McKinsey: How did the Oberoi Group begin?

P. R. S. Oberoi: In 1922, my father, Mohan Singh Oberoi, came to Simla to look for a job. Set about 7,000 feet up in the Himalayas, Simla was India's summer capital, the place from which officials conducted the affairs of the Raj. The entire Indian government moved to Simla for the summer months—lock, stock, barrel, and files. Before 1911, they faced a 1,200-mile trek from Calcutta; when Delhi became the new imperial capital, their journey was much shorter.

My father found a job as a clerk at the Cecil Hotel, which was the most fashionable hotel in Simla. Senior British officers and Indian princes made up most of the guests. The Cecil belonged to the Associated Hotels of India, the first—and for a long time only—hotel chain here. My father was the hotel's cashier, for which he was paid 50 rupees a month. He was 22 years old. Hardworking and dedicated to his job, he soon became a capable and trustworthy assistant to Mr Grove, the general manager of the Cecil.

Some time in 1927, Ernest Clarke, an executive in the hotel, asked my father to accompany him to Delhi, where he had just landed a contract to run the Delhi Club. So lucrative was this contract that within two years Ernest Clarke was able to buy his own hotel in Simla. Wanting to concentrate on his Delhi responsibilities, he asked my father to manage it.

Clarke's was nothing like the Cecil. Half the size, it had dilapidated plumbing, gloomy bathrooms, creaking floorboards, and abysmal occupancy rates. Renovating it gave my father a unique opportunity to learn how to build a top-class hotel virtually brick by brick. Within a year, Ernest Clarke had made him an equal partner in the venture.

Around 1933, Ernest Clarke and his wife took a six-month vacation abroad. When they returned, they couldn't believe what my father had achieved. Not only had he refurbished the entire hotel, he had persuaded the Indian army, whose headquarters were nearby, to use it. Junior government officials now frequented the bar. Occupancy levels had shot up to 80 percent.

The Clarkes were so impressed by what my father had done in their absence that they offered to sell him their hotels in Simla and Delhi and retire to Britain. In 1934, my father mortgaged all his assets, my mother sold off her jewelry, and they became the sole owners of the two hotels. The Oberoi Group was born.

What attracted your father to the hotel industry?

The glamor of it all: fine buildings, elegant people, excellent food. For my father, the Cecil epitomized the roaring twenties. Every Saturday, it rolled out a red carpet in case the Viceroy of India stopped by. The Raj had a strong influence on style.

What was the first big leap for the Oberoi Group?

The acquisition of the Grand Hotel in Calcutta. The capital of imperial India until 1911, Calcutta had been the home of the British East India Company for almost 250 years. Its architecture was Western European in style, with mansions and department stores lining the streets. The Grand, a 500-room hotel that looked like an English mansion, was considered to be among Calcutta's most distinctive buildings.

In 1937, disaster had struck. A typhoid epidemic spread through the hotel, killing several guests. The Grand was closed and a receiver appointed. A year later, my father took out a lease from the receiver and set about refurbishing it. The work took a full year. Everything was redone: the floorboards were pulled up, the plumbing was ripped out, and all that remained was scrubbed, swabbed, scoured, and sterilized over and over again.

During the Second World War, the Grand became highly profitable. Calcutta was one of the key transit points from which the Allies shipped troops and supplies out to the battle fronts in Burma, Singapore, and the Philippines. The Grand was only available to officers of the Allied Forces who used it for long-term accommodation. The hotel was the venue for all the town's most prominent social activities.

In those days, hotels were like grand pensiones. There was practically one attendant to every room. If you wanted a cup of tea or your clothes needed pressing, all you had to do was ring the bell, and the attendant would appear. Guests were different then, too. Few were tourists. Most were people in transit: civil servants or military officers who would stay at a hotel for two or three months at a time.

What made you venture abroad before you had fully penetrated the Indian market?

In 1969, we took over the management of the Soaltee in Kathmandu. Next was the Lanka Oberoi in Colombo, then the Imperial Hotel in Singapore, and in 1971 the Mena House overlooking the pyramids at Cairo. At that time, India exported very little, and certainly no "know-how" in the hotel trade. But when we saw Hilton managing hotels all around the world, and Sheraton, and Intercontinental, we looked at each other and said, "We have the expertise too. And we understand the East better than any of the larger chains. We should be able to manage a hotel in Kathmandu better than the Western groups. So why don't we?" Unfortunately, strin-gent government regulations prevented us from taking out of India any of the profits we were making, so we were forced to enter into management contracts.

It was the Mena House that established our reputation for renovating grand buildings and royal palaces and making them into hotels without destroying any of their original character. Situated in Giza, right next to the pyramids, the Mena House was a small hotel with an impressive history. Here, Field Marshall Montgomery had planned the battle of El Alamein, and Winston Churchill and Franklin D. Roosevelt had met to discuss the end of the Second World War. (Later, many of the Egypt-Israel negotiations leading to the Camp David peace agreement were conducted at the hotel.) But at the time, despite its history, its stunning views of the pyramids, and its nine-hole golf course, no hotel chain would touch the Mena House because it was so far out of town.

What did you do when you took it on?

We had to modernize it. Thanks to coal-burning stoves, the kitchen was black, many rooms lacked bathrooms, you could see all the wiring, the swimming pool didn't have a filtration unit, and so on. The staff numbered 700, but decades of government employment had sapped initiative, hard work, and service quality. Not only did we have to restore the fabric of the hotel to its original glory, we also had to train the people who worked there to achieve high standards of customer service.

Is there an Oberoi approach to turning hotels around?

All of our hotels are unique; each and every one reflects local architecture, materials, and culture. Take the Mena House again. An Egyptian architect led the refurbishment, and every morning he would go to the souks of Cairo to look for designs that reflected the early-nineteenth-century origins of the hotel and seek out craftsmen who could replicate them.

When we acquired the Windsor in Melbourne, a hotel that dated back to the 1880s and was regarded as a local treasure, some people opposed us, saying "They'll make a curry house out of it." Today, restored to its former elegance, it is among only a handful of famous historical buildings in the city. Even when we build new hotels, we pride ourselves on reflecting local styles. My father always told us that we weren't building hotels for ourselves, or even for our children, but for generations to come.

What do you consider to be Oberoi's distinctive value proposition?

Besides India, we now operate luxury hotels in such countries as Australia, Egypt, Indonesia, Iraq, Saudi Arabia, and Sri Lanka. Barring Australia, all of these are regions where service tends to be patchy, privacy elusive, and personal security a worry. We ensure our guests are comfortable in all three respects.

Take service. It is hard to achieve a consistent level of service in India, and even harder in Egypt. As we grew, we began to set exacting standards which were specified in service manuals so that people who work with us would know exactly how high a rose stem ought to be in a bud vase, how to turn down a bed at night, or how to cut a cigar for a guest.

Another barrier to ensuring service quality in these regions is that people tend not to think about the long-term ramifications of their work. We always have a problem with the narrow focus of trades in India, for instance. A painter will only paint and an electrician will only do the wiring. We have to get in a third person to take the paint off the switchplate that the painter has left behind. Of course, labor is cheap in India. But I always warn our managers that if they think employing more people ensures better service, they are wrong. More people just means more training, more turnover, more mistakes, and more people to administer.

People often confuse hospitality with service. In most of the countries where we operate, people are hospitable, in the sense that they are polite and willing to do things for their guests. But that doesn't mean they understand what customer service is all about. Privacy is important to our guests. A business customer does not want to stay in a hotel that is noisy or too busy. For that reason, we don't allow weddings to be held in our Indian hotels. We have lost a lot of revenue as a result, but weddings—especially Indian weddings, which tend to be three-day affairs—can be disruptive to guests who are looking for peace and quiet.

In countries with wide wage disparities, security is always a consideration. Our hotels have only one entrance for guests and visitors. We keep a close watch on who enters our properties and have a large number of security staff who constantly patrol the premises.

What kind of customers do you attract?

It varies, but we have noticed some shifts in customer profile. In the 1930s and 1940s, it was mainly civil servants. In the 1950s and 1960s, the world's wealthiest families—the Rockefellers and the Agnellis—would stay with us when they toured India. They don't come any more, or at least not in the same numbers. Maybe they have seen India now, or there are other places they want to go.

Today, our guests are mainly international business travelers who are highly conscious of service quality. They have traveled all over the world and stayed in many hotels. They have all the benchmarks. If you can satisfy today's business travelers, you can satisfy anyone.

How important is training?

Because we set stringent service standards about everything, right down to the texture of toilet tissue, the temperature of the hot water in the bathroom, and the cleanliness of our kitchens, and expect everyone in the organization to meet them, we invest very heavily in training and retraining. The latter is just as important as the former because our customer profiles are constantly shifting and therefore the perception of what constitutes quality service is also changing. We need to train and retrain our staff to meet these evolving customer expectations.

We have a broad formal management training program. In the first few decades of our growth, we hired expatriate managers, mostly from leading European hotels. But we knew this policy was not sustainable in the long term because of the Indian government's restrictions on the hiring of foreign nationals. In 1966, we started the Oberoi School of Hotel Management to develop our future managers. It was the first such institution in India.

As many as 40,000 applications come in from all over the world for 24 places. We train people for middle management positions such as restaurant and front-office managers, hoping that a few of them will eventually go on to become general managers. All of our current Indian general managers attended the Oberoi School.

One benefit of training a broad mix of nationalities is that many graduates go back to manage our properties in their home countries. Another is that when we open a hotel in a new country, we often have a network of local people who trained with us. In several countries in Asia, and even in Australia, you can find our graduates running hotels—both ours and other people's. We now aspire to develop the school into the Oberoi Center for Learning and Development, which facilitates continuous change and improvement and coordinates sharing of best practices across Oberoi hotels.

How much autonomy do you give your general managers?

All our experience tells us that a hotel is only as good as its general manager. Standards, training, and brand all count, but at the end of the day it is the manager who really makes a hotel successful. We give our general managers a lot of freedom in managing their properties as profit centers.

There are three areas where we exert control centrally. The first is training. No matter where they are in the world, all our employees are trained and monitored. The second area is control of major costs like personnel and energy. These two items alone account for approximately 30 percent of the cost of running a hotel. We want to ensure that all our general managers are aware of—and implement—best practices in cost control. Third is interior design. Many general managers think they know a lot about it, and want to get involved. This can be disastrous; I have seen some lovely hotels ruined by their interior design. We don't tolerate any interference for that reason.

How international are your management ranks?

We believe that a company like ours needs to be international in every respect. As soon as the Indian government relaxed the regulations concerning the hiring of foreign nationals, we expanded our recruitment drive overseas and brought back many of our foreign managers to work in India. We now hire managers irrespective of their nationality. In fact, to the best of my knowledge, the Oberoi Group employs more expatriates than any other corporate entity in India, domestic or foreign.

What is your view of diversification?

It's tempting to diversify into other sectors, but we continue to resist. The hospitality industry still offers plenty of scope for expansion in India, as in most of the developing world. We are barely beginning to scratch the surface of these markets. Occupancy rates in the top hotels are very high. It is almost impossible to get a last-minute booking at our Bombay hotels.

There are ample opportunities to diversify within the hospitality industry. I believe one of the biggest will lie in India's two-star hotels. You go to some of them, and you can't sleep there, or eat the food. They are disgusting. Anyone who can provide quality two-star service is sure to do well.

When we diversify outside our core activities, it is always with a partner who knows that business well. For instance, we operate—seldom under our own name—several restaurants, airport hotels, and snack bars in Southeast Asia. We hold the franchise to open 20 or so Hard Rock Cafes in Australia. We also co-own and operate the largest wholesale bakery in Saudi Arabia.

Do you think the concept of the deluxe hotel is changing?

We believe that senior executives no longer want to take their holidays in a resort hotel with three or four hundred rooms. Nor do they like having to rush out every morning to secure a good spot by the pool, or being surrounded by 150 other people. The future of the top-class resort hotel, in our view, lies in the small establishment with no more than a hundred rooms. We opened a villa resort in Bali about 15 years ago with this in mind. Several of the rooms have their own private pools. It was the first hotel of its kind in Asia.

We are building in Jaipur, the first deluxe resort hotel in India. When it opens in 1997, this 75-room resort will recreate the ambience of an old "Rajasthani" fort, while maintaining exceptional product and service standards.

How do you go about site selection?

There are many analytical approaches, but what works for us is instinct. My father was skilled at finding sites. When he chose the location for our Delhi hotel, there was nothing near it but a golf course. Then, it was classified as "on the outskirts of Delhi." Once we built the hotel, it became "inside Delhi." Today, it is "in the center of Delhi."

It was just the same with our Bombay hotel. My father said, "I must get the best site in Bombay," and he did, but it wasn't land that he bought, but sea. The state government sold us a piece of the sea that we had to fill in before we could build our hotel. Today, that piece of reclaimed land is probably the most expensive in Bombay—indeed, possibly the most expensive in the world, and I am not exaggerating. Anyone taking an analytical approach would have told us we were nuts; many did.

Even so, we are not alone in following our noses. I recently asked the owners of a major international retail chain how they choose sites. They said, "Location, location, location." So I asked, "How do you measure footfall, traffic flow, and such?" They replied, "What are you talking about? We say 'This is the site,' and that's it."

How do you keep in touch with all your properties?

We own and operate 27 hotels in six countries, and operate related businesses in several others. Our employees number 10,000—or 16,000 if you count the Oberoi-operated properties. I can't possibly know all of them, but I do know a large proportion because many have been with the company for a long time. I know more than 90 percent of our over 700 executives personally.

I travel between our properties all the time. Some I visit as often as six or seven times a year, and I always stay for a few days; it's the only way to find out what is really going on in a hotel. My father used to go through all the visitors' comments during his visits. On his return flights, he wrote detailed inspection reports. If a hotel had too many complaints, he would be most upset. Going forward, we realize the need to establish systems that enable us to keep in touch with all our properties all the time, and intend to invest up to 5 percent of revenues in information technology and communications over the next few years.

How do see your role changing over time?

Our aspiration is to double in size by the year 2000. As we move toward owning 50 hotels, it will get much harder for me to keep my finger on the pulse of each one. I think I'll be spending a lot of my time in site selection, in designing the format of new hotels (whether they are to have, say, 50 rooms or 500), in going over architectural plans, and so on. The day-to-day running of our hotels has already been passed over to professional managers. I will also devote my attention to creating the foundations for growth in shareholder value. We are uniquely positioned to be the premier hospitality and leisure group in this region. In doing so, we hope to increase our net worth from about $750 million to roughly $2 to $3 billion in the next few years. Only then will I feel satisfied that we have truly built a solid foundation for generations to come.