeinstalledbaseofMWand

3.5m/snotavailable

everywhere.Windmappingvery

primitiveactualwindspeed

monitoringneededatsite.

FuelCells

Mediumcapex,lowopex

Electricityproducedwithout

combustion.Backuplifediminishe

s

withusage,notwithtimeasin

batteries.

Hydrogensupplychain,percei

ved

technologyimmaturity.

Source:Kumarsdiscussionswithrenewablesindustryexperts;alsoPernick,Ro

nandClintWilder2007.

TheCleantech

Revolution:TheNextBigGrowthandI

nvestmentOpportunity.NewYork:C

ollins.



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NODAWNFORNEWDAWN 35


Exhibit3

FeasibilityCalculation,Version0

F

irstCutFeasibilityCalculation

Baseline:SiteRunningonDG

Alternative:SiteRunningonDG

+S

olar

Panels

Explanation

Daysperm

onth

30

Dayspermonth

30

A

HoursofD

GRunperday(1)

18

HoursofDGRunperday(3)

6

B

Dieselcon

sumption,l/hr

2

.55

Dieselconsumption,l/hr

2.55

C

Dieselcost,IndianRs/l(2)

40

Dieselcost,IndianRs/l(2)

40

D

Costofdie

selpermonth

55,080

Costofdieselpermonth

18,360

E=A

BCD

Savingper

monthondiesel,IndianRs

36,720

F

Investmen

tinrenewableenergysystem,

IndianRs

23,000,00

G

Investmen

tnetofdepreciationbenefit(4),

IndianRs

17,68,700

H=G

(1

70%

33%

)

Numberofmonthsforpayback

48

I=H

/F

Source:C

ompanydocuments.

Notes:(1)Remainingsixhoursaresuppor

tedbythebattery.

(2)Blendedaverageofnationwidecosts.

(3)DGRunisusedbyexceptionon

lywhenbatteryisnotchargedbysolarpanels.

(4)Asanincentive,80%ofcapexisallowedtobedepreciatedinthefirstyear.Notethat70%istheadditionalca

pex

whichisdepreciated(usually10

%

isdepreciated)andthetaxrateis33%.

no dawn for 'new dawn' the non-diffusion of an innovation

Documents