Ram Charan is the go-to adviser for CEOs, corporate directors and entrepreneurs the world over. Known for his insights and practical wisdom, the acclaimed advisor, speaker and author has counselled some the world’s most successful business leaders. For over 35 years he has worked behind the scenes at companies such as GE, Bank of America, 3M, DuPont, KLM, Novartis, EMC, Verizon and so on. In Delhi recently for the Ernst & Young Entrepreneur of the Year 2010 event, he spoke extensively to Amit Ranjan Rai on competition and innovation in the current economic climate.
Throughout the past year, people have been discussing how to adjust to the new economic realities — the new normal. Are things normal now? Have corporations learnt the lessons and are on the right path?
It’s new, but not normal. It is not normal, it is evolving. There is a lot of uncertainty. The key thing here is that we should not be fighting the old war. The global financial system, as everybody knows, did break down, but the key points of that system are yet not fully understood. Second, the links are not yet known. Third, the transparency is still not transparent. And as long as transparency is not there, you can expect more to come.
The practical people in business know that there could be a bend in the road tomorrow and strategies could become obsolete quickly. They know a strategy in a specific sense is not going to have an eternal life.
How do you see the current economic and business climate? And what should be the priorities for businesses?
If you consider the total world economy, there are three things happening. One, the highly developed economies are barely recuperating from intensive care. Two, the economies of China, India, Brazil and so on are seeing high growth but there is this seed of inflation. Three, the resource-rich countries are seeing higher demand and therefore prices are going up. So you see three different gears of economic growth. If you are in an emerging fast-growing economy like India, the highest priority right now is to figure out what inflation means and where it is going, and as a result the impact it can have on your cash flow needs, on your pricing, and so on. You will have to see how the game is changing. There is a belief that the government is going to control inflation in India; that belief needs to be challenged because it is a different kind of inflation.
Everyone expects competition to be much stiffer in the days to come. How should companies approach competition?
Competition is also going to be influenced by the inflation trend. It’s about who does a better job — you or the competitor. Here you’ve got to focus on the basics. That is, if you’re doing product innovation are you doing it better than the competition or not. While a competitor may be good at one thing, it may not be doing a good job in, say, managing cash. Here you can have a competitive advantage as the competition may find it difficult to fund inflationary requirements.
Competition is going to be there, it has always been there. Are you faster, more innovative, are your costs under control, and are you servicing better? How good you are with the basics will determine your edge. At all times, you will have to ask what your differentiator is. The good news is in the long run we have a growth economy. So while you think, why we are going through this phase of inflation, you better not take our eye from long-term building of the business. Then you need to preserve your talent and have to outcompete. Outcompete in entrepreneurship, innovation, cost structures, new product development and speed — speed is a great competitive advantage.
So the fundamentals for competing for growth remain the same…
The first part is the basics. That is, growth has to be profitable, capital efficient, sustainable and differentiated. These are very demanding words. They are measurable and identifiable. Two, you need to know where your focus is. Once you have that clarity, you need to concentrate on four items — talent, innovation, productivity and speed. And while you have to be in the growth areas, don’t distract yourself from the basics.
Remember, the four items I mentioned are important; if you do all the four regularly, over time you are going to succeed and will have longevity. The first one, as I said, is talent. No talent, no numbers. It is the job of the leader to bring, identify, deploy and develop talent; not many companies do it well. Number two, you have to be ahead of the curve in terms of costs, cost structures all the time. The third is that you do not wait for home runs in innovation. It’s the fourth one where you begin to differentiate with others and that is about speed and adaptability. Those four things need to go on simultaneously. Very few companies do it.
In every market margins are getting squeezed because of stiff competition. You have often advocated focusing on high-margin growth…
The key is that companies have got to control the reality. Margin is only one factor; the other is how you use capital. Your criterion has to be the return on capital — so you may have lower margins but high velocity of usage of capital. If your margins are declining, you need to do innovation, new segmentation, watch your costs, get better margins than the competition. At the same time you also need to utilise your capital better. If you have high utilisation of capital you will have the return on capital. And then, speed, as I’ve said, also needs to be the focus — you earn the cost of capital but when you scale up faster, you create a distance between yourself and the competitor.
What are the challenges and problems CEOs are coming to you with post the financial crisis?
This varies from business to business, economy to economy. I will give you what is generally on the minds of the leaders. One is enterprise risk, that’s because uncertainty has increased. There is more regulation and more volatility in the financial system. So they all have to think about risk and how to mitigate it. Two, corporate governance and succession have become important items. For the Western economies, profitable growth is one of the biggest challenges. In the emerging economies, the issue is, are we able to get the right amount of the commodity resources needed. The supply chain is becoming a major issue. Global supply chains are getting affected — if one country is having great difficulty it does affect the rest of the supply chain.
Where do you see Indian companies on the innovation scale when compared with their western counterparts? Do you see them as the next game changers?
It is going to emerge. It has only been 15 years that the License Raj got dismantled. So India is still very young. But the people, skills, energy and drive are huge here. They have the freedom of what they want to do and have access to technology like never before. The founders of Infosys had to spend six months to get a computer in the first place, and then they began to fire. Give India some years and it will have game changers. It’s Indians who invented a lot of things in the West.
But isn’t innovation is India in some way or the other related to labour or cost arbitrage? Also, are we seeing enough process innovation as compared to product innovation?
Both product innovation and process innovation are going to come, and they are going to go forward. As for the issue you’re raising in the first question, yes, there is genuine innovation happening — it is simply turning out be more cost-effective. It is not done simply because it is labour arbitrage. There are many multinationals that are putting up R&D centres here and doing very innovative work. That is because of the brainpower skills and knowledge available here — it is not because of labour arbitrage. Genuine innovation is certainly happening.
And that innovation is happening not just in products, but also in business models. Bharti Airtel’s (Minutes Factory) business model remains unique in the world. When I look at it, it is going to go a long way. That is a business model which none of the Europeans or Americans, or Japanese has caught up with.
How should companies approach innovation here?
Work backward from consumers, and then say how do I differentiate, what innovation I need to do. Because if you do innovation and the consumer doesn’t get it, it is not going to work for you. Plus, if you do innovation here and the consumer gets it, you may have the chance to do similar things in Indonesia, Malaysia, parts of Africa and so on. Then you can scale it up. But you’ve got to work backwards from the consumer.
There are three things that people need to master; innovation is converting an idea into differentiation, revenues and margins. Invention is generation of an idea. When I look at companies around the world there are two drivers of innovation — one is the technology-driven and second is consumer-driven. A number of companies have, in fact, linked differentiation to revenues and margins. So that is happening.
What is innovation? It comes from connecting different things; there are few original ideas. Almost all innovations are connections of some things that have existed. When you’ll work backwards from the consumer, some things will be difficult to do, others may look simple, but it doesn’t matter how you do it as long as the consumer wants it, and it is profitable for you. Nano is a consumer-oriented thing and it is built by an Indian group.
Indian companies are expanding their markets overseas; Africa is being looked at as a good opportunity. How should companies go about choosing their markets?
It is good to explore other markets, and Africa is a growth market. The Indian community may have a better chance to succeed than those from other countries. The reason is we have a mindset of lower costs, a mindset of better use of resources, and we have affinity to many of the African countries. But you need to have the same thinking rigour — is the distribution there, infrastructure and logistics there, what are risks and also can you do innovation there. So you’ve got to see what your balance is.
The business logic may vary but the basics remain the same. One, companies and entrepreneurs will have to have clarity of the goal. Two, you need to have a sound business model, and you can live with the struggles in between. When you have those two and the capabilities that you are building, then you are going to see which sequence can work for you. Sometimes a sequence may not work for you. For instance, in the case of Bharti, the MTN thing didn’t work out, it then moved to Zain and see how it works. The goal was obviously very clear: Which probably was that right now we have roughly 200 million customers, (where do I get the next 100 or 200 million customers). Now in this business scale matters. It’s a global goal.
