Under Ravi Venkatesan’s leadership from 2004 to 2011, Microsoft India’s revenues grew fivefold and the country became one of the fastest growing geographies for the software firm. Last year, the 49-year-old Venkatesan quit as chairman of Microsoft India to explore new ground. He is now working on a book on why it is imperative for multinationals to succeed in India. Venkatesan suggests that the capabilities that companies develop in India can help them win all over the world.
In a conversation with India Knowledge@Wharton, he notes that India "may be one of the hardest markets [to break into] across the world, but if you succeed here, then you are like an Olympic athlete." Venkatesan is yet to finalize the title of his book, but the working title pretty much sums it up: "Learning from Chaos. Win in India to Win Everywhere". The book is scheduled to be published later this year.
Prior to joining Microsoft, Venkatesan worked with U.S.-based engine and power generation firm Cummins for more than 16 years and was the chairman of Cummins India. He is currently a director on the boards of AB Volvo and Infosys Limited and is also a member of the advisory boards of the Harvard Business School and Bungee.
An edited transcript of the conversation follows.
India Knowledge@Wharton: Why did you think of this particular topic for your book?
Ravi Venkatesan: My original interest was to understand why India matters so little to most multinational corporations (MNCs). This was a result of my contrasting experience at Cummins and Microsoft. While [his stints at both firms] were extremely successful, there was one big difference. At Cummins, India contributed close to 15% to 20% of global profits, while at Microsoft, India accounted for only 2%. As I looked around me, I found that a vast majority of MNCs in India are still subscale, with India contributing only around 1% of their global businesses. I was puzzled by this. Interestingly, the companies themselves think that they are successful here. They think they are doing well because they are growing here in the double digits, which is not the case in developed markets. Most of them say that they are at their target profitability [in India]. But the fact is, India still makes an irrelevantly small contribution. And that’s what intrigued me.
I then looked at a number of companies. For instance, I looked at Nokia, which went from a 65% market share [of the mobile phone market] in India to 30% in two years. I looked at General Electric (GE), which was the pioneer of outsourcing in India. But the 2000s was the "lost decade" for GE in this country. It hardly grew its revenues here during this period. [More recently, GE has been growing very strongly again in India.] Then I looked at McDonalds. This is a company that has built its identity around the Big Mac — a beef product. It comes to a country that is largely vegetarian, where the cow is sacred and US$1 is still a big price point for the mass market. And yet, it has created the fastest-growing restaurant chain in the country. So I began to look at why a few companies are spectacularly successful in India, while for others the revenues from India are largely irrelevant. I then started looking at what this could mean for them.
India Knowledge@Wharton: How do you define a "successful multinational" in India? Is it purely based on its revenues and market shares or are there other parameters also?
Venkatesan: If you look at major economies and growth rates, then China’s impact is crushingly dominant. India is next, even with our slowdown to below 7% [projected GDP growth for this fiscal year]. If a company’s revenues broadly reflect global GDP as an opportunity, then India as a market should contribute at least 10% to 15% of the new growth at a company on a global basis, China should contribute 35% to 40% and emerging markets as a whole should contribute around 50% to 65% of the growth. That’s a healthy portfolio. If you haven’t done this, it means that you have not got your engines working right. That’s metric number one.
When I looked at the really successful companies, I found that the CEOs of these companies were driven by the conviction that strategically they need to be a dominant player in this market. They need to be an early mover and build an unassailable leadership position before their competition. Those who come late get reduced to being marginal players. JCB Construction’s 60% share of construction equipment and Cummins 60%-plus share of engines and diesel generator sets are good examples of doing this right. So the second definition of success is that you had better be a market leader in the important economies of the world. And China and India are the most obvious ones.
The third piece is that the best companies are beginning to see that the capabilities they develop in India help them win around the world. I have begun to believe that this may be the single most important reason for a multinational to figure out and crack the code in India. If you think about it, China is unique. You are not going to find too many countries in the world that are run like a company — where there is fantastic infrastructure and where the government tries to make things as predictable as possible. Many more countries resemble India more than they do China. India is all about getting things done despite the government, dealing with a difficult policy environment, working in an environment of extreme uncertainty and volatility, and dealing with people who have aspirations but don’t have disposable incomes. India may be one of the hardest markets across the world, but if you succeed here, then you are like an Olympic athlete. The capabilities that you develop here will help you win all over the world. I like how Stephen Elop [CEO] of Nokia put it: "India is like a petri dish for innovation. If we win here, we can win everywhere. Conversely, if we lose here, we could end up losing in lots of other markets."
India Knowledge@Wharton: Does this mean that we are likely to see a lot more reverse innovation from India? Will this also be a measure of a company’s success in India?
Venkatesan: Yes. But it will not be restricted to innovation only in products. Like I said, it applies to dealing with uncertainly and unpredictability, it applies to how you grow and develop talent and how you build partnerships, and it applies to … your management method to create an agile system in a large bureaucracy. All these parameters apply not just in other emerging markets but in developed markets as well. In the medium to long term, this may be the single most important reason for a company to succeed in India. The ROI [return on investment] on this will be greater than from the India market itself. It is no longer about the developed and developing markets; it is about the top of the pyramid everywhere and the middle and bottom of the pyramid everywhere.
India Knowledge@Wharton: When you studied the MNCs that have been successful in India, what did you find are the key factors for their success?
Venkatesan: At one level, the answer is obvious. Once the top of the pyramid is saturated, a company needs to address the middle. It needs to make the necessary investments in supply chain and distribution, localize manufacturing, set up engineering capabilities, develop market specific products, localize management, empower the local team and so on. But doing all this [in India] is so different from how the company operates in other geographies, apart from China, that there is tremendous resistance to change. So the most important step is commitment from the global CEO. Unless the global CEO says that India is strategically important and personally commits to the India journey, things will not change. The India market is very hard. Every decade, there are seven or eight tough years and two to three good years. You have to survive the tough years and run hard in the good years. The CEO must have the vision and commitment to say that despite the chaos and the turbulence, we must stay invested. The CEO must realize that it is not just about winning in India. It is about leveraging India to win in other geographies.
Once the global CEO is committed, you have to get the next level of management engaged with the India story. Typically what works is that you take a transformational opportunity — like the IBM-Bharti outsourcing partnership — and make that your Trojan horse for transformation. You get the whole company focused on making it work. Also, like Dave Cote at Honeywell, you need to hold the presidents of global businesses accountable for growth and leadership in China and India – not just [for] meeting their [overall] numbers.
Also, if you want transformation, it’s critical that the country head in India is someone totally trusted by the [top management], especially the global CEO. And he must have easy access to the global CEO. Otherwise, they will not listen to him; they will be tone deaf. This trust is even more important than market knowledge and an India network.
One of the most important attributes of the India CEO is courage. This is because almost on a daily basis, he will need to take a tough stand both internally and externally. For instance, even if the firm has frozen salaries globally, the India CEO must have the courage to say that his team deserves a raise because they have grown their market by 30%. If he doesn’t have the courage, he will end up toeing the company line and making a complete mess. In other geographies, the local CEOs don’t need to make such tough calls on a daily basis because the company’s business model and the country environment are well aligned.
Another vital quality of the local CEO is that he must be a person for whom India is not just a stepping stone to the big job: It is the big job. For this, the company also needs to do its bit. Nothing significant can be achieved in India in less than five to seven years. So the company has to say that India is important enough to let this person grow within the hierarchy without having to move him or her to another geography.
India Knowledge@Wharton: Why have so manymultinationals not been able to adopt these measures?
Venkatesan: It is like health. We all know that we must eat right and exercise well, but most of us ignore it until the body sends us a big alarm. Many CEOs understand intellectually what needs to be done to win in India. But that is not enough. There needs to be an experiential moment of truth that gets the CEO committed to the country. This often happens when the global CEO spends enough time on the ground in India to see past the surface and get a visceral feel for the potential of the market. This is what happened with Sam Palmisano in IBM in 2003.
India Knowledge@Wharton: Does the success of a multinational in India depend on the sector in which it operates?
Venkatesan: Yes. In any country you have a spectrum of firms across B2C [business to consumers], B2B [business to business] and B2G [business to government]. The closer you are to B2C and B2B, the easier life is. There is less corruption, less harassment and less regulation. The closer you are to B2G, like infrastructure, the more harrowing it is. The more a business depends on access to natural resources like land, minerals or spectrum, the tougher it is for an MNC to succeed in India.
India Knowledge@Wharton: Isn’t this true for other countries also?
Venkatesan: Yes, it is. But it is far more magnified in India.
India Knowledge@Wharton: Does the size, the age and the country of origin impact the success of a multinational in India in any way?
Venkatesan: I have some anecdotal evidence, but don’t have robust data to support it. I have not seen any correlation of success with respect to age, but I think size does make a difference. Size is an advantage when it comes to making long-term investments and the ability to take risks. Country of origin also makes a difference. Western European countries, particularly Sweden, Germany, France and the U.K. have a history of being global. They also tend to take a longer-term view.
Scandinavian firms place a very high level of trust in their local managers and therefore are more willing to do things differently. American firms are globally oriented, but many of them are very arrogant. They take a very export-oriented and a one-size-fits-all approach. Korean [firms, such as] Hyundai and Samsung, do extremely well because they are willing to make big preemptive investments to win in India. Japanese firms, with a few exceptions, do badly; they are ultra-cautious and lack trust.
India Knowledge@Wharton: Are joint ventures a good way for companies to enter India?
Venkatesan: Yes. If you want scale and want to get to the middle of the pyramid fast, then joint ventures are a good vehicle provided you find the right partner with similar values. If you get the right partner, then [that firm] brings in the brand [recognition], the distribution capabilities, and policy and regulatory influence. All these are extremely important. Also, a strong partner allows the multinational to get the right balance between local and global.However, a bad partner can set you back many years; it’s a lot about due diligence.
India Knowledge@Wharton: In what way is operating in China different for multinationals than operating in India?
Venkatesan: The biggest difference is the way one has to engage the government in China. There is also a massive part of the Chinese economy that is export-driven — this really doesn’t exist in India beyond information technology services. China is a vastly bigger and more affluent market with a much bigger middle class. In that sense, it’s an easier market than India. But in almost everything else, it’s pretty similar.
India Knowledge@Wharton: With increasing globalization, how important is it to have a globally integrated workforce?
Venkatesan: Having the whole workforce globally integrated is neither possible nor practical. What you need is a very high degree of cultural diversity … at the senior level. What is important is to have a very strong talent flow around high potential leaders. Firms need to have India, China and other emerging markets as crucibles of leadership development and send the best and brightest of their top and middle-level people of any nationality to these countries.
You also need to move people around to build capabilities. So if you want to develop engineering capability, you must send your people to countries like Japan, Germany and the U.S. for two- to three-year assignments. But this is not easy to do. Companies need to have enlightened policies to make this happen.
India Knowledge@Wharton: Indian firms are now increasingly going global. In what way are their challenges different from companies based in other countries? What measures do they need to take to ensure a smooth passage?
Venkatesan: Everything I said about multinationals operating in India applies to Indian firms going global. Most Indian firms are not doing these things because they are in the first stage of globalization. I see it as a journey. They will go out, they will stub their toes and they will get burned. Then they will reflect and course correct.
India Knowledge@Wharton: Indian IT companies in particular are currently having a rough time in the U.S. Some analysts have suggested that it is the success and growing size of these companies that is attracting the adverse attention. What are your views on this? Is this part of the globalization journey?
Venkatesan: Yes. As long as you are small, you are below the radar. The problems start when you become big. The single biggest problem in developed markets today is jobs. If Indian firms want to operate at scale and over a long period of time in developed markets, then they need to invest in creating jobs [in those markets]. This means that they need to localize their leadership and their teams as quickly as possible.
They also need to create large programs to give the local people skills and make them employable in their core business. Further, they need to be seen as giving back to the communities in which they operate. They need to cultivate goodwill and policy influence there. And of course, they need to behave in a culturally sensitive manner. In America it must feel like an American company, in the U.K. like an English firm.