He's written on the global company, and the individualised corporation. In his most recent book, Managing Radical Change (co-authored by Chris Bartlett and Gita Piramal), management guru Sumantra Ghoshal explores the ability of some organisations to surf a rapidly changing business environment. On a recent visit to Mumbai, Ghoshal shared some of his views on managing transformation with BT's Roshni Jayakar. Excerpts:

Q. In Managing Radical Change, you write about companies that have managed to achieve a radical improvement. In your opinion, what is the most critical quality for this?

A. There is a whole range of things required. But the real problem for the top management is: intellectually, they understand the need for radical change; they also see some of the first steps they must take; but they don't have the courage to do what they see and believe what they need to do. The real problem is not the intellectual gap in knowing what they need to do. It is the courage gap resulting in not being able to do what they know they should be doing.

To what extent is charismatic leadership a pre-requisite for radical performance improvement?

Let me ask you: is Azim Premji charismatic? Or Narayanamurthy? I am taking two extreme examples of companies that have created the highest value. Today, given the success (of Infosys), Narayanamurthy has a halo round him. But if you came from Mars and sat next to him in a plane, you won't see him as charismatic. You will see him as a decent person. In that sense, charisma helps but it is not a pre-requisite. What you actually need is an ability to inspire confidence in your customers, your employees, and among the investor community. What you need is authenticity. And that's what all these people have. By and large, they are what you see. That's relatively more important than pure charisma.

Managing Radical Change demonstrates that most managers steeped in the tradition of business-as-usual incrementalism find it hard to believe that they can perform well even when the competition is much bigger and stronger. Any Indian examples?

If you look at Reliance today, you would say it's big. But when Reliance started, what was IPCL like? It had huge factories in place, was highly profitable, and, actually, quite admired. Take Narayanamurthy. He was an employee of Patni Computer Systems, who started a new business, which we know today as Infosys. In fact, in India, it is almost as if we need to build a case that Goliaths can survive. That David can win is obvious.

But once a company is very successful, like say Reliance or Infosys, would it be possible for it to achieve radical performance improvement?

Take Infosys or Wipro. In terms of revenue, these are Rs 1,000-crore companies, and won't draw any attention. What is interesting is that they have a market capitalisation that is around 50 times their revenue. Cambridge Technologies Partners' (CTP) multiple of revenue is 1.5 to 2. Infosys is less than half CTP's size in terms of revenue, yet its market capitalisation is 40 times its revenue.

The challenge for Infosys is not whether it can maintain its revenue-growth by continuing with what it is doing today. Or, can it maintain its current growth in profits? The pertinent question is: can the company maintain its market capitalisation? The answer is: not unless it makes the jump to the next step of value-addition. Even today, for Infosys, Wipro or TCS, more than 70 per cent of the revenue comes in from traditional business-call it customer research augmentation (or body shopping); basically, wage-rate arbitrage.

If these companies want to maintain their market capitalisation, they will have to move to the next step-systems integration and the creation of intellectual property. That's a huge challenge. At one level, these are the most successful companies in India; at another level, these companies are facing the most serious challenge. Riding market capitalisation, the way they are, is like riding a tiger. As long as you keep riding, it's fine. But if you fall off, the tiger will eat you. The need is to jump on to the next step, but it's an extraordinarily difficult move to make.

Every company faces this problem. At one level, even if the business (you are in) is growing, how will you continuously renew yourself? Cisco, in 10 years, has become four different companies. Infosys, in the last 10 years, has remained the same company. Same is the case with both Wipro and TCS. They all need to be different in the future.

By being different, do you mean diversification...

It's not the kind of diversification where you are manufacturing cement and, suddenly, you start producing toothpaste. But, if you are into COBOL programming and you move up to systems integration, where you need to understand customer's business, decide at the strategic level and integrate across diverse technologies... That's what I am talking about.

Is high performance possible only in a company belonging to sunrise industries? Or, is it possible for a company to achieve outstanding performance even when it belongs to an industry that is shrinking?

It is possible. Take steel. Globally, which industry has fared worse than steel over the last 20 years? Yet, L.N. Mittal has grown (his empire) from one mill in Thailand to, depending on how you count, the third or second-largest producer of steel in the world. There have been generations of managers who have grown up in India and abroad where the notion of strategy was Porterian (based on Michael Porter's framework of competitiveness, which emphasised industry-factors). If you take any one-year period, a company's performance is bound to be affected by industry factors. If you take four years, the industry explains a very small part of the performance, typically 6-9 per cent; the rest is management. When Jack Welch says ''control your destiny'', what he means is if you become better than the best in whatever you do, ultimately what you develop is control over your destiny. If you have the management capability to be better than the best, then you declare independence from the vagaries of industry- and demand-conditions.

Another example is Hastings Jute of Calcutta. Which industry in India has done worse than jute? Mill after mill closed. Yet, Hastings is creating new capacities, building new mills... Because they are breaking through the traditional logjam of owners versus employees, owners versus trade unions, and so on, to build a partnership, a shared destination kind of relationship.

That means, the quality of management is critical to embark on a journey towards excellence...

Ultimately it's management. Managers can't stand up and say that my performance is bad because the industry is bad, or because the rupee is doing this, that, or the other. Managers are not paid to make the inevitable happen. Managers are paid to make happen what otherwise won't happen.

The phrase we use in the book is 'the smell of the place'. You can walk into a factory or office, and in the first 15-20 minutes you will get a smell (of the place) in the looks in people's eyes... Every year in July, I visit Calcutta for a month to spend time with my parents. Most of this time I spend at home: sleeping or feeling tired. But when I go back to Fountainbleau (where I teach), it's bang in the middle of the prettiest forest (I've seen), the smell of the trees, the crispness in the air, makes the difference. The problem with most companies in India is that they create a downtown Calcutta inside themselves, which saps away all the energy, all the creativity. The challenge for managers is not so much ''how do I change people?'' The challenge is to change it to an invigorating smell. It's not about creating entrepreneurs. It's about the release of entrepreneurs who are held hostage inside your company.

That sounds like re-inventing companies. Problem is, at the end of the process, many firms find themselves where they started...

For every success, there is one or more failure. The best definition of strategy that I have ever heard is the ability to be consistently lucky. When bad times come you suffer a little less than your competitors and when good times come you do a little better than them, so over time it becomes a huge difference of outstanding performance. Having said that, consider Westinghouse. It continuously restructured, but when you look at what the restructuring was, it was more of one CEO diversifying, then the next CEO selling those diversifications to rationalise; one decentralising, the next one centralising operations. In contrast, look at GE, which has been changing continuously, but has been driven by long-term vision. Each step enables the next. So you never stop. It's an endless journey, but it is a purpose-driven, progressive journey towards continuously staying ahead of the envelope.

An envelope?

In business, there is an envelope. Anything you do, others will catch up. How do you continuously stay ahead of this envelope. It's not by continuous restructuring. The distinction is vision, and purpose-driven continuous renewal as against random restructuring driven by fads or fashions or by CEOs wanting to leave their thumb prints all over the company.

In Managing Radical Change, you use the metaphor of the spinning top to address the issue of developing organisational capabilities for sustained superior performance. What do you mean by the spinning top?

Well, companies are inherently unstable. Like a top-if you don't keep on spinning it, it will come to a halt. It needs continuous energy to keep it spinning. When I was studying, the nirvana was sustainable competitive advantage. Today, the concept is no longer valid. Now, it's continuous self-renewal.

Historically, financial capital was the critical resource. Today, there are trillions of dollars sloshing round the world looking for ideas. The dot.com bubble may have burst, but it has served a very good function. Finally, people have got it that money is not a scarce resource. The real scarce resource is human capital. The real issue is true value creation. It's a different game altogether.

On the one hand, there is the conventional old management system, where the (key) resource is financial capital, (the) goal of strategic processes is value-appropriation, and (the) objective of strategy is sustainable competitive advantage.

On the other, is the new system where the critical resource is human capital, (the) focus of strategic processes is value-creation, and (the) strategic goal is continuous self-renewal. That's a totally different management philosophy, compared to the old economy one. You can continue with the old system, but the capital market will continuously squeeze you and ask: where is earnings growth?

Essentially, the New Economy is all about this transition from the old-management world to the new-management world. It's very difficult for the CEO to recognise that capital is not what it's all about now; it's people; it's about changing continuously.

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