Restructuring of Indian Firms for Catering to Emerging Markets

Puru Gupta & Saurabh Mundhra

 TABLE OF CONTENTS
INTRODUCTION ........................................................................................................................................ 3
POSITIONING FOR EMERGENT MARKET COMPANIES ............................................................... 4
FACTORS GOVERNING AN ECONOMY .............................................................................................. 5
INSTITUTIONAL CONTEXT .......................................................................................................................... 5
ROLE OF INTERMEDIARIES .......................................................................................................................... 6
MARKET FORCES IN INDIA AND THE EMERGING SCENARIO .................................................. 7
PRODUCT MARKETS ................................................................................................................................... 7
CAPITAL MARKETS .................................................................................................................................... 7
LABOR MARKETS ....................................................................................................................................... 8
GOVERNMENT REGULATION ...................................................................................................................... 8
A PROACTIVE GOVERNMENT – NEW INITIATIVES ....................................................................................... 9
CONTRACT ENFORCEMENT ....................................................................................................................... 10
EMERGING IMPERATIVES FOR INDIAN COMPANIES ................................................................................... 10
SPECIFIC COMPETENCIES TO BE LEVERAGED1 .......................................................................................... 11
COMPARATIVE ANALYSIS .................................................................................................................. 12
THE TRANSITION PROCESS – FROM DIVERSIFIED TO FOCUSED .......................................... 13
STRATEGIES FOR THE FUTURE ........................................................................................................ 14
THE FOCUSED APPROACH ........................................................................................................................ 14
BUILDING ON CORE COMPETENCIES ......................................................................................................... 14
MERGERS & ACQUISITIONS AND CONSOLIDATION ................................................................................... 15
INVESTMENTS IN INNOVATION AND RESEARCH ........................................................................................ 15
A NEW PRODUCTIVITY DRIVE .................................................................................................................. 15
BRAND BUILDING AND SERVICE............................................................................................................... 15
REAPING CROSS BORDER SYNERGIES ...................................................................................................... 16
CONCLUSION........................................................................................................................................... 17
REFERENCES ........................................................................................................................................... 18
Introduction
The Indian Industry has been predominantly a group of family based businesses and
conglomerates. These conglomerates right from the Tatas, Birlas, Mittals, Ambanis, and
Jindals have significantly defined and shaped Indian industry and commerce. Surviving
the successive protectionist regimes and emerging out of them successfully is a
bewildering achievement. Yet now when the economy is in an ongoing reforms process,
and is fanned by the breeze of globalization, privatization and liberalization; these very
conglomerates face new opportunities and threats.

Capitalizing on their internal capital and brand equity, this is the most opportune time for
these companies to revitalize their strengths, reform their structures and strategies and re-
launch themselves aggressively in the global markets.

The global markets emphasize value adds, innovation, flexibility, excellence and
customized products and services. The big question is whether the conglomerates should
diversify into strengthening their internal functions or take a focused approach to
establish and consolidate their markets. In the following paper, we attempt to discuss the
governing forces behind the decisions, an assessment of the decisions, and an orientation
for the future. Looking ahead, we discuss the strategies Indian companies must employ if
they decide to focus on core competencies.
Positioning for Emergent Market Companies
There are two main forces that govern the strategy adopted by organizations for
sustenance, survival and economic growth – one being those that push an organization to
expand its current localized markets, and the other being the Competitive Advantage they
hold in their market, that is, the degree to which its assets can be transferred to another
market:

(1) Defender – If globalization pressures are weak, and a company’s own assets are not
transferable internationally, the company needs to concentrate on defending its turf
against international exposure. For instance, Bajaj, Anchor, etc. The products could not
be transferred internationally.
(2) Extender – If globalization pressures are weak and a company’s assets are
transferable; the company can extend its success at home to a limited number of other
markets. E.g. Asian Paints, Infosys, etc Infosys extended its information technology
services and entered North America and Europe
(3) Dodger – If globalization pressures are strong, and its assets work only at home, then
it needs to concentrate on dodging its new rivals. Companies do so by a) selling off their
stakes to multinationals, b) concentrating on their competitive advantage solely,
c) complementing the multinationals’ offerings or adapt them to local tastes, and d)
moving to the other end of the value chain.
(4) Contender – If globalization pressures are strong and its assets are transferable, the
company may actually be able to compete head-on with the multinationals at the global
level, by shedding businesses, outsourcing components previously made in-house, and
investing in new products and processes.

Liberalization and Globalization in any Economy exposes the market to competition.

Depending upon their positioning, managers can respond in a variety of ways.
By better understanding the relationship between their company’s assets and the
particular characteristics of their industry, managers can also anticipate how their
strategies may evolve over time. As more and more companies learn to compete in the
global markets, we are bound to see a growing number of aggressive “contenders”.
Many of the most successful companies will remain focused on their local markets,
strengthening their main sources of competitive advantage. Others will build on a
successful defense of their domestic markets and look for opportunities abroad.

Factors governing an Economy

Institutional Context
The most important determinant of an emerging economy is the effectiveness with which
an economy helps buyers and sellers come together – including the role of the market
forces, the role of the institutions as facilitators and the role of government.
This effectiveness is measured on five important parameters - A country’s product, its
capital markets, its labor markets; the regulatory system; and its mechanisms for
enforcing contracts. These parameters are referred to as the “Institutional Context” of
an economy. Companies need to devise strategies in line with the Institutional context
inherent in an economy.
Role of Intermediaries
Apart from the Institutional context, an economy is dependent upon a lot of other factors.
These factors, together with the Institutional Context, determine the strategy to be
adopted by a company, for a particular market. For a sustainable growth, these are also
the “Critical Success Factors”:
Intermediaries Importance
Political and Social The economic & social policies and tax structures developed
System by the government should be supportive of the Private sector
Openness to Change In the wake of Liberalization and globalization, the openness
of an emerging economy to reform processes, foreign
investments and commerce
Presence of Venture Financial stability governs financial performance. Presence
Capitalist & Securities of strong financial institutions reflect the confidence and
stability of an economy
Educated Talent Human resources are critical for an organization. To
optimize the performance of an organization, talented
managers act as the linchpin
Judicial System An ineffective judicial system is an impediment to the
orientation of an economy
Transparency in the Effective functioning and processes entail transparency in
processes their transactions
Market Forces in India and the Emerging Scenario

In India, Market forces determine the state of the emerging economy. Each of the
elements of the Institutional Context has its own Ups and Downs . These elements
change with time and are affected by the presence of intermediaries. The Ups and Downs
have their impact on a company, based on its structure – whether it is a conglomerate or a
focused company.

Product Markets

• Patent Regime changed. Regulatory Bodies monitor product quality and fraud.
TRIPS: Conforming to WTO standards of Patents and Copyrights.

• Inconsistency of information between buyers and sellers, due to underdeveloped

communication infrastructure – inefficient postal service, illiteracy, power and
electricity problems, roads and transport, etc
• Not very strong Consumer forums and verification agencies to authenticate the
information supplied
• As for SCM and logistics, Suppliers are available, but their quality and
dependability varies greatly.

Capital Markets

• With the country's 15-year-old reforms process taking effect, India is poised to be
one of the fastest growing economies. Aided by a maturing domestic market and a
high GDP growth rate, India’s stock markets are booming like never before,
which now offers Venture Capitalists the best promises of returns from the
country to date. Consistent growth in the Indian IT market also contribute to a
continued climb in VC investments, which are now available in some cities and
from the Indian Diaspora
 • Since the capital markets were open to foreign investors, financial intermediaries
became more sophisticated. Better Regulation, lending facilities and better
interest rates are a natural outcome of an open economy.
• The local banking system is well developed, with easy availability of equity and
stable debt and equity market.
• Accounting Standards - Financial reporting functions well

• Bankruptcy processes exist but are inefficient. Promoters find it difficult to sell
off or shut down “sick” companies.
• There is weak monitoring by bureaucrats

Labor Markets

• Growing number of Business Schools, providing specialized skills and good

exposure
• A highly liquid pool of English-speaking management talent, fueled by business
and technical schools, provides a developed market for Managers.
• A sizeable cadre of techno-managerial force
• Ability to mobilize large teams of professionals in quick time
• Low Labor Costs in India attract a lot of multinationals facing increasing profit
pressure and looking for cost cutting. Multinationals like Ford, DaimlerChrysler,
Wal-Mart and General Electric are looking at India as one of the options1.

• The trade union movement is active and volatile, and has strong political
affiliations, thereby creating challenging conditions in the Workers Market. E.g.
The recent incident in Honda, Gurgaon.

Government Regulation
Government holds a stake in virtually every decision external to a business for any
company. Indian law requires that companies get permission for entry and exit of
business, price modifications, import and export policies, etc.
The law establishes subjective criteria for many of these decisions, so Indian bureaucrats
have a great deal of discretion in how they apply the rules.

• With economic growth the primary objective, cash inflows are being welcomed -
managing large capital flows without excessive volatility; speedy decision-
making and timely corrective action in the face of instantaneous electronic fund
transfers across the globe
• Regulations have been eased, and policies are being revisited and reviewed.
• A dynamic press and vigilant NGOs keep a check on the system

• The democracy is vibrant, but the government is highly bureaucratic.

• Corruption is pervasive in the system
• Possible conflict of interest between central, state and local government

Experience and connections ensure amicable relationships with the government. Intricate
relationships between businesses and government are a norm in Emerging countries like
India. For instance, Reliance launched local tariff plans, against the law, but managed to
garner support from the government, resulting in fine-tuning of the policy.

A Proactive government – New Initiatives

Apart from the above, some Initiatives taken by the Indian government, reinforcing the
growth and positioning of India on the global map:
9 Kyoto Protocol: Conforming to global standards of emissions from production units
or service units.
9 Disinvestment of Loss making Public Sector Units (PSUs) and revival or disposal of
Non-performing Assets (NPAs) E.g. Hotels, BALCO
9 Privatization of Public Sector firms for efficient management and productivity.
9 New Foreign Trade and Export Policy: Tax rebates for exporters, Creation of Special
Economic Zones, Credit for Exporters.
9 Tax rebates for restructuring: provides benefits in the form of a weighted tax
deduction on the amount spent on R&D and also accelerated depreciation rates for
 equipment purchased for R&D purposes. Pharmaceutical companies can deduct 150%
of the amount spent on R&D from taxable income.
9 Infrastructure Development: Construction of National Highways (Golden
Quadrilateral Project), Power Plants (Hydel and Nuclear), Airports,
Telecommunication Infrastructure; Energy Infrastructure (Diversification of sources)
9 IT Act: Acts to facilitate Electronic Commerce in the Economy

Contract Enforcement

• Regulatory Authorities have been setup for various markets in India, to regulate
the transactions, and to enforce contracts.
• With the economy opening up, more global players would enter the market.
Therefore, greater regulation is required, which is being monitored by
independent authorities. Enforcing contracts is critical in the Indian scenario,
since a strong law and order reflects the strength of the system, and in turn, the
economy.
• The enforcement of contracts is still not effective enough to entrust confidence in
the economy by the global players. As a result, companies are less likely to be
able to resolve disputes through judicial channels.
• Political goals take priority over economic efficiencies, resulting in lack of
confidence in the economy and stunted growth. Judicial system should be
independent of the Political system at the centre, and therefore, should demand
higher autonomy.

Emerging Imperatives for Indian Companies

9 Transparency in the system
9 Creation of Critical Mass, in terms of capital, infrastructure and human resources
9 Assimilation of Technology
9 Employee Retention Measures
9 Global Benchmarking
9 Evaluation of Human Capital
9 Creating Brand Equity with Customers, Employees and Investors
Specific Competencies to be Leveraged1
9 Movement towards opening different sectors for Foreign Direct Investment, and
declining control of public sector
9 Export Orientation and Marketing: Indian manufacturing companies should possess a
strong export orientation coupled with front-end marketing skills, operational
excellence and technical capability.
9 Superior technical capability will be critical in becoming a tier I supplier and moving
up the value chain
9 Build on Edges: India has an edge over its competitors in skill intensive industries
like automobiles, pharmaceuticals, telecommunications and consumer electronics. In
these sectors the country has the potential to build an IT-like dominance.
9 Lean Management
9 Focus on Four sources of competitiveness in India’s skill-based manufacturing –
o the ability to re-engineer equipment to lower capital costs by 30-40 per cent as
in the case of Reliance and Hindustan Inks,
o innovative process re-engineering,
o the availability of skilled technicians, and
o A quality mindset, especially in discrete manufacturing areas like forging and
casting.
 Comparative Analysis
Considering the Market forces mentioned above, and the Emerging Orientation of the
Indian Business Environment, the impact of these forces on a Conglomerate would differ
from that of a Focused Company, based on their inherent attributes, style of functioning
and the processes followed by them. Following is a relative analysis of both the
structures:
Advantage – Conglomerates
-Internalize Functions-
Many business groups in emerging
markets make up for the absence or
weakness of market intermediaries by
internalizing these functions
• Capital Market Æ Venture capital
firm, private equity provider,
mutual funds
• Product Markets Æ Regulatory
authority, arbitration function
• Labor Markets Æ Training
Programs, business schools, head-
hunting firm, relocation service
• Government Regulation Æ
Lobbyist
• Contract enforcementÆ arbitration
service
-Create New Businesses-
Funding available internally and costs
spread over different businesses
(TATA Financials for TATA Motors)
-Resource Movement internally-
Internal relocation of employees with
matching skills and competencies
ensures optimized talent utilization as
well as saves costs. (E.g. TAS)
Create- Own Labor Community-
New Businesses
Aditya Birla Group & Godrej have
established communities of their own
in Mumbai
-Leveraging Existing Brand Value-
--x--
Advantage – Focused
Companies
-Competitive Advantage-
Companies develop a strong
competency in the focused areas, and
build a brand around it
-Better Efficiency-
Quality processes ensure a more
efficient output
-Robust Internal Systems-
Streamlined Internal Information and
incentive systems (Tools like EVA,
Balanced Score Card, Activity-based
costing need to be adopted)
-Ease of Entry and Exit in
Business-
Open Economy is devoid of trade
barriers with adaptability to change
-Efficient Dissemination of
Information-
Transparency in the system, with
updated information
-Promoting Entrepreneurship-
Due to competency building, focused
organizations diversify into
independent units, entrusting
ownership and accountability,
thereby promoting entrepreneurship
--x--
The Transition Process – from Diversified to Focused

Conglomerates are leveraging their existing setups (internal funds, brand equity, trust and
relationships) into venturing and streamlining their processes. There is a transition
happening with a move towards focusing on core competencies and outsourcing all the
secondary domains. Focused approaches would reduce gross inefficiencies, accelerate the
decision making process and also enhance entrepreneurship. When the conglomerates
would become successful in establishing themselves as global players in their core areas,
they might hive off or sell off their peripheral areas of business.
Looking ahead, the Institutional context is changing, with more confidence in the
economy and more cash inflow and financial funding of equity capital.

These conditions have accelerated the drive of Indian companies from dodger to
extender to contender (as explained in the model). The major Indian business houses are
now on the contender’s aggressive path utilizing their in-house capital and resources.
This shift may be more out of compulsion but the Indian businessmen have understood
the new emerging economic environment. An open Economy devoid of any trade barriers
with high forces of Globalization entails companies to take a focused approach.

The nature of the industry is a dependency as well. A company in a predominantly local

business may prosper because of its superior service and distribution. But a competitor
may make a move that changes the industry fundamentally, giving advantages to global
players
Strategies for the Future
The emerging contender is already on its way to unchallengeable dominance. The
success and range of its journey would depend on the strategic initiatives it takes. We
propose the following strategies for the contender to grow and prosper globally:

The Focused Approach

The liberalization of the economy saw a period of unhindered diversification and growth,
particularly in non-core areas, which adversely affected the corporate sector. The process
of restructuring has seen companies hiving off operations in a bid to refocus on core
competencies and become leaner to face competition. A lot of consolidation is being
engineered in some sectors like Pharma, IT, Automobiles. Financial institutions must
consolidate to face up to much stronger international institutions. We are seeing the
beginning of possibly a large movement of Indian companies re-engineering their
businesses to be web-compatible and entering into the world of e-commerce either
directly or as part of a portal.

Building on Core Competencies

Outsourcing Secondary Activities: The contender is most comfortable in building on its
core abilities and competes in proven grounds. Hence many emerging Indian companies
have decided to refocus on core competencies, while outsourcing or shedding off
secondary operations.

Examples
• ONGC Videsh. It was created out of ONGC and now focuses only on oil
exploration and acquisition.
• IT Sector is refocusing on core competency.
• Jindal Stainless Ltd Jindal Stainless Ltd, a part of the $2 billion O P Jindal
group, has drawn up plans for an integrated stainless steel project in
Orissa’s Jajpur district. To be built in two phases, it will have a capacity of
1.2 million tonnes per annum.
Mergers & Acquisitions and Consolidation
This is the inorganic mode of the focused approach. Companies consolidate and grow
largest to gain larger and diverse markets shares and build a global brand. The profits and
economies of scale help them ward off tough competition.
Examples:

9 Birla firm control over Ultratech (L&T): in cement, textiles, and chemicals and in an
investment vehicle with stakes in asset management and insurance.
9 Chambal group: Its presence in fertilizers is spread across such companies as Zuari
Industries and Chambal Fertilizers. An integrated entity could provide benefits of synergy
and a higher valuation.
9 Tata Chemicals and Coromandel have emerged as integrated fertilizer companies with
portfolios comprising both urea and phosphates fertilizers.
9 IDBI and IDBI Bank
9 In textiles, Century has an integrated presence, with revenues of over Rs 1,000 crore,
strength in exports and a foray into branded garments under the `Cottons' banner

Investments in Innovation and Research

After TRIPS, many Indian companies realize the need to focus on innovating new
products and services. This requires allocating a major chunk for R&D activities. As a
result, Patents granted to India have been rising, an outcome of both Indian and foreign
companies that have set up operations here. The latest data from the U.S. Patents office
shows that in 2003, patents granted to innovators based in India increased by 37% to 341
from 249 Innovation and R&D are major initiatives in auto and pharmaceutical
industries. For Instance - I-flex Solutions in IT, DRL, Ranbaxy in Pharmaceutical, Tata’s
Indica, Mahindra and Mahindra‘s Scorpio in Automobiles and Biocon in Biotech.

A New Productivity Drive

To increase the productivity and have competitive costs. To minimize overhead charges.

Brand Building and Service

The major thrust should be on building global brands for both products and services. For
today’s consumers there should be a variety of innovative, flexible and customized
products and services to make any mark. E.g. Whirlpool, Samsung, Nokia
Reaping Cross Border Synergies
Interregional trade agreements are in vogue these days. These foster better supply of
goods and markets for finished products. They also help in economies of scale by
procuring raw materials the cheapest sources, manufacturing at strategically favorable
locations and selling products where they are demanded. A company can open different
subsidiaries in different countries to optimize on labor, cost and returns. Interregional
frameworks can also lead to self trade and less dependence on other powerful countries.
In this regime of globalization and diluting trade barriers one must capitalize on inter
regional dependencies.

Pharma Sector
Issues: TRIPS, Lax
Patent Policies, low
R&D
Restructuring:
R&D, Invest in new
molecules, Generics,
ANDA Approvals,
Challenging
Innovator’s Patents
Major Players: DRL,
Ranbaxy
IT Industry
Auto Industry
Issues: Low share in
Issues: Foreign Players
world trade, Low to
Restructuring: New
Medium End activities,
Product Segments
Lack of Products, More
(Tata Indica, M&M’s
focus on development
Scorpio), Partnering
and maintenance than
for R&D, Tweaking
innovation, Lax Licensing
existing Products. Core
Policies
Competency
Restructuring:
Major Players: Honda,
Innovation, Low Cost to
Tata Motors, Maruti,
Premium Product, High
M&M.
end of Value Chain
Major Players: Infosys
, Wipro , TCS
Conclusion
As India moves from a delivery-driven economy to a market-driven economy, with
functional organizations giving way to Business Units, Cost-based decisions to Value-
based decisions, Global Focus needs to be reinforced, reiterating its commitment to
become a powerful nation in this knowledge century .Although the path would be full of
constraints and impediments, the wise Indian elephant would continue to lumber and
move ahead cautiously.

While the India businesses would focus on core areas and build world class products and
services, they should not forego control over their internal support functions, since
keeping the stakeholders confident of their solvency is equally critical.

However, as specialized market intermediaries emerge, the benefits of being part of a

diversified business group would decline and then the conglomerates can outsource or
sell off secondary business units. The dismantling of business groups will, we believe,
follow naturally once those institutions are in place.
References
Harvard Business Review - Competing with Giants: Survival Strategies for Local Companies in Emerging Markets; Mar 1,
1999; Niraj Dawar, Tony Frost
Harvard Business Review - Why Focused Strategies May Be Wrong for Emerging Markets; July 1, 1997; Tarun Khanna,
Krishna G. Palepu
Harvard Business Review - The Right Way to Restructure Conglomerates in Emerging Markets; July 1,1999; Tarun Khanna,
Krishna G. Palepu
Harvard Business Review – Strategies That Fit Emerging Markets; June 2005; Tarun Khanna, Krishna G. Palepu and Jayant
Sinha
Journal of Business Strategy – Preparing for a new global business environment; Dwight Allen and Michael E Raynor – Vol
25 No. 5, 2004
Gurcharan Das – India Unbound

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Institute Name: Faculty of Management Studies,

University Of Delhi
Delhi-110007

Authors:

1. Puru Gupta
#691, Sector 28
Noida – 201303
#9871924216
purugupta@gmail.com

2. Saurabh Mundhra
354 Nirman Apartments
Mayur Vihar Phase I
Delhi-110091
#9811994112
saurabh_mundhra@yahoo.com