How Eu Companies Can Be Successful in India
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Transcript of How Eu Companies Can Be Successful in India
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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; exceptionalquality; intellectual skills; etc).
EU companies are already taking advantage of India
The EU is one of Indias 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 hasnt 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.
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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
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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 China1.
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 2025.2
A. The domestic market opportunity
Indias vast population is increasing its purchasing power
While ~50% of the population was classified in the low-income bracket3 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.4
B. The offshoring opportunity
India accounts for roughly 65% of the global offshoring market and is expected to grow at 50-60% perannum for the next 5 years
Offshoring provides a fast growing and increasingly important opportunity for MNCs. It is mainly derived
from Indias 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 Indias human capital extend beyond cost
Many MNCs are seeking India for the superior management and technical talent base that it offers. Over100 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.
1 Among economies larger than $125Billion2 Goldman Sachs Dreaming with BRICS the path to 2050"3 Per annum income of less than 450 Euro4 Indias median population age is below 24 as compared with EU and US population at over 35.
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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 Indianpopulation 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 MNCs 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.
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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.
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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
What vision do MNCs have for their operations in India for
the next 5 years and how are they gearing up towards it?Outlook
Leveraging India forvalue-add
opportunities
How do MNCs best leverage other advantages offered by
Indian presence beyond the domestic market opportunity?
To what extent are products/ business models localized
to Indian conditions? How is the decision made?Localization
What is the role and structure of local management at
MNCs? How much autonomy does the India team have in
strategic and operational issues?
Position of local
management
What key challenges do MNCs face in India and how do
they go about mitigating these?Key challenges
encountered
What is the general perception of India at global MNC
headquarters?
View of India from
headquarters
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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 thedomestic 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 Indias 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.
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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:
Industry standing and industry
altering innovations...
Providing the full range ofbanking products in India;Created special onlineofferings for Indian clients
Cutting edge products andsolutions available in India
8 local manufacturing units andcountrywide marketing andservice presence
The industry leader in thechocolates and confectionarymarket
Multiple innovations acrossproducts, price and packaging
Introducing the latest telecomtechnologies to India
Transferred their full productrange enabling end to end
communication solutions
Ranked as #1 pharmacompany in India
Built a superior sales force anddistribution network currentlyused in joint marketingagreements
Introducing superior enginetechnology, new 3 and 4wheeler models, andinnovative customizedsolutions to India
New technology and designexpertise introduced to India
Developed special productstailored to Indian marketrequirements
Created and grew segments inthe confectionary market fromthe ground up (especiallydeposited candy)
...strong performance
indicators...
Achieving 45% sales growthand 70% growth in consumerbanking
See India as 4th major homemarket for the group
1,200 Cr. in sales in 2002 Over 20% revenue growth and
over 30% profitabilityenhancement in 2003
Top performing share price
~650 Cr. in sales Holds a 70% value share of
the chocolate market Achieved growth of ~30% in
both revenues and profitabilityduring the 90s
Market share of 40% of connected subscribers on itssystems
Suppl ied 50% of mobile
network systems in India
Over 1,100Cr. sales and128Cr. profits in 2002
Gearing up for signif icantgrowth post 2005
Turned operation around tobecome profitable 1,5 yearsafter initiating independentoperations in India
Turnover of ~500Cr. Investing over 300Cr. in
expanding capacity to satisfyexpected global demand
Turnover of 350Cr.; growing30-40% annually
India is one of the topperforming units fororganization
...and leveraging India for
global business
Reached s ignif icant costsavings through BPO
Expanding to serve the BPOneeds of other financialinstitutions
First IT centre outside EU &USin India
Significant export of products,solutions and services fromIndia
Exporting both finished goodsand innovative concepts toCadbury around the world
Project Next Bi l lion :Collaborating with Wipro todevelop infrastructure andservices in India for mobile
networks in emerging marketsacross the globe
Plans in place to develop Indiaas R&D center, statistical &data management, sourcing forraw materials, and clinical trials
Plans to make India global hubfor 3 wheeler mfg, and thelaunching pad for globalexpansion
Planning components exportsto the EU
Have built an export businessfor both tractors andcomponents
Plan to increase exports 6 foldto 6000 units in 3 yrs
Export ing creative talent,innovation and ideas
Local advertising is being usedin other markets
Company example
SEVERAL MNCs SUCCESSFUL ALONG BOTH DIMENSIONS...
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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 andservices to develop.
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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
centres perception of India and the position that it occupies on managements 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 theIndia 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 highlightedthe India CEOs accomplishments at the corporations global forum.
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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 Indias 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
Why is this important?
helps find the right balance of autonomy allotted to the local team and aligns organizational objectivesin India
One challenge faced by MNCs is that global managements 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.
SUCCESSFUL MNCS VIEW INDIA AS A KEY FOCUS AREA
DESPITE IT BEING A SMALL CONTRIBUTOR CURRENTLY
We want to partner India into the future. With our strongand reliable local presence, we are the ideal partners forrealizing Indias needs in infrastructure development...we arecommitting to make new investments in India to the extentof US $ 500 million in the years to come. Siemens
We see huge potential in the market since this is where thegrowth is happening..We have overtaken Italy in 3 wheelerproduction Piaggio
India is a fast emerging economy with low product penetration.The country is gaining recognition for its increasing pool oflocal knowledge and talent. India is increasingly taking chargeof its own future in the Convergence, Digital and Internetrevolutions. Philips
India is seen as an important market...KSF
#1
Siemens aims to consolidate its presence as Indias idealinfrastructure partner - offer complete solutions for differentmarket segments by combining multiple high-endtechnologies, i.e. building complete hospitals, airports,railways or industrial units.
Piaggio aims to make India a manufacturing and operationalpad for expansion into the rest of the world
Philips sees India as the next big thrust area for Philips Asia.The Global board and India management team have jointlyset a revenue target of 1Billion Euro for India by 2007, with250 Million Euro coming from exports
...supported by top driven aspirationsKSF
#2
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KSF#4 Change the rules regarding global metrics and standards to meet market challenges
Why is this important?
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 hashelped them focus on establishing market presence, gain market share and capture future growth prospects.
LATERAL FLOWS SPEED INTEGRATION AND
FACILITATE LOCALIZATION
* Wartsila is the worlds leading ship power supplier, and a leading provider of decentralized power generation solutions
Constant two way interaction to
build a common thought platform
Local team understands globalstandards and practices
Global team understands localchallenges and the need for
smart localization
Local team Global team
Possible interaction
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
KSF#3
Personnel transfersFormation of focus
groupsGlobal conferences
and workshopsPersonal CEO visits
SUCCESSFUL MNCs FINE-TUNING GLOBAL METRICS
TO SUIT INDIAN ENVIRONMENTKSF
#4
Company Metrics used Implication for India
Sets targets within the context of Indiamarket challenges
Understanding that h ighpenetration will compensate forreduced margins
Management able to create the rightproduct-price proposition Investment in distribution network
and product localization
Adopts standard global product marginand profitability metrics
But Indian team given longertimeframe to reach globalbenchmark
Al lowed investment in robustdistribution network Cur rent ly leveraged for joint
marketing agreements; will be akey driver for growth post 2005
Hindustan Lever
Defines metrics that highlight operatingefficiencies as much as topline growth
Understanding constraints of pricesensitive environment
Al lows investment in marketpenetration and reach while drivingefficiencies HLL known as most successful in
rural penetration
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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 companys ultimate success.
KSF#5 Build for the long-term in India regarding people, HR practices and external stakeholders
Why is this important?
more cost effective, enhances continuity, and leverages understanding of local environmentBenchmarked companies mentioned three main reasons for investing resources in a high-quality local team:
CREATING A HIGH QUALITY LOCAL TEAM CONSIDERED
EXTREMELY IMPORTANT BY ALL MNCsKSF
#5
Externally, local managers aremore effective at managing
supplier relationships,distributors and otherintermediaries
Internally, local teams areusually more effective atmanaging the local workforce(either unionized on nonunionized)
Cadbury, HLL, ABB, GSK,Piaggio all cited having anpredominantly Indianmanagement team a key
contributor to success
Local teams have a deeperunderstanding of the
environment and the Indianconsumers tastes andpreferences
Local managers are oftenbetter positioned to designproducts and business modelstailored to the Indian market
Headquarters provides uswith the required support andadvice, but you need a 100%local team to execute theyknow the environment best -
Piaggio
Capability to manage local
operations
Expatriate manager costs aresignificantly higher than locally
available talent
High expatriate mobility maylead to a discontinuity instrategy
The engineering andmanagement talent availablein India is world class andcosts less - Wartsila
Cost effectiveness and
business continuity
Suitability for business model
innovation and localization
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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:
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
Why is this important?
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
MNCs ADOPTING SOME KEY HR PROCESSES TO
BUILD A STRONG LOCAL TEAMKSF
#5
Strong recruiting processes
Carefully selected educational institutions E.g.Indian IIM and IIT schools
Top management involvement in theprocess
Well defined criteria for evaluation
- HLL recruits at top schools and has arigorous interview process which includesapplicant values and integrity assessment
Continuous investment in relevant training
Large investments in entry-level training as wellas management development programs
- Allianz-Bajaj investing in an in-housemanagement training program for a newgeneration of managers
Companies also creating uniformity and asense of belonging to the global organization
- Barco*, has created a global innovationcompetit ion designed to enhance
integration
Well-designed performance management
system
Systems to ensure that evaluation criteriais aligned with business imperatives
High level of involvement from seniormanagement in defining both hard andsoft performance criteria
Career progression avenues for high
potential employees
This factor was singled out as a keydifferentiator in India- Indian employees tie social status to career
progression, and are thus highly motivatedto progress.
- May differ from Europe, where employeesmay retain a particular position as a careerand lifestyle choice
*Barco is a Belgian Company known as a world leader in imaging technology
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Standards
..demonstrating commitmentby staying within the
boundaries of the overallcorporate standards whileadapting to local needs
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
Why is this important?
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 FACTORS
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.
KSF#7
Results
...meeting and exceedingfinancial targets
STMicro moved fromproject execution to end-to-end management bysurpassing expectationsin terms of quality,reliability, and cost STMicroelectorincs
Innovation/ knowledge
transfer
...demonstrating theability to devise sound
innovative business models
that adapt to localchallenges
Here in India we insistedthat we will absolutely notdeviate from global safetynorms or use fast money.This has bought us credibilityat HQ and given us a chanceto shape our industry Lafarge cement
Bank-Cafe, Kiosk anddoorstep delivery ofbanking services are allconcepts that sprung upin India and are nowbeing looked at globally ABN Amro
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KSF#8 Leverage India opportunities beyond the product/market
Why is this important?
draws attention to the India organization, derives value for global organization, and gains competitive
advantage
Offshoring 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 forpersonalvisits 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 offshoring process.
SUCCESSFUL MNCs GRADUALLY TRANSITIONED DECISION POWER
TO THE COUNTRY OPERATION
Time
Freedom to innovate on and introduce
new products
E.g. Setting up manufacturing and
distribution networks
Freedom to invest in localizing certain
aspect of manufacturing
E.g. Sub assembly, procure certain
components locally, or enter into
supplier agreements
Freedom in local operational decision
making
E.g. Independence over advertising
and promotion strategy
Limited independence for local team;
all decisions approved by global
management
...Complete operational freedom within
approved budget
Increasing
decision
rights for
local team
Reducing
day to day
role of
global
team
Invest in the
formation of
a high
quality
local team
Define a
value
added role
for country
management
Establish
local team
credibility
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KSF#8 MNCs ARE LEVERAGING FOUR MAIN OPPORTUNITIES
BEYOND THE PRODUCT/ MARKET
Software development/ Engineering
Software activities include both embeddedsoftware for the global product range andapplication design
MNCs have added significant value to theirorganizations, both through savings on softwaredevelopment and important contributions to IP
Research and Development
Significant cost savings and product developmentbreakthroughs achieved
Most benchmarked MNCs operating R&D centershave significant expansion plans
- Transferring greater components of the R&Dvalue chain to India
- Expanding scope to worldwide R&D
Shared services/ BPO
MNCs are realizing significant efficiencies byshifting a host of support functions to India
- These include back office operations such as
transaction processing, customer interfacemanagement, and IT support services.
Manufacturing and sourcing
Successful MNCs are leveraging localmanufacturing towards global advantage
- Including components, sub-assemblies, and full
products that cater to the domestic and exportmarket
- Leading companies are integrating India intoglobal platforms, in areas where India hasstrongest competitive advantage
* High voltage circuit breakers above 72,5 KV; medium voltage outdoor circuit breakers, magnetic actuators
...AND REALIZING SIGNIFICANT GAINS IN ALL AREAS
Astra Zeneca
conducting cutting
edge R&D as well
as discovery work
in India
Philips planning to
expand software,
product dev &
research from
1000 to 2500 seats
by 2007
ABN Amro BPO
center services
entire global
operation and
other banks
Grundfos earmark-
ing 70% of
production from
Chennai facility for
export
STMicroelectronics
planning to expand
1000 seat Noida
software dev
facility to 1500
Glaxo Smithkline
setting up both
clinical trial and
research in India
SKF Bearings has
set up an R&D
unit for 2 wheelers
in Bangalore
Wartsila is
leveraging cost
advantage and
project
competency to
service group
Bayer setting up
India shared
services structure
to drive efficiencies
ABB supplying
worldwide demand
for certain power
products*
exclusively from
India
Allianz Bajaj does IT
servicing for some
Asian countries,
looking to expand
Siemens
proposing to make
India a
manufacturing hub
for medical
systems
R&D Software dev./ Engineering Shared services/ BPO Sourcing/ Manufacturing
KSF#8
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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 companys 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
Why is this important?
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 degreesof localization in parts of the value chain. Some factors that may affect localization decisions are mentioned
below:
a. Labour/capital trade-off: Indias large labour surplus, which is expected to grow even further in the future,1
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 adecade 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
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KSF # 10 Formulate India-specific business model strategies (product, value, pricing)
Why is this important?
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 wasnot 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.
Infrastructure
challenges
Distinct tastes and
habits from rest ofworld & variations
within India
Large variation in
paying capacity
Dispersed
population;
fragmented retail
channel
~ 50% villages not connected by
all weather roads; Large number
of supply chain intermediaries
India has 336 tribes, 18languages, 1600 dialects
...product proposition
tailored to the unique
target segment
...an appropriate
value-price offering
for each segment
...cost effective
reach
...innovative supply
chains
~650,000 villages; ~70%
population in rural India
~ 6 million retail outlets
Both a niche super rich class
and an average income 1/10th of
OECD countries
Core challenge Explanation Mitigation principle
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a. Tailored Product Proposition: As Indian tastes and habits are distinct from the rest of the world and vary
from region to region, many companies have found the need to alter their international product to suit local
tastes and conditions. Successful companies derive ideas for customisation from a deep understanding of the
needs of the segment being targeted.
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.
SUCCESSFUL MNCs TAILORING PRODUCTS TO SUITINDIAN ENVIRONMENT
Consumer cell Identifies the customer segments
and their needs, and tests products designed by
R&D
- We discovered that peanuts in India are less
desirable almonds on the other hand are
much more attractive to consumers
Innovation cell develops the right features given
market conditions and the customers price-value
trade-off
- A European chocolate would not survive theconditions, we formulated more resilient
chocolates that do not melt easily
KSF#10
Consumer
insight cell
Innovation
cell
Degree of
customizationCompany example
Tailored products vary from minor
localization to complete innovation
AVL built emissions detectors that
can operate under extreme heatand dusty conditions
Grundfos built pumps that can
work under adverse power
conditions, such as those in
certain parts of India
Renault-ITL developed smaller
low-mid HP tractors designed to
fit the Indian farmers plot size
Perfetti entered a completely new
product category, building the
deposited candy segment from
ground up
Cadbury has a successful product
innovation model in place
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SEVERAL EXAMPLES OF COMPANIES EMPLOYINGINNOVATIVE DISTRIBUTION STRATEGIES
c. Cost effective reach: Indias geographic size, dispersed population and fragmented retail channel pose a
significant challenge for companies to reach their target customers in a cost effective way.
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 effectively1. 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 Piaggios 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.
* * *
Cadburys rural/ semi urban horse driven
kiosks increase reach
Companies employing innovative distribution
strategies......focusing on cost effectiveness and reach
Partnerships often used to drive more scale
through the channel
Allianz-Bajaj partnering with banks,hospitals, travel agents and others to
distribute insurance products
GSK is leveraging its channel to form jointdistribution agreements with both
pharmaceutical and consumer goodsplayers
Swedish SKF bearings is partnering withauto components company to increase
product visibility in rural areas
Danfoss, Denmarks largest industrialGroup, has developed a network of
references and third party consultants to
increase the reach of its energy saving
products
KSF#1
0
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1 Piaggio established that its localized product of the same quality could be produced at 30-40% less cost in India as compared to Europe.
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)
HOW WELL IS YOUR COMPANY PERFORMING
AGAINST THE 10 KSFs?
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 companys 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.
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Appendix
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