The Committed Innovator: A conversation with board director Ireena Vittal

Ireena Vittal has spent 30 years helping both multinationals and start-ups grow their businesses, especially in emerging economies. Today, she is one of India’s top advisers on innovation and growth, serving on the boards of some of the country’s largest institutions and assisting governments on issues related to urbanization and agriculture. As part of an ongoing series of interviews with leading innovators, this episode of the Inside the Strategy Room podcast features Vittal and Erik Roth, who leads McKinsey’s innovation work globally, discussing what it really takes to grow profitably in developing countries.

Erik Roth: Ireena, tell us first a little about your background.

Ireena Vittal: I started out working with Nestlé, then moved to Max Touch, now Vodafone India. When I joined McKinsey, I worked across the world—in the US, Europe, Israel, Pakistan, and across the emerging markets. In 1999, a group of us decided that McKinsey needed to better understand emerging markets, so we created a concept called “how half the world shops.” For the next 12 years we had a blast working with colleagues in Brazil, Russia, India, China, South Africa, and Mexico to see what ideas travel well from developed markets and what is unique about growing in these emerging countries. I have continued on that journey ever since. When you study emerging markets, you realize how different their structures are—government structures, city structures—and you realize that understanding the whole is as important as understanding categories.

Erik Roth: Were there pivotal moments that shaped your view of growth and innovation?

Ireena Vittal: One was the realization that growth is an issue of mindset, not the state of market. The second was that margins come from the investing structure. You can have an amazing mindset about growth, but if the industry structure is off-kilter, you have to be very patient. The third thing was that consumers do not think about categories or brands, they think about their lives. Companies that consistently grow focus on continuously improving the intersection of their products and services with consumers’ lives without asking the consumers what they want—because consumers don’t really know. If you understand the lives of consumers, you are able to keep reimagining how to serve them.

Erik Roth: What are some of the biggest differences between growth mindsets in developing and developed nations?

Ireena Vittal: The differences are more about the stage of the country’s evolution than fundamental consumer differences. Beyond that, market depth in most emerging economies is very shallow. You need to be in these markets for tomorrow, not necessarily for today. Great growth companies get granular about growth early in the game.

If you want to win in India, you need to define the many Indias that exist. Think of India as Europe, not as America. You need to treat Indian states as Germany and France and Italy rather than as Michigan, Ohio, or New York, because they are very different markets. Leaders who are paranoid about consistent growth quickly break up India into many Indias. The key is to go deeper with the customers you have, which requires focus on retention and raising the share of wallet, as well as acquiring new customers. It also requires small, continuous inorganic moves to get into adjacencies, sometimes to acquire talent or the right product or market fit. It’s a game of juggling balls: retention, going deep, remaining relevant, and continuously making small acquisitions.

Also, many developed markets have been shaped by supply, with large retailers aggregating assortments and standardizing demand. In emerging markets, where retail categories themselves are still evolving, it’s critical to continuously reinterpret categories and not be wedded to formats.

Erik Roth: You said earlier that industry structure is critical. Business model innovation has much to do with industry structure. How important are business models in the growth equation of developing markets?

Ireena Vittal: I love that question, because businesspeople do not accord enough importance to the margin model and the business model. One has to remember that India is at $2,000 per capita and China is at $10,000 per capita—these are still emerging markets, and therefore the ability to control price is very limited. In a world that is increasingly risky, reducing margin risk becomes critical. For that, you need to get your cost structure and product portfolio right, from entry price point up to premium.

Thirdly, you need to get where you play in the value chain absolutely right. Some of the fastest-growing companies in emerging markets have disaggregated their business models and said, “This is what we will do internally, this is what we will influence, and for this piece we will find others who are more natural owners or have better cost structures or different return expectations.” In emerging markets, the physical boundary of the company you run is much broader than the legal boundary of the company you own, because you have to influence your ecosystem much earlier in the game.

Erik Roth: Are ecosystems more important to successful growth in developing markets than some multinationals appreciate?

Ireena Vittal: I don’t think they are more important but making sure they scale up to your quality and cost structure requires more work. A strong grower in emerging markets has commercial teams in vendor and business development that are two, three, four times the size of such teams in developed countries. That’s because in developed countries you have ecosystem players that are simpatico in terms of culture, compliance, quality standards, and cost structures, while in emerging markets you have to curate them.

Erik Roth: You are on boards of large entities and some exciting start-ups in India. What big differences do you find between them?

Ireena Vittal: Well, the first is obvious: start-ups are born digital and are learning how to scale. The incumbents are learning how to become digital and more agile. They are both coming to the same place but from very different starting points. The other difference is that start-ups have the luxury to be focused primarily on the consumer, with no legacy formats. Finance start-ups see their business as providing credit, while a big bank says, “But what does this mean for my branch network?” The start-ups are comfortable with reimagining go-to-market strategies and the incumbents have to do a delicate dance between repurposing what they have and creating the formats for tomorrow. They are so busy managing their current brand portfolios that reinterpreting the category and potentially cannibalizing your own business requires huge amounts of courage.

Erik Roth: For an organization to become more innovative, boards often need to nudge management to raise the aspiration. We call it the “green box”: the gap in growth that needs to be filled through innovation. Has that been your experience on the boards you sit?

Ireena Vittal: I think the word is not nudge but inspire. The board’s role is to bring constructive challenge into the room. That is most helpful to CEOs who get so used to growth at a certain rate that they assume it to be the organization’s natural rate of growth. A board can say, “You have built a new muscle, why not accelerate the growth?” The CEO might reply, “But we are already growing at 15 percent.” And the board can say, “You are capable of growing faster.” It’s also helpful to move the conversation from the annual rate of growth to your rightful share in the market. What does your team deserve and what do you therefore need to build a moat around?

Erik Roth: As you look across India and other emerging markets, what are some inspiring examples of companies that understand growth and innovation?

Ireena Vittal: We see it happening in the healthcare industry, which is moving from a focus on formats like hospitals and diagnostics to patient centricity, asking: what does it take to create a 24/7, multiyear relationship with a patient and to move from surgical inputs, for example, to preventive measures? What would you need in terms of consumer data and patient trust to have a clinical engagement with them that reduces the amount of time they spend in hospital? We also see it in retail, where businesses are realizing that they need to move from pure availability to discovery to fulfillment of anticipated needs.

Erik Roth: What about new entrants? India has a number of unicorns.

Ireena Vittal: What I find fascinating about them is that, because they are born digital, they are all experimenting with amazing things. I was sitting with a team yesterday that has created a predictor model from the first transactions for who will likely be a high-quality customer. We realized there was no point in chasing every customer; we wanted high-quality customers. This team started with 65 variables and brought it down to 13, which can now predict customer quality with 65-percent accuracy. Another business realized that customer retention is critical in India and the single most important factor was the first transaction. The team has identified 39 failure modes, 33 of which are internal. They are now systematically doing root-cause analysis.

The start-ups are using technology and the intimacy they have with the customer to reduce inertia in the purchase cycle and simplify the customer’s decision process, and they are deciding whom they want to serve and how. Their big advantage over incumbents is that they have end-to-end consumer insight data. Incumbents have tons of data but some of it is suspect. More importantly, 90 to 95 percent of the data they have captured is transactional, because the other parts of the organization that capture relationship data have not codified it.

Erik Roth: Large incumbents tend to focus on financial data as opposed to the customer-centric data. These start-ups seem to start from a point of customer centricity. Is that by accident or by intention?

Ireena Vittal: I think it’s a bit of both. Start-ups capture a lot more data because of the way they engage with customers. But I believe the incumbents have as much right to win this game as the start-ups do because they have extensive institutional and category insight but may not be leveraging it. Those insights may not be in the form of data. Some large retailers are using insights on cross-sell and upsell that are so much more thoughtful than what the start-ups have, because they have known for decades how consumers interact with them.

But incumbents are so siloed that the data insight does not naturally flow into either the creation of the value proposition or how they engage with consumers. Large incumbents are organized for efficiency; they are functional. And they often don’t listen to the front line, which has a huge amount of insight.

Erik Roth: If these large companies could increase the speed within which they aggregate, synthesize, and act on information, would that give them an advantage in developing markets?

Ireena Vittal: Yes. The issue is what it would take for them to increase the speed of learning. Information in many incumbents is power. Why would I share information? What’s in it for me? Making this a critical part of strategic growth has to come right from the top. Secondly, it requires agile teams where different functions bring their insights and information together. When folks realize growth has accelerated—and they did it themselves and enjoyed this way of working—within a couple of generations the attitude to sharing information changes.

The question to ask is, where is the enemy? Is the enemy outside or inside? The moment you have external orientation, the moment you are looking at reimagining the category and market share, you have an enemy outside to fight and internal enemies become friends. One of the best CEOs I know is constantly creating enemies outside because it makes those inside collaborate.

Erik Roth: How does a leader make sure the organization is tuned properly to emerging market dynamics?

Ireena Vittal: It’s important to keep in mind certain characteristics of emerging markets. One is the importance of what I call the war on waste. Cost is a competitive advantage because there is so little pricing power. You have to build a business model that assumes a price-cost squeeze of 1 to 2 percent annually. One of my clients said that the margin is given by the head office and the price is given by the local competitor, so you have only the cost to play with. He taught me the equation, C is equal to price minus margin. That’s the game. You don’t play the game of cost plus margin equals price.

The other issue is risk. You must look at risk-adjusted returns in emerging markets because every year something goes wrong. You need to build a plan B into your margin structure and business model.

Clarity on the source of growth is also critical. You have to be very sharp about where the next $100 million is coming from and make choices, because you could easily fragment yourself chasing many small rabbits in China and India. Another issue is that horizontal collaboration is crucial, because your supply-chain and sourcing leaders are working with a fragmented vendor base, finance is dealing with high risk—the functions have a tougher job than in developed markets. Therefore, being thoughtful about shared metrics across functions is critical.

Erik Roth: What are some of your go-to metrics?

Ireena Vittal: One is when you declare a customer acquired. Customer acquisition costs should measure when you become a part of that customer’s monthly basket, part of their ritual, so acquisition should be defined not as the first transaction but as a retention transaction. Another metric is customer quality. In emerging markets with large populations, it is easy to grow the top line but that rarely translates to retention, so how do you know who is a good customer and become more relevant to that customer? I know companies that have let go of customers they thought were not a good fit for their product offerings and were comfortable with a smaller top line but a stronger and more predictable bottom line. The third one is return on capital employed (ROCE). As we discussed earlier, business is about cash in these countries. It is very easy to have vanity metrics but because of the high business risk, the only thing that matters is return on capital, not gross margin.

Erik Roth: Do most CEOs understand that these are ROCE businesses and you have to watch the capital expense line, not operating expense line?

Ireena Vittal: No. I will tell you a story. We were serving a US company setting up a business in India that had a $300-million capex. We did the math and told them, “Even in 100 years you will not get returns on this.” They said, “But these are the FDA standards. When was the last time you built a factory for this quality of product?” I told them, “We have convinced your global CEO that you need a plant at $20 million.” This same team eventually built a $54-million plant—FDA-approved—and now they are making money hand over fist. If they had invested $300 million, they would have been dead in the water.

Adults don’t learn by listening; they learn by doing. People who get burned and have to write down investments learn this lesson. The rule of thumb is, if something costs you $100 in the US, in China or India it should not cost you more than $40 or $45.

Erik Roth: Have those rules of thumb become rules of management?

Ireena Vittal: That depends on the sagacity of the global CEO and their sponsorship. How close is the CEO to the emerging market? If they are close, then they get it earlier because they feel pain earlier, but if they are several organizational layers away, it’s a struggle. Multinationals that grow well here understand that, because of income and the demand structure, these markets are made for good-better-best, and good-better-best keeps moving upward. If you come with too much best, or with last season’s best, the consumer kicks you out. The consumer is smart—especially top-end consumers who are global consumers. You have to iterate and stay slightly above the income levels.

Erik Roth: You do a lot of work for governments on urban issues and agriculture. Do Indian governments use innovation and iteration to tackle those issues?

Ireena Vittal: Some of the most stunning innovations I have seen have come from our best politicians and bureaucrats. India is building public assets, such as the digitally enabled identity system or the UPI [unified payment interface] platform, using technology that will prevent large corporations from owning the data. For example, India has a large poor population who get food through a public distribution system. In parts of India, this is now fully digitized. I visited a small village store that did not even have a roof but the operator, who was illiterate, was fully digitized. The weighing machine reads out the amounts in a cute American accent—“500 grams of sugar”—because so many people are illiterate. People bring cards to which the government has transferred money and pay for the food digitally. It’s all cashless. When you have more than 1.3 billion people, this helps. People talk about Estonia (known for its digital society and services). Estonia is awesome, but it has 1.3 million people.

Erik Roth: What lessons could other governments take from this in serving and interacting with their populations?

Ireena Vittal: There are lots of lessons to be learned in education, water management, and distributing food to the poor. Our governments have much work to do, but I find it fascinating that bureaucrats start with digital technology. It has become ingrained. That, to me, is where the hope is.