Critical Success Factors for MNCs Win in India

Project Report on Multinational companies must adapt to Indian conditions in order to thrive there

 

 

Over the past 20 years, multinational companies have made considerable inroads into the Indian market, yet many haven't realized its potential -- succeeding only in niches, for instance, or failing to maximize economies of scale or to tap India's breadth of talent. All too common is the experience of a leading consumer goods company whose Indian revenues have grown by 7 percent annually over the past seven years, almost twice the rate of the parent company during the same period but only about half that of the sector in India.

For multinationals, the key to reaching the next level will be to adapt to Indian conditions rather than to impose global business models and practices on the local market. It's a lesson many companies are already learning in China, which more and more multinationals treat as a second home market.

 In India, this trend has been slower to pick up steam, though promising examples have begun to emerge.

For example, a big global automobile company became one of India's largest manufacturers -- growing at 40 percent a year since its inception more than a decade ago -- by building a local factory, setting up an Indian R&D facility to better understand local customers, and hiring a well-known Indian figure as its "brand ambassador."

By contrast, a leading beverage company initially entered India with a typical global business model -- sole ownership of distribution. This approach resulted in high costs and low market penetration, and the company's managers quickly identified two other big challenges: India's labor laws make organized distribution operations very expensive, and the country's fragmented market demands multiple channel handoffs. In response, the company contracted out distribution to entrepreneurs. As a result, market penetration rose and costs fell. Today, the company uses the India unit's P&L as a benchmark to help normalize costs for its operations in other regions.

Such focused efforts will be increasingly valuable: India's economy is expected to grow as much as 7 percent a year over the next few years, among the highest rates of any big emerging market. In several product and market categories -- mobile handsets, for example -- the country could account for more than 20 percent of global revenue growth in the next decade. In this article, we'll highlight three principles that forward-looking multinationals are embracing to achieve their potential in India.

 

1 Organize for India 

 

Many multinationals struggled in the early going, some because they gave local management too little autonomy, others because of insufficient attention and investment from headquarters. Many of today's leaders have already solved these problems: removing bureaucratic roadblocks imposed by the head office helped one multinational power-and-automation-technology company we studied to unleash rapid growth in its previously sluggish Indian operation. Similarly, a global electronics manufacturer revived its Indian efforts by shutting down a foundering joint venture, establishing a stand-alone Indian business with a high degree of local empowerment to customize products to suit local needs, financing an aggressive local marketing campaign, and bringing costs down by helping to source components. Today, that company is one of India's leading electronics manufacturers.

The bar is now rising for multinationals, whose long-term success will depend on building country-specific operations and management systems. Some are rethinking their organizational models, making India a business unit in its own right instead of managing it along the axis of global products or functional areas. The benefits include the sharper development and execution of strategy and a more accountable on-the-ground leadership.

A global conglomerate faced with declining sales in India recently consolidated its business units there under one country head with direct P&L responsibilities. That executive makes all major decisions (including headcounts, pricing, and product customization), and all heads of local business units now report to him rather than to their global business unit leaders, as they did before. This new approach has helped the company to concentrate its resources and to speed up decision making, so it can now serve local customers more effectively and achieve faster growth.

Moves like this create a serious talent imperative: the head of the local unit must be experienced and knowledgeable about India's market and culture; able to make decisions on capital spending, products, and pricing; and ready to manage a direct line of communication with the global company's CEO. The talent imperative extends to lower-level managers, whose empowerment can likewise stimulate innovation and entrepreneurialism on the ground, while decreasing times to market for new products.

Given the many opportunities available and the relative shortage of skilled and experienced managers in India, multinationals have had to revise their talent models significantly to compete with domestic players. The most progressive global companies are moving in three directions:

• Local roles with global visibility. Such roles for local managers may include representation on corporate executive committees and will emphasize entrepreneurialism, confer more authority than most managers enjoy, and typically offer higher compensation.

• Meritocratic culture. Leading companies offer accelerated career tracks to high performers, fair and transparent advancement processes, the absence of a "glass ceiling" for locals, a performance-based system that motivates self-starters, and differentiated incentives for high performers.

• Mobility and tailored leadership programs. Structured global rotations for strong performers and leadership-development courses (especially those offering certification) are proving to be effective recruiting and retention tools.

Approaches like these are satisfying the multinationals' need for strong local leaders and the desire of Indian managers for autonomy and career growth.

2 Customize for India 

 

Big differences between haves and have-nots, languages, literacy rates, and geography (including the urban-rural divide) make it difficult for a global brand to satisfy all Indian consumers. Marketing something as straightforward as, say, a television presents challenges in rural India. Some consumers may be able to afford a TV, for example, but cannot speak or read English. Some might use the TV primarily for listening to music.

One way to strike the right balance between global brands and local positioning is to introduce subbrands or models with features suited to Indian needs. A leading global electronics manufacturer now offers television models with menus in Hindi and five other regional languages. It has also enhanced the sound systems of some models to provide a better listening experience.

As multinationals move deeper into the Indian market, they also run into low-cost local competitors. Meeting that challenge requires working with local suppliers to reduce costs -- without compromising the brand attributes that set the multinationals apart. In our experience, when they aim for game-changing local customization -- say, a 60 to 80 percent cut in costs with just a 30 percent reduction in features -- they boost the odds of navigating these tricky waters. This approach isn't new, but it's not easy to pull off, which may explain why multinationals have been slow to embrace it.

One example of successful local customization comes from a multinational equipment manufacturer that builds and sells relatively low-cost, no-frills tractors in India. These are far less elaborate than the kind of machines the company markets in more developed markets. As a side benefit of developing the new lightweight models, it started selling a version of them in its home market to small-scale farmers and others looking for a relatively inexpensive yet sophisticated product.

Another company moving in this direction is a consumer electronics business that routinely uses conjoint analysis across its markets to learn more about Indian consumer's willingness to pay for specific product features. Further, it challenges its design team by undertaking competitive teardowns not just of comparable products but also of products from adjacent industries and of very low-cost, nonbranded offerings. The company has set a target: a 30 to 50 percent cost reduction for every new generation of its products, without any impact on features.

Similarly, a leading global car manufacturer in India dedicated a team to the task of understanding customer requirements so that it could make better trade-offs between features and costs. (Some multinationals devote more than 10 percent of their product-development resources in India to such efforts.) Leading companies also take talented employees from India and rotate them through their product-development organizations globally to embed "frugal engineering" in the corporate culture.

3 Partnering in India 

 

Multinationals that entered India by themselves have generally fared better than those that created joint ventures with Indian partners, our experience shows. Indeed, most multinationals that opted for joint ventures have exited the Indian market, while a handful have bought out their partners or established themselves as majority shareholders. One global consumer goods company, for example, bought out its Indian partner because of differences over product marketing and brand positioning. The multinational is now doing well in all the segments it competes in.

Yet partnerships with Indian companies need not be limited to joint ventures. A strategic alliance between an international technology manufacturer and an Indian company, for instance, set up a local manufacturing plant that doubled its production volumes in 18 months and became one of the world's lowest-cost producers. The alliance's success encouraged the multinational to upgrade India from a "nice to have" market to an essential part of its international operations.

Similarly, a global pharmaceutical company developed alliances (rather than a joint venture) with Indian manufacturers to license and market those manufacturers' generics and off-patent segments. The agreement helped the multinational to enter the fast-growing Indian market for branded generics and off-patent medicines, thereby responding to its demand for low-cost, easily accessible products.

Success in India will be increasingly important to multinational companies. To thrive there, they must empower the local organization, adapt to the Indian consumer's needs, and consider engaging the country's companies in relationships that extend beyond traditional joint ventures.

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