Up until recently, an international brand would enter an emerging market like India, by taking an existing product and create a stripped down low-cost version for the new market. But not any longer. Traditional business models no longer apply in India. Increasingly, you will see new products developed from the ground up with new business models. The March 2012 McKinsey Quarterly article, “How Multinationals Can Win in India,” predicts that in the next 10 years, 20% of global revenue growth will come from India. For multinationals in India to succeed, they must adopt new business paradigms immediately.
So far, multinationals have made gains in particular niches. However, none had achieved market leadership on a large scale in India. The report cited examples of companies that failed by clinging to old global business paradigms. When they shifted tracks, they experienced a turnaround.
In the article in The Economist, ‘Less is more‘, (Nov 17th, 2011) supports the contention that old global business models are no longer effective in today’s market. In the past, developing countries were perceived to be sources of lower labor costs. Today these countries are creative and are building low-cost technology and machinery that are being sold in developed markets.
One of the cited examples is the Fetal Heart Monitor, developed by Siemens. The idea for it came from India. In the past, ultrasounds were used to monitor the heart of the fetus. But these machines are expensive, complicated and one must be trained on how to use it. In India they simply used off-the-shelf microphones. German engineers improved the product without changing its simplicity. Anyone can operate a Fetal Heart Monitor without any training. It is also much cheaper than an ultrasound.
New business paradigms needed in India
A new global business paradigm must utilize the capacity of large corporations to grasp the expertise of developed countries and combine it with innovative creations from developing countries like India. To do this successfully will mean letting go of old global business market mindsets and paradigms that didn’t succeed in India. These include:
– The concept that one model fits all: This is not true in India. The country’s market is largely fragmented. In essence, there are many “Indias” within India. There is a plethora of cultures, geography, different languages, literacy levels and financial levels per culture group. There is a need to understand each of these cultures’ ways, needs and circumstances, so that products can be adjusted to meet each cultural market’s requirements to enhance sales
– Hierarchy, bureaucratic roadblocks: A foreign multinational head who holds all decision making power poses a disadvantage, especially if he is based outside the country. He is unfamiliar with India’s unique business culture. Plus, India regularly experiences changing market conditions. The multinational head fails to respond to these changes adequately
Some multinationals recognized the flaws of centralized autonomy. They responded by delegating a high degree of autonomy to Indian operations. In one case, a company that did this experienced a 30% revenue growth yearly from 2001 – 2005, the McKinsey report said.
Delegate autonomy to India
Transferring autonomy to Indian operations is the crux of needed change by multinationals. It implies that only India’s top talent is tapped to handle the delegated autonomy competently. The Indian leader has knowledge of, and experience with the Indian market. He decides on capital expenditure, head-counts, product development, product customization and pricing. He also oversees empowerment of lower management levels to enhance innovation and free enterprise.
Strong middle management is critical to successfully implementing business growth strategy. Ironically, India lacks good local middle management talent. The McKinsey report cited three ways that some multinationals have responded to the situation. First, through the institution of a fair and transparent reward system based on performance. This included incentives including career advancement to encourage self starters with high performance levels. Secondly, through the creation of prestigious job positions. These jobs included membership on executive committees and global visibility. Other incentives were higher salaries and more authority. The position was usually granted to those with strengths on entrepreneurship.
The final way is through the provision of certified leadership development courses. This became an incentive to recruit new talent and was a way to retain good performers. Leadership programs were also introduced that provided mobility and structured global rotation for top performers.
Commitment raises bottom line
It is necessary that multinational companies shift their vision when they do business in India. It is not efficient nor profitable to always focus on the bottom line. A shift in vision will call for more commitment on the part of the multinational in many ways. One means of doing this would be to expand commitment cycles. Ideally, top leadership should aim for five-year target cycles in India, and aim high. Commitment would also require global CEOs and senior executives to visit the country an average of four times yearly. This will give them the opportunity to dialogue with local clients, and get a keener understanding of shifting business cycles so that they would have an eye on which local investments deserve continued support amid business cycles.
It goes without saying that when a multinational delegates authority to its Indian CEO, there is sufficient funding to back him up. This implies, too, that the multinational has aimed high and hired only the best man for the job. At the same time, understanding the capability of your Indian CEO, it is mutually beneficial that he also has a place in global executive committees.
Quality products, lower cost
Success in India requires understanding the spending power and the demands of the Indian market. Indians like good quality products, but these should be available at prices they can afford. To make these products affordable without sacrificing quality, one can remove frills that can cut production cost from 50-70%. Sometimes, there is a side benefit to the above. An example that McKinsey cited involved a low cost, no-frills tractor that a multinational firm created for Indian farmers. The product also, surprisingly, became marketable in the US, where a number of farmers wanted a sophisticated yet affordable tractor. What yinned, in essence, also yanged.
However, producing a good product is not enough, especially in India. It is necessary to have a distribution network and chain supply that works efficiently among the various “Indias within India.” This means that the multinationals must retain strong relationships with their leading stakeholders, such as external agencies, the government and regulators.
When making a five-cycle business plan, part of the plan should be to aim high. This would mean regularly seeking new business development options. A specific team must be formed for the purpose of developing local partnerships that enhance revenue. McKinsey cited the example of a large beverage firm that was hindered, among other things, by labor laws that made distribution expensive. The firm solved its problem and circumvented these laws by contracting local distribution entrepreneurs. In the end, market penetration was enhanced, at significantly lower costs.
Finally, it is time for multinationals to outsource Indian products and talent globally. India’s products are cheaper, and the country has a vast talent pool to produce these products on a much larger scale. This can be done with an R & D team from India that is tasked to discover new innovations in the country that are relevant to markets overseas.