how mnc companies can be successful in india

TEN SUCCESSFUL TIPS FOR SUCCESS IN INDIA

Table of Contents

Setting the context: The India Opportunity 1

Benchmarking Objectives and Methodology 4

Ten Tips for Success in India: A Framework 7

Section A: Commitment at the Global Level 8

Section B: Empowered Local Management 11

Section C: Localized Product/ Market Business Models 16

Appendix: Benchmarked Company Snapshots 21

Setting the context: The India opportunity

India presents a remarkable business opportunity by virtue of its sheer size and growth

• The Indian economy is now ranked 12th in the world in terms of GDP and is the fastest growing after China. • India is expected to continue along the same trajectory, with consistent growth rates of between 4-7% as

exhibited over the last 2 decades.

• This will position it as the 8th largest economy in the world over the course of the next 20 years, with a larger GDP than that of Italy, France or Germany by the year 2025.

A. The domestic market opportunity

India’s vast population is increasing its purchasing power• While ~50% of the population was classified in the low-income bracket in 1994-5, this proportion is rapidly

declining, and is expected to account for only 17.8% of the population by 2006-7. • At the same time, there is a rapid shift from the low-middle classes to the burgeoning middle class, and an

even faster increase in the sizes of the high and upper middle class, fuelling growth in the economy. • Even more pronounced is the growth of a niche ‘super-rich’ class, now estimated to comprise of over

100,000 households with net worth of >$1 mn each.

The growing size of the middle and higher consumer classes with increased income and paying capacity has spurred an increase in consumerism and brand consciousness• Companies have been taking advantage of dramatic growth in such consumer markets as automobiles,

motorcycles, computers, durable goods, and cellular communication – all exhibiting compounded annual growth rates (CAGR) of 6%-29% from 1996 to 2011(estimated).

• The domestic market opportunity will further be boosted by a likely increase in propensity to spend and by

the growing consumption by the young generation in India.

B. The off-shoring opportunity

India accounts for roughly 65% of the global off-shoring market and is expected to grow at 50-60% per annum for the next 5 years

• Off-shoring provides a fast growing and increasingly important opportunity for MNCs. It is mainly derived from India’s largest asset – its people. India is the largest English-speaking nation in the world with the second largest pool of scientists and engineers (second to the US).

• Companies are able to realize significant cost savings by utilizing the highly qualified labour force at attractive rates, and translate this into an important competitive advantage. The cost of a highly qualified engineer/ scientist in India is less than $20 per hour, as compared to over $40 per hour in the US or EU.

The benefits of India’s human capital extend beyond cost• Many MNCs are seeking India for the superior management and technical talent base that it offers. Over 100

MNCs have set up R&D facilities in India and many have placed Indian talent in key positions in their organizations both locally and globally.

India is also emerging as the manufacturing and sourcing location of choice for various industries• India is considered a low cost leader in such areas as steel and metals and a regional base for the high quality

production of some manufactured goods such as automotive components, engineering equipment, power equipment, and medical systems.

C. The Primary Challenges (and how they are being addressed)

While India is positioned for success, there are multiple challenges that must be addressed as an integral part of

MNC strategy; these include:

Difficult operating environment – Mainly brought about by government policy and processes, procedural

bottlenecks, and the legacy of cumbersome labour laws.

• The reforms process adopted by the Indian government in response to these problems is now firmly in place.

Significant progress has been made in liberalizing the external sector- thus allowing freer flow of capital

goods and raw materials – opening up the financial sector, and reducing customs duties. Second phase

reforms that are in the making include lifting restrictions on FDI, simplifying tax and tariff regimes, and

opening up markets for competition.

Socio-economic challenges - Related mainly to poverty, illiteracy, and health concerns. A quarter of the Indian

population still earns less than $1 per day and ~40% of the population is illiterate

• While these are grave concerns and India does measure on them poorly, even in comparison with other developing countries, an analysis of the trends in the last 10 years shows that India has made significant improvements. Life expectancy has improved from ~60 years in 1991 to ~65 years in 2001, and population below the poverty line has moved from 40% to 25%. The rate of improvement recorded by India is significantly better than most other developing countries. This is attributed to the sustained high economic growth rates, multiple schemes for the poor launched by both state and central governments, and the increasing thrust in these areas by other bodies such as NGOs, World Bank, the Corporate Sector, etc.

Weak infrastructure – This is perhaps the most significant challenge that affects MNC’s operations on a day-

to-day basis and includes such factors as poor roads, inadequate airports and port facilities, and inconsistent and

relatively expensive power supply. The government is responding to this challenge with various measures, some

of which are described below, yet much still remains to be achieved

• Roads: The Golden Quadrilateral – a $12Billion, 4-6 lane highway project that will span the length and

breadth of the country, connecting the 4 major metros.

• Power: Deregulation of the power sector and unbundling of State Electricity Boards (SEB) into separate

transmission, generation and distribution units.

• Telecom: Privatisation of government-held companies, introduction of multiple technologies, and policy

focus on creating a competitive playing field.

• Airports and ports: Plans to upgrade, develop and corporatize major facilities.

Despite these challenges, many European MNCs have been successful in India - both in relation to other Indian companies in the same sector and benchmarked against their average global performance. These companies have recognized the tremendous potential India has to offer as a sizeable, growing market and a sourcing point for global competitive advantage, and view India as a business opportunity that they cannot afford to forego. EU companies already make up ~50% of all MNCs operating in India and a multitude of other EU companies are actively planning to enter the market.

Benchmarking Objectives and Methodology

The MNC benchmarking exercise presents members of the business community a set of actionable recommendations that can serve as guideposts when devising an India entry strategy or evaluating current India operations. The main question we attempted to answer is: What are the critical components that enable MNCs to become successful in India?

Methodology: Benchmarking included extensive desk research and detailed face-to-face interviews with senior executives from ~30 European based MNCs operating in India, representing 15 countries from across the EU. The companies were selected from a variety of industries as diverse as confectionary, industrial goods, power, and automobiles. Selected companies are those that have demonstrated a firm commitment to Indian operations; they vary in terms of length of presence in India or degree of success attained. The interviews were conducted by The Boston Consulting Group (BCG) and Confederation of Indian Industry (CII) working teams, together with functional and industry experts from BCG.

BENCHMARKING SCOPE SUMMARY

Key Topics/ Questions That Were Discussed During Interviews

View of India from What is the general perception of India at global MNCheadquarters Headquarters?

Key challenges What key challenges do MNCs face in India and how do

encountered They go about mitigating these?

Position of localWhat is the role and structure of local management atMNCs? How much autonomy does the India team have in

managementStrategic and operational issues?

LocalizationTo what extent are products/ business models localized

To Indian conditions? How is the decision made?

Leveraging India for How do MNCs best leverage other advantages offered byvalue-add

Indian presence beyond the domestic market opportunity?opportunities

OutlookWhat vision do MNCs have for their operations in India for

The next 5 years and how are they gearing up towards it?

Defining success for EU-based MNCs in India

Success in India may be defined along two dimensions:

Capturing the domestic market opportunity:

• These companies have been able to satisfy growth and profitability objectives in India by capturing the domestic market opportunity at large. They have positioned themselves as mass-market players in relation to their industries, often by localizing their operations in India. By virtue of their success, these companies have become key contributors to the global or regional setup in terms of market share, contribution to bottom line, or innovation.

Leveraging India’s resource base to derive additional value for the corporation:

• These companies have succeeded in adding value to their corporations by engaging in such activities as R&D, manufacturing, BPO and sourcing from India. For some companies, this has become a key competitive strength, differentiating them from global competition.

Company Examples

Benchmarked companies differed in their degree of success. The most successful companies were able to capture substantial market share through market-customized strategies, introduce industry altering innovations, exhibit strong financial performance, and also use India to derive additional value for their organizations. Some examples of such success stories follow:

SEVERAL MNCs SUCCESSFUL ALONG BOTH DIMENSIONS...

Company example Industry standing and industry ...strong performance ...and leveraging India for

altering innovations... indicators... global business

• Providing the full range of • Achieving 45%sales growth • Reached significant costbanking products in India; and 70% growth in consumer savings through BPOCreated special online banking • Expanding to serve the BPOofferings for Indian clients • See India as 4th major ‘home’ needs of other financial

market for the group institutions

• Cutting edge products and • 1,200 Cr. in sales in 2002 • First IT centre outside EU &USsolutions available in India • Over 20% revenue growth and in India

• 8 local manufacturing units and over 30% profitability • Significant export of products,countrywide marketing and enhancement in 2003 solutions and services fromservice presence • Top performing share price India

• The industry leader in the • ~650 Cr. in sales • Exporting both finished goodschocolates and confectionary • Holds a 70% value share of and innovative concepts tomarket the chocolate market Cadbury around the world

• Multiple innovations across • Achieved growth of ~30% inproducts, price and packaging both revenues and profitability

during the 90’s

• Introducing the latest telecom • Market share of 40% of • Project ‘Next Billion’:technologies to India connected subscribers on its Collaborating with Wipro to

• Transferred their full product systems develop infrastructure andrange enabling end to end • Supplied 50% of mobile services in India for mobilecommunication solutions network systems in India networks in emerging markets

across the globe

• Ranked as #1 pharma • Over 1,100Cr. sales and • Plans in place to develop Indiacompany in India 128Cr. profits in 2002 as R&D center, statistical &

• Built a superior sales force and • Gearing up for significant data management, sourcing fordistribution network – currently growth post 2005 raw materials, and clinical trialsused in joint marketingagreements

• Introducing superior engine • Turned operation around to • Plans to make India global hubtechnology, new 3 and 4 become profitable 1,5 years for 3 wheeler mfg, and thewheeler models, and after initiating independent launching pad for globalinnovative customized operations in India expansionsolutions to India • Planning components exports

to the EU

• New technology and design • Turnover of ~500Cr. • Have built an export businessexpertise introduced to India • Investing over 300Cr. in for both tractors and

• Developed special products expanding capacity to satisfy componentstailored to Indian market expected global demand • Plan to increase exports 6 foldrequirements to 6000 units in 3 yrs

• Created and grew segments in • Turnover of 350Cr.; growing • Exporting creative talent,the confectionary market from 30-40% annually innovation and ideasthe ground up (especially • India is one of the top • Local advertising is being useddeposited candy) performing units for in other markets

organization

Ten Tips for Success in India: A Framework

Achieving success in India ultimately pivots on having the right India business models in place. These business models are not prescribed. They are derived from the mechanisms that enabled them to develop, namely global management and local management processes. During the MNC benchmarking exercise we identified 10 key success factors for MNCs in India; these factors fall under the three categories as demonstrated below.

Reaching Category C (Localized product market business models) is the end-game achieved by most successful companies. Global management processes provide the global support and technology, Local management processes drive local autonomy and capability and both together work to allow localized business models, products and services to develop.

Section A: Commitment at the global level

India is a unique market that merits tailored global management processes. The more global management understood this and facilitated flexibility for the local operation, the higher was the degree of success attained.

Global processes are set by the global centre and form the framework within which the MNC can operate in India. These processes are instrumental in offering the right backup, support and technology to the country organization - helping it in conducting business and leveraging the international brand name in India. The centre’s perception of India and the position that it occupies on management’s agenda were factors found to influence the degree of success attained.

KSF#1 View India as a key focus area

Why is this important?

• …to direct appropriate resources towards India and ensure speedy and favourable decisions…

Successful organizations such as Swiss power & automation leader ABB, Swedish Telecom giant Ericsson, Spanish confectionary maker Joyco, Siemens from Germany, and others have been explicit about the importance of India to their global portfolio – drawing attention and resources to the India operation and ensuring high-level facilitation of major decisions.

India ‘country champions’ help bring India to the forefront of the global agenda. These are senior executives who have a deep understanding of the Indian environment and actively champion India related decisions. Since Indian operations are often times small contributors to Group revenues, this requires strong management vision and understanding of the opportunity at hand. Sponsors could be senior Indian managers who originated in the India system and progressed through the organization -as in the case of UK pharmaceutical major GlaxoSmithKline - or members of the management team who recognize the promise that India holds and are dedicated to ‘making it happen’. ABB, for example, has designated its two most senior global division heads to hold active positions on the India board. In addition to facilitating faster and friendlier decision making, these senior sponsors act as a credible source of information and expertise on the country and country operations. If located in country, senior sponsors are also responsible for ensuring that the right values and corporate culture are inculcated in the Indian arm of the organization.

Other ways by which successful MNCs raised the profile of India on their global agenda are by arranging high- level CEO visits to India to demonstrate their commitment internally and externally, or publicly recognizing the efforts and achievements of the India operation - as with German-Indian insurer Allianz-Bajaj, which highlighted the India CEO’s accomplishments at the corporation’s global forum.

SUCCESSFUL MNCS VIEW INDIA AS A KEY FOCUS AREADESPITE IT BEING A SMALL CONTRIBUTOR CURRENTLY

KSF#1 KSF#2

India is seen as an important market... ...supported by top driven aspirations

“We want to partner India into the future. With our strong Siemens aims to consolidate its presence as India’s idealand reliable local presence, we are the ideal partners for infrastructure partner - offer complete solutions for differentrealizing India’s needs in infrastructure development...we are market segments by combining multiple high-endcommitting to make new investments in India to the extent technologies, i.e. building complete hospitals, airports,of US $ 500 million in the years to come.” — Siemens railways or industrial units.

“We see huge potential in the market since this is where the Piaggio aims to make India a manufacturing and operationalgrowth is happening..We have overtaken Italy in 3 wheeler pad for expansion into the rest of the worldproduction” — Piaggio

“India is a fast emerging economy with low product penetration. Philips sees India as the next big thrust area for Philips Asia.The country is gaining recognition for its increasing pool of The Global board and India management team have jointlylocal knowledge and talent. India is increasingly taking charge set a revenue target of 1Billion Euro for India by 2007, withof its own future in the Convergence, Digital and Internet 250 Million Euro coming from exports

revolutions.” — Philips

KSF#2 Formulate bold, long-term targets that drive decision-making -

- why is this important?

• …to align the organization behind exhibited market potential and help circumvent short term hurdles…

Translating India-related plans to long-term measurable goals adds a visionary lens to all decisions related to future products, markets and investments. Successful companies that highlighted India’s importance on their global agenda often followed through by framing these as clear, important aspirations (see above diagram).

Long-term targets and aspirations also help influence how management thinks about the business in the short to medium term. For example, UK confectioner Cadbury links these targets back into the management process of targeting and monitoring and uses them to form a baseline for discussions with the regional and global teams. Piaggio cascaded long-term country level targets into the business, translating them into such objectives as focusing on increasing the quality of engines, or speeding up the supply chain for components. Other companies may link long-term targets to more conventional top-line revenue or profitability metrics.

In contrast, companies that adopted short-term globally standardized targets in India, often found themselves ‘justifying’ their inability to meet these due to price pressures, intense local based competition in the market, or policy and regulation.

KSF#3 Create processes that accelerate the integration as well as the localization of the organization


• …helps find the right balance of autonomy allotted to the local team and aligns organizational objectives in India…

One challenge faced by MNCs is that global management’s perspective about the challenges and the opportunities in India is often quite different from the reality on the ground – leading to differing views on the appropriate business model for India. Situations may arise where the local team feels that they neither have the autonomy to run the local business as needed, nor do they have the support from the global management in terms of taking India-relevant decisions. This can lead to an increasing communication gap as well as lack of mutual faith and credibility.One way by which benchmarked companies have been able to create a deeper understanding of the Indian environment and align organizational objectives, is by encouraging frequent and high level interaction between the global and local teams, at various levels of the organization.

KSF#3

LATERAL FLOWS SPEED INTEGRATION AND

FACILITATE LOCALIZATION

Constant two way interaction tobuild a common thought platform

Local team• Local team understands global

Global teamstandards and practices• Global team understands local

challenges and the need for ‘smart’ localization

Possible interaction

Personnel transfersFormation of focus Global conferences

Personal CEO visitsgroups and workshops

E.g. Wartsila* arranging formal India-Finland personnel transfers at both mid management and engineer level• Streamlining communications and creating organizational alignment • Forming working level relationships which facilitate ongoing work • Creating mutual understanding of the systems, constraints and tradeoffs for each group

** Wartsila is the world’s leading ship power supplier, and a leading provider of decentralized power generation solutions

KSF#4 “Change the rules” regarding global metrics and standards to meet market challenges


• …allows fine-tuning of metrics to fit with Indian market realities and sets the organization to take full advantage of India opportunity…

Successful MNCs have worked the unique characteristics of the Indian environment into their target-setting process. For some companies in heavily regulated industries, e.g. Oil and Gas, Pharmaceuticals, and Financial Services, this has been especially important. Setting unique India targets with a long-term horizon in view has helped them focus on establishing market presence, gain market share and capture future growth prospects.

KSF#4

SUCCESSFUL MNCs FINE-TUNING GLOBAL METRICSTO SUIT INDIAN ENVIRONMENT

Company Metrics used Implication for India

Sets targets within the context of India Management able to create the rightmarket challenges product-price proposition• Understanding that high • Investment in distribution network

penetration will compensate for and product localizationreduced margins

Hindustan Lever

Adopts standard global product margin and profitability metrics• But Indian team given longer

timeframe to reach global benchmark

Defines metrics that highlight operating

efficiencies as much as topline growth

• Understanding constraints of price

sensitive environment

Allowed investment in robust distribution network• Currently leveraged for joint

marketing agreements; will be a key driver for growth post 2005

Allows investment in market penetration and reach while driving efficiencies• HLL known as most successful in

rural penetration

Section B: Empowered Local Management

Performance in India will ultimately depend on the capabilities and drive of the local team. Companies that we interviewed had long recognized this and worked towards establishing a highly capable local team that is empowered to take decisions. As part of this process, organizations have gradually transferred responsibility to the country management often to the point where they have full autonomy within a budget. In doing so, companies have leveraged the excellent management and technical talent available in India, and formulated HR policies that are a mix of global policy (often demonstrating a feeling of belonging to a global organization), and local processes that cater to the needs of Indian employees. These teams are often taking the lead in shaping company strategy, and have become a core contributor to the company’s ultimate success.

KSF#5 Build for the long-term in India regarding people, HR practices and external stakeholders


• …more cost effective, enhances continuity, and leverages understanding of local environment…

Benchmarked companies mentioned three main reasons for investing resources in a high-quality local team:

KSF#5CREATING A HIGH QUALITY LOCAL TEAM CONSIDERED

EXTREMELY IMPORTANT BY ALL MNCs

Cost effectiveness and Capability to manage local Suitability for business modelbusiness continuity operations innovation and localization

• Expatriate manager costs are • Externally, local managers are • Local teams have a deepersignificantly higher than locally more effective at managing understanding of theavailable talent supplier relationships, environment and the Indian

distributors and other consumers’ tastes andintermediaries preferences

• High expatriate mobility may • Internally, local teams are • Local managers are oftenlead to a discontinuity in usually more effective at better positioned to designstrategy managing the local workforce products and business models

(either unionized on non tailored to the Indian market

unionized)• “Headquarters provides us

• “The engineering and • Cadbury, HLL, ABB, GSK, with the required support andmanagement talent available Piaggio all cited having an advice, but you need a 100%in India is world class and predominantly Indian local team to execute – theycosts less” - Wartsila management team a key know the environment best” -

contributor to success Piaggio

In forming local teams, companies have committed significant resources to recruiting and especially retaining highly capable people. Some processes that have contributed to building successful teams are mentioned below:

MNCs ADOPTING SOME KEY HR PROCESSES TOKSF#5

BUILD A STRONG LOCAL TEAMStrong recruiting processes Continuous investment in relevant training

Carefully selected educational institutions E.g. Large investments in entry-level training as wellIndian IIM and IIT schools as management development programs

• Top management involvement in the - Allianz-Bajaj investing in an in-houseprocess management training program for a new

• Well defined criteria for evaluationgeneration of managers

Companies also creating uniformity and a- HLL recruits at top schools and has asense of belonging to the global organizationrigorous interview process which includes

applicant values and integrity assessment - Barco*, has created a global innovationcompetition designed to enhanceintegration

Well-designed performance management Career progression avenues for highsystem potential employees

• Systems to ensure that evaluation criteria This factor was singled out as a keydifferentiator in India

is aligned with business imperatives- Indian employees tie social status to career

• High level of involvement from senior progression, and are thus highly motivatedto progress.management in defining both ‘hard’ and

- May differ from Europe, where employees‘soft’ performance criteria

may retain a particular position as a career

and lifestyle choice

*Barco is a Belgian Company known as a world leader in imaging technology

Philips Software Centre and STMicroelectronics have both been recognized as one of the top employers in India

“Philips India is recognised as one of the most respected companies and as one of the best employers. It plans to generate another 1000 jobs in the next 5 years in knowledge work and at least as many more indirect jobs in the supply chain.” - Philips

“Our recognition as a one of the Best Employers vindicates our strong belief in our people and practices. It is also a sign of ST India maturing as a world-class organization.”- STMicroelectronics

KSF#6 Define a value added role for country management


• …motivates local team to perform and facilitates transfer of responsibility…

Multiple business-unit organizations operating in India may have a need for an activist country management role, while this may not be the norm for the organization in other countries of operation. The main reasons behind this are: lack of scale in individual business units for the India business, similarity in some part of the value chain which may not exist in other countries (e.g. supply chain, distribution channel), and commonality of important overall issues (e.g. regulatory affairs) across business units.

Additionally, as companies progress from being ‘executers’ of global strategy in India to assuming a higher degree of autonomy and decision making power, they have found it important to broaden the role of local

management to oversee multiple areas of responsibility. Some specific areas of responsibility may be identifying and leveraging cross-divisional synergies, identifying opportunities for new businesses in India, assuming responsibility for building a country level brand, and building and managing relationships with external stakeholders. These stimulate frequent working level interaction with the global organization and facilitate the gradual transfer of control to the country organization.

KSF#7 Establish local team credibility


• …provides the local team the required business flexibility and smoothens the strategic decision making process…

Having a credible local team in place is a key requirement for success. A high level of trust is essential for decision rights to flow through and localization to take place. Beyond the processes that relate to the formation of the local team, which to a large extent lie with global management, companies voiced their opinion that establishing credibility was in the hands of the local management team itself. We identified three ways in which local management created credibility:

CREDIBILITY OF LOCAL TEAM ACHIEVED THROUGH

THREE KEY FACTORSKSF#7

“Here in India we insistedthat we will absolutely not

Innovation/ knowledge deviate from global safety

Results norms or use ‘fast money’.transfer...meeting and exceeding ...demonstrating the

This has bought us credibilityat HQ and given us a chance

financial targets ability to devise soundto shape our industry”innovative business models• Lafarge cementthat adapt to local

challenges

STMicro moved fromproject execution to end-

Standardsto-end management by “Bank-Cafe, Kiosk and..demonstrating commitmentsurpassing expectations doorstep delivery of

in terms of quality, banking services are all by staying within thereliability, and cost boundaries of the overallconcepts that sprung up• STMicroelectorincs corporate standards whilein India and are now

being looked at globally” adapting to local needs

• ABN Amro

As witnessed through KSF # 5-7, having a capable and empowered local team in place is imperative for success. The diagram below demonstrates the gradual transfer of decision-making rights to the local team.

SUCCESSFUL MNCs GRADUALLY TRANSITIONED DECISION POWERTO THE COUNTRY OPERATION

Invest in theReducing

Limited independence for local team;all decisions approved by globalformation of

day to day managementa highquality role of

local team global Freedom in local operational decisionmaking

team • E.g. Independence over advertisingand promotion strategy

Define avalue T

ime

Freedom to invest in localizing certainadded role aspect of manufacturingfor country • E.g. Sub assembly, procure certainmanagement components locally, or enter into

supplier agreements

Freedom to innovate on and introducenew products

Establish• E.g. Setting up manufacturing and

distribution networkslocal teamcredibility

...Complete operational freedom within

approved budget

KSF#8 Leverage India opportunities beyond the product/market


• …draws attention to the India organization, derives value for global organization, and gains

competitive advantage…

Off-shoring opportunities are a key point of focus for MNCs operating in India today. In fact, all the MNCs that we benchmarked are either actively involved in using India for value added activities outside of the domestic market opportunity or are in the process of evaluating such opportunities. Their ability to contribute to their global operations in this regard was highly appreciated by their headquarters and increased the stature of the India organization.

Some key hurdles faced by companies included global level concerns related to IP protection, quality and reliability of domestic suppliers, or political complexity associated with job loss in Europe. To overcome these, many successful companies took a small step approach, demonstrating the benefits from outsourcing a limited piece of the value chain and then expanding the scope of outsourcing – for example, starting by handling IT operations for another country organization, demonstrating the savings and then moving to handle another country or region. Again, arranging for personal visits by company executives to India to witness first hand the capabilities of the India organization and the opportunities available in the country were important in facilitating the off-shoring process.

KSF#8MNCs ARE LEVERAGING FOUR MAIN OPPORTUNITIES

BEYOND THE PRODUCT/ MARKET

Research and Development

• Significant cost savings and product development breakthroughs achieved

• Most benchmarked MNCs operating R&D centers have significant expansion plans - Transferring greater components of the R&D

value chain to India - Expanding scope to worldwide R&D

Software development/ Engineering

• Software activities include both embedded software for the global product range and application design

• MNCs have added significant value to their organizations, both through savings on software development and important contributions to IP

Shared services/ BPO Manufacturing and sourcing

• MNCs are realizing significant efficiencies by • Successful MNCs are leveraging localshifting a host of support functions to India manufacturing towards global advantage

- These include back office operations such as - Including components, sub-assemblies, and fulltransaction processing, customer interface products that cater to the domestic and export

management, and IT support services. market

- Leading companies are integrating India intoglobal platforms, in areas where India has

strongest competitive advantage

KSF#8

...AND REALIZING SIGNIFICANT GAINS IN ALL AREAS

R&D Software dev./ Engineering Shared services/ BPO Sourcing/ Manufacturing

Astra Zeneca Philips planning to ABN Amro BPO Grundfos earmark-expand software,conducting cutting center services ing 70% of

edge R&D as well product dev & entire global production fromresearch fromas discovery work operation and Chennai facility for

1000 to 2500 seatsin India other banks export

by 2007

Glaxo SmithklineSTMicroelectronics Siemens

planning to expand Allianz Bajaj does IT proposing to makesetting up both 1000 seat Noida servicing for some India aclinical trial and software dev Asian countries, manufacturing hubresearch in India facility to 1500 looking to expand for medical

systems

SKF Bearings hasWartsila is ABB supplying

leveraging cost Bayer setting up worldwide demandset up an R&D advantage and India shared for certain power

unit for 2 wheelers project services structure products*

in Bangalore competency to to drive efficiencies exclusively from

service group India

* High voltage circuit breakers above 72,5 KV; medium voltage outdoor circuit breakers, magnetic actuators

Section C: Localized product/market business models

Creating the right product/market business models for India is perhaps the most critical, and the most challenging success enabler. While global and local processes can create the platform from which to launch these models, the company’s long-term success and sustainability depends on its ability to design its business model in response to unique challenges and opportunities raised by the market. This makes it imperative to have clear and directed strategies, through the two remaining success factors.

KSF # 9 Localize parts of the value chain to obtain Indian costs and capability benefits


• …builds competitive advantage by achieving effective cost structure, maintaining quality standards,

and leveraging the effects of scale…

MNCs in India are faced with stiff competition from local players, often with an entirely localized setup. To compete effectively, it is important to set up an effective cost and operating structure involving various degrees of localization in parts of the value chain. Some factors that may affect localization decisions are mentioned below:

a. Labour/capital trade-off: India’s large labour surplus, which is expected to grow even further in the future, results in comparatively low wages. Companies have considered this factor in their localization equation and transferred labour-intensive processes to India. Lafarge, for example, clearly demonstrated that the standard global IT system is not economical given the cost of Indian IT experts. Instead, it designed its own IT system at a reduced cost – with acceptance by the head office.

b. Brand recognition: Some companies have chosen to import critical components and manufacture other parts locally, in order to leverage high European quality levels and brand recognition. Wartsila, for instance, imports diesel high capacity engines from European suppliers who have developed their capabilities over a decade and manufactures less critical parts in India.

c. Cost structure: In the early days of its joint venture, Joyco set up its operation using common European cost allocations and imported machinery that was more expensive than locally available machinery. Joyco has since identified and developed capable local suppliers and has indigenized its cost structure, enabling the company to compete successfully with local players.

d. Global platforms and scale: As companies are becoming more sophisticated in the use of global platforms, they are increasingly using a mixed localization strategy. AVL, for example, found it most economical to import most of its electronic components from vendors with which it has global contracts, while manufacturing mechanical components in India, and assembling the final product locally.

e· Regulation: State government incentives may prompt companies to localize parts of the value chain such as manufacturing or R&D. Certain states in India are known to provide various incentive schemes which may include tax holidays, free rent or use of utilities for setting up operations in a particular area – which have encouraged MNCs to set up operations in the area.

1 A surplus of 47Million people in the working age group is expected in yr. 2020

KSF # 10 Formulate India-specific business model strategies (product, value, pricing)


• … delivers the right product at the right price with right positioning for India…

This final key success factor is perhaps the most important. Companies recounted time and again that it was not enough to merely replicate in India business models that have been successful in Europe and elsewhere in the world. The following graphic illustrates some of the market challenges that are unique to India, and some of the principles that successful companies use to help tackle them.

Core challenge Explanation Mitigation principle

Distinct tastes and...product propositionhabits from rest of India has 336 tribes, 18tailored to the uniqueworld & variations languages, 1600 dialects

target segmentwithin India

Large variation inBoth a niche super rich class ...an appropriate

and an average income 1/10th of value-price offeringpaying capacity

OECD countries for each segment

Dispersed~650,000 villages; ~70%

...cost effectivepopulation; population in rural Indiafragmented retail reach

~ 6 million retail outletschannel

Infrastructure~ 50% villages not connected by

...innovative supplyall weather roads; Large number

challenges chainsof supply chain intermediaries

a. Tailored Product Proposition: As Indian tastes and habits are distinct from the rest of the world and varyfrom region to region, many companies have found the need to alter their international product to suit localtastes and conditions. Successful companies derive ideas for customization from a deep understanding of theneeds of the segment being targeted.

KSF#10 SUCCESSFUL MNCs TAILORING PRODUCTS TO SUIT

INDIAN ENVIRONMENT

Cadbury has a successful product Tailored products vary from minor

innovation model in place localization to complete innovation

Degree of Company examplecustomizationConsumer Innovation

insight cell cell

AVL built emissions detectors that

Consumer cell Identifies the customer segmentscan operate under extreme heat

and dusty conditionsand their needs, and tests products designed by

R&DGrundfos built pumps that can

- “We discovered that peanuts in India are lesswork under adverse power

conditions, such as those indesirable – almonds on the other hand arecertain parts of India

much more attractive to consumers”

Renault-ITL developed smallerInnovation cell develops the right features given

low-mid HP tractors designed tomarket conditions and the customer’s price-valuefit the Indian farmer’s plot size

trade-off

Perfetti entered a completely new- “A European chocolate would not survive the

product category, building theconditions, we formulated more resilient

deposited candy segmentfromchocolates that do not melt easily”

ground up

b. Appropriate Value/ Price Offering: India is a country of widely dispersed income distribution, containing both a small but substantial affluent class and a vast population with an average disposable income that is

1/10th that of OECD countries.

Successful companies have understood that India is not just about cheap products but providing the right value proposition, and have thus been able to find success across various price points. Companies catering to the mass market, such as HLL, have employed breakthrough efficiencies that enable them to break the price barrier and supply high quality goods at affordable prices. Philips has used this logic to cut the price of its acclaimed Compact Fluorescent Lamps sold in India from Rs. 600 to Rs. 140. On the niche side of the spectrum, Skoda has recently entered the high-end motor market in response to market demand, competing with the likes of Mercedes, and positioning cars in the super luxury category at a price of Euro 50,000.

c. Cost effective reach: India’s geographic size, dispersed population and fragmented retail channel pose a

significant challenge for companies to reach their target customers in a cost effective way.

SEVERAL EXAMPLES OF COMPANIES EMPLOYINGINNOVATIVE DISTRIBUTION STRATEGIES

Companies employing innovative distribution...focusing on cost effectiveness and reach

strategies...

Cadbury’s rural/ semi urban horse drivenPartnerships often used to drive more scalethrough the channel

kiosks increase reach•

Allianz-Bajaj partnering with banks,

hospitals, travel agents and others todistribute insurance products

• GSK is leveraging its channel to form jointdistribution agreements with bothpharmaceutical and consumer goodsplayers

• Swedish SKF bearings is partnering withauto components company to increaseproduct visibility in rural areas

• Danfoss, Denmark’s largest industrialGroup, has developed a network ofreferences and third party consultants toincrease the reach of its energy savingproducts

d. Innovative supply chains: Infrastructure challenges and a large number of supply chain intermediaries place pressure on the supply chain both in terms of cost and consistency. MNCs that have localized their supply chain have often also developed strong links with their suppliers by investing resources in improving their processes and technology and thus growing their business. Piaggio, for example, has localized 100% of its 3-wheeler product in India so that it could compete effectively. It worked hand-in-hand with multiple Indian suppliers to raise their quality and reliability levels - by training them and transferring technology. In order to provide a world-class product, Piaggio prompted Lombardini, a reputed Italian engine manufacturer, to set up operations close to Piaggio’s facility in Pune. This resulted in a highly successful relationship and a win for Lombardini – that was then also able to leverage India for its own worldwide operations.

* * *

Companies have followed many different paths to build and follow the key success factors mentioned in this document. Our benchmarking exercise has revealed that it is important to have the majority of these 10 success factors in place (and not merely one or two) in order to unlock some of the remarkable potential available in India, both in the domestic market as well as for other value added activities.

We hope that this document will serve as a useful tool in assessing your own company’s strategy and performance in India.

The attached Appendix provides a profile of the benchmarked companies together with specific examples of how they have used global processes, local processes, and customized product/market business models to succeed in India.

HOW WELL IS YOUR COMPANY PERFORMINGAGAINST THE 10 KSFs?

10 Key Tips for Success in India

1. View India as a key focus area

2. Formulate bold, long term targets that drive decision making

3. Create processes that accelerate the integration as well as localisation of organisation

4. “Change the rules” regarding global metrics, standards to meet market challenges

5. Build for the long term in India regarding people, HR practices and relationship with external stakeholders

6. Define a value-added role for the country management

7. Establish local team credibility

8. Leverage India opportunities beyond the product market

9. Localise the value chain, based on scale and complexity trade-offs

10. Formulate India-specific business model strategies (product, value, pricing)

1 established that its localized product of the same quality could be at 30-40ared to Europe

Executive Summary

The Indian market is essential for European Union (EU) companies• Large and growing domestic market; increasing purchasing power and consumerism. • Provides opportunities for competitive advantage (low cost sourcing of products and services; exceptional

quality; intellectual skills; etc).

EU companies are already taking advantage of India• The EU is one of India’s largest sources of FDI and trade. • EU companies comprise 50% of all Multi National Corporations (MNCs) in India.

• Many see India as key to their long-term global growth and competitive advantage.

Investments in India are yielding returns• Companies have begun to capture local market opportunities (especially in niches). • Many are also sourcing from India (resulting in lower costs and higher productivity).

• Some are even more successful than their global operations.

But the road hasn’t been easy, and companies faced several challenges• Bureaucratic hurdles and government processes resulting in a difficult operating environment. • Low average disposable income, a highly dispersed population and distinct tastes from the rest of the world.

• Weak infrastructure in terms of roads, power, telecom, and port facilities.

To guide your company, this report presents 10 factors that companies have used to become successful in India. These have been identified based on benchmarking successful EU MNCs operating in India

• Success factors fall under three categories:

A. Commitment at the global level; provide global support and technology; B.

Empowered local management; develop local team autonomy and capability;

C. Localized Product/Market Business Models: create customized products and services in response to the unique environment in India.

• Most companies have implemented the majority of the success factors, and not just one or two.

Successful companies differ from less successful players in their ability to rapidly adapt their business models for India• Most companies recognize the need for local adaptation. • However, implementation is more difficult than it seems – it requires a deep customer understanding and

building scale in India while managing complexity. • Three key areas require adaptation (in additional to several others) – a strong product value proposition,

“smart” localization of manufacturing, and robust supply chains.

Successful companies view India as a long-term play, not a short-term turn• Success in India did not happen overnight. • Success requires commitment, management drive, and focus on long-term objectives for India in the global

portfolio.

how mnc companies can be successful in india

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