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Challenges likely to be faced by the businesses in the emerging economies internationalizing at a fast pace

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  • 1. 1 Table of Contents CHALLENGES LIKELY TO BE FACED  BY THE BUSINESSES IN THE EMERGING ECONOMIES  INTERNATIONALIZING AT A FAST PACE...............................................................................2   World as Global Economy                                                                                                                     ..............................................................................................................  2     Two Sides of a Coin                                                                                                                               ........................................................................................................................  2     Transition in India                                                                                                                                  ...........................................................................................................................  3     Internationalization Challenges                                                                                                              ......................................................................................................  3     Challenges for companies exporting Indian merchandise and services                                            ......................................  3     Debt/Cash management challenges                                                                                                   ...........................................................................................  4     Integration related challenges                                                                                                            ....................................................................................................  4     Marketing Mix                                                                                                                                   ...........................................................................................................................  4     Talent challenges                                                                                                                               ........................................................................................................................  5     Examples                                                                                                                                                .........................................................................................................................................  6     Infosys                                                                                                                                               ........................................................................................................................................  6     ICICI Bank                                                                                                                                        .................................................................................................................................  7     Suzlon Energy                                                                                                                                   ............................................................................................................................  8     Conclusion                                                                                                                                            ....................................................................................................................................  10   Nature Thoughts & Symmetry
  • 2. 2 Challenges likely to be faced by the businesses in the emerging economies internationalizing at a fast pace World as Global Economy Globalization is a continuation of developments that have been going on for some considerable time. Today, globalization involves numerous features, but the following three seem to be the main engine driving global economic integration: a) internationalization of production accompanied by changes in the structure of production b) expansion of international trade in trade and services c) widening and deepening of international capital flows Globalization is now a forceful process that is unlikely to be reversed. The future policy alternatives for countries and regions have thus to be analyzed in the context of the global economy with free trade of goods and services, free movement of capital, technology and skills and with improvements in transportation and communication links. Two Sides of a Coin The investment firm Goldman Sachs estimates that by 2050 the Chinese and Indian economies will be respectively the second and third largest economies in the world. Already, companies from these countries are emerging as important players on the global landscape. Greater access to developed country markets and technology transfer hold out promise improved productivity and higher living standard. But globalization has also thrown up new challenges like growing inequality across and within nations, volatility in financial market and environmental deteriorations. Another negative aspect of globalization is that a great majority of developing countries remain removed from the process. Till the nineties the process of globalization of the Indian economy was constrained by the barriers to trade and investment liberalization of trade, investment and financial flows initiated in the nineties has progressively lowered the barriers to competition and hastened the pace of globalization. Nature Thoughts & Symmetry
  • 3. 3 Transition in India The Indian economy has undergone significant institutional transformation over the last 15-17 years. After following decades of socialist-tending policies, a decisive break came in 1992, when the then government led by Prime Minister Narasimha Rao and Finance Minister Dr. Manmohan Singh acted to contain a balance of payments and economic crisis facing the country, by making a radical shift to an economic regime that embraced market forces. This change in policy direction has continued more or less evenly since, and has paid off handsomely, with the Indian economy moving beyond its earlier orbit of 2-3% p.a. annual Gross Domestic Product (GDP) growth rates to a 6-9% p.a. growth range. In the process, India has come to be a favorite of the international business and investment communities. At the same time, local Indian companies have taken advantage of the liberalized policy environment and their own entrepreneurial abilities, to face up to the challenges of competing in the global marketplace. Exports from the Indian economy have been growing at double-digit rates for the last several years, and recently there has been a very strong trend of outward foreign direct investment (FDI) and international merger and acquisition (M&A) activity by Indian companies (Indian Commerce Ministry Website). With its increasing integration with the international economy and the burgeoning middle class, India economy offers a fertile ground for international expansion for Western multinationals. Indian firms are fast internationalizing by investing abroad and employing locals. Fast pace of Indian firms going International: ➢ ➢ ➢ Indian firms are moving up the competitive value chain . Asia is becoming equally important regions as Europe and USA . Compassionate capitalize: Unique approach of Indian firms to extract maximum value from even ailing business by applying innovative and cost effective methods that they have developed over the years in an extremely resource constrained and uncertain domestic environment. Internationalization Challenges Challenges for companies exporting Indian merchandise and services Firms which are primarily involved in the exports of Indian merchandise or services to foreign countries faces challenges in terms of: ➢ Non tariff barriers and Phyto-sanitary barriers ➢ Foreign regulatory environment ➢ High transportation costs ➢ Visa related issues ➢ Inspection and certification related issues Nature Thoughts & Symmetry
  • 4. 4 Debt/Cash management challenges Some of debt/cash management challenges are: ➢ Raising debt/cash in Indian market is difficult and expensive, because of high interest rates and underdeveloped bond market in India. ➢ Underdeveloped Foreign exchange market in India pose another challenge as Indian currency is very volatile and leads to frequent forex losses for Indian firms. ➢ Indian Government’s foreign exchange laws – FEMA, which are not very supportive of Indian firm wanting to business abroad ➢ Firms which are raising substantial portion of debt from abroad find it difficult to pay off debt because of foreign exchange volatility, which makes even this debt expensive. ➢ Valuation of foreign firm, which is being acquired are generally very high and the high premium paid of such acquisition doesn’t easily translated into real benefits which in cash. ➢ Most Indian firms are small in size and many of the target firms which are being acquired are much large size, posing challenges with assimilation of these firms Integration related challenges ➢ ➢ Because of cultural difference, it is difficult to integrate acquire firm fully in terms of workforce. Also inexperience of Indian Managers in this area is posing major challenges in fully integrating the facilities the abroad and real benefits of acquisition Indian firm had never been leaders in Innovation and research, which is challenge to acquire firm which are innovation centric Marketing Mix Marketing knowledge is dependent on the relevance and depth of marketing information available to the firm. Firms that use relevant, accurate and timely information are in a better position to respond to export problems. Information about exporting and more specifically market information were mentioned as the most serious problem of manufacturing. Getting concrete information on respective foreign markets is essential before exporting can occur. Distribution is another major problem area in exporting. Many SMEs in developing countries lack information about marketing channels and fail to establish marketing networks. Sound financial position is one of the keys to secure price advantage in the target market. Many SMEs in developing countries run into problems for lack of timely and adequate working capital, which not only adds costs but can also endanger the entire production operation. The importance of financial barriers to exporting, such as difficulty in acquiring the necessary funds to initiate. Nature Thoughts & Symmetry
  • 5. 5 Quality is often indicated as one of the most important conditions for entering and remaining in foreign markets and logistics management. It concerns packaging, meeting importers quality standards and establishing the suitable design and image for export markets. There are different quality standards in developing countries. However, many of the quality problems are the result of inadequate knowledge about market requirements, product characteristics and production technologies. Several researchers indicated that local product standards, customer standards and buying habits may be unsuitable for foreign sales and may require adaptation. In most studies successful firms adapt their products to foreign markets. Export market barriers are related to product requirements in the export market, the country of origin, cultural similarity and brand familiarity. Lack of similarity of legal and regulatory frameworks of the exporting and importing countries and lack of familiarity with market export procedures are also mentioned as export market barriers. These factors are regrouped into customer and procedural barriers. Export procedures. One of the most cited obstacles with regard to exporting concerns the time and paperwork required to comply with foreign and domestic market regulations. Governments do not solely impose these procedural requirements. Also independent organizations such as banks, shipping organizations and insurance companies, have their own procedures. A firm that wishes to enter the export market or intends to increase its export activity will have to acquire the knowledge and skill to deal with administrative procedures. In particular for inexperienced managers foreign documentation and paper work may appear very difficult to cope with. Talent challenges Top management teams lack international experience. Rapid-growth market companies are not confident that their organization has or can build an effective international management team. Top management teams lack awareness of local cultures and understanding of global markets, according to our survey results. Lack of an internal management pipeline forces companies to recruit from rivals. Companies in rapid-growth markets are building their international management teams through the development of internal pipelines as well as recruitment from other organizations. While building an internal pipeline requires time and investment, the latter can result in high turnover and salary inflation. Companies are unable to retain and reward high performers in different markets. Some companies report it can be difficult to appropriately incentivize performance across different markets and cultures. According to our survey results, many companies feel they can improve their approach to retaining high performing global talent. Nature Thoughts & Symmetry
  • 6. 6 C-suite leaders and lower-level managers hold conflicting views on talent management. The gap in priorities across C-suite and managers presents an additional challenge to talent management. In particular, our survey found significant differences in viewpoints around recruiting locally from new markets, effectiveness in rewarding high performance and aligning business strategies with an individual’s performance objectives. Examples Infosys Liability of foreignness: Internationalizing companies face challenges when entering new markets, where they are relatively unknown and have to adjust to newer ways of doing things. This phenomenon is referred to as the “liability of newness” or “liability of foreignness”. The Indian IT industry and Infosys had to face these challenges in the early years. In the initial years when they visited Chief Information Officers (CIOs) of western companies, there existed a big gap in the perception of Indian companies in the West, and Indian companies’ assessments of their own strengths. To overcome this, a large campaign was mounted by the Indian industry association – the National Association of Software and Service Companies (NASSCOM), individual companies, and the government of India. The aim of the campaign was to enhance awareness amongst prospective Western clients of the value proposition offered by the Indian IT sector in catering to the tremendous shortfall of IT professionals in Western companies. These early efforts bore fruit according to Murthy and led to the tremendous growth of the Indian IT sector and to the trend towards outsourcing of services to India. Organizational Structure: Research suggests that the high centralization causes information overload at the top, hinders an organization’s ability to respond to local conditions, and results in demotivation at lower levels of the hierarchy. Infosys is becoming an increasingly flat organization and has reduced number of layers down from about 14 in 2001 to 6-7 today. Simultaneously it is more decentralized than before with human resources policies devolved to unit levels, and unit-level empowerment on budgets, plans, etc. The company’s website also suggests that Infosys is a “place where there is a minimal hierarchy”. Processes: Quality management has been suggested in the literature to lead to competitive advantage. The company benchmarks its processes against world-class standards and models such as ISO 9001-TickIT, SEI-CMM / CMMI, ISO 20000, ISO 27000, AS 9100, TL 9000 and ISO 14001. Nature Thoughts & Symmetry
  • 7. 7 Further, the company makes use of quality initiatives such as IPM+ (an integrated project management suite to improve project and program management), BrITe (Business results impact @ Infosys Technologies – an innovative blend of IT-specific Lean principles approach including Statistical techniques like in SIX SIGMA), iSOP (Infosys Scaling Outstanding Performance – to evaluate and identify improvements in units that are using the Baldridge Model), and the PRIMA awards. ICICI Bank ICICI Bank is an example of a company that has managed to adapt itself to the liberalization and opening-up of the Indian economy by transforming itself into a fast-moving and customer-driven entity. In this process, ICICI Bank has emerged as the 2nd largest Indian bank with the largest international presence. International expansion: ICICI Bank identified international banking as an important opportunity in 2001 to cater to the cross- border needs of clients by leveraging domestic banking strengths. In 2003, the Bank set up its very first offshore branch in Singapore followed by an office in Dubai, and setting up of the UK and Canada subsidiaries in the same year. Organization Structure: ICICI Bank went through five organizational changes in eight years preceding 2007. There was a lot of resistance in the first year. However, after this initial phase there was a change in attitude and outlook and the way people went about their work. Processes: What sets ICICI Bank apart from its competitors is its superior ability in identifying early trends, developing strategies to take advantage of these trends, and executing the strategy better than others. ICICI Bank has always been competing successfully with the international players in India. ICICI Bank’s relationships are considered as one of the key strengths enabling the Bank to offer the “best of both the worlds” i.e. understanding the needs of the Indian consumer and ability to deliver world-class solutions, including leadership in structuring credits and syndicate loans. Cultural Differences: The Bank has a preference to have locals to take care of the regulatory interface in international locations. Depending on regulatory requirements as well as foreign language requirements, different countries have different mix of locals and Indian nationals. E.g. in Russia, almost 90% of the employees are local Russians. The Bangladesh operations are almost completely run by local Bangladeshis. Key positions in these international locations are however typically staffed by Indian nationals with experience of having worked at the Bank in India. Nature Thoughts & Symmetry
  • 8. 8 Suzlon Energy Introduction: Suzlon was founded in 1995 by Mr. Tulsi Tanti and his brothers when they were exploring alternative sources of power for their textile business in western India. The unreliable electricity grid was then creating many inconveniences for the business, prompting the family to explore wind energy as an alternative. After the family installed two windmills to power their textile business, Tanti and his brothers envisioned that they could actually make a very profitable business out of generating wind energy. Shifting focus away from textiles, the new foray of Suzlon into wind energy was financed with USD 600,000 put together through the sale of some family assets. Tulsi Tanti and his brothers bought ten turbines from Sudwind, a small German company, assembled a group of former engineering classmates, rented a factory, and hired a German consultant for 90 days to teach them the business. When Sudwind went bust in 1997, the Tantis hired its engineers and created a R&D center in Germany. In 1999, the company started selling its partly homegrown turbines in the Indian market Following this foray, Suzlon has grown over the last 10 years to become a top-5 wind energy producer worldwide with sales of over USD 3.4 bn in 2008 and a global footprint. Suzlon today: Suzlon has a global market share in the wind-turbine business of about 10.5% (BTM, 2007). The company operates in 21 countries (Annual Report 2008, p. 3) and employs almost 14,000 people from 15 nationalities The company derived 58% of its revenues in FY 2008 from outside India against 34% the earlier year. The USA accounts for almost 20% of total revenues, while Europe and the rest of the world together account for about 27% of revenues. As part of its internationalization strategy, in 2006 the company acquired Hansen Transmissions of Belgium for USD 565 mn . Hansen was the world’s second largest gearbox maker and Suzlon expects that the acquisition will give it manufacturing and technology development capability in wind gearboxes, and enable an integrated R&D approach to design more efficient wind turbines. In May 2007, Suzlon acquired a 33.6% stake in REPower for USD 698 mn . RePower is one of the world’s largest manufacturers of offshore and onshore wind turbines and the acquisition is expected over the years to add to Suzlon’s technological capability, especially in the production of large wind turbines. On the importance of international markets, Mr. Tanti expects about 40% of Suzlon’s future revenues to come from Europe, 20% from the US, 10% each from India and China and the balance from the rest of the world. Organizational Structure: Nature Thoughts & Symmetry
  • 9. 9 Suzlon seems to have been moving towards increased decentralization in the last few years. Until a few years back, Suzlon was a promoter-driven company. As a first step towards empowerment and increasing accountability, the promoters created strategic business units (SBUs) and appointed non- promoter heads of the SBUs. This change led to decentralization in the company. Additionally, individual functions got embedded in the SBUs and the whole corporate paradigm shifted to the SBUs. Within the SBUs, there was a matrix structure, with about 70% weight to line manufacturing and about 30% to the functional heads. This led to a need for balance, but since people with existing experience within the company were sent to the SBUs, there was a common understanding of overall priorities, which facilitated the change to the SBU and matrix structure. Processes: Suzlon has also undertaken full backward integration of the supply chain by developing a comprehensive manufacturing capability for all critical components in wind turbines, thus ensuring economies of scale, quality control and assurance of supplies. This approach stands in contrast to the more piecemeal approach taken by many of its competitors. The company is moving more and more towards a process orientation and The increasing process orientation has meant a certain amount of cultural adjustment. Culture: Suzlon’s corporate culture is undergoing a certain transformation as the company internationalizes. For instance, there has been an increasing call for greater transparency in decision making as the company internationalizes, and international employees are demanding greater empowerment. Human Resources: Suzlon employs more than 14,000 people from 15 nationalities. A related challenge the company has faced is in terms of keeping up its manpower with the rapid growth the company has experienced in the last few years. For instance, with increased decentralization and employee empowerment, the question that arises is whether people have the same amount of passion as top management in taking responsibility and driving growth. In order to deal with the challenges of employee motivation, the company is working on a number of initiatives. Also, in order to prepare its employees for a greater international exposure and skills, Suzlon is teaming up with leading business schools like IIMs and ISB. Suzlon appears to be transforming itself from a family-owned and family-driven business to acquiring qualities of a professionally-run MNC. A part of Suzlon’s success can be attributed to its being in the “right place at the right time”, in terms of the timing of its founding and the sudden international focus on renewable energy. At the same time, Suzlon’s strategy emphasizing aggressive international expansion and organizational transformation might have played a role. Nature Thoughts & Symmetry
  • 10. 10 Conclusion Some of the major patterns and conclusions that the study converges upon are as follows: From comparative to competitive advantage: With shift towards advantages based on availability, lower cost and skills of the technical and scientific manpower, Indian companies’ need to create complementary skills and the success are governed by competencies developed within a company and aspirations of its top management. Favorable ‘push’ and ‘pull’ conditions for overseas successes: For an increasing number of industries, Indian companies are reaching the point of having global advantages—favorable factor conditions, domestic demand characteristics comparable to that overseas, presence of ancillary and supportive skills, and pervasive confidence for looking beyond domestic markets. On the ‘pull’ side, from the situation of Indian origin being a handicap, the world has come to acknowledge ‘India advantage.’ Three strategy types for Indian companies in overseas markets: ‘Outsourcing,’ where the domestic market is either very small or unattractive; ‘Internationalization,’ where companies are aiming to expand market or balance business downturns and risks of domestic market; and, ‘Multi-nationalization,’ where companies are aiming to create sustainable competitive position in several geographies. Differing requirements of the institutional and the retail customers: Joint ventures are generally not viable for institutional customers, while being a useful option for reaching the latter—with benefits related to local knowledge, capital, brand, and distribution. Organizing for growth and capability building: Structure for the three strategy types is different and a ‘dual-core’ model could balance requirements of risk-taking in new areas with efficiency in stabilized activities. While carrying Indian imprint, the culture will be company-specific and should be allowed to evolve in a directed way. Critical role of conviction-laden leadership: This is a common element across all the Indian companies that have made overseas breakthroughs and the leadership traits of being clear, fundamentals oriented, and planned need to be supplemented with international orientation and preparedness for longer haul for success in overseas markets. Nature Thoughts & Symmetry

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