India has drama in store

India has drama in store

By Amy Yee

Published: December 29 2008 22:06 | Last updated: December 29 2008 22:06

When Kishore Biyani tried a “clean Italian look” of glass and minimalist lines in one of his Big Bazaar stores, he was surprised by the effect on his customers – it drove them away. The sleek section of the store remained empty while the rest of the shop bustled.

Mr Biyani, head of the Future Group, India’s largest retailer, realised the decor was intimidating and alienating the middle-class Indian consumers who were more used to crowded bazaars and shops.

“You need hustle and bustle,” says Mr Biyani. “The Indian model of shopping is theatrical. There is buzz and haggling. If you have wide aisles you have a problem.”

Why crowded neighbourhood shops still enjoy the upper hand

Big, modern stores are not guaranteed victory in India’s retail revolution. Tiny, crowded hole-in-the-wall neighbourhood shops do have advantages over their “organised retail” counterparts. Small shopkeepers often know their customer personally, offer free home delivery, let customers order by phone and keep a tab.

“I had a grocer in Mumbai. I never saw him but the service was fabulous,” says Anirudha Mukhedkar, chief executive of Restore Solutions, a retail consultancy in Bangalore. “I ordered over the phone and I would pay him at the end of the month. He didn’t have to have a large store.”

Indian customers traditionally favour personal service and “not a cold-blooded transaction”. Retailers in India should think about “how to personalise and bring a degree of warmth to the transaction”, says Mr Mukhedkar. “If retail wants to get its act right, it needs to go back to basics.”

Kishore Biyani, chief executive of Future Group, India’s largest retailer, also retains some of the basics of shopping in India. Mr Biyani is known for creating the atmosphere of an open-air bazaar in his sprawling hypermarkets. His Big Bazaar stores have narrow aisles, overflowing bins and loud music.

“In India, theatre is always there in selling,” says Mr Biyani.

Mr Biyani’s Big Bazaar “hypermarket” stores, which are India’s closest equivalent to Wal-Mart, are clean, air-conditioned and well lit. But they have deliberately narrow aisles and overflowing display bins that simulate the feel of open-air markets common in India.

Drama and theatre are important elements in Mr Biyani’s stores, which also include the Pantaloons and Food Bazaar chains. At one store in a Mumbai shopping mall, dance music popular in Indian nightclubs blasts from loudspeakers while customers jostle to reach the best goods.

Modern retail stores are relatively new to India, so Mr Biyani and other retailers are having to adapt to the evolving shopping habits of Indians. The biggest mistake that retailers make is thinking that “just because you have set something up people will come”, says Anirudha Mukhedkar, chief executive of Restore Solutions, a retail consultancy in Bangalore.

Shopping in so-called organised stores accounts for only 4 per cent of India’s $322bn (€229bn, £218bn) retail industry but this share is expected to grow to 22 per cent of $427bn by 2010, according to the Federation of Indian Chambers of Commerce and Industry.

Unlike their struggling counterparts in the west, India’s retailers are looking at an attractive growth market. But getting it right will be tricky, given the country’s diverse population and distinct regional cultures.

Understanding India’s wide diversity – socio-economic, religious, regional and linguistic – is key to that strategy. “When you say Indian consumers, there are at least 10 Indias,” says Mr Mukhedkar.

Cultural preferences vary widely between regions. For example, types of rice and how people buy it differs in the north and south, says Harminder Sahni, managing director of Technopak, a retail consultancy based in Delhi.

In the north, rice might be sold in open sacks so consumers can inspect the goods. But in some parts of the south, rice is a common staple sold in sealed packets.

Store lay-outs will also vary according to region. In big groceries in Kolkata, eastern India, and other coastal cities, fish is a staple sold in the vegetable section, whereas it is categorised with meat in inland areas.

Because of these distinct regional tastes, retailers “don’t look at India as India”, says Mr Sahni. “They pick a region or market or city...The first two years might be in one city.” He says that most do not have ambitions to open pan-Indian stores: “Many start in one part of India and just stick to that.”

The Future Group has found another way of capitalising on regional variations: it has 72 annual promotions linked to local festivals. The company says the Big Bazaar store in Bhubaneswar, capital of the backwater eastern state of Orissa, took the group record for a single day’s turnover after promoting a sale linked to a festival.

William Bissell, managing director of Fabindia, a chain of upscale boutiques that sells clothing and housewares, says “every store has to offer a different mix. That’s why retailing in India is so complicated”.

Mr Bissell notes that Fabindia, founded in 1960, has an inventory of 200,000 items to cater to consumer tastes that vary dramatically across regions. “Any retailer will say that is crazy,” says Mr Bissell. To manage its enormous inventory, Fabindia has installed an IT system to track the flow of goods at nearly 100 stores in India.

Capacious western-style malls are also cropping up, especially for luxury goods. But when catering to the mass consumer, “it makes sense to have smaller stores with more workers”, says Mr Mukhedkar of Restore Solutions.

He points out that India’s cities command some of the highest real estate prices in the world but labour costs are among the lowest. Packed shelves are also preferable to give the consumer a sense of abundance and choice. “If a shelf can take 50 things, try to fit in 75,” Mr Mukhedkar advises. “Density per square foot has to be as high as possible.”

For practical reasons, Mr Bissell favours smaller stores. He dismisses the notion of a 100,000 sq ft Ikea-style store in India, except where “enormous” volumes might justify high maintenance costs. “At 40 to 44 degrees in the summer I’m going to have to air-condition the whole thing. That would be an environmental disaster.” And it would be too expensive, he adds, in a country where electricity rates are high, and power cuts force many businesses to buy costly diesel-run generators.

The biggest misunderstanding about retail in India, says Mr Bissell, is that Indians consume as copiously as westerners. Instead, Indians are more selective, value-conscious and price-sensitive. Mr Sahni of Technopak agrees. In a grocery store, an Indian consumer will not fill up a trolley as is common practice in the west. “Indians will shop with a basket. Below a certain income level, people won’t want to spend so much with each transaction.” Smaller refrigerators and limited storage space at home are also factors. “People will buy more frequently and in smaller packets,” says Mr Sahni.

But some aspects of retail in India are more abstract. To stay attuned to India’s pulse, Mr Biyani has a special unit devoted to tracking the country’s social trends to incubate ideas for new store brands and strategies.

The “Future Ideas” group includes sociologists, interior designers, graphic designers and other cultural experts. One of their biggest tasks is analysing the changing tastes of Indian youth.

With more than half of India’s population under the age of 25, understanding their consuming habits and aspirations is a priority for the Future Group. “India is still family-centred, and young people influence purchases,” says Mr Biyani. But by far his biggest challenge as a retailer is managing the speed of change in India.

“How do you make an organisation that is not permanent in thought, structure or design?” asks Mr Biyani. “Retail in the next five years will be different. Nothing is permanent.”

Sony Chases Apple's Magic

Even with a former Steve Jobs lieutenant driving innovation, Sony still hasn't captured its rival's cool

By Cliff Edwards, Kenji Hall and Ronald Grover

Sony Chief Executive Howard Stringer bristles every time he gets the question: Why can't the Japanese electronics giant be more like Apple? The maker of the iPod, iPhone, and Mac computers consistently delivers supercool gadgets that are easy to use, while Sony sells music players, TVs, and cameras that get mixed reviews and often don't even work well with other Sony (SNE) products. "Sony is a very big company," Stringer says by way of explanation. "Our toughest competitors are niche organizations."

Stringer is quick to admit, though, that Sony may face a troubled future if it can't rival Apple (AAPL) in creating simple software that makes its gadgets fun and in giving consumers easy access to music and videos. Apple's iTunes store has long made filling iPods a cinch, but Sony's consumer electronics and PlayStation divisions have only recently started to integrate their offerings with those of the company's movie studio and music label. That's one likely reason why Sony's products earn profit margins of 10% or so, compared with the 30% margins that Apple's devices command.

So Stringer went straight to the source. Three years ago, he hired Tim Schaaff, a top lieutenant of Apple CEO Steve Jobs, and created the title of senior vice-president for software development for him. Although Schaaff was expected to spend most of his time in California, he's so integral to Stringer's plan to remake Sony that he has a direct reporting line to the CEO. Schaaff's role has grown quickly, and today he also has a hand in product design, licensing, planning, and engineering. "When we brought Tim on board, it was a recognition that we needed someone whose experience crosses multiple borders," Stringer says.

A KNACK FOR KILLER PRODUCTS

Schaaff doesn't come across as an agent of change. The 48-year-old Dartmouth grad studiously avoids the press. When he speaks, he does so slowly and deliberately, giving the impression that he is reading from index cards inside his head. But at Apple, Schaaff showed a knack for translating geeky ideas into killer products. The self-taught software engineer oversaw development of Apple's QuickTime video-streaming format, which serves as the foundation of iTunes, the iPod, and the iPhone.

Stringer is clearly hoping Schaaff can seed Sony with Apple's Silicon Valley entrepreneurial culture. When the Welsh-born Stringer became Sony's first non-Japanese CEO in early 2005, he pledged to make the company "cool again." While Schaaff has made important strides toward that goal, Sony clearly needs to inject some zing into its products. On Oct. 29 the company said net earnings for the quarter ended Sept. 30 were off by 72% from the year-earlier period. The report came on the heels of a warning that profits for the year would fall by more than half, due to the strengthening yen and lackluster sales of TVs and digital cameras.

It was more evidence that after a three-year makeover, Sony is still struggling to get its groove back. Now, as consumers rein in spending, they're even less likely to buy the expensive gizmos Sony plans to unveil over the coming months. That would be a major setback for "Sony United," Stringer's program to turn the company's fractured family of products and services into a model of integration. The goal is to sell Bravia televisions that connect to the Web and download the latest Spider-Man movie, Walkman phones that offer tunes from Sony artists such as Beyoncé, and e-book devices that ask if you want to purchase that new John Grisham thriller.

Stringer has given Schaaff unprecedented freedom to conquer resistance and boost cooperation among Sony's myriad—and often warring—units. Schaaff has also served as something akin to secretary of state, working with other companies to help make Sony products more appealing. Last summer, for instance, he led a high-stakes effort to persuade Hollywood to allow downloads of films and TV shows via Sony's PlayStation 3 game console. Sony wanted to introduce the service at the annual E3 video game convention in Los Angeles in July to highlight the versatility of the PS3, which includes a Blu-ray disk player and a hard drive that can store hundreds of movies. With just six months to rally the studios, Schaaff's days became a blur of airplane lounges and conference rooms as he shuttled from Hollywood to Sony offices in California and Tokyo. But the studios held off, waiting to see whether rivals would sign up. "Nobody wants to be the only guy licensing content," Schaaff says.

"THE DOORS ARE MORE OPEN"

Finally, as workers were installing giant flat-panel televisions at Los Angeles' Shrine Auditorium for Sony's news conference, Schaaff's team started to make some real headway. Promising to include technology that would prevent users from sharing films over the Internet, Schaaff managed to convince studio executives that the PS3 network could provide a new outlet for their movies—and serve as a counterweight to Apple's growing clout in the market for downloads. At its launch on July 15, the PlayStation Network offered both rentals and purchases from six of the seven largest movie studios. To many at Sony, the deal signaled increasing cooperation among the PlayStation team in Northern California, Schaaff's group, and Sony's film division. "Today there's much closer integration between hardware and software," says Peter Dille, the Sony executive responsible for the PlayStation Network. "The doors are more open, and people are finally realizing that their phones can connect to other offices."

The result of the growing spirit of cooperation? Sony in January partnered with retailer Amazon.com (AMZN) on an online music store, called MyPlay, that lets consumers download tracks from various record labels without copy restrictions. After years of criticizing the quality of Microsoft's programs for phones and handheld devices, Sony last fall astounded the industry by scrapping its own software and online store and embracing the software giant's Windows technology for its Walkman portable media players. Then in February, it chose the Windows Mobile operating system for a new line of phones called Xperia. And since July consumers have been able to bypass Sony's online store and download content for its e-book device, the Reader, from rival Web sites. Schaaff "knows how to speak the same language as both the entertainment and technology folks," says Sony Pictures Television President Steve Mosko. "And he knows what a 16-year-old wants as well."

Despite Schaaff's successes, there's still plenty of resistance to his efforts. Some colleagues praise him for his quiet thoughtfulness, but others say he has accomplished little in his three years at the company. "He came in lecturing everybody, saying 'Well, we did it this way and this way at Apple,'" says one executive in Sony's consumer electronics division. Others grouse that Schaaff has demonstrated little of Jobs' take-charge attitude. "To expect a storm-the-castle, everyone-pulls-in-the-same direction attitude, forget it," says another executive who has worked with Schaaff.

SERIOUS ABOUT CHANGE

Sensing the opposition to his new hire, Stringer has worked to shore up Schaaff's position. At a 2006 management meeting, Stringer asked young software engineers to sit in the front. That forced some senior executives to the back, sending the message that the CEO was serious about change. And in May 2007, Stringer put Schaaff in charge of the United Service Steering Committee, a group of 30 top executives that meets monthly to air grievances and come up with ideas to boost profits.

When veterans such as PlayStation chief Ken Kutaragi balked at sharing power, Stringer didn't budge. Kutaragi was moved into a new advisory role, and he eventually resigned. Since then, Stringer has tapped executives once based in the U.S.—whom he has worked with over the years—to head up key divisions: mobile phones, PlayStation, and the fledgling digital books unit, which sells the Sony Reader. While those new faces are more willing to work with Schaaff, "Tim [still] has to do things very gently," says longtime friend Ty Roberts, a former Apple executive who is now chief technology officer at Sony subsidiary Gracenote, which maintains a database of information about virtually every music CD ever made. "Sony is not like Apple. You can't just tell people to do something. It's all about building consensus here."

It's easy to see that Stringer and Schaaff, at least, have come to a consensus on Sony's future. Sitting side by side during a breakfast meeting at Tokyo's Westin Hotel in late September—Schaaff's first press interview—the two often complete each other's sentences. "There are a lot of people who were waiting for this...," Stringer says. "To fail," Schaaff and Stringer say in unison. "Exactly," adds Schaaff.

Sometimes roadblocks have even come up on Stringer's pet projects. Early in Schaaff's tenure, Stringer started trumpeting the Reader as proof that Sony could out-Apple Apple. Meeting with engineers at Sony's sprawling U.S. consumer electronics campus nestled in the canyons near San Diego, Schaaff discovered the e-book device was hung up by infighting among rival camps. The dispute confirmed the silo mentality he had detected in his first few weeks on the job. "I was hearing, 'Sony doesn't do this and Sony doesn't do that,'" says Schaaff. "I was a little suspicious."

One group wanted to make the gadget compatible with Mac computers, but designers balked at that idea. Sony had never bothered with Apple software, they said, and there was no reason to start now. And the online bookstore remained in such a muddle that even technically savvy users were having problems finding and purchasing the titles they wanted. The Reader launched in October 2006 to a lukewarm reception with those issues unresolved.

Although the Reader won points for design, the limelight has been stolen by the Kindle, a rival device released last year by Amazon. The Kindle has been widely derided for its blocky look and feel, but analysts say it has been selling far better than Sony's Reader. A key reason is that Amazon made it simpler to download content by including a free wireless connection to its online store, while the Reader must be attached to a PC to load new books. Sony on Oct. 2 released a third-generation Reader that still lacks wireless downloads. Steve Haber, president of the e-books division, concedes the company could be nimbler but says changes are under way. "We've got a lot of good things coming," he says.

You hear the same thing from executives across the company. But will the good things come soon enough to help Stringer meet his goal of transforming Sony by 2011? While Stringer and Schaaff say they'll get there, some former Sony executives wonder when Schaaff might help the company develop anything as iconic as the iPod or iPhone. "Apple is the Sony of the 21st century," says one. "In the past two years, Sony has had plenty of time to come up with an iPhone. Why hasn't it?"

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Plugged in for the Holidays

Despite the current economic turmoil, Christmas may not be a total bust for gadget makers. Consumer Electronics Assn. predicts that fourth-quarter sales of TVs, stereos, and the like will grow by 3.5%, even as overall holiday spending drops by 14%, Twice magazine reports.

To read the Twice article, go to http://bx.businessweek.com/Sony

Dell Bets Splashy Design Will Sell Its New Laptops

Dell Design Chief Ed Boyd is transforming those once-stodgy PCs with art and color. Can made-to-order laptops revitalize the computer maker?

By Reena Jana

Hanging on a wall at Dell's (DELL) consumer design lab in Austin, Tex., are neat rows of what look like abstract paintings. There's a splashy watercolor in turquoise, black, and green, and a mosaic pattern of white and red dots and geometric shapes. Another is covered with hand-drawn sketches of olives in green, purple, and orange. These aren't works of art, though. They're dozens of prototypes for future laptops. Look closely and you see the Dell logo on each one.

The man behind this effort is Ed Boyd, one of Dell's most unusual hires in recent years. Boyd is an industrial designer who used to dream up new sunglasses and shoes for Nike (NKE). Now the 43-year-old is trying to make design an integral part of Dell, the personal computer maker long known for cranking out boring gray boxes. "I was skeptical it could be cool," says Boyd, who joined the company last year. "I took the job when I heard the design lab would function like a startup for consumer [products]."

LET THE BUYER DESIGN

Dell plans to roll out the first three laptops with these colorful designs on Nov. 11, in time for the holiday season. Customers will pay an extra $75 for the designs, on top of the basic $699 price tag for the company's budget-line portables. The designs are from Nigerian painter Joseph Amédokpo, South African graphic artist Siobhan Gunning, and Canadian designer Bruce Mau.

For Boyd, this is just a start, though. Next year, Dell will let buyers customize laptops in a dizzying number of ways, mixing scores of colors, patterns, and textures. The options will go far beyond the handful of choices available from most of its rivals. In essence, Boyd is taking the Nike approach of letting people design their own sneakers, and trying to apply it to the world of computers. "We're pushing the idea of [made-to-order computers] to the next level," says Boyd.

Dell could certainly use a change in fortune. The once-mighty PC maker has stumbled in recent years: Its stock is off by more than 60% since 2005. Even after founder Michael S. Dell returned as chief executive in 2007, the company continued to lose ground to Apple (AAPL) and the resurgent Hewlett-Packard (HPQ). "We had higher expectations for Dell's turnaround by now," says Clay Sumner, senior analyst at FBR Research (FBR). Dell's market capitalization is now $24 billion, compared with $93 billion for Apple and HP's $87 billion. The net cash on Apple's balance sheet is about the same as Dell's market cap.

Michael Dell contends that the company is making progress. He says Boyd's efforts have helped Dell get back on track, particularly with consumers. "We've got the most exciting new products ever from Dell coming in the second half of this year," Dell said during a speech in June. "That's fundamentally what brings new customers in."

RISKS AND REWARDS

Still, Dell's timing is awful. With the economy headed into recession and consumers cutting back, it will be difficult to charge any sort of premium for cool design. Analysts say that's especially true for companies such as Dell that don't have an established reputation for design. "Price will be more important for consumers because of the economic deterioration," says Mika Kitagawa, an analyst with the market research firm Gartner (IT).

Boyd is used to taking risks. Last year he hired an obscure graffiti artist named Mike Ming to create images for Dell products, a move that worried some of Dell's straitlaced staff. He also signed off on an undersized keyboard for Dell's first mini-notebook PC, a decision the company's founder clearly disagreed with. "Michael Dell wanted the full keyboard experience," says John Thode, Dell's vice-president for small consumer devices.

Then the sales figures for these products started coming in. A limited edition laptop designed by Ming and the mini-notebook, released in recent months, both exceeded expectations, company executives say. "I got an e-mail from Michael saying: 'Keep going, going, going,'" Boyd says.

Boyd's design staff has now grown to 120 people scattered from Austin to Miami to Singapore. There are a dozen PhDs in the group, whose degrees include engineering, computer science, and cognitive psychology. Besides new products, they're working on such cost-saving packaging as an inflatable cushion made from recycled plastic. They're also trying to overhaul the online shopping experience at Dell.com by, among other things, moving to replace choppy point-and-click navigation with more fluid scrolling through images. "Design isn't just cosmetic," Boyd says.

Last year, Dell tried offering consumers the choice of a dozen different colors for their laptops, but the company couldn't deliver the computers as speedily as promised. The delays angered customers and sparked numerous critical blog postings and news reports. Boyd says Dell will be prepared this time as it tries to deliver an even more complicated mix of designs and colors.

Rivals will be tempting consumers with their own new designs. Apple has just unveiled a line of sleek laptops, made from a single piece of aluminum. The toughest competition may come from HP, which has been investing in design much longer than Dell and used that edge to surpass Dell as the world's No. 1 personal computer maker two years ago. This fall, HP is bringing out a touchscreen PC, the thinnest laptop on the market, and a $700 mini-notebook with a red-and-purple peony design from fashion designer Vivienne Tam.

These sorts of products may be a tough sell this holiday season. But if Boyd and Dell keep investing in design, they may ultimately find a more receptive audience. "People want gadgets that look cool on campus or in a café," says Gartner's Kitagawa. "Customization will be more and more important. In the long run, it's the way to go."

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How Apple Does It

While Dell (DELL) is newly focused on design, Apple (AAPL) has set the standard for the computer industry for years. In Do You Matter? How Great Design Will Make People Love Your Company (FT Press, 2008), Robert Brunner, Apple's former director of industrial design, provides an inside look at how the company approaches design. There's advice from Apple's current design chief, Jonathan Ive, as well as four lessons from Brunner's years leading the effort: support design at senior levels; design for more than decoration; be original; and launch products quickly and often.

To read a review of Brunner's book, go to http://bx.businessweek.com/product-design/reference/

Advertisers Adjust to Market Luxury in a Recession

When marketing a Lexus, high-end appliance, or luxe cosmetic, advertisers are promising bargains to the cash-strapped rich

By Burt Helm

Nowadays, even affluent Americans are thinking twice before hitting the mall. A recent Gallup survey showed that 49% of people making $90,000 or more a year rated economic conditions as "poor," a 23-point increase since early September.

That has companies scrambling to tweak their marketing messages. Forget the usual talk of indulgent luxury. Instead, companies from General Electric (GE) to Lexus (TM) are employing sober, left-brain pitches—special deals, useful features, long-term savings. "There are plenty of high-end brands that sell themselves on the 'I-buy-it-because-I-can' idea," says Hayes Roth of brand consultant Landor. "They'll have to temper that."

Imagine trying to sell half an ounce of anti-aging eye cream for $145 a pop. That's the challenge facing La Prairie, the luxury Swiss skin-care company. Paul Wilmot, who handles public relations for La Prairie and other tony brands, has been pitching the editors of fashion and beauty magazines in the hopes of working the luxe potion into the gift guides that appear in December issues. His spin: The cream contains ingredients usually available only in pricey prescription ointments. "No one wants to look like an idiot who just bought something because it's expensive," says Wilmot. "So La Prairie makes an intellectual case."

Last month, GE began selling its new Profile washer-and-dryer set, which costs a very plush $3,500. The ads feature the stylish machines in eye-catching cherry red, an appeal to what GE marketer Paul Klein calls the style-conscious "iPhone (AAPL) consumer." But the ads focus more on down-to-earth practicality—specifically, technology that doles out the optimal amount of soap and water per load. "We know electricity costs are going up," says Klein. "And we know water scarcity is a problem." GE is also encouraging retailers to explain how the machines will save customers money by being gentle on their clothes, extending the life of their garments.

"TIME TO BE MORE RATIONAL"

For years, Toyota Motor's (TM) luxury brand has run pre-Christmas "December to Remember" commercials featuring a loving spouse giving his or her significant other a new Lexus wrapped in a big red bow. The company assumes there are still enough people out there with sufficient loot to put such pricey baubles under the tree, so you will see those ads this year, too. But Lexus is also hedging its bets. In mid- September it began running ads with the tagline "Lowest Cost of Ownership." That's a reference to Lexus' decent fuel economy, durability, and resale value. "It's definitely a time to be more rational," says Dave Nordstrom, Lexus' North American marketing chief.

A couple of years ago, discount brands got into the luxury game, too. Even Hyundai Motor, Korean king of the econo box, aspired to move upscale. Now the automaker is trying to sell entry-level luxury in the worst car-selling environment in memory.

Hyundai's response: Depict more snooty rivals as over-priced. In its ads, Hyundai is taking pains to note that its new Genesis sedan ($33,000) has the same sound system as a Rolls-Royce Phantom ($300,000-plus). "If you'd rather have money than a hood ornament," goes the ad, the Genesis may "look even better than a Rolls-Royce."

Generics Are Gaining on Name Brands

Recessionary forces are prompting shoppers to trade down from name brands, while off-brands are shedding their cheap-knockoff reputation

By Matthew Boyle

Whether they sell cookies or cough syrup, makers of generic products are profiting in perilous times. U.S. sales of private-label goods rose 10% in the year ending June 28, according to Nielsen, compared with a meager 4% gain for national brands.

Turning cheap in tough times isn't the surprise. What's different is that the rising quality of private labels may keep customers coming back. Products from manufacturers such as Perrigo (PRGO), TreeHouse Foods (THS), Home Diagnostics (HDIX), and Ralcorp Holdings (RAH) have evolved to name-brand quality and are starting to adopt similar strategies in marketing and innovation. "Today, store brands have a much more sophisticated offering," says Wendy Liebmann, CEO of New York marketing consultancy WSL Strategic Retail.

Several factors are behind this heyday for generics. In a homogeneous retail world, stores are looking to private-label offerings to distinguish themselves from rivals. Anyone can sell Cheerios, but Safeway's (SWY) O Organics line is so successful that it now licenses the name to other retailers such as France's Carrefour. With no ad costs, store brands also deliver higher profit margins.

Much of that money is being plowed back into the business. Home Diagnostics, which makes diabetics' blood glucose monitoring systems for retailers including CVS and Walgreens, invested $15 million to make its new product easier to use at a price that's roughly 35% below national brands. "We get pigeonholed as a private-label player," says CEO J. Richard Damron Jr., "but we spend a significant amount on R&D." Meanwhile, Perrigo, with $1.8 billion in annual sales of over-the-counter medications, just broke ground on a $25 million plant expansion in Allegan, Mich., and is acquiring companies abroad. "We're in a good spot now," says Perrigo CEO Joseph Papa.

The generics boom has also extended to TreeHouse and Ralcorp, which make private-label food such as salad dressings, soup, and hot cereal. "Not only are consumers trading down to lower-priced products, we believe that grocery retailers are stepping up their private-label focus to take advantage of that consumer migration," says SunTrust Robinson Humphrey (STI) analyst William Chappell. One sign that the balance of power may be shifting: Ralcorp recently paid $2.6 billion to buy Post cereal from Kraft Foods (KFT).

Stores Count Seconds to Trim Labor Costs

By VANESSA O'CONNELL

SHELBY TOWNSHIP, Mich. -- Daniel A. Gunther has good reason to keep his checkout line moving at the Meijer Inc. store north of Detroit. A clock starts ticking the instant he scans a customer's first item, and it doesn't shut off until his register spits out a receipt.

To assess his efficiency, the store's computer takes into account everything from the kinds of merchandise he's bagging to how his customers are paying. Each week, he gets scored. If he falls below 95% of the baseline score too many times, the 185-store megastore chain, based in Walker, Mich., is likely to bounce him to a lower-paying job, or fire him.

Fabrizio Costantini for the Wall Street Journal

Daniel Gunther, who works at a Meijer megastore north of Detroit, says he has been told 'get people in and out' of the checkout line to improve efficiency.

American retailers have come under tremendous financial pressure as beleaguered consumers curtail their spending. At least 14 major chains have sought bankruptcy protection over the past 12 months, and many others are struggling. With nearly all of them under the gun to cut costs and improve profit margins, "labor-waste elimination" systems like the one used by Meijer are sweeping the industry.

The brains behind Meijer's system is a consulting and software company known for decades as H.B. Maynard & Co., which last year became the Operations Workforce Optimization unit of Accenture Ltd. Borrowing from time-motion concepts first developed for U.S. steel mills and factory floors, it breaks down tasks such as working a cash register into quantifiable units and devises standard times to complete them, called "engineered labor standards." Then it writes software to help clients keep watch over their work forces.

The client list of OWO, as it is now known, has included more than five dozen retail chains, including Gap Inc., TJX Cos., Limited Brands Inc., Office Depot Inc., Nike Inc., and Toys "R" Us Inc. A host of other "work force management" companies also offer to help retailers improve worker productivity.

Cutting Down the Chatter

Interviews with cashiers at 16 Meijer stores suggest that its system has spurred many to hurry up -- and has dialed up stress levels along the way. Mr. Gunther, who is 22 years old, says he recently told a longtime customer that he couldn't chat with her anymore during checkout because he was being timed. "I was told to get people in and out," he says. Other cashiers say they avoid eye contact with shoppers and generally hurry along older or infirm customers who might take longer to unload carts and count money.

Reactions from customers at Michigan stores vary. "Sometimes you like to get in and get out right away," says Barb Bush, who shops at Meijer stores in DeWitt and Owosso and says she likes the current system. "A lot of [the cashiers] like to stop and chat, and I don't really have the time for it."

Linda Long, 58, who shops at the Okemos store weekly, says of the cashiers: "Everybody is under stress. They are not as friendly. I know elderly people have a hard time making change because you lose your ability to feel. They're so rushed at checkout that they don't want to come here."

Meijer spokesman Frank J. Guglielmi said in an email that "as the retail landscape became more crowded and competitive, Meijer has focused more intently on maximizing efficiencies." The engineered standards, he said, take into account all types of customers, including the elderly. The system, he said, has enabled Meijer to staff stores more efficiently, and has increased customer-service ratings. Meijer, a family-owned chain with more than 60,000 employees in five states, doesn't disclose its finances.

Mr. Guglielmi says Meijer "expects employees to be at 100% performance to the standards, but we do not begin any formal counseling process until the performance falls below 95%." If a cashier is "challenged in their position," he says, the company provides "training and counseling to help improve their performance. If this doesn't help them, there are various alternatives." He declined to elaborate.

Customers at several Michigan stores said managers appeared to be opening fewer checkout lines than before, relying on faster-moving cashiers and self-checkout systems to pick up the slack. "I do notice that the cashiers go a little faster, but it doesn't necessarily matter because there aren't that many cashiers," says Melissa Shoe, 20, a regular shopper at the Lansing store. Before Meijer installed its system a couple of years ago, OWO, then still known as H.B. Maynard, helped devise engineered labor standards for everything from greeting shoppers to scanning items too big to remove from a shopping cart. By calculating a standard time for each task, a retailer can more closely monitor worker performance and figure out how and where to reduce labor, the single biggest controllable expense in retail. OWO says its methods can often cut labor costs by 5% to 15%.

The approach is rooted in the time-motion theories of Frederick Taylor from the early 20th century, which were used to break down tasks into units to determine the maximum work a person could do. Harold B. Maynard, the company's founder, began his career in 1924 as a time-study engineer at Westinghouse, then formed his own company. For 70 years, that company worked primarily for manufacturers.

In 2000, after demand from manufacturing industries declined, the company shifted into retail. These days, about 80% of its $20 million in annual revenue comes from retail.

"As manufacturing gets shipped overseas, many people thought that would be the end of engineered standards," says John Lund, a professor of industrial engineering at an extension program for workers at the University of Wisconsin. "In fact, we are not seeing that at all. We are seeing a renaissance of engineered standards in the retail industry."

Hannaford Bros., a subsidiary of the Belgian Delhaize Group, says OWO helped it reduce labor costs at more than 150 supermarkets in New York and New England. Just adding presliced pickles to sandwiches, rather than having deli workers slice pickles themselves, saved Hannaford $60,000 in labor costs, according to Mike Farago, a former process-improvement specialist at Hannaford.

At Bob's Stores, a Northeastern clothing and footwear chain, the software revealed that shaving one extra second from the checkout process for each shopper would produce $15,000 in annual labor savings across its 34 stores, according to Kevin Campbell, assistant vice president for store operations. He says Bob's used the software to determine how many workers to schedule at any given time. The methods enabled it to lower its labor budget by 8%, he says.

Engineering Meets Service

Unlike factory workers, most retail clerks deal face-to-face with customers, which raises questions about how such labor standards can affect customer relations.

"If it is the type of job where you can lay out every element of the job, then you might get more output per hour" using such a system, says Barry Hirsch, a labor professor in the economics department at Georgia State University. "But if it is a job that requires things that can't be quantified -- special effort for a customer, or just being friendly -- then delineating things too carefully for how employees behave can decrease productivity, because you're just so focused on working to precise guidelines."

OWO says retailers can, and should, adjust time standards to take into account customer service and other variables such as store layout or sales volume, which can affect how long it takes employees to perform certain tasks. In a study late last year for a large clothing chain, for example, OWO determined that for every customer buying something in a high-traffic urban store, 2.63 items were "disturbed" and required straightening or reorganizing. That compared to 1.98 items in quieter suburban stores.

Meijer says it pioneered supercenters in the early 1960s. Each store stocks around 150,000 products, including groceries, apparel, sporting goods, home furnishings and pet supplies.

In recent years, it has faced mounting competition from discount supercenters owned by Wal-Mart Stores Inc., which often offered lower prices on general merchandise. Meijer adopted the new labor standards for cashiers to boost productivity. It added fingerprint readers to cash registers so cashiers can sign in for work directly at their registers, not at a time clock, "saving minutes of wasted time," says Roy Smith Jr., the former director of Meijer's Benton Harbor, Mich., store. The chain also installed a system to monitor how many cases per hour stock workers were loading onto shelves.

In the late 1990s, the typical high-traffic Meijer store employed about 700 workers and nearly 50 managers, says Mr. Smith, who worked at nine Meijer stores over 15 years before quitting in September. Between late 2003 and late 2007, he says, Meijer's "selling, general and administrative" expenses, which includes labor, fell about 4%. The company spokesman declined to comment on those numbers, but said that most Meijer stores now employ between 250 and 400 workers.

In spring 2007, Meijer began disciplining cashiers who couldn't keep up with its baseline standards, according to Mr. Smith and several longtime cashiers. Hitting the baseline was "like a C-minus" grade, says Mr. Smith. Those who fell below 95% of the baseline -- a score of 95 -- faced penalties or weeding out. Meijer posted weekly "cashier productivity" notices in employee-only areas.

Store managers used the scores to decide whether new cashiers still in the 90-day probationary period should be transferred, or fired. Longtime employees also were scrutinized. In a given week, up to one-fifth of the scores posted were below 95, current and former cashiers say.

Before the scoring system, "nobody knew who was good," says Mr. Smith. Afterwards, managers knew "this person isn't as strong as that person. It becomes really obvious, and you're able to put a number to that." Cashiers were counseled for as many as seven weeks on improving performance; those who didn't lost their jobs, he says.

Employees with scores below 95 are told: "Get your percentage up, and we'll have a manager watch you to see what you should do differently," says Nastassia Gauna, who worked as a cashier at the Adrian, Mich., Meijer store before quitting, she says, in August.

The X Factors

The computer scores, Ms. Gauna says, don't "take into consideration the many things that can go wrong at a register to kill your time" -- a customer who doesn't have enough cash and is "digging through a purse," a credit card that doesn't swipe through the charge, or an item with no price or item number on it. Some customers ask for cigarettes located in another part of the store, and the cashier has to get them. Others forget items and retreat to the aisles to find them.

Buying Time

Operations Workforce Optimization, a unit of Accenture, breaks down tasks into quantifiable units, devises standard times to complete them, then writes software to help clients keep watch over their workforces. Here are some ways it trimmed time from common tasks at an unnamed grocery retailer.

Produce

• Bananas, a top-selling item, are stocked by grasping inverted bunches by the tips. Flipping the box over prior to stocking allows the employee to grasp multiple bunches at once by the stems.

Projected savings: $100,000 per year*

Bakery

• Some breads and rolls are packaged in plastic bags and closed with twist ties. Innoseal or bag clips reduce the manual motions required.

Projected savings: $200,000 per year*

• During packaging of some goods, employees are walking to the work rather than bringing the work to them, often traveling several steps for each tray rather than bringing the rack to the workstation.

Projected savings: $20,000 per year*

(* Savings generally vary according to the number of stores in a chain.)

"Recovering" Items

At clothing retailers, OWO defines "recovery" as collecting an item that has been left behind or disturbed by a shopper. Tasks vary, depending on the scenario -- re-hanging a garment that's on the ground versus one that's not on the ground -- and the store. Handling an item and looking for a tag should take about 1.8 seconds. Buttoning or zipping a garment should take about 2.4 seconds.

To help a large clothing chain figure out efficient staffing, OWO's analysis found that in high-traffic stores, for every 100 customers purchasing something, 50 pieces of clothing need to get rehung and replaced back out on the sales floor. It takes more than 11 seconds per shopper to recover an item.

In low-traffic (often suburban) stores, 15 items need to be returned to the floor, for every 100 customers who buy something, and it takes about six seconds per shopper to recover an item.

This kind of behavior, of course, tends to tick off other shoppers waiting in line, but some of them sympathize with the cashiers. "I am 84, and I get behind some old person and I can't stand it," says one shopper at the Owosso store. "They go into their purse and they are counting out a penny, and I am thinking that poor clerk, and people are lining up. But it's not the clerk's fault."

Kristine E. Barry, a cashier at the DeWitt store, says she began to see cashiers hurry along elderly customers by telling them to put their items on the belt more quickly because they were being timed. "When you have a situation where you are dealing with an elderly customer who's not as speedy, you're under pressure," says Ms. Barry, who has been a Meijer cashier for 22 years.

Jacqueline Sue Hanning, 25, took a job as a cashier in the Adrian, Mich., store for $7.15 an hour, in July 2007. She says she was "written up" three or four times last spring for scores below 95. She was told she would have to move to another department, at lower pay, if her score didn't improve, she says. "Make sure you're just scanning, grabbing, bagging," she recalls being told. She quit after nearly one year on the job.

Two shoppers interviewed in front of the Okemos store said they were told by cashiers that they were being timed. "There was one particular cashier that was in so much of a hurry," recalls Ms. Long, the regular customer at that store. "And he was saying, 'When you're afraid you're going to lose your job, you're going to make more mistakes.' "

The United Food and Commercial Workers Union, which covers about 27,000 Meijer employees in Michigan, including 3,000 cashiers, has filed a grievance against the company in connection with the cashier-performance system, saying it has found flaws in it. The union says the matter is headed for arbitration. The Meijer spokesman declined to comment.

Ms. Barry, the DeWitt cashier, who says her weekly score usually hits or exceeds the baseline, admits to using a few tricks to improve her times. She makes heavy use of the register's "suspend button," which stops the clock. The system detects when remote scanning guns are used, automatically allowing slightly more time to scan big items that stay in the cart. Ms. Barry sometimes uses the remote scanner for nonbulky merchandise.

"It is pretty much survival," she says. "You have to learn the tricks of the trade."

Lessons from Virgin's U.S. Brand Builder

For Frances Farrow, the central trick is to see the business from the customer's perspective and respond to the customer's needs

The Executive: Frances Farrow, 44

Background: Farrow, an executive member of the board of Virgin Atlantic Airways since 1993, arrived in New York eight years ago to help build Virgin USA, the headquarters of the Virgin Group in North America, where she is currently chief executive. Virgin is already a household name in Europe, with more than 200 companies run by charismatic entrepreneur Sir Richard Branson. Farrow's job is to expand the Virgin brand in North America.

The Company: Virgin USA was established in 2001 and currently consists of about 15 different brands (BusinessWeek.com, 7/8/08). This year, the company launched Virgin America, a domestic airline service based in San Francisco.

Revenues: $23 billion (Virgin Group global revenue)

Her Story: Everyone's got something to say about Virgin. With an unusual brand name and a mold-breaking leader in Richard Branson, that's hardly surprising. From praise of his business acumen and curiosity about his home on Necker Island in the British Virgin Islands to head-shaking at our outrageous company stunts, I have heard them all. But the ones I appreciate most are comments about the brand's elasticity and its unique ability to succeed in diverse markets: "I fly your airlines, my kid uses your cell phones, we rock out at the music festival, and we're excited for Richard to invent alternative energy options."

It is a reminder of Virgin's infinite opportunities, but also of the risks of letting the brand stray off course.

My job is to help start new Virgin companies in North America while making sure the global brand remains strong. The mission is pretty clear: Our brand values have been the same since 30 years ago, when Richard went from running a student magazine to running a record company and then an airline. And even as we are expanding the global brand, including here in the States, with much higher stakes, the approach is still the same.

Virgin Innovations

First of all, the customer viewpoint remains the heart of our companies' origins: We spot gaps in the market where consumers have needs, and we try to fill them. Richard himself was a frustrated consumer who found a better way. Stranded at an airport, he chartered a plane and got himself and his fellow passengers home. That experience inspired him to start an airline that he himself would want to fly. Virgin Atlantic introduced the seatback entertainment system and an onboard bar, and it taught cabin crews to make friendliness a priority, to name a few innovative firsts.

How does our startup process work? Even as a global enterprise, Virgin Group starts companies with the same alacrity and speed as when Richard first began to build the brand. Consistent with Virgin's entrepreneurial genesis, the process is not complicated, and we keep pace with market changes. Our corporate development team has experience with private equity, investment banking, and entrepreneurial activities. Together with the brand team, it looks for sectors currently experiencing consumer "headaches," which to us are opportunities. The teams work together to make sure these opportunities fit our brand values and offer something better and fresher in their sectors. Partners and other investors come to us with all sorts of ideas, to which my teams ask and answer the following questions: Are we meeting a gap where there is a need? Does it offer consumers a better deal? Is it the right fit for our brand? Can we offer both substance and a unique Virgin flair across many consumer touchpoints?

The better consumers know us, the more they love us. That's what our brand studies have found, and I think it's in no small part due to how we go about deciding what companies to start. We don't ask ourselves, "What do we want to bring to market?" but rather: "What do consumers want?" We look at the world from the point of view of the consumer. The result of that kind of criteria is loyalty.

Maintaining Freshness

In spite of our track record in Britain, U.S. consumers were not so familiar with the Virgin brand when we started out here. This gave us the opportunity to enter U.S. markets with the same entrepreneurial passion that breathed life into Virgin's first British companies. But the brand is fresh and innovative, not only because of what we do but how we do it. Let me give you a few examples.

In the early 2000s, we recognized that both the young and the budget-conscious had limited cell-phone options. So we partnered with Sprint (S) and started Virgin Mobile USA (VM) as the first mobile virtual network operator in the U.S. to offer affordable but quality handsets and wireless service with excellent customer care and mobile data services. Six years later, its customer base exceeds 5 million consumers. It's a crowded marketplace—to cut through, one of the things Virgin is known for is its irreverent attitude when it comes to advertising. We started Virgin Mobile with holiday advertising, such as Chrismahanukwanzah and SugarMama, a revenue-generating program where users were rewarded with free minutes for watching online content.

It's not just about marketing. One of the ways we've continually stood out is by finding a niche, differentiating our product among existing ones, and improving customer service. For instance, when we launched Virgin America, as an affordable option to a sector in need of a makeover, we offered such features as seatbacks with a functioning PC run off Linux that houses on-demand movies, video games, and a first-of-its-kind seatback food ordering system. We're tickled that people are blogging about other extras, such as seat-to-seat texting, the mood lighting, and even the safety video.

Humane Lending

The financial-services industry is another pain point in the U.S. We recently watched a small company called CircleLending build a steady customer base and expertise in family-and-friends lending programs. Because we liked what they did and felt it could go even bigger and bolder with the Virgin brand, we invested in it and rebranded it Virgin Money. We saw the power of the brand immediately: Six months after rebranding, revenues jumped more than 50%. The brand has given the business permission to communicate in a fun and more human way. We now have advertising about friends, family, and loans with characters asking with a wink, "Anyone up for a threesome?"

We've also taken some knocks, however. One unique hazard in building on a known global brand is making the assumption that a product or service that works in one market will work here. In the late 1990s, we launched Virgin Cola in the U.S. with hype and fanfare. Richard drove a tank into Times Square and knocked down cola cans. Despite success in Britain and other countries, U.S. consumers didn't want another cola, and we retreated. It offered us a valuable lesson: One size doesn't fit all.

Virgin got its start as a true upstart. Richard launched a student magazine that led the way to a record company, and so forth. We are fortunate that instead of constantly reinventing ourselves 30 years later, we can stay true to our authentic roots, our rock-and-roll spirit, and the challenge laid down every day by our founder, who seems always to be one step ahead of everyone else in gauging the next big thing. But the entrepreneurial Web 2.0 world we live in means there are fewer Goliaths to slay and plenty of upstart Davids. We certainly don't rest on our laurels, because there is always room for better options of style and substance. That's what gets the folks at Virgin USA out of bed every day (and Richard out of his island hammock).

Copyediting? Ship the Work Out to India

Not far from New Delhi, Mindworks now has eight overseas clients, and it's mounting a big effort to go after more U.S. publications

by Nandini Lakshman

In a squat, gray building in Noida, a leading outsourcing destination 15 miles from New Delhi, is the headquarters of Mindworks Global Media. Here, 90 young men and women peer into their computers, editing copy, designing and laying out pages, and even reporting over the phone. Mindworks isn't a new publication. It's a company to which media groups in Asia, Europe, and the U.S.—including the Miami Herald and South China Morning Post—outsource work that journalists and copyeditors usually do. The Mindworks staff works two to three shifts a day, seven days a week. Tony Joseph, 46, an editor-turned-entrepreneur, is Mindworks' founder and chief executive. He sometimes drops by at 6 a.m. to see his employees, just when U.S. clients are putting their papers to bed.

Mindworks has been handling outsourcing assignments from non-Indian publishers for four years. It expects plenty more business as the cost-cutting in U.S. and European print media grinds on. Some Western publishers do their outsourcing in-house—Thomson Reuters (TRI), for instance, has moved basic Wall Street reporting on U.S., European, and Gulf equities to a new bureau in Bangalore. But other media companies prefer to outsource to the Indians directly. On June 24, Mindworks made global headlines when the Associated Press reported that the company had taken on copyediting and layout work for a couple of publications owned by the California media publishing group Orange County Register Communications.

Mindworks' Joseph, who was born and bred in Kerala, has spent most of his working career in New Delhi in senior editing positions at such leading India papers and magazines as Economic Times, Business Standard, and BusinessWorld. Now he lives in New York to be close to his clients and travels to India every quarter. He wouldn't divulge names or details about his clients, but he says Mindworks has eight from the publishing industry in all. The Orange County Register is the latest. A deputy editor at the Register says that Orange County's outsourcing to Mindworks "will be a one-month trial" for the service of laying out pages for one of its community papers and of copyediting stories for the flagship Register.

Markets in Flux

The U.S. is a new market for Mindworks, which got its first American client last year. "The U.S. is the world's biggest media market, and the business there is changing rapidly," says Joseph. "For us, the greatest opportunity for creativity and growth is in markets where there's a lot of flux and everything is open for reconfiguration." Indeed, U.S. publications have been plagued by declining print readership and advertising as readers keep switching to online media. Outsourcing work to India helps keep publications in business. "It helps them improve efficiencies in editorial packaging and reallocate resources to reporting and writing," Joseph says. Mindworks claims that it helps publications cut costs 35% to 40%.

Mindworks didn't start out with foreign clients. It began locally, publishing magazines for such companies as Bharti Airtel (BRTI.BO), India's largest telecom provider. At the height of the technology outsourcing boom in 2004, Mindworks got an assignment from a British airline magazine. The job: Do a story on this question: If you had 2 million pounds to spare, what's the best seaside property you'd buy in Europe? Sitting 5,900 miles away from London, Joseph and his team made international calls and delivered the article in eight days. It was a one-off job, but it encouraged Joseph to relaunch Mindworks as a global media outsourcing company in 2005. After mulling which aspect of journalism would make the most business sense—writing, reporting, or editing—Joseph concluded that copyediting was where Mindworks could most excel. "Tony's track record in journalism and India's labor arbitrage are a big value-add and cost saver for clients," says Ranjan Kapur, who heads the India arm of Martin Sorrell's WPP Group (WPPGY) and personally was an original angel investor in Mindworks Global.

Mindworks' other investors nudged it to explore the U.S. market. In 2007, Helion Venture Partners, a venture capital fund registered on the island of Mauritius, came aboard, buying out the initial investors—WPP's Kapur and the Kolkata-based media house Ananda Bazar Patrika, owner of BusinessWorld, which Joseph once edited. "We felt that media content outsourcing was underutilized but had great potential,— says Sanjeev Agarwal, managing director of Helion. Agarwal has an excellent record—he founded Daksh, India's most successful business-process outsourcing company. Agarwal made a fortune when Daksh was acquired by IBM (IBM) in 2004.

New U.S. Thrust

Joseph and his editorial team honed their global outsourcing skills on publications from Southeast Asia (South China Morning Post) and the Middle East(Gulf News), for which they edited copy and laid out pages. Mindworks now has a dedicated editorial and design team, ranging from 5 to 15 people, for each of its eight global clients.

The staffer logs into a foreign publication's general desk basket, where the client's raw stories are parked for editing. Each team member is assigned a few stories, which are checked for grammar, style, and accuracy. In case there are inconsistencies or inaccuracies, the copy editor at Mindworks gets in touch with the news editor of the foreign publication. If the team is handling a particular section of the publication like Sports or Lifestyle, then the contact person in the U.S. is the section head. The reporter is never contacted.

Every deal goes through a two-month transition, when the client and the customer try to understand each other's needs. Either the publication's representative comes to India, or a senior Mindworks team member is posted overseas, for a fortnight to a month, to familiarize himself with the client's style requirements and work culture. "It helps minimize errors," says Joseph. Mindworks plans to increase its staff from 100 to 1,500 people by 2013. Joseph has just hired a new head in the U.S. for new business development and plans to build a five-member U.S. operations team to help market Mindworks'services.

Today, Mindworks may have an early-mover advantage in global media outsourcing, but others are bound to follow. Helion's Agarwal says media outsourcing could be a $2 billion opportunity for India. For the past four years, Gurgaon-based Express KCS has been designing restaurant and product ads for a host of Northern California papers, including Contra Costa Times, The Oakland Tribune, The Argus in Fremont, and Tri-Valley Herald. A year ago, Express KCS ventured into copyediting and layout for London's Property News. More media outsourcing business will flow to India—and to Mindworks. "The issue is, how quickly can they scale up?" says Agarwal. Joseph is confident he can stay ahead. "Our processes are not easy to replicate," he says.

Herman Miller's Clinical Trials

Herman Miller took the office by storm with an ergonomically correct chair. Now it's trying to build up its hospital business

by Reena Jana

It seems fitting that Herman Miller (MLHR) is remaking its Aeron chair—once a $1,000 status symbol that allowed Web moguls of the '90s to sit coolly and comfortably while navigating the Internet—as hospital furniture. Just as the leaders of the dot-com boom are themselves graying, the office-furnishings giant hopes to cash in on one of this era's megatrends: the graying of America.

The Aeron's ergonomics have now inspired the Nala, which has an easy-to-adjust seat designed, in theory, to help people recovering from surgery. Herman Miller's first patient-oriented product for the clinical market, the Nala makes its debut on June 9 at Chicago's NeoCon World's Trade Fair, a furnishings industry show, and will go on sale to hospitals in the fall for a list price of $1,800—pretty costly for patient chairs.

The timing could be right. With many companies downsizing or freezing new hires, demand for office furniture—even the still-popular Aeron, which now sells for $750—is expected to decline. Although the Zeeland (Mich.) company's revenue rose 10.5% last year, to nearly $2 billion, growth is slowing from 14.6% a year earlier. Herman Miller already has a growing business supplying hospitals and doctors' offices with furniture, including desks, chairs, pharmacy shelves, and steel carts. While the company doesn't break out unit sales, it says health-care furniture revenue has grown at an annual clip of 15% for the past five years. Now its designers are taking a closer look.

Moving into hospitals makes sense for designers of office furniture. "The need for more ergonomic hospital furniture follows naturally the trend that has happened in the office in the last 20 years or so," says Pascal Malassigné, a research scientist at the Veterans Administration Medical Center in Milwaukee and an industrial design professor at Milwaukee Institute of Art & Design. Because many hospitals need to upgrade outdated facilities, now is a smart time to develop innovative clinical furniture, he adds.

Why not, then, Herman Miller designers wondered, do for patients what's been done for those confined to hours of desk labor—make the seat as comfortable and functional as possible.

Using the existing design and engineering intellectual property that allows the Aeron and other chairs to tilt smoothly had another plus: Herman Miller could avoid making a costly new research and development investment. "We didn't want to go out and reinvent," says Tom Granzow, senior program manager for Herman Miller for Healthcare, who ran product planning and strategy on the Nala project. The company saved a year of R&D time.

Still, Granzow's team needed to determine whether such a design could apply in the realm of clinical furniture. Beginning in 2005, it conducted research in nine hospitals around the country. Designers and engineers visited patient rooms and met with nearly 200 nurses and doctors. The company also enlisted Boston-based innovation firm Continuum, known for its work in health-care-device design, to conduct research and advise on aesthetic concepts.

The study revealed how difficult it is for patients to get up from traditional stationary chairs found in most hospitals. That work clarified Herman Miller's goal: to create a transitional piece of furniture that can help a patient sit up with ease after being confined to a hospital bed for days or weeks, and to do so without using full muscle control or a caregiver's help.

Nurses and physicians also advised on several crucial details, such as making sure an intravenous-medication line wouldn't catch on the chair's arms and the need to find antimicrobial upholstery that could be cleaned if blood or other fluids get trapped in the seams.

Beyond such practical concerns, both design teams wanted to create a visually pleasing chair that would serve as a brand symbol, as the Aeron has for the past 14 years. The aim was to make an inviting piece of furniture that looked anything but clinical while serving clinical purposes.

It's such user-centered research that could give Herman Miller an advantage over established clinical-furniture makers, says Roger Martin, dean of the Rotman School of Management at the University of Toronto, who consulted with Herman Miller in the early '90s but was not involved with the Nala's development. "We're seeing the beginning of a revolution in health care around people thinking of the user's experience," he says.

Already, rival Steelcase, (SCS) which leads the office-furniture segment with $3.4 billion in annual sales, has had a successful run with its Nurture by Steelcase line of hospital furniture, which offers patient chairs and also is based on user-centered design. (Steelcase doesn't break out sales figures.)

But Herman Miller is taking a different approach. While Steelcase chairs are designed for patients recovering from specific procedures, the Nala is meant to be bought in bulk by hospitals and used by a variety of patients.

With its identity as a patient chair, the Nala most likely isn't destined to become the status symbol the Aeron once was. But its debut could help the furniture maker in a healthy—and increasingly competitive—market.

One Laptop Meets Big Business

The big idea of giving PCs to poor children has been challenged by educators and business. Here, follow the misadventures of One Laptop per Child

by Steve Hamm and Geri Smith

One by one, the children ran into the school yard, lining up in a grassy field next to a low-slung building of classrooms topped by a rusty steel roof. Most of these children in Luquia, a tiny, impoverished town 13,200 feet above sea level in the Peruvian Andes, wore ragged navy-blue uniforms, and many had not bathed in days. Their small adobe homes have dirt floors, no running water, and no bathrooms. They share sleeping space with dozens of squeaking guinea pigs, which scamper underfoot before becoming the family's rare meal of meat. The children, then, were understandably giddy with excitement in May as principal Pedro Santana handed them the most valuable thing they had ever owned: a small green-and-white laptop computer.

These children are among the first in Peru to receive laptops from a trove of 140,000 the government plans to distribute to poor rural students this year in a bold bid to revolutionize the country's dismal educational system. Yet even as the students enjoyed one of the biggest thrills of their lives, the organization behind the computers, One Laptop per Child, was in danger of cracking.

The outfit begun by former MIT Media Lab director Nicholas Negroponte had been thrown into turmoil by the stress of trying to achieve the audacious goal of transforming learning by supplying millions of the world's poor children with laptops. Six weeks earlier, OLPC President Walter Bender, who helped launch the Peruvian deployment, quit abruptly in a dispute with Negroponte, the group's chairman. Software security leader Ivan Krstic left, too. Those departures followed a messy breakup with chip giant Intel (INTC) in January. Cambridge (Mass.)-based OLPC's travails seemed to signal that a group that had promised to rescue the world's poor children from ignorance was itself in need of a lifeline.

The fate of OLPC is uncertain, and it's too early to judge the effectiveness of the computers. Still, it's possible to draw lessons about the difficulties of such grand-scale social innovation. The group's struggles show how hard it is for a nonprofit made up largely of academics to operate like a business and compete with powerful companies. They also show what happens when differing philosophies of education and beliefs in how software should be created go head-to-head. Values the group has promoted have met resistance in the marketplace, government bureaucracies, and classrooms. That Negroponte and his colleagues took on way more tasks than they could handle only complicates the situation further.

Since its launch three years ago, OLPC has fallen woefully short of Negroponte's initial goal of supplying Third World children with 150 million laptops by the end of 2008. Development of the XO laptop and software took longer than expected; the price came in at $188 each rather than the $100 first targeted; countries including Libya and Thailand reneged on initial pledges to buy large quantities; and competition from tech titans like Intel slowed momentum. Although pilot programs began in 2006 on test laptops, the final version wasn't ready until late last year. Now pilots are running in 20 countries, distribution has begun in two, and about 370,000 laptops have been shipped.

The group seems to have backed away from the brink in recent days. On May 15 it announced a tie-up with Microsoft (MSFT) to run the Windows operating system on the XO laptop, gaining credibility with a number of governments. And other backers like Google (GOOG) and Advanced Micro Devices (AMD) are holding firm. During the week of May 18, Negroponte ran a four-day conference in Cambridge that brought together education and tech leaders from 44 countries. About 500,000 orders were placed, bringing the total to 750,000 outstanding orders.

A chastened Negroponte no longer predicts mass adoption in short order, but he remains confident that OLPC can have a major impact. He sees it playing the role in computer-aided learning that Muhammad Yunus' Grameen Bank has had in the global spread of microcredit. Grameen started something that many others now practice. "We're not building an empire. We're building a movement," Negroponte says.

Now, as the initial tech development phase has wound down, the organization faces a more daunting challenge: deploying and integrating millions of laptops in schools and communities. If something goes awry, the fragile credibility it has stitched together in recent weeks could rip apart. "This is the moment of truth," says Chuck Kane, a longtime software industry executive who became OLPC's president on May 2. "One unsuccessful deployment and it might mean the end of the project."

SEARCHING FOR THE INTERNET

Spending time in villages where the laptops have been distributed shows both OLPC's promise and immense challenges. In Luquia, Justo Miguel Común, a fifth-grader who is the youngest of seven children of subsistence farmers, was delighted to get his laptop in late April. "I like the math games, and I love the camera," he said two weeks later. On a chilly evening, his mother, Alejandra, who quit school after first grade, watched proudly as her 11-year-old son sat at a small table outside their adobe house with his face illuminated by the light from the screen. "This computer is going to be a very good thing for learning," she said.

Yet when BusinessWeek asked her son detailed questions, it became clear he didn't fully understand the computer's capabilities. His teacher had told the class to search the Internet for information on the environment, but the boy was stumped. "I was trying, but I couldn't find anything," he explained. He seemed to think the Net was something contained within the machine.

Such are the challenges of introducing not just a strange new machine but an alien world to a child brought up in isolation from outside culture. The leaders of OLPC believe the laptops must be much more than electronic substitutes for textbooks if they are to profoundly effect learning. The group, an offshoot of MIT's Media Lab, which Negroponte launched 23 years ago, has based its educational philosophy on the theories of Seymour Papert, a Media Lab professor who pioneered the use of computers in elementary education in 1967. Papert, now retired, developed a theory called Constructionism, which posits that young children learn best by doing rather than by being lectured to. So to create a tool that could deliver more than rote lessons and e-books, OLPC designed the machine and its software to enable collaboration, exploration, and experimentation. "We're hoping that these countries won't just make up ground but they'll jump into a new educational environment," says David Cavallo, OLPC's chief education architect.

CULTURAL IMPERIALISM?

While this philosophy is essential to the mission of OLPC, it's also a source of tension. Current educational leaders in Peru embrace Constructionism, but most countries base their education systems on the idea that teachers pass their knowledge to receptive students. That was a problem for OLPC in China as well as India. India's education department, for instance, calls the idea of giving each child a laptop "pedagogically suspect," and, when asked about it recently, Education Secretary Arun Kumar Rath barked: "Our primary-school children need reading and writing habits, not expensive laptops."

Some observers accuse OLPC of cultural imperialism. "It's arrogant of them. You can't just stampede into a country's education system and say, Here's the way to do it,'" says William Easterly, a professor at New York University and author of The White Man's Burden: Why the West's Efforts to Aid the Rest Have Done So Much Ill and So Little Good.

In fact, though OLPCers still have faith in Constructionism, they don't force the approach. Nor do they still insist on open-source software, a change that has caused some of the deepest rifts within the group. Originally, rather than using Microsoft's pricey Windows and ready-made commercial applications, they chose the Linux open-source operating system and created a new user interface and applications designed specifically to aid in learning by doing. A key reason to support open source: It allows students to tinker directly with software. However, some countries, such as Libya, which initially agreed to buy more than 1 million laptops, backed out and chose a Windows-based alternative from Intel. One attraction: Microsoft cut the price of a software package for poor schools from $150 to $3.

So when Negroponte chose to do business with Microsoft, turmoil erupted within the organization. After an Apr. 1 meeting during which the board agreed to break bread with Microsoft, Bender resigned. For weeks, OLPC's online message forums lit up with an angry debate. The anti-Microsoft side believes software shouldn't be owned but shared freely. To Negroponte, the choice was simple—and necessary—pragmatism. "It's like Greenpeace cutting a deal with Exxon. You're sleeping with the enemy, but you do it," he says.

Negroponte has had to fend off critics from the start. Early on, Intel and Microsoft executives, confronted by this charismatic rabble-rouser with his promise of affordable computing for the masses, called the XO a toy. They rushed out alternatives. Suddenly, Negroponte and his band were up against two of the most powerful tech giants in the world. And the giants played rough. Even after Intel joined with OLPC last year to help design a version of the XO powered with its chips, some of its people belittled the XO to governments who had agreed to buy it. Negroponte accused Intel of undermining his cause. Intel complained he was pressuring it to stop selling its Classmate PC for poor students. Negroponte now says he wishes he had been able to hold his temper and avoid a split.

He also faults himself for not managing his organization more effectively. "I'm a visionary, not a manager," he says. He ran the organization like a science project rather than a business. People had overlapping responsibilities. The staff of 23 regular employees and 26 consultants lacks the resources to support the needs of the pilot programs and deployments now under way—much less massive expansion. Negroponte, who travels incessantly to visit heads of state and education ministers, was spread too thin. So was Bender. Kane, who joined the organization as a part-time chief financial officer last year, is now running day-to-day operations. Already, the operational chaos has diminished. Now he's busy closing deals with countries and lining up business partners to help produce the technology for the next-generation XO. "We're moving from academic brainstorming mode to execution mode," Kane says.

DEBATABLE USEFULNESS

OLPC might not be in such turmoil if Kane had been promoted earlier. Nigeria had agreed to buy 1 million XOs, but after a competition among three alternatives, the country chose Intel's Classmate PC instead. Why did OLPC lose out? Intel provided more support, writes Isa Muhammad Ari, director of administration for Nigeria's Federal Capital Territory, in an e-mail.

With OLPC, most of the weight of training is carried by local education officials. In Peru, the Education Ministry is racing to prepare teachers. It gives them a 40-hour course that includes an introduction to the learning programs, instruction on basic repairs, and tips on how to use the laptops to enhance their lessons. Teachers BusinessWeek spoke to in two villages where the machines have been distributed seemed excited about them. One recent morning, teacher Ananias Richard Inga played a catchy song programmed in Spanish into the laptops to teach his first- and second-graders how to write and pronounce vowels. When seven-year-old Idelma Huarocc, her brown cheeks burned and peeling from the sun, typed "Idelma ama a mamá" (Idelma loves mama), she wiggled with pleasure as the computer's voice read her sentence. "This really motivates them, and it makes it easier for kids to advance at their own pace," says Inga. Teachers at another school where the laptops were tested in a pilot project that began a year ago report their students' reading comprehension has improved significantly, the drop-out rate is down, and students who once said they expected to be farmers like their parents are now dreaming of becoming lawyers, accountants, or engineers.

Even with these results, the Unified Union of Education Workers of Peru, representing some 320,000 public school teachers, is skeptical. "These laptops aren't part of a comprehensive educational, pedagogical project, and their usefulness is debatable," says Luís Muñoz Alvarado, the union's general secretary. Muñoz never had a chance to explore the laptops, though. In what seems an easily avoidable blunder, the Education Ministry has not explained the program to the union.

Recognizing the need to integrate the laptops into communities, OLPC is scrambling to develop guidelines for deployment based on the experiences in Uruguay and Peru, the two countries with the largest distribution so far. The group is also bringing in consultants to advise countries on how to integrate the PCs. One, Edith Ackermann, a visiting scientist at MIT, says OLPC should have involved more educational experts in creating and testing the applications. Instead, she says, "The hackers took over." The result is some programs are too complex for many children to use. "Now we have to deal with this. I don't know if it's too late," says Ackermann.

While some critics have called on OLPC to hire aggressively so it can provide on-the-ground support for dozens of countries at a time, Negroponte and Kane plan instead to rely even more on outsiders. They'll forge alliances with local tech companies and nongovernment organizations that will provide deployment support.

Although each country has a different situation, they can learn from common experiences. OLPC plans on using Haiti, the poorest country in the Western Hemisphere, to test ideas about how to best integrate the computers with society and to create a template for other countries.

Just getting started in Haiti will be a challenge. The group's second trip there was delayed by riots over food shortages in April. The first shipment of laptops was held up in customs for weeks. Donors are paying for some laptops, but not all. Asked how Haiti can afford to pay for PCs when its citizens are starving, Guy Serge Pompi, the Haitian educator coordinating the project, answers: "You can't just focus on the present. The starving is the present. The future is education. We need to train our students for better jobs and a better future."

The desire to educate students for a better future was shared by officials from Rwanda, Colombia, Afghanistan, Senegal, and other countries. Although large-scale studies have not been done to show whether the laptops improve learning, initial successes in Uruguay and Peru have emboldened others to make the effort. In Peru itself, the laptops are gaining momentum. Regional governors have asked the Education Ministry to order a total of more than 500,000 additional laptops. "We aren't so overly optimistic to believe that distributing laptops is going to resolve the social demands of people who have been marginalized and submerged in extreme poverty for decades, but we believe it is a great step forward," says Education Minister José Antonio Chang.

Food Is Gold, So Billions Invested in Farming

By DIANA B. HENRIQUES

Huge investment funds have already poured hundreds of billions of dollars into booming financial markets for commodities like wheat, corn and soybeans.

But a few big private investors are starting to make bolder and longer-term bets that the world’s need for food will greatly increase — by buying farmland, fertilizer, grain elevators and shipping equipment.

One has bought several ethanol plants, Canadian farmland and enough storage space in the Midwest to hold millions of bushels of grain.

Another is buying more than five dozen grain elevators, nearly that many fertilizer distribution outlets and a fleet of barges and ships.

And three institutional investors, including the giant BlackRock fund group in New York, are separately planning to invest hundreds of millions of dollars in agriculture, chiefly farmland, from sub-Saharan Africa to the English countryside.

“It’s going on big time,” said Brad Cole, president of Cole Partners Asset Management in Chicago, which runs a fund of hedge funds focused on natural resources. “There is considerable interest in what we call ‘owning structure’ — like United States farmland, Argentine farmland, English farmland — wherever the profit picture is improving.”

These new bets by big investors could bolster food production at a time when the world needs more of it.

The investors plan to consolidate small plots of land into more productive large ones, to introduce new technology and to provide capital to modernize and maintain grain elevators and fertilizer supply depots.

But the long-term implications are less clear. Some traditional players in the farm economy, and others who study and shape agriculture policy, say they are concerned these newcomers will focus on profits above all else, and not share the industry’s commitment to farming through good times and bad.

“Farmland can be a bubble just like Florida real estate,” said Jeffrey Hainline, president of Advance Trading, a 28-year-old commodity brokerage firm and consulting service in Bloomington, Ill. “The cycle of getting in and out would be very volatile and disruptive.”

By owning land and other parts of the agricultural business, these new investors are freed from rules aimed at curbing the number of speculative bets that they and other financial investors can make in commodity markets. “I just wonder if they need some sheep’s clothing to put on,” Mr. Hainline said.

Mark Lapolla, an adviser to institutional investors, is also a bit wary of the potential disruption this new money could cause. “It is important to ask whether these financial investors want to actually operate the means of production — or simply want to have a direct link into the physical supply of commodities and thereby reduce the risk of their speculation,” he said.

Grain elevators, especially, could give these investors new ways to make money, because they can buy or sell the actual bushels of corn or soybeans, rather than buying and selling financial derivatives that are linked to those commodities.

When crop prices are climbing, holding inventory for future sale can yield higher profits than selling to meet current demand, for example. Or if prices diverge in different parts of the world, inventory can be shipped to the more profitable market.

“It’s a huge disadvantage to not be able to trade the physical commodity,” said Andrew J. Redleaf, founder of Whitebox Advisors, a hedge fund management firm in Minneapolis.

Mr. Redleaf bought several large grain elevator complexes from ConAgra and Cargill last year for a long-term stake in what he sees as a high-growth business. The elevators can store 36 million bushels of grain.

“We discovered that our lease customers, major food company types, are really happy to see us, because they are apt to see Cargill and ConAgra as competitors,” he said.

The executives making such bets say that fears about their new role are unfounded, and that their investments will be a plus for farming and, ultimately, for consumers.

“The world is asking for more food, more energy. You see a huge demand,” said Axel Hinsch, chief executive of Calyx Agro, a division of the giant Louis Dreyfus Commodities, which is buying tens of thousands of acres of cropland in Brazil with the backing of big institutional investors, including AIG Investments.

“What this new investment will buy is more technology,” Mr. Hinsch said. “We will be helping to accelerate the development of infrastructure, and the consumer will benefit because there will be more supply.”

Financial investors also can provide grain elevator operators the money they need to weather today’s more volatile commodity markets. When wild swings in prices become common, as they are now, elevator operators have to put up more cash to lock in future prices. John Duryea, co-portfolio manager of the Ospraie Special Opportunity Fund, is buying 66 grain elevators with a total capacity of 110 million bushels from ConAgra for $2.1 billion. The deal, expected to close by the end of June, also will give Ospraie a stake in 57 fertilizer distribution centers and the barges and ships necessary to keep them supplied with low-cost imports.

Maintaining these essential services “helps bring costs down to the farmers,” Mr. Duryea said. “That has to help mitigate the price increases for crops.”

Mr. Duryea of the Ospraie fund dismissed the idea that financial investors, with obligations to suppliers and customers of their elevators and fertilizer services, would put their thumb on the supply-demand scale by holding back inventory to move prices artificially.

“It is not in our best interests for anyone to be negatively affected by what we do,” he said.

Perhaps the most ambitious plans are those of Susan Payne, founder and chief executive of Emergent Asset Management, based near London.

Emergent is raising $450 million to $750 million to invest in farmland in sub-Saharan Africa, where it plans to consolidate small plots into more productive holdings and introduce better equipment. Emergent also plans to provide clinics and schools for local labor.

One crop and a source of fuel for farming operations will be jatropha, an oil-seed plant useful for biofuels that is grown in sandy soil unsuitable for food production, Ms. Payne said.

“We are getting strong response from institutional investors — pensions, insurance companies, endowments, some sovereign wealth funds,” she said.

The fund chose Africa because “land values are very, very inexpensive, compared to other agriculture-based economies,” she said. “Its microclimates are enticing, allowing a range of different crops. There’s accessible labor. And there’s good logistics — wide open roads, good truck transport, sea transport.”

The Emergent fund is one of a growing roster of farmland investment funds based in Britain.

Last October, the London branch of BlackRock introduced the BlackRock Agriculture Fund, aiming to raise $200 million to invest in fertilizer production, timberland and biofuels. The fund currently stands at more than $450 million.

Braemar Group, near Manchester, is investing exclusively in Britain. “Britain is a nice, stable northwestern European economy with the same climate and quality of soil as northwestern Europe,” said Marc Duschenes, Braemar’s chief executive. “But our land is at a 50 percent discount to Ireland and Denmark. We just haven’t caught up yet.“

Europe, like the United States, is facing mandated increases in biofuel production, he said, and cropland near new ethanol facilities in the northeast of England will be the first source of supply. “No one is going to put a ton of grain on a boat in Latin America and ship it to the northeast of England to turn it into bioethanol,” he said.

For Gary R. Blumenthal, chief executive of World Perspectives, an agriculture consulting firm in Washington, the new investments by big financial players, if sustained, could be just what global agriculture needs — “where you can bring small, fragmented pieces together to boost the production side of agriculture.”

He added: “Investment funds are seeing that this consolidation brings value to them. But I’m saying this brings value to everyone.”