Asia Institute Interview with Mr. N R Narayana Murthy
N R Narayana Murthy
Founder and Chairman Emeritus of Infosys Technologies Pvt Ltd., India
Mr. Murthy is a legendary Indian business known for building Infosys Technologies from a local company to a global leader in consulting and technology services. This Interview concerns the position of SMEs (small and medium-size enterprise) in Korea and in the world.
A major issue in Korea these days is the proper relationship between major multinational companies and small and medium-size enterprises (SMEs). There are many who see the large firms as a threat to smaller companies, and especially to small mom and pop stores. At the same time, it is not clear that the relationship is innately adversarial. What do you feel should be the proper relationship between small or medium size enterprises and larger corporations? And what role should government play in terms of regulating large companies so as to protect smaller ones?
Well, I can say one thing with confidence. Whatever the government does, it has to make sure that there are incentives in place for smaller companies to become big. This point may seem minor, but it is not. Unfortunately, during seventies, the government of India put in place an industrial policy that included many incentives for companies to remain small. Therefore, what the businessmen did in response was to create more and more small companies as they tried to expand their operations. Ironically, the attempt to help small companies created an artificial environment that held companies back from expanding and realizing their full potential.
I understand the motivations of governments to offer incentives that make it easier to establish and maintain small-scale companies today. But, at the same time we must be careful not to give so many incentives that the company does not want to grow bigger or to pursue excellence.
It certainly is true that often policies undertaken with one intention can have almost the opposite effect.
Another realm in which I think government can play a meaningful role is in setting out incentives for small companies that create the mindset of a large company CEO among small scale entrepreneurs. I think this point is critical. If you start to think like a big company CEO, no matter how small your business is, suddenly you find yourself in a new world and many opportunities will open up for you quite naturally—opportunities that were previously invisible.
Once SME CEOs adapt that perspective, they can take advantage of their relationship with larger firms. Let us consider my own business of software development, and specifically the large-scale development of software and information services. Infosys has invested very heavily in quality processes, tools and training. It is unlikely that a small company could make such an investment by themselves. Infosys spends approximately 350 million US dollars on its training and R & D. which is beyond the means of an SME. Ideally, the government could offer incentives for larger companies to provide access for smaller companies to their quality control programs, their training programs, productivity improvement and research and development infrastructure as long as it is not proprietary. At the same time, it is also possible for the government to create a centralized infrastructure that can be employed by smaller companies for nominal rates.
The idea is certainly appealing, but I fear that deep cultural traits of competitiveness make it hard to adopt such policies in Korea on a large scale. That said, some places, like Chungnam Techno Park, have already adopted such practices for SMEs with great impact.
I feel that government can play a role in promoting a symbiotic relationship between large firms and SMEs. For example, government can help link smaller companies to larger companies through mechanisms that allow a large company to feel comfortable working together with a smaller company because the government has endorsed the relationship and provides support – guarantees the relationship. If something goes wrong in that relationship, larger companies will have the means to resolve the disagreements and claim their losses. Generally, the larger companies say that the consequential losses are more important than actual losses. What they mean is that the losses as a result of damage to a firm’s reputation with customers from a problem involving smaller firms they cooperate with is far more serious than the monetary value of just that transaction.
Obviously, nobody can provide complete insurance against all consequential liabilities from work with smaller firms, but at least the government can think in terms of creating a safety net, an insurance mechanism that covers possible problems and thereby means that larger companies will not hesitate about working with the smaller companies.
The Japanese offer a very exciting model for how government can help smaller companies to link up with larger companies in a mutually beneficial manner. Japan has created a very positive value chain that places many smaller companies under the care of a large company. I believe that Korea is already taking steps to create a symbiotic relationship between SMEs and major firms. I can imagine an innovative mechanism for marketing and sales of smaller companies in which close cooperation with larger companies plays a significant role.
So should we assume that SMEs have to be protected, or that large firms somehow owe them something?
It is certainly not the case that large firms are the strong player in every respect. I would say that smaller companies have an advantage in innovation because their speed in taking advantage of opportunities is very high in comparison with the larger companies that are slower and more bureaucratic. Smaller companies do not need help in innovation and speed but they do need help in improving quality and productivity, in training their employees, and expanding sales and marketing.
You suggest that government can play an essential role as a mechanism for cooperation between large and small firms. But there is much talk in Korea about how firms should take their own initiative in creating a symbiotic relationship with smaller firms. For example, Samsung, of its own initiative, has worked to promote a symbiotic relationship with smaller companies for growth. Obviously there can be a role for government, but perhaps there also can be symbiotic relationships that can be worked out between larger and smaller companies? Or, perhaps, between companies and NGOs or local community groups?
I have found that in any relationship, even between a husband and wife, both the parties will have to bring sustained complimentary value to each other. Otherwise the relationship will die. Therefore, in a symbiotic relationship between a larger company and a set of smaller companies, the two parties will have to sit down and define the sustainable complementary value each party brings to the other. The larger company may, perhaps, bring the power of its finances, its brand, its access to markets, its marketing and its sales capacity. The smaller company will bring to the table its speed in innovation and its institutional flexibility, its focus, and its specialized skills for producing unique components and customizing to meet special needs.
But the day the larger company itself develops these competencies, the relationship will fail. No degree of artificial regulation can undo this reality. Therefore, the smaller company will have to constantly innovate and demonstrate how it can bring unique value to the larger company. The same is true for the small firm’s expectation of the value of working with a larger firm. Symbiotic relations are critical but they must be based on this understanding of sustained complimentary value between the two parties subject to constant evaluation.
In the Korean case, the political debate goes beyond small suppliers in the supply chain who work with large conglomerates. Another critical issue is how large firms are now starting to run chains of outlets that sell products at very low prices and undercut small shops of limited means. We also have large companies who set up direct competitors with local family businesses. For example, SPC Group’s Paris Baguette chain for bread and pastries competes directly with mom and pop bakeries. A large part of the Korean economy is made up of small shops, and there have been lots of calls to limit the ability of large companies to engage in practices perceived as undermining the well-being of these smaller companies.
We find the same political issue in India. One of the main reasons why the state governments are so reluctant to bring large foreign retailers into their regions is because they feel such big firms will take away the business from the mom and pop stores.
But the reality of business is completely different from the perception. The big retailers can bring the power of technology and the economies of scale in purchasing. Therefore, they can provide better prices to consumers. Because they invest heavily in technology for logistics and for cold storage for food items, they provide fresher produce. Well, entry of large retailers may result in loss of jobs for a million people in India. But, more than 400 million Indians will benefit immensely from cheaper prices and fresher items, thanks to these large retailers. We have to take the utilitarian view in this case. At the end of the day, it is the mom-and-pop stores that are there at the street corner. If you want a carton of milk any time of the day, you can go and get it there. You do not want to drive down to the big retailer. So, there will be a role for both the small and the large retailer in any economy.
The answer to the problem of how to protect small retailers is not endless regulation to limit the entry and growth of large retailers. Rather, the smaller stores have to bring in innovation to give them an advantage. For example, small stores can deliver products to the customer’s house. Or, they can keep their shop open until midnight, or they can open their shop in the morning as early as 5 or 6 AM. In other words, small firms can provide a differentiated value proposition that will give them a real advantage. If they can innovate, they can bring better value to the consumer than the large technology-driven retailer.
You mentioned the question of innovation previously. What is the best way to encourage innovation amongst these smaller shops?
About ten years ago, one of the janitors at our company came up to me and said, “Sir, you keep talking so much about innovation. But, I really don’t understand what you mean by it.” I replied, “Friend, sit down with me here. I will explain the meaning of innovation. You are in charge of eight conference rooms here at Infosys. It is your responsibility to make sure that these eight conference rooms are clean and are maintained in good order. Every morning when you come to the office, ask yourself the following questions: What can I do to maintain my conference rooms cheaper, faster and better? The answer is innovation.” He understood the gist of innovation and has become very successful in using innovation to make himself more and more useful day after day.
At a generic level, we have to keep asking ourselves a basic set of questions:
- How can I do things faster today as compared to yesterday?
- How can I do things cheaper today as compared to yesterday?
- How can I do things with a higher level of excellence today as compared to yesterday?
Let us hear a bit about your own experience. When you started Infosys, it was not a big company. What were some of the critical issues for you in your evolution? How did you take advantage of your strengths as a small firm?
In 1992, we were a firm of about two million dollars (USD) in revenue; last year, 2011, our sales were about seven billion (USD). I recall when IBM, Microsoft, Oracle and a few others came to Bangalore back in the early nineties, my friends told me “your company is going to be in serious trouble! All your best employees will leave you and go to work for those multinationals and it will be very difficult for you to get new employees of that quality”. So, we sat down and thought long and hard about what we could do to attract employees. We realized that these multinational companies would pay much higher salaries. So, we decided that until such a time that we can also pay our youngsters competitive salaries, we would provide them with stock options. Thanks to our stock options scheme, they made a lot more money than they could if they had joined a big multinational company. We went public in 1993 and we gave away about 35% of the company’s equity. We knew that big companies, like IBM, would not be in a position to give stock options in India. So we created a unique differentiation with these big companies.
Another important issue we focused in on was improving the working environment. We knew that those multinational companies were able to provide a good working environment. They offered their employees a big office, whilst we had small offices. They had very good technology and recreation facilities. So, we decided to go public as early as possible and raised money to create India’s first software campus. That was something that those multinationals were not able to do. Why? Because, at that time, they were not committed to investing in India to create infrastructure in the country. Most rented offices in city centers. These city centers did not provide enough parking space and cafeterias. So, when we decided to go out of town and create huge office space, invest in the best technology and infrastructure, establish quality food courts, and create an environment like a central research center, not a local branch office, we created differentiation which the multinationals could not match at that time.
Also, we decided that we had to provide exciting work opportunities for our young people. That’s why we decided to go public and enhance the brand equity of the company so we could bring home bigger and more complex projects for our employees and also enhance our sales force. These strategic decisions of our company greatly enhanced our position and we were able to attract quality people in larger numbers than most multinational competitors. At the end of the day, no matter how small you are, and no matter what industry you are in, if you ask ‘what differentiation can I create with reference to my competitor that is valued by my customer,’ you will find a way forward.
Available at Korea IT Times