‘The software industry is going to be ten times bigger in 10-15 years’

Roger Martin is dean of the Rotman School of Management at the University of Toronto. A frequent visitor to India since the past two decades, he has been tracking local companies since his first visit in 1990.

Martin was formerly a director of Monitor Company, a global strategy consulting firm based in Cambridge, Massachusetts, and the author of The Design Business: Why Design Thinking is the Next Competitive Advantage.

He is also a close associate of Alan Lafley, CEO of Procter & Gamble (P&G), the consumer goods giant and an independent director on the board of Research in Motion, the firm that makes Blackberry smartphones.

His upcoming book, Fixing the Game, is about the two biggest market crashes in 2001 and 2008 and what caused them. In this,
Martin will reveal the culprit: the tight coupling of the ‘real’ market (business) with the ‘expectations’ market (the stock market).

In an interview with DNA, Martin says Americans aren’t much bothered about the recent corruption scandals in India. They were more concerned when a group of Americans were killed at the Taj Mahal Hotel, he says. Excerpts:

What kind of changes have you seen in Indian companies in the two decades you have been visiting India?
Two decades ago there weren’t many Indian companies with an international exposure. Now there are so many of them. This morning, (December 15th), I spent time with the top management of Tata Consultancy Services (TCS). With Chandra (N Chandrasekharan, CEO of TCS) and his key management. They are not afraid of foreign competition. It’s a sense of … we have the companies, the brains and the capital to go after markets internationally. That’s different from the nineties.

Twenty years ago, at least my recollection is India had much more of an import-substitution mentality. What can we do to produce domestically stuff so that we don’t have to import it? It was the ethos of the place. Now Indian businesses think of what do I do that can make us dominate the world? That’s the mentality now. What can we buy now? The way (Lakshmi Niwas) Mittal did — buying up global steel companies — I cannot ever imagine Indian companies like that 20 years ago. Mittal bought Arcelor and moved to London — that’s the biggest difference.

When did Indian companies come of age? Was it when the economy opened up a bit in the early nineties?You have to walk first, then jog and then run. Some Indian companies put their head into the international world, a little by little bit, by taking small bets and when that worked out, believed they can do more. I am not sure that TCS or Infosys or Wipro talked of being giants of the size of IBM when they started. When they started, they turned out to be an attractive product and service offering. They just went from there.

Are Indian companies in the jog phase or are they really sprinting now, when you compare them with global peers?
There are different groups doing different things. There are groups that are sprinting. For instance, the Tatas are interesting and gigantic. But they were not so international before TCS was, but with the automobiles and steel they now have an international presence. But to say that TCS is doing anything but sprinting will be a mistake. What I can tell is that they are one of the firms in the world in their sector to watch out for. They have an outpost in Latin America served by Latin Americans and not by the Indians. They have built the entire supply chain there. They are aggressive.

What are the challenges before Indian companies such as TCS? Sooner than later, labour arbitrage would cease to be an advantage…
The best thing that ever happened to Japan was their labour getting expensive. They were forced to add value in a more sophisticated way. They were forced to invest in R&D and I think that is the challenge. The cost advantage has narrowed dramatically. The challenge now is building the brand, as something more than an Indian sweatshop. Building a brand is important. Close to my heart is a strategy study we did to convince Arthur Anderson to create what was first called a systems integration practice within it. It then became Andersen Consulting, which became Accenture, an independent company. We created that with them. It was a first of kind company. I think Accenture has created a brand imagery that’s different from TCS. I think TCS has probably got like-to-like good capabilities as Accenture has, to add value to clients, but I think Accenture gets paid more for it.

Why is that so?
Because they have established their brand as a sophisticated systems integration firm. Whereas TCS and Infosys started off with the premise we can do at half the cost. It will take a while to build on that to create an impact. That’s clearly a challenge.

Between, Accenture and TCS, is there a disparity in pricing?
When I talked to these guys they say the price realisation of IBM Global Services and Accenture is higher but they say their hours of work and output are the same.

What needs to be done to get that pricing power?
I think the same thing that happens in all branding. You have to develop the brand imagery that stands for something. I think it can typically block your goals when you say we do it cheaper. If you try and conjure up Accenture, and what it means to you and what does Infosys mean to you, I think what the brand conjures up for Accenture is that it is an innovator and that it is a global firm. We have Accenture as a brand on TV all the time, whereas Infosys sounds like an engineering company.

What they need to do is build an image that they are more sophisticated than anybody else and figuring out to rearrange the business to make it more effective and more competitive. That’s a higher value-added positioning. Once you figure out what you want to do and that’s more than the outsourcing … we’ll set up the research & development because it’s cost effective…

Where does ‘design thinking’ fit into all this?
It fits in a couple of ways. Software isn’t an industry in the way we think of normal industries. When we think of chemicals, food, movies and aircraft, these are vertical slices of economy. Software is the final resting place of knowledge. When we a tackle mystery, we turn it into heuristic and then into an algorithm and then into software. All forms of knowledge are heading towards software, so I don’t think of TCS and Infosys as information technology outsourcers. As knowledge moves closer to algorithm, people can figure out how to source it over the counter. Committed-to-software  — that’s the place to be. It’s a whole world of businesses heading in your direction. I think there are more and more opportunities for the TCS’s of the world to grow. The software industry is going to be ten times bigger in 10-15 years. So if you are in the business of software to help companies be more efficient, I think you are in a great place.

How difficult it is for a small Indian brand to compete with globally established brands of say Unilever and Procter & Gamble?
There’s always a way. A brand that is global or a brand that is significant has to be distinctive in established markets. It can’t be a me-too product. There’s always a chance to create a new brand in an old established market where there are global brands.

Is it more challenging?
Just think of smartphones. Research in Motion was the established brand with its Blackberry. Apple built a brand in that business. Then there was a duopoly between them and then Android built a brand supported by Google. They actually don’t build phones so I think there are always new industries that come along with chances of building brands quickly in the absence of existing brands. In segments such as fragrances, detergents and distilled spirits that have been around for a long, long time, one has to be distinctive to make a difference.

Which are the recognisable Indian brands globally?
If we do a survey in North America, I wouldn’t be surprised if Fab is ranked high.

Fab India?
Most Indian companies simply do not engage in brand-awareness based advertising campaigns.

What about Kingfisher?
Yeah. They do some sponsorships, but I don’t know how many people would be aware that Kingfisher is an Indian brand.

Why Fab India?
Because they are often in the press. The two that would have the most unaided brand awareness are the Tatas and the Nano. There were a million stories on the Nano. The one that gets into the paper are ones that would be the most famous.

Fab India does not have retail outlets in North America or for that matter too many in India…
Yes. But they have stories that appear in Western media that mention how cool they are. They get hyped.

Isn’t it strange! Tata Nano ... is not commercially successful in India?
They sold about 500 Nanos last month, but they were talking about 20,000.

Can financing be the only problem?
It’s interesting to see how much financing matters in buying cars. In the US, the car market collapsed from 18 million a year to 11 million a year because of financial distress of car makers which saw many car companies folding up their financing business and buyers couldn’t buy as financing wasn’t available.

That’s in a massively rich country where sales were influenced by financing. So in a country like India, that’s a real challenge.

You’ve been advising Alan Lafley about P&G. In India, they see a sudden spurt in marketing activity to take on market leader Hindustan Unilever through price wars. But it quickly fades as they temper it after a point of time…
Unilever and Colgate have an established position in India for long. In a way, P&G didn’t do it like they did in China. P&G didn’t believe in joint ventures in India. When China opened up, P&G went in with Hutchison Whampoa and that’s a reason for it to do well. Basically, when P&G gets an even start with a competitor in any country, it dominates competitors. The wall came down in eastern Europe and P&G went ahead and did well. In India, Unilever is ahead as it was early to market and has acted proactively to challenges. I think P&G in due course will have a position here.

Was the lack of an Indian partner the reason? They had one in Godrej for some time…
That was for a reason. It is figured out that in some countries you have to do partnerships. Historically, when Unilever was building up its huge Indian business, it was in an era when the only way a foreign company could do business was through a partnership. P&G was an American company whereas Unilever was an Anglo-Dutch company that was more into partnerships. So hats off to Unilever. They have done a wonderful job … India and South America were two markets where P&G was severely behind as it was late to get there.

Are big acquisitions the way to grow?
It is interesting that they (P&G) are willing to do acquisitions. They did Richardson Vicks and for virtually nothing they bought two brands — Olay and Pantene. Olay is now a $2.5 billion business and massively profitable, and Pantene is a $2 billion business. When P&G got Max Factor, they got along with it SK2 for nothing. It was a face cream made from mushrooms from the hills of Japan. It was a $30 million dollar business and now it is an $800 million business. These brands are very profitable. It’s way more than the Max Factor cosmetics brand. When companies buy they don’t know what gems lay inside.

Blackberry has lost out to the newcomers in the smartphone market…
Yeah. It’s like what happened when colour TVs came to America. The minute Americans saw a colour TV, they said they’ve to get those. There was massive substitution. That’s exactly what’s happening in smartphones. There’s a feature phone and then a smartphone emerges. Smartphones have gone from 3% to 18% globally in a matter of few years. I do believe that in the next five to seven years the smartphone business would be five times bigger than it is today. Or may be more.

But what happened to Blackberry and Nokia? They didn’t see it coming?
Blackberry started getting beaten with iPhone launching in the US and then Android entering through free products - that’s gained a huge market share. For Blackberry, the market share is down in the US, but it’s winning big time around the world. It is unclear how well the iPhone and Android will do internationally as they are much less efficient in using the telecom network. Before the iPhone, the Blackberry could do anything — send a message and receive a message at just one-tenth network usage. Then came Apple and Android, as they are not meant to be efficient and they don’t care. Apple does not care one iota what happens to the carrier. To give you an example, when you call up a Blackberry message that’s a long chain, it only calls up 2,000 characters from the network. And as you scroll down and read it, the phone starts calling up extra characters. But with the iPhone, the minute you call up the message the whole things comes on and it just takes up huge network bandwidth.

It turns out that carriers in the world such as AT&T, which went exclusive with iPhones, managed to increase their market share but their networks were destroyed. Now AT&T is a home of dropped calls and it has a consumer perception of dropped calls and network congestion. All the carriers around the world look at the United States and say they have got the most overbuilt bandwidth in the world and they were stupid.

Now, carriers elsewhere are saying we got to be careful. Blackberry cares about efficiency. There will be a question mark on how fast iPhone penetrates markets around the world.

Cellphones dominantly sell through carriers and not independently and so the carrier is the gatekeeper to a great extent. That may just be the RIM view. The best-selling phone around the world is the Blackberry 2G Curve. It can operate just a little under 3G and are turbo-jet 2Gs.

Do you see foreign investors’ view on India changing as corruption scandals come to the fore?
I don’t think it is a big deal yet. Indians are concerned more than non-Indians. The worst thing that happened to India was when a bunch of Americans got killed in this hotel (We are sitting at the Taj Mahal Hotel in Mumbai). That was more immediate for Americans than a bunch of scandals in India. If It’s kept up for a while then it would be of a concern.

Ratan Tata has said we’re on the verge of becoming a Banana Republic…
Did he say that? The good news for India is that China is a tougher place to do business. Brazil is also a tougher place to do business. So I think it is not devastating yet, but I think India is losing an advantage it had - that, this is a country that had more transparency and more humane policies for labour than China. I am struck how many people in this trip alone have mentioned corruption. There are people who say that the only thing different is that it is now getting publicised. There is a view that it’s going to be a good thing. It was happening underground and now people will be wary as it is being talked about and newspapers will go after them.