John S. Clarkeson, co-chairman of the Boston Consulting Group (BCG), has visited India and China at least a dozen times each over the last decade. And every time, he says, he's been amazed at the transformation in the two countries since his previous visit. Clarkeson was in Hyderabad on September 24, 2005, to attend the 32nd National Management Convention of the All India Management Association. He squeezed time out to speak exclusively to Business Today's E. Kumar Sharma Excerpts:

Where does India fit into BCG's global scheme of things and how important is it?

In mature economies, we have lots of client relationships that are stable and growing in those markets. But in a market like India, which is still to reach full maturity, we are not quite sure which clients will turn out to be the most important. But we do know that it is a very important market because interesting things are going to happen here. You need to know perhaps a little history about BCG. We opened an office in Japan in 1964, years before the world understood what an important role it would play in the global economy. The 21st century is obviously going to be about information exchange and it's pretty obvious to everyone that India is already a very serious player in this area. So, we are here because we believe that India presents an attractive opportunity for us.

BCG has large practices in India and China. What are the landmark changes that you have noticed in these countries?

When you revisit China after a year or two, you have to pause to get your bearings right once again because the whole skyline has changed. That's not the case in India because you don't see an enormous amount of physical change. But there is a less tangible, more psychological change that is becoming apparent here now. In my conversations and discussions with Indian businessmen, I see a dynamism and self-confidence that wasn't there before. And the fact is that in the last six years, India has emerged as a formidable competitor. Indian businessmen feel that a contest with a large multinational, whether here or abroad, is something they can actually win. That to me is the most significant change. India's it story is well known. But you also have manufacturing companies that have, for example, gotten their quality up to Japanese standards. They are increasingly making their mark in the export market. I don't think very many people would have expected this to happen 10-15 years ago. It's a virtuous circle and it takes time to build up critical mass. We haven't really seen anything quite like this in the 20th century with the exception of Japan, and potentially, this is a much bigger market.

By when?

Not in 10 years maybe, but certainly in 20. Demographics and growth rates seem to indicate that, subject, of course, to the rider that nothing makes the country less attractive as an investment destination.

"India can become a flexible manufacturing base"

What do you feel Indian companies should do to succeed in the global environment?

At a very general level, you need to be able to draw on the strengths you already have. We already know what those are. India can produce sophisticated products at remarkably low costs. The question is: can you discern the right opportunities around the world where you can compound your advantages. I think that requires some understanding of global market dynamics. You have to compete in the developed world because that is where some of the best competition is. You should do that now because competition is what makes companies great. But there are also these 'in-between markets' that are neither developed nor underdeveloped, which present Indian companies with great opportunities to thrive and grow. The trick will be to get this mix right. Within the next 10 years, I think, it will become quite clear which Indian companies have worked out this new balance.

How can Indian manufacturing companies become world beaters in the same league as Indian service providers or China-based manufacturers?

In some industries, particularly among small manufacturers, you are not producing enormous numbers. That has to change. It is possible for India to become a very flexible manufacturing source. The country is very good at improvising low-capital intensive manufacturing today and, I imagine, will continue to do so in the future. So you need to make a distinction between those industries where mass production is the only way to go and those where some intermediate forms of flexible manufacturing could be a better way of realising value and focus on the latter.

Any particular sector?

You need to break down the supply chain of the whole world to figure that out. Auto parts could be one. In the US, small companies are springing up to make bicycle parts. You would say, 'hey no, how can they possibly compete with mass-produced components made in China and Japan?' But they're not in that game at all; there is a huge market for custom-designed bikes which need small changes in size and design. India should be all over that market. I don't know if it is. A day will come when all these little shops in California come to India looking for components. Right now they are making them themselves.

A recent BCG report says 'people businesses' recorded some of the highest growth rates in advanced economies. How can India cash in on this?

Clearly, the growth in developed economies is increasingly coming from services. It doesn't mean that there isn't a demand for physical goods, but services now account for a larger portion of the pie. The essence of service is that it can't be industrialised; people account for a large portion of the cost structure of the services industry. The problem is, western accounting has no way of treating people as assets. We have wonderful systems for physical business assets, but we don't have a system of measuring assets when they are human. Our research on 'people businesses' is all about measuring people with the same rigour that we have historically applied to asset-based businesses. We have to come up with a new matrix that is not a reflection of the old industrial age but more suited to new age services. What is terribly interesting for India is that it is competitive in several industries that, historically, it wouldn't have got into until later in its own development cycle. It is thanks to electronic telecommunications that India is now a serious player in a very late stage service business like it. So, in the knowledge sector at least, India is posed with some very 21st century challenges on to how to figure out the best ways to measure, manage and organise people businesses. Several new opportunities will be up for grabs, and it is reasonable to expect that India will have the experience and the insight to actually do a better job of managing some of these (than other competing countries). That is another reason why what is happening in India is very exciting for the rest of the world.

"India presents an attractive opportunity for us"

BCG advocates that HR should not be seen just as a support function. Why?

HR has always been a support function. I would rather say that there are businesses in which it has a strategic role as well. Your ability to manage people, maybe, is what distinguishes you from the competition. Let us take a hypothetical example: a company acquires raw material, designs a product, assembles it and delivers it to the client. You can outsource every one of these functions to a greater or lesser degree. So what is a company? A company comprises a group of people which has a creative insight about how it can use all these resources that are available in the world to solve a particular customer's needs in a creative way. That is the only part you cannot outsource and that function has to be one that the company is superb at. Crucially, that function has to do with attracting the right people and getting them to work in a collaborative way. Yet, you also have to manage this network that you have formed for the work you are not doing in-house anymore. As a result, people become the real assets. So, a company must have a strategy for attracting the right people and retaining them; it is very easy for them to go across the street and do the same thing for someone else. Creating an atmosphere in which they say: 'I'd rather be here than anywhere else,' becomes essential and takes a lot of skill to create. That's where the human resource function takes on a strategic dimension.

How receptive are companies to this?

I don't think this is hard to sell in the developed economies. Many functions have grown in importance in the last couple of years. The two that come to mind immediately are it and hr. The latter now is more than simply benefits, payroll, promotion and evaluation. It is much more common for CEOs to spend time with the head of hr than was true, say, 10 years ago.

You have often emphasised the role of the leader. While on the topic of HR, can you elaborate on your views on leadership?

Leaders are traditionally thought to be strong people who set the direction and policies of the organisations they lead. It's a top-down model. But this may not work in a knowledge society. Today's leaders have to create organisations in which all levels of the hierarchy have to contribute to the tailoring and adaption of a common vision. This obviously can't come from a single brain.

What has BCG's experience in India been like?

We have to advise our clients not about how things were or used to be but about how they are going to be. To do that, we had to be here as early as possible and we had to develop as much insight as we could into how things are going to develop. We are here also because we believe that India presents an attractive opportunity for us; we have to understand its potential and explain that to our clients around the world. When we entered the country in 1995, most of our clients looked at India as another market in Asia. That has changed significantly. India is now looked upon not only as a market but also as a competitor and a resource base.

What are your personal thoughts on the country?

I have already talked about the change on the business side. But I must add that I haven't confined myself to Delhi and Mumbai only; I have also seen a lot of the Indian countryside and visited villages; they haven't changed much. Yes, you can get on to the internet, there are the mobile phones, and so on, but physically, the country hasn't changed much compared to China.