Challenges to indian businesses


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Challenges to indian businesses

  1. 1. Page 1 of 10 Y KRISHNA MOHAN ID: 2012HZ58051 BIRLA INSTITUTE OF TECHNOLOGY AND SCIENCE Distance Learning Programme Division M.S. (Consultancy Management) 2012-13 Course – CMZC 473 - INTERNATIONAL BUSSINESS ASSIGNMENT-2Q. Write an essay on the „Challenges faced by Indian businesses internationalisingat a fast pace - A Cultural Perspective‟. INTRODUCTION1. In the early nineties, India faced major financial crises, led by foreign exchangecrunch that dragged the economy to the brink of Defaulting on loan repayments andBalance of payment crisis. In the face of these crises, the Indian polity, prompted byimmediate needs and demands from multilateral agencies, adopted a slew of domesticas well as external sector reforms. The policy changes radically pushed for more openmarket oriented economy.2. During the same time, with the end of the cold war, Globalisation became thebuzzword on the world economic stage. The reforms in the Indian economic policiessaw a host of foreign companies land on the Indian shores. The Indian market which tillthen, was under a protectionist regime had to face the challenge of the foreigncompanies and catch up with the markets of the developed countries. This led to quicklearning by Indian businesses in internationalisation both in scale and speed.3. To overcome the challenges of the developed markets, Indian businesses initiallyenhanced their growth by adopting an Organic Growth concept and after achievingsufficient growth under a liberalised policy environment and their own entrepreneurialabilities, rose up to face the challenges posed by global markets, adopted inorganicgrowth concept. This saw a spurt in the Merger & Acquisition (M&A) activities, whichpredicted overtaking of the inward FDI by outward FDI. In the course of theinternationalisation process, the Indian businesses moved away from the traditionallower cost labour and infrastructural costs and rose up the value curve, by offeringincreasingly sophisticated products and services for the international markets.4. While the Indian businesses are internationalising at a fast pace, they are facedwith numerous challenges common to all businesses while internationalising. Howeverdue the inexperience of the Indian businesses in internationalising, these challengesmay pose a difficult hurdle to cross in the absence of support from the Indiangovernment or research in these aspects from an Indian perspective. CHALLENGES FACED IN INTERNATIONALISATIONGROWTH THEORIES.5. The objective of every business enterprise is to increase its revenue, profit orassets. The process of increasing the revenue of the enterprise, can be achieved byeither through the enterprises‟ own business activity i.e. increase its growth rate with thehelp of an efficient management or by acquiring a technology developing company inorder to enhance its competitive advantage and growth rate. The former process is
  2. 2. Page 2 of 10 Y KRISHNA MOHAN ID: 2012HZ58051 BIRLA INSTITUTE OF TECHNOLOGY AND SCIENCE Distance Learning Programme Division M.S. (Consultancy Management) 2012-13 Course – CMZC 473 - INTERNATIONAL BUSSINESSknown as Internal Growth also called Organic Growth; while the latter process is knownas External Growth also called Inorganic Growth. Thus, to achieve growth, businessenterprises can choose to build in-house competencies, invest to create competitiveadvantages, innovate in the product line to achieve Organic Growth i.e. develop corecompetencies and sales; in contrast growth achieved through expansions met throughmergers & acquisitions achieve Inorganic Growth.6. The growth of Apple Inc. is a perfect example of organic growth, where growthwas driven by trend setting technological breakthroughs and product innovation. On theother hand growth of Microsoft is a classic case of inorganic growth where growth wasdriven by large scale acquisitions. In the Indian scenario, growth of TATA motors bydeveloping its core competencies and sales, Indian IT companies like wipro and Infosysand classic examples of Organic Growth; on the other hand growth of TATA motorsdriven by foreign acquisition of Jaguar, Landrover, Corus steel etc... and growth ofSuzlon by foreign acquisitions are examples of Inorganic Growth stories.7. The success of Organic Growth is a sure-fire test of the management‟s ability toshare a common vision and deliver the vision. Companies growing organically not onlymeasure their success on financial metrics alone but take careful note of other metricslike customer satisfaction metrics, product quality metrics, logistics and supply chainmetrics etc. While both Organic and Inorganic Growth offer intrinsic value in their ownway and the choice being dependant on the market and industry scenario as well as thestrategic vision of the business. Matter of fact, a good management principle would beto use a combination of both methods to gain a steady growth pattern in the domesticmarket as well international markets. For example, TATA motors initially adoptedOrganic Growth options for processes in which it did best i.e. manufacture of vehicles,and after consolidation in the domestic market adopted Inorganic growth measures forexpanding its business potential.CHALLENGES TO GROWTH.8. The challenges faced by businesses adopting organic growth can be overcomeby innovative and home grown management principles and practices; on the other handfor achieving success in adopting inorganic growth, the businesses should have abilityto cope with diverse institutional, cultural, people oriented and competitiveenvironments, so as to coordinate geographically dispersed resources and to leverageresources across national borders.9. The challenges faced by businesses adopting Inorganic Growth may be broadlycategorised under the following headings:- (a) Markets. Businesses need an in depth knowledge about entry into foreign markets, in the creation of new markets, how to compete with other global brands, strategy, products, consumer psychology and preferences, quality control and improvement of value chain in terms of R & D. Understanding
  3. 3. Page 3 of 10 Y KRISHNA MOHAN ID: 2012HZ58051 BIRLA INSTITUTE OF TECHNOLOGY AND SCIENCE Distance Learning Programme Division M.S. (Consultancy Management) 2012-13 Course – CMZC 473 - INTERNATIONAL BUSSINESSconsumers in other parts of the world and creating localized marketingcommunications to reach these consumers necessitates adoption of marketingstrategies which take care of cross cultural differences in consumption patternsand media habits.(b) Manpower. To cater for global manpower requirements, the businessesneed to adopt global human resource policies. These policies need to addressqualities pertaining to the global mindset of the employees - theirprofessionalism, talent growth & change areas and work ethics and leadershipissues. The qualities of the employees can be nurtured through proper processmanagement, systems thinking and competency development, especially domainand soft skills. While towards addressing leadership issues, the managementneeds to adopt a decentralised style of leadership and need to shed theirfeudalistic management style. (c) Technology. The businesses need to keep pace with the globaltechnological trends and thereby frequently update the technology in use.(d) Quality Management Systems. The Indian industries havealways been lacking in quality when compared to their western counterparts thusQuality has always been a contentious issue in Indian industry. The inadequateattention towards quality has often been attributed as a reason for India laggingbehind in industrialisation against the global rivals. However, the opening of theIndian economy in the 90s brought about a sea change in Indian companiesattitude. Indian businesses since then realised the importance of quality as itenabled them to stand up against global competition. The initial phase of thechanging scenario was marked by a spate of companies going in for differentlevels of ISO certification. The second phase was ushered in by the emergenceof a vibrant IT industry where quality consciousness was always important andintroduced international quality management standards like PCMM and SixSigma thereby bringing in new techniques in product and process qualityassurance systems.(e) Governance and Ethics. Different geographical areas havedifferent kinds of parameters in terms of governance and ethics. Thusbusinesses need to understand them and accordingly incorporate a transparentand responsive administration towards local laws and government regulations.(f) Risk Management. The businesses need to leverage pastexperience of analysts and the knowledge base they are exposed to; to evaluatethe risks that can be taken. Financial companies/banks play an important role inmaking companies aware of the risks and also help in constant evaluation andelimination of credit, currency and financial risks. Thus Design andimplementation of Enterprise Risk Management solutions need to be adopted bythe Indian businesses.
  4. 4. Page 4 of 10 Y KRISHNA MOHAN ID: 2012HZ58051 BIRLA INSTITUTE OF TECHNOLOGY AND SCIENCE Distance Learning Programme Division M.S. (Consultancy Management) 2012-13 Course – CMZC 473 - INTERNATIONAL BUSSINESS (g) Management of Change and Organisation Culture. The global culture transcends local cultures and, at the same time, respects national and ethnic differences. Change management needs to be facilitated to bring about a change in mindsets and attitudes of Indian managers, bringing in flexibility, changing old leadership styles away from feudalistic or paternalistic management, aligning the mindsets with world-class processes.10. While most of the above challenges posed to Inorganic Growth can be effectivelyengaged by employing consultants in relevant fields, Management of Change andOrganisational Culture poses the most difficult challenge for any M&A to be successful.Thus the Indian businesses adopting Inorganic Growth need to understand the issuespertaining to this critical challenge for ensuring positive and successful growth throughM&A.CULTURE & ITS IMPORTANCE.11. Mergers & Acquisitions (M&As) are the most happening strategy fororganisations attempting to gain a competitive advantage. Business corporations spendmillions of dollars in pursuit of this strategy as it provides Advantages of scale,Increased share holder value, Access to new markets and Lower overheads. The earlystages of most M&A are characterised by high hopes, elation about the deal, and not tomention plenty of media attention. The long term reality however is often disappointing;under achievement in terms of shareholder value, level of internal conflict or evendivorce of the merged partners or resale of the acquisition. Research has howeverstated that the success rates are less than commendable i.e. 83% of all M&As do notimprove share holders value and only 25% of them succeed. Research has identifiedthat post M&A, the integration process holds the key to its success. The make-or-breakof a M&A is shaped by; One - Whether the integration management succeeds in gettingvery culturally diverse, real people to work together constructively in order to achievetangible goals; Two - Putting people on the centre stage will do much to turn strategicintent into reality. Thus the human and cultural facets play the most important roleduring the integration phase.12. Research has identified that Culture and Integration of Cultures as the mainreason for failures of M&As and also the most difficult areas for integration of a M&A. Anational culture is a set of beliefs, perspectives, motivations, values and norms sharedby the majority of the inhabitants of a particular country. It is reflected in the laws of thecountry, its institutions, values and social standards. Culture has three primarycharacteristics; It is shared by a group of people, It is something that people learn, Itdepends on environmental conditions. A crucially important function of culture is todefine Concepts – which helps people to differentiate or enable comparison betweenvarious items of information Eg. Conceptions can determine how a message isinterpreted, or how a recipient reacts. The culture in an organisation is created by thepeople working in the organisation (if there are no people in an organisation, then there
  5. 5. Page 5 of 10 Y KRISHNA MOHAN ID: 2012HZ58051 BIRLA INSTITUTE OF TECHNOLOGY AND SCIENCE Distance Learning Programme Division M.S. (Consultancy Management) 2012-13 Course – CMZC 473 - INTERNATIONAL BUSSINESSare no cultural issues to contend with), and these two components taken togethertranscend all other parts of the organisation. Thus people and cultural components areinterrelated and complications arise because these issues don‟t fit cleanly into anyformulaic approach and no “silver bullets” exist that can resolve many of the people andcultural problems.13. Knowledge of culture facilitates the following:- (a) To communicate effectively. (b) To conduct negotiations and understand the nuances of bargaining postures. (c) To predict trends in social behaviour. (d) To understand ethical standards and concepts of social responsibility. (e) To predict how cultural differences will effect consumer reactions to advertisements and other promotional aspects.14. The influence of culture on business can be broadly grouped under the followingcategories:- (a) Business environments. Culture effects relationships between trade unions and managements, Employment conditions, Role of government in business affairs, Extent of employee participation in management decisions, degree of formality of personal relationships etc... (b) Marketing. What & when people buy, Who does the purchasing, Which member of the family makes purchasing decisions, the grade of acceptability of advertisements etc... (c) Social attitudes. Attitude towards work & material possessions, entrepreneurship, politics, religion, role of women in society, wealth accumulation etc...15. Linguistic influences. Languages and cultures are intimately intertwined, aslanguage is the vehicle through which ideas and perceptions are expressed. Manyaspects of a community‟s culture are reflected in the language it uses; and a detailedknowledge of that language provides illuminative insights into the relevant culture. Onthe other hand ignorance of a language results in scope for boundlessmisinterpretation of messages. Also translation would be difficult if the usage of wordsand phrases in a particular language would be dependent upon the concept of theparticular culture. Eg. Fords‟ Pinto small car sold poorly in certain parts of LatinAmerica - where the word „Pinto‟ is used to represent „small sexual male organ‟;Chrysler for power – in Spanish this means „Chrysler is an Aphrodisiac‟, Come alivewith Pepsi – in Germany it means „Rise from the grave with Pepsi‟.
  6. 6. Page 6 of 10 Y KRISHNA MOHAN ID: 2012HZ58051 BIRLA INSTITUTE OF TECHNOLOGY AND SCIENCE Distance Learning Programme Division M.S. (Consultancy Management) 2012-13 Course – CMZC 473 - INTERNATIONAL BUSSINESS16. Non-linguistic influences. Similarly the meaning of body language variesfrom one country to another. Eg: Disagreement is indicated by shaking of head fromside to side in some countries, while people nod their head in some other countries.Showing of soles of the feet to others or placing a foot over the knee is considered agrave insult in some cultures.17. Lifestyle. Culture is a major determinant of lifestyle. Other importantinfluences on lifestyle are income, upbringing, personal experiences and relationshipwith the community at large following. Lifestyle involves a pattern of living habits, leisurepursuits, types of entertainment purchased, degree of involvement in communityetc...Observing or studying lifestyle can help in identifying certain commoncharacteristics, which can be categorised as below:- (a) Attitudes towards home, family, security and proprietary. (b) Whether the indivual is interested in inward growth of outward growth. (c) The degree of logic applied to purchasing decisions. (d) Whether their outlooks are conservative and traditional or whether innovative and adventurous. (e) Whether they are motivated by materialistic or non-materialistic drives.18. While many of the above are characterised by individuals, the cultural factorscharacterised by the national culture of the host nation are:- (a) Employee Values. Extent of individual loyalty and commitment to an employing company. In some countries, employees identify themselves very closely with their employing organisations, while in some countries the employee identifies himself with the occupation, profession or specific functional role. (b) Decision Making. Whether decision making is centralised or decentralised. Cultural factors cause senior managers to take all important decisions themselves, while in other countries employee participation in management decision making and extensive delegation are common. (c) Management Structure. Authority systems within firms. Whether autocratic or democratic, hierarchical, bureaucratic, or flexible. The number of levels of management within the organisation. (d) The extent of nepotism within organisation. (e) Attitude towards bribery.EFFECT ON INDIAN BUSINESSES.19. As the Indian businesses are trying to go global, the various aspects of culturethat have been identified as hurdles to growth are fully applicable to Indian businesses.
  7. 7. Page 7 of 10 Y KRISHNA MOHAN ID: 2012HZ58051 BIRLA INSTITUTE OF TECHNOLOGY AND SCIENCE Distance Learning Programme Division M.S. (Consultancy Management) 2012-13 Course – CMZC 473 - INTERNATIONAL BUSSINESSWhile the cultural factors required to be considered are numerous, certain principalcharacteristics, which are nation based need to be addressed by the businesses beforeattempting M&A. In any M&A, the participants are human and are driven by both theirshared cultural and individual personalities. Thus the factors affecting M&A can bebroadly categorised as below:- Cultural Affects Resulting In(a) Decision-making style • Effective integration requires rapid decision-making. (for example: consensus •Different decision-making styles can lead to slow contrasted with top-down) decision-making, failure to make decisions, or failure to implement decisions.(b) Leadership style • A shift in leadership style can generate turnover among (for example: dictatorial or employees who object to the change. This is especially consultative, clear or true for top talent, who are usually the most mobile diffuse) employees. • Loss of top talent can quickly undermine value in integration by draining intellectual capital and market contacts.(c) Ability to change • Unwillingness to implement new strategies. (willingness to risk new • Unwillingness to work through the inevitable difficulties things, compared with in creating a new company. focus on maintaining current state and meeting current goals)(d) How people work • Merged companies will create interfaces between together functions that come from each legacy company, or new (for example: based on functions that integrate people from both legacy formal structure and role companies. If the cultural assumptions of the legacy definitions or based on companies are inconsistent, then processes and handoffs informal relationships) may break down with each companys employees becoming frustrated by their colleagues failure to understand or even recognize how work should be done.(e) Beliefs regarding personal • Again, these differences can lead to breakdowns in "success" getting work done. If people who believe they have to (for example: achieve goals as a team integrate with people whose organisations that focus notion of "success" emphasizes individual performance, on individual "stars," or on the resulting situation is often characterized by personal teamwork, or where dislike and lack of support for getting the job done. people rise through connections with senior practitioners)20. The major attributes of the Indian culture is polar distances away from thewestern cultures, except in few cases where certain attributes of Indian culture match
  8. 8. Page 8 of 10 Y KRISHNA MOHAN ID: 2012HZ58051 BIRLA INSTITUTE OF TECHNOLOGY AND SCIENCE Distance Learning Programme Division M.S. (Consultancy Management) 2012-13 Course – CMZC 473 - INTERNATIONAL BUSSINESSwith that of the host countries. Despite the fact that the Indian culture is dissimilar to thatof the other countries/continents, Indian businesses have mostly been successful inexpanding abroad. A few cases of Indian businesses having going global areconsidered to show how these businesses have been successful despite the oddsagainst them. (a) The case of Indian IT industry. The Indian It industry before going global had adopted Organic Growth and has in the initial years displayed gradualist growth. From the days when these companies offered dedicated outsourcing of talent, to starting a subsidiary staffed by Indian personal, in the European or American markets, and then further move to grow by M&As, helped the Indian IT companies to internationalise. Thus many of the employees of these organisations had prior working experience before the organisations went global and as the organisation went global, it was easy for these employees to adapt to the new cultural environment. These organisations are predominantly controlled by one family member and without any other family member taking up any role in the company (as in the case of Wipro) OR controlled by the founders without any family member taking up any position in the management (like in the case of Infosys), but the organisational structure of these organisations has become more decentralised and converted from a hierarchical structure to a flatter organisation. Values were encouraged included sharing, creating an “informed consensus” through finding binding aspects between differing positions, challenging and debating issues, etc. Thus the IT companies had any hurdles to face while internationalising. (b) The case of Indian Banking Industry – ICICI Bank. At ICICI Bank international expansion has progressed along a staged- approach. Initial expansion started in markets with close business and cultural ties with India and a significant presence of people of Indian origin, such as Dubai and Singapore, and then progressed to other distant countries. The Bank was founded in pre-liberalisation times with active participation of the government, but proactively and successfully responded to the demands of a free market economy by means of a strategic redirection and an organisational transformation. In this process, the Bank has emerged successfully in the face of competition from much larger public sector Indian banks and international banks. Some of the key organizational characteristics at the Bank include:- Increasing professionalization and cross organisational and informal communication. Organizational processes are characterised by rapid decision-making, operational efficiency, entrepreneurship, leveraging of technology, innovation and brand-building. The Bank has a adopted a clear
  9. 9. Page 9 of 10 Y KRISHNA MOHAN ID: 2012HZ58051 BIRLA INSTITUTE OF TECHNOLOGY AND SCIENCE Distance Learning Programme Division M.S. (Consultancy Management) 2012-13 Course – CMZC 473 - INTERNATIONAL BUSSINESS centralization/decentralization differentiation when it comes to its international operations. HR policies emphasizing employee development and a performance- oriented culture. Top management team leading with a very visible leadership stance. An organizational culture that appears to promote empowerment (leaders in promoting women to top organizational posts) and a challenge- filled work environment, which has helped employee retention. Thus ICICI bank has been successful in internationalisation by adopting various management techniques to suit its development plans rather than adopting one fixed set of techniques. (c) The case of Indian Energy Industry – Suzlon Energy. Suzlon Energy has grown from a home grown (with assistance of foreign expertise), wind turbine manufacturing industry into 5th largest in the world wind turbine business.The company has concentrated its globalization spree towards improving its core business i.e. Wind Energy, by undertaking acquisions for full backward integration of the supply chain into all related spheres of power generation from wind energy. This company has grown In-organically following the Uppsala method. Suzlon initially 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 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. While Suzlon‟s achievement has been successful in the international environment over the last few years, but during this fast growth track there inevitably have been occasional challenges in managing this growth such as quality issues faced by the company recently. To deal with such challenges, the company will have to work on keeping its current spirit of growth alive while constantly focusing on upgrading its organisational and operational excellence to world standards. CONCLUSION21. Till the early 1990s, Indian entrepreneurs or business families developed theirbusinesses within the country despite the unfavourable business atmosphere within thecountry. Post the liberalisation; the Indian businesses were faced with growing
  10. 10. Page 10 of 10 Y KRISHNA MOHAN ID: 2012HZ58051 BIRLA INSTITUTE OF TECHNOLOGY AND SCIENCE Distance Learning Programme Division M.S. (Consultancy Management) 2012-13 Course – CMZC 473 - INTERNATIONAL BUSSINESScompetition from the foreign businesses invading India. To overcome this challenge,some of the Indian businesses developed horizontally by adopting Organic Growthwhile a few of them expanded by adopting Inorganic Growth. While there are challengesposed to either type of growth, the challenges posed to Inorganic Growth are tougher incomparison. While there is ample research available for western companies orcompanies from the developed markets, adopting Inorganic Growth, the same is not sofor companies from transitional economies or developing countries.22. The challenges posed to any business adopting Inorganic Growth i.e. M&A aretougher and of these, Cultural Challenges are the toughest. Thus in striving for successthrough M&A, organisational design and transformation is considered as the mostimportant. Organisational Culture is akin to Personality of an individual, which is highlyindividualistic and having a sizeable Ego. Thus as such a personality cannot bechanges overnight, Organisational Culture also cannot be changed. An M&A is akin to aLove-Marriage between two individuals having diverse Individualistic Personalities. Asthe two individuals understand each other, respect each others‟ personality and adjustto suit the other personality, the marriage grows to become a success. Similarly in thecase with an M&A, where the organisational culture of the organisation needs to beunderstood, respected and adjustments need to be made for its growth and success.23. The Indian businesses have been greatly successful in handling the M&Asdespite the high failure rate of M&As and that Indian businesses who have ventured intoM&As are the traditional feudalistic organisations run as family empires. These Indianbusinesses had flourished in an atmosphere prevalent with multi-cultural, plural society.Hence it is likely that the Indian businesses could have shown remarkablereorganisation and agility to reorganise in the face of international challenge.References.(i) Thesis on - The Internationalization of Indian Firms: Strategic Issues,Organizational Transformation, and Performance by Prasad Oswal.(ii) Management Decision - Emerald Article: Enhancing the success of mergers andacquisitions: an organisational culture perspective by Mike Schraeder, Dennis R. Self.(iii) Paper on Intercultural Challenges of Transatlantic Merger – Kultur &Management.(iv) International Business by Roger Bennett.