india-challenges of doing business
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India : Challenges of doing business
Presented by:Anmol Agarwal; Shine Nair;30th October 2007.
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CASE STUDIES
Operating Strategies of doing Business in India
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Performance of an MNC can be analysed along fourdimensions
What element of this companys entry strategy helped it/prevented it fromestablishing an early leading position in the market?
How has the company managed its internal operating system on four dimensions(first three consist elements of value chain and last one is an enabling factor)
Value proposition to consumers and Innovation in product profile and valuedelivery
Value chain (sourcing, manufacturing, distribution) Managerial talent
What image does the company convey to local communities/governmentbodies? How did it create such an image?
How has the company managed to impact local regulations?
2. Entry strategy
3. Operatingsystem
4. Managingregulations/local image
a) Fundamental financial performance (profitability, growth, shareholder returns)b) Market power (distribution, product innovation) and market sharec) Recognition, both internal (share of parent revenues, profits) and external
(public, press etc)
1. Performance
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PERFORMANCE : Unilever through HLL has deliveredsuperior performance in India.
1. Financial
2. Market Power
3. Recognition
Fundamental PerformanceProfit after taxUSD million
120160
217 255307
360 384 367
261313
1997 1998 1999 2000 2001 2002 2003 2004 20062005
CAGR11%
Market PerformanceTRS, Indexed
Largest share (60%) of the domestic soap market Largest share (53%) of the domestic fairness cream
market Largest share of the domestic instant coffee market
Brand IdentityHigh recall domestic brands
Market share
The Indian operations (HLL) contributes a significant 6%of the groups global turnover and nearly 6% of net profit
Indian talent recognized within the global firm, e.g KekiDadiseth in HQ, Harish Menwani in Unilever USA
Internal
An unmatched distribution reach covering directly over a million retailers and a wide product portfolio with price- competitive products underpin its market leadership UBS Analyst
Conferred the Good Corporate Citizen Award, for the
year 2000 01
External
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BSE-FMCG INDEX
HINDUSTANLEVER
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PERFORMANCE : Unilever through HLL hasdelivered superior performance in
Overall rating
Very successful
Failure
Entrenched player established in 1933; among the largest companies inIndia with revenues in excess of USD 2.5 billion
Achieved local market dominance by pursuing both organic and inorganicroutes
Description
Strong local product development: created new product category with itsfair and lovely (fairness cream) and introduced low cost detergents(Wheel) to match local competitors
Manufacturing and procurement system creates products at lowest cost:use scale, best procurement practices, outsourced manufacturing tomatch/ set local price points
Deep distribution reaches into remote villages; many local innovations inmanaging system which are being copied by Unilever Mexico and Brazil
Almost entirely Indian managerial staff have had an Indian CEO since1960s
Products across price points, but all focusing on superior valueproposition
2. Entrystrategy
3. Operatingsystem
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PERFORMANCE : Unilever through HLL hasdelivered superior performance in
Overall rating
Very successful
Failure
Seen as local company significant recruiters of talent, Indian externalface, invest/ participate in social initiatives.
Regulations do not have significant impact on business (consumerproducts); but individuals have significant goodwill with governmentsacross all levels.
No problem in making significant acquisitions (including acquiring the firstprivatised company) and subsequently making operating changes in
acquired companies, including politically sensitive worker attrition.
Description
4. Managingregulations/local image
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HLL COVERS A SERIES OF PRICE POINTS IN KEYCATEGORIES TO PROVIDE CREDIBLE CHOICE FORANY CONSUMER SEGMENT (1/2)
Competition
Soaps*
8
8.4
9
9
11-11.5
10
12
14.4
19.6
18
Low Medium High
Price point Brands
Breeze Rose Lifebuoy milled Jai Lime
Breeze softand Shiny
Lux Sandal Lifebuoy Intl. Gold Rexona Sandal
Rs/unit
Price point Brands Price point Brands
Liril Rain Fresh
Hamam Lifebuoy Intl. Plus Lux Pink
Godrej No. 1
PalmoliveNaturals
Nirma Herbalina
Cinthol Lime Fresh
Dettol
* Price made comparable for 100 gm SKUs
18.4 Lux International
18.6 Savlon
24.8 Pears
20 Fair & Lovely 20.6 Moti Gulab
45 Dove 9.3 Jai Jasmine
14 Liril
13.2 Nikhar
14 Chandrika Ganga Shikakai
10.6 Ganga 20 Cinthol C Intl. DoyCare
22.4 Camay
40 Mysore Gold
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* Price made for comparable 1 Kg SKUs** Price made comparable for 500 gms SKUs
Competition
Detergents*
19
26
18
25
20
41
55
40
63
85
85
140
140
155
145
170
Low Medium High
Price Brands
Premium
Price Brands Price Brands Price Brands
Wheel Green
WheelJugmug
Wheel Active
Rin Shakti
Rin Supreme
Revel Plus Surf Multi-
Action Surf Excel Matic
Surf Liquid
Surf Excel
Nirma
Friendly Wash
HenkelMr.White
Nirma Super
Tide Areil Compact
Henko PowerPearls
Tea**
85
90
90
108
116
100
Competition
Lipton Taaza
Red Label
YellowLabel
Duncan DoubleDiamond
Red Label Tata Tea Manikchand P
Girnar Royal
Tata Tetley
49 Ariel Gain 36.6 Acme Act
100 HenkoStainChampion
62 Tiger Tea
70
74
ManikchandNirali
Tata Agni
115 Taj Mahal
190 GreenLabel
HLL COVERS A SERIES OF PRICE POINTS IN KEYCATEGORIES TO PROVIDE CREDIBLE CHOICE FORANY CONSUMER SEGMENT (2/2)Rs/unit
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P&G has not managed to create a large andsuccessful business in India
Overall rating
Entered with a JV with Godrej, which did not work due to differences inexpectations, and no clear exit route for either player
Description
2. Entry strategy
P&G focused away from India, and shifted marketing operations to Singapore.They have continued to run with expat CEOs
Unsuccessfully tried to replicate Unilevers extensive distribution model Have recently implemented its project Golden Eye' which involved consolidation
of its supply chain, lowering inventory levels, improving visibility and service Proctor & Gamble introduced premium range of products in India. Unlike
Unilever, did not look at outsourced, lower quality products to build volumes andreach.
Many of its product launches have failed to make a dent in the market Ariel has8% of market, Head & shoulders 12%
3. Operatingsystem
EVALUATION OF P&GS INDIAS PERFORMANCE ON FOUR DIMENSIONS
Small size of USD 100 mn, listed company which has some of the older brandsvery profitable; however, new brands pitched at premium end, faced with lowvolumes and high branding costs leading to losses
1. Performance
Seen as having lost out to Unilever
Commitment to India not significant, leading to shifting of marketing operationsoutside India
4. Managing
regulations/local image
Very successful
Failure
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LG has grown at an astonishing pace to become a$1 Billion company in India
1. Financial
2. Market Power
3. Recognition
Fundamental PerformanceSalesRupees million
Brand Identity Identified as a possibilities brand with
catch phrase - Expand your life High brand recognition for quality
and premium attributes
Market share
Internal External
LG CASE EXAMPLE
Market leadership position in domestic airconditioners (~30%)
Ranked as the largest CDMA handset seller in thecountry in 2002-2003
Highest market share in colour televisionscategory (~18%)
Unlisted
12504850 10560
19030 2216033150
45000
65000
95000
1997 98 99 00 02 03 04
CAGR82%
Indian manufacturing facilities are beingexpanded to serve more emerging markets (for ACs, TVs etc.)
Super Achievers Award for MD KR Kim fromCETMA for the extraordinary success of LGElectronics in a short span of six years .
01 05 E
http://images.google.com/imgres?imgurl=www.naukri.com/gpw/lgnew/images/smiley2.gif&imgrefurl=http://www.naukri.com/gpw/lgnew/top.htm&h=71&w=62&sz=2&tbnid=FO8VeZ7ecpgJ:&tbnh=66&tbnw=58&prev=/images%3Fq%3DLG%2Belectronics%2B%252B%2BIndia%26hl%3Den%26lr%3D%26ie%3DUTF-8%26oe%3DUTF-8 -
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LG focused on providing a superior productoffering and aligned distribution network
Overallrating
Very successful
Failure
Strong commitment: Setup operations in mid 1990s, with a clear aspirations and commitmentto making Indian operations central to groups performance
Achieved this through Rapid investments in setting world class manufacturing unit and customizing supply chain
and produced durables Creating Export base out of India
Setting up contract manufacturing capacity for its other markets once least cost plantshad been customized in India (e.g. for color TVs and air conditioners) Setting up IT outsourcing arm in India
Description
Value proposition: Focused on providing high value/price products to capture latent demand. Toachieve this
concentrated on on developing high value/price products and introducing knockdown versions
Created an aspirational brand whilst providing low cost mass products,
Supply chain: Concentrated on creating new distribution channels ( created over a 100 new branches for
rural and semi urban areas), create strong incentives for channel partners and concentrated onensuring low inventory at channels
Cut imports and concentrated on achieving high levels indigenous content to reduce costs
Hired local senior management team. Local managers buy design made critically responsible tofor the country strategy
Indiastrategy
Businesssystem
Managementsystem
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Seasonality in consumption Low volumes in
several markets Huge transportation costs
due to poor roadinfrastructure
Production strategy
Indianuances
LG strategy Set up multiple product lines,
which with minimal changescan be reconfigured for differentproducts (e.g., washingmachines in winter whenrefrigerator sales are low)
Set up India as contractmanufacturing base to ensurescale in operations (e.g., TVsand compressors)
Set up plants in better infra-structure/reachable place(e.g., Pune)
High import cost
Rapidly moved to makeproducts indigenous(e.g., compressor whichis 30 40% cost of fridgeis produced locally)
Increased indigenouscontent through localsourcing
Absence of retail network inhuge chunks of the country
Mom-pop retailers with multi-brand outlets
Limited/no brand pull
Limited/no retailer loyalty
Created over a 100 newbranches for rural and semiurban areas
Provided best incentives todistributors/retailers to switch
Ensured bundling of fastselling goods with slowmoving ones (e.g., if youwant LG TV, you have tohave LG fridges)
Sourcing Distribution
. . . and re-engineered costs and improveddistribution to complete the virtuous cycle
Improved distribution hasmeant that over 50% of LG TVsold today are bought in ruralareas, in contrast to ~15% few
years ago
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Hutch has a shown tremendous growth in 8 years
1. Financial
2. Market Power
Fundamental PerformanceSalesRupees million
Market PerformanceTRS, Indexed
Brand Identity Very high brand recognition andsignificant loyalty
Perceived as very premium offering
Market share
HUTCHISON CASE EXAMPLE
One of the top 3 player in wireless telecom inIndia with 18% market share
Unlisted
2141 3860
1873627881
40075
56078
2000
CAGR92%
2001 2002 2003 2004 2005
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Hutch expanded organically and inorganically tobecome largest GSM player in India (1/2)
Overall rating
Very successful
Failure
Strong commitment to their end state vision for Hutch India: Entered with objective ofbecoming a national mobile operator in 1991, even when only 4 metro cities (
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Cultivated Indian image, not HK ownership
Helped pool influence by forming the COAI as an industry forum, which by virtue of having most major operators as members, was able to make regulations morefavourable to industry growth. Often COAI also influenced policy decision by seeking
judicial intervention in government/regulators decisions
For several years COAI had significant influence on regulation, however over period oftime Reliance along with other state owned incumbents created own strong lobby group
Hutch expanded organically and inorganically tobecome largest GSM player in India (2/2)
Overall rating
Very successful
Failure
Description
Managingregulations/local image
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Applied forlicenses for metrocircles
Could only enterMumbai circle
Entered Delhi,Kolkata andGujarat throughacquisitions
Extendedacquisitions toHaryana,Rajasthan, UP
Picked up newlicenses forChennai,Karnataka, AP
and Tamil Nadu
Bidding forGSM licensesfor 4 metros
Maximum 2bids per circle
Licensing andlaunch of mobileservices for newcircles (20)
Maximum 2operators per circle
New telecom policy
License tostateoperators forevery circle(default 3 rd operator)
License tenderedfor 4 th operatorfor circle
License for VSNL(to be the 5thoperator in every
circle)
1991 1994 2000 2001 2003
Hutch mobilefootprint
Hutchexpan-sion
Keypolicychanges
Hutch Indiaoperations arevalued at close
to $1b today
Hutchison had a long term plan for India and chose to await growth enabling
regulation
Hutch gradually established a pan India foot print
Hyundai has become one of the most profitable
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1. Financial
2. Market Power
3. Recognition
Fundamental PerformanceSalesRupees billion
1999 2000 2001 20032002
Indias second largest car manufacturer Market Share of 19% in passenger vehicles segment
from Apr - Sept 2005 Market Share in B segment 23% from Apr - Sept
2005 Clocked highest ever sales in Oct 2005 of 24,762
vehicles with the Santro and Getz accounting for 85%
Brand Identity Hyundai SantroMarket share
Indian arm designated as global hub for small cars Cumulative exports from India surpassed the 200,000
mark, the fastest rate for any Indian car manufacturer Most cost-efficient producer for small cars in Hyundai's
global network About 3% of Hyundai Motor Corp in 2004
InternalIn our view, HMCs India business is a success story, and
could become one of the most important operations for the company. - Deutsche Bank Analyst
Overall, we were quite impressed with the plant and the position HMI achieved in the Indian auto market in such a short period of time. . - Deutsche Bank Analyst
External
HYUNDAI CASE EXAMPLE
2004
Aggressive Marketing usingTop Movie Stars as brandambassadorsStrong Brand Recall as theSunshine Car and the XingTopped JD Power AsiaPacifics studies for productquality & customer satisfactionfor 2000, 2001 & 2002
Hyundai has become one of the most profitablecar makers in India within six years
ProfitsRupees billion
5.123.2 29.9 34.0
39.657.1
76.9
1999 2000 2001 20032002 2004
-0.05
-0.5
0.61.7 2.7 1.6 3.8 4.06CAGR57%
2005 2005
HYUNDAI HAS BEEN A RESOUNDING SUCCESS
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HYUNDAI HAS BEEN A RESOUNDING SUCCESSSTORY
Overall rating
Very successful
Failure
India strategy
Businesssystem
Strong commitment: Hyundai made a strong commitment to its India operations andstrategically sort to capture large market through Setting itself to take on market leader Suzuki
Entered in the small car segment; instead of bringing in sedan like other entrants Invested $650 mn upfront to create Greenfield capacity
Description
Value Proposition:
Positioned itself to provide a superior product in the B category segment, whichincluded several add on features ( e.g. More effective AC, competitive fuelefficiency, better ground clearance)
To maintain cost competitiveness; parent has backed Indian subsidiary with freeR&D and product up gradation (no royalty outflow)
Supply Chain
Built up strong nationwide distribution (no dealerships, 250 service points) Invested heavily in local vendor development (90% of input is locally sourced)
Recruited a large army of Indian middle managers; but continue to have Korean expat
as Managing Director
Management
System
A AS A SO G S CC SS
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HYUNDAI HAS BEEN A RESOUNDING SUCCESSSTORY Very successfulFailure
Hyundai worked closely with state government to get sales tax concessions Has recently been aggressively driving for policy change with respect to LPG
vehicles
RegulatorySystem
Overall rating Description
DESPITE ITS LATE ENTRY HYUNDAI CAPTURED
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1
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0 100,000 200,000 300,000 400,000 500,000 600,000
DESPITE ITS LATE ENTRY, HYUNDAI CAPTUREDSIGNIFICANT SHARE IN THE MID SEGMENT2000-01 EXAMPLE
( ) Market share
Rapid expansion ofthe mid-segment
New entrant HyundaiSantro captures13%market share atthe expense ofMaruti Zen
Maruti Zen (12%)Hyundai Santro (13%)Daewoo Matiz (9%)Maruti Alto (5%)
Value conscious mid-segment emerging:
Mid-segment booms,repurchase cycle
shortening
Source:McKinsey analysis; Cris Infac Report
Maruti 800progressively
lossesshare to 30%
Cumulative volume (units)
P
r i c e
( R s .
H u n
d r e
d T h o u s a n
d )
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. . . and supported this by developing lower costsupply chain practices
Production strategy
Hyundai
strategy
Leveraged existing capitalassets
Did not invest in gold platedfactory relocated moth-balled factory in Canada toChennai
Set up India asmanufacturing base toensure scale in operations
Significant investment in localsuppliers for wide variety of
sensitive parts Enhance existing auto-
component capability inChennai (Hyundai-Achieve100 ppm program)
Invested in local suppliers(e.g., India Pistons, Lucas-TVS) in product refinement,manufacturing qualityimprovement and costreduction
Clear localisation plan (e.g.,80%+ localisation achievedin 2-3 years)
Developed extensivedealer network and
ensured availability ofspare parts at low costwidely across the country
Sourcing Distribution and service
Toyota also seems to be getting the virtuous cycle
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Toyota also seems to be getting the virtuous cycleright
Careful study of the marketrevealed that MUV segmentwas large but current localofferings were not of very highquality
Localised the Kijang, launchedat more than 10% pricepremium
Quality was significantlysuperior, captured leading MUVsegment position, and is a top 5player overall
Lower lifetime ownership cost(low repairs, high mileage)
Large distributionchain, often in ruralareas to meet MUVdemand
Created significantbrand awareness forToyota throughoutIndia
Significant investment ofmanagerial efforts in supplierup gradation indigenisation
component significant Manufacturing facility built to
scale leveraging global baseby exporting transmissionsystems (160,000 p.a.) andbuilt up vehicles toneighbouring countries
Superior value atparticular price
Widedistribu-
tion
Optimizedsupplychain
GM on the other hand missed key steps in the
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GM, on the other hand, missed key steps in thevirtuous cycle
Most mid market offerings (OpelCorsa, Swing) performed poorlydue to inferior lifetime ownershipeconomies - low fuel efficiencyand high spares cost
Upper end product,(Opel Astra) good but
unchanged for 8-10 years
Premium offeringmakes distributionlimited to top 10metros cannot tapfull demand potential
Low volumes affectedability to indigenise tolower costs
Small capacity plantmakes Indian foraystructurally unviable
Write-offs ofover USD 100million
Significantstrategicrelook
Superior value atparticular price
Widedistribu-
tion
Optimizedsupplychain
Pepsi localized products and practices to become
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Strong commitments: During early 90s Pepsi worldwide identified India and China askey focus geographical regions for the group. The group was therefore as a wholecommitted to creating strong opportunity in India
Entered India as a JV with State Govt. (Punjab) to ensure compliance with existingregulations
Pepsi localized products and practices to becomemarket leaders (1/2)
Overallrating
Very successfulFailure
Description
Indiastrategy
Value proposition: Strong brand building
Focussed approach to building a local brand through Adopting initially a local brand name (Lehar Pepsi) Sponsors local events, (cricket), adopting local slogans (e.g., Yeh dil mange
more, Yeh hai right choice baby, endorsement by local film/sports icon (Sachin,Shahrukh , etc.)
Leader in pricing: Initially launched Pepsi at 2/3 local competitors price Subsequently launched 500 ml/1lt. variants at lower rates resulting in overall
industry price cut subsequently Multi-product strategy: diversified revenue streams by focus on snack foods (Lays,
Cheetos, etc.) and restaurants (Pizza Hut)
Businesssystem
Pepsi localized products and practices to become
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Pepsi localized products and practices to becomemarket leaders (2/2)
Overallrating
Very successfulFailure
Description
Supply chain Innovations the supply chain by
Third party transportation Takes up stakes in bottling units Indegenousation of ingredients (e.g., developed caffeine produces locally)
Businesssystem(Contd.)
Internally experimented with Expat CEO, however quickly realised the need for astrong Indian management team and set up one
Manage-mentsystem
Ensured regulatory support by working with powerful stakeholders
Setup agri-processing unit in Punjab, investment that to get permission forbeverage unit Ensured subsequent relaxation of initial stringent operating conditions by ensuring
relevance to local economy (e.g., 65,000 direct/indirect jobs, etc.)
Regu-
lations