These days there is a lot of press coverage about Wipro, Infosys, Tatas and other big Indian firms. Indeed some of these firms are making big moves and are going global. But the real story of growth in India is a bottom-up story.

This story is about the 7m small-and-medium-businesses (SMBs) that generally don't consume any IT today. In my last article, I had suggested that this is an attractive bottom-of-the-pyramid (BOP) opportunity for on-demand offerings.

Land of micro-firms
What does the Indian SMB sector look like? The best way to understand it is with an example. Let's look at the garment industry. This has about 150,000 micro-firms that together export over $30b a year. Collectively you can think of them as a loosely-coupled process network that doesn't have a dominant network organizer. In this network, the individual micro-firms are adding capacity and are improving their connectedness to the rest of the network. Overall, this industry network, like others, is booming.

As we move forward, will we see a wave of horizontal integration leading to more pronounced industry concentration? After all, this is what has happened in the US time and time again. Du Pont, U.S. Rubber, U.S. Steel, General Electric, Coca Cola, and National Biscuit among others were all dominant firms created as a result of this consolidation process. More recently, in the last decade, the many small radio and TV stations in the US have been merged together to form national franchises. One can say that this process is, well, almost predictable. Or, is it?

The garment industry network of micro-firms in India is not going down the path of horizontal integration due to cultural and regulatory (to do with labor laws and tax benefits) reasons. The network structure will stay. However the character of the network will change. There are two changes that are relevant here. One is to do with increased specialization, in part, due to a capital-deepening that's taking place. The other change is more subtle. It's about a shift from an inward-looking worldview to a global mindset.

New door has opened
Presently these large industry networks of micro-firms are not IT-enabled. However we know from looking at, say, Toyota's supplier network that IT can be an important lubricant and facilitator of network efficiency and trust. The reason for absence of IT in today's micro-firm based networks is to do with the traditional license model.

The emerging world of on-demand applications and annuity based pricing changes the game. It now makes it possible to service the inherent (though latent) demand for IT in micro-firm based industry networks.

How big is this opportunity? Well, if appropriate applications are available then it's not too speculative to imagine that the addressable market is at least 1% of revenues. This makes it a $300m opportunity in the garment industry alone. Add to that the "unorganized" $50b retail industry and we are really talking big numbers. This is even before we have considered the $12b micro-firm based network of the diamond polishing industry (India is a global leader in that space); or the $8.7b automobile components industry network that's on an upswing. The list goes on. It includes the micro-finance industry and community banks, the numerous private small health clinics, you get the idea. None of these micro-firm based networks has been a viable market for the old-style software applications business model. But a new door has opened and the opportunity can now be monetized.

Honda's, not Harley's
The 100cc-Honda-mobike version of hosted application for micro-firms hasn't yet been invented though many people are furiously working on it. The broad contours of what this application will look like are getting clearer. For instance, it's pretty apparent that hosted Office look-alikes or hosted mini-ERPs and mini-QuickBooks are not the answer. The successful application won't be targeted only at the micro-firm but also at the industry network that supports it. Its primary role will be to reduce network cycle-time (say, by shaving off 2 weeks in the 14 week garment design-to-delivery process that touches many network participants) and network specialization (by creating new markets).

The hosting model will also undergo some tweaks. For instance, it will have to have offline capability based on synchronization. Moreover it will be mostly mobile-centric and not PC-centric (a micro-firm with $200K annual revenue can't afford many PCs; in any case, there are 6m handsets sold a month, compared to 5m PC's a year in India).

The distribution model is likely to be community-based and will involve bundling with other core products/services that are relevant to the network participants.

Think market expansion, not displacement
In essence this "SMB opportunity" is about market expansion, not displacement. Think back to what happened in the airline industry when discount airlines like SouthWest, RyanAir and Easy Jet entered the fray. Though these new airlines took traffic away from the conventional airlines, they also significantly grew the market.

Oftentimes this market expansion message gets lost in the media. It's a lot more exciting to portray SaaS as a disruption for the conventional application companies (like SAP or MS Office). It is that, but the bigger longer term effect will be the creation of a new consumption pattern for software solutions among micro-firm based industry networks. And the theatre of action for this will be Asia, particularly India.

Getting in on the action
Assuming that your firm wants to participate in this revolution, what's the best way to do it? One way is to simply wait and later gobble up one of the winners (akin to FOX buying MySpace). Another option is to participate as a strategic investor in a local venture (as the Japanese automakers typically do in emerging markets to great advantage).

The most high-touch option is to incubate the new application (and its business model) locally. This is hard to do as it's the anti-thesis of the traditional sales-out strategy. But firms outside the IT industry are going down this path in their own areas. Nokia has already made a killing with its made-for-India low-cost cellphone with a built-in flashlight. Now GE is betting big on this idea as well. They have concluded, as Jeffrey Immelt mentions in his June'06 HBR interview, that "the right solution is not an American product stripped down to meet an Indian price, but a truly Indian product designed from the ground up to carry an Indian price". Are you game for this?


Sharad Sharma's 20 years experience in the enterprise software and wireless infrastructure sectors involves a turnaround (of VERITAS India operations), a startup (now part of Cisco), and an intrapreneurial setup of AT&T's and later Lucent's R&D operations in India in mid-90s. He has also managed product teams in both US and India. Sharad examines the transformation challenges facing the industry in his blog Orbit Change Conversations.