Inside outside

Management experts recommend that Indian companies mine untapped domestic potential before venturing into overseas markets. Do the companies agree? What determines their growth strategy? the strategist asks industry leaders

B Muthuraman
Managing Director,
Tata Steel

Following economic liberalisation, Indian companies had a choice. They could either expand within India, outside India, or do both. Tata Steel chose to do both, simultaneously. This was because the company's criterion in selecting the area of expansion was based on where it could create maximum value for its stakeholders.

Thus the question in hand was to identify regions with sustainable growth and strategic fit. The company went global with the acquisition of Natsteel, Millennium Steel and then the mammoth takeover of Corus.

Simultaneously, we put in place our plans to more than treble our capacity in India and we are rigorously pursuing it.

In my view, while Indian companies must anchor themselves in India, they should also attempt to build strong bases in other countries if they have global aspirations.

A distinguishing characteristic of a multinational is that it retains its USP in each country where it is present.

In order to build a corporate brand across the globe, Indian companies need to base their growth plans on factors like availability of markets, low cost regions, availability of raw materials, supply chain needs, infrastructure and so on.

Jagdish Sheth
Charles H Kellstadt professor of marketing,
Goizueta Business School, Emory University

Indian companies should focus on the domestic market, but they will not be able to do that always. If an industry is competitive on a global scale, like personal computers, for instance, then you cannot rely on only the domestic market for growth.

Remember, 65-70 per cent of costs is accounted for by procurement, and global sourcing may well be key to growth in a globalised market.

When competitors are present internationally, and have access to economies of scale and inexpensive raw material procurement, it is absolutely necessary for Indian companies to establish a global presence as well. That is the only way they can protect their domestic market domination.

Then, Indian companies have other strategic reasons for venturing overseas. The first is to show exceptional growth. In India, stockmarkets place a high premium on companies that grow faster than the domestic market.

It is important to remember that in stockmarket valuations, just about 20 per cent weightage is given to dividends; 80 per cent is growth-dependent. So it makes sense for companies to seek extraordinary growth opportunities wherever possible. And that is exactly what Indian IT companies have done.

The other reason for seeking overseas consumers is the volatility of the domestic market. The Indian economy is a high-risk one because government and regulatory decisions are unpredictable.

That has an enormous impact on markets and companies fear investing in manufacturing and increasing capacity. This, then, is a way to derisk their business models.

Of course, they can't just head to any market they choose. Consider packaged goods players. Entering the US market, especially, is cripplingly expensive: a new brand in the US needs an advertising budget of at least $100 million, and that's just one cost.

Logistics and distribution are another expense "" exporting to a mainstream market, rather than manufacturing on location, will not be cost-effective. And then, retailers are powerful: they charge high slotting fees to display brands on their shelves.

When entry costs to mature markets are so high, it makes sense for companies to go to newer markets like South Asia and Africa. Access to these markets is easier, there are fewer dominant domestic brands and the Indian pedigree is welcome.

Is the cost of reaching out to next layer of the domestic market the real reason why companies prefer going overseas? Emphatically, no. There is infrastructure available in the smallest village across India. And the current growth of supermarkets only helps in aggregating demand from small villages.

Consider companies like TVS, Bajaj and Onida "" they have made more money from rural India than urban India.

Yes, in the Licence Raj days, there were problems in reaching into the hinterlands. The cost of working capital was high and companies needed to fund small retailers to help them grow. The spread of media, too, was limited, which restricted advertising and marketing opportunities.

Those problems are going away. The cost of working capital has come down; mom-and-pop stores have their own independent borrowing power and with the expansion of telecom and television services, reaching out to consumers, too, is no longer an issue.

(As told to Meenakshi Radhakrishnan-Swami)

Sunil Duggal
CEO,
Dabur India

You cannot concentrate on Indian markets alone: that's a blinkered approach. Not doing business abroad is ignoring an opportunity at your own risk. There is enough headroom for Indian companies to go international now.

When Dabur looks at overseas mergers and acquisitions, we look at the obvious synergies between the acquired company and our own businesses, the market access that our products can get and the technology access that they can provide us. We look at the opportunity as the sum of parts being greater than the whole.

Then, it makes sense to undertake global acquisitions because the valuations are lower than India. Besides, there are not too many M&A options in India "" acquisition targets are more plentiful abroad. For acquisitions, our first line of sight would be those countries where we already have an organic-growth presence. Only then would we explore newer international markets.

We have managed to develop businesses organically in countries like Saudi Arabia, Pakistan, Bangladesh, Nigeria and Egypt. In countries like Nigeria or, say, Egypt, which have little cultural similarity with India, we have realised that it is best to acquire local management teams and mould them to our way of thinking.

When we first entered foreign markets, 80 per cent of our workforce was Indian. But depending on the pace of collaboration we see the local management talent becoming at least one-third of our workforce within three to 10 years of entering a new market.

Then, India is a complex country in which to build a distribution network. This can be a huge advantage in managing the distribution function in other countries, where the conditions are not as complex.

Indian companies have an edge even over the multinationals, because multinational consumer goods giants are well-versed with modern trade.

Our experience, however, is in dealing with fragmented trade and in most developing economies "" in Africa, for instance "" trade is fragmented and modern trade is still at a nascent stage. In such a scenario, Indian companies can build a better distribution network.

Still, setting up distribution is among the easier tasks, as it is more quantitative. It is the qualitative and softer aspects like consumer insights where we are learning at every stage.

In Africa, for instance, we retained the brand architecture for our Vatika brand, but had to replace the coconut oil formulation. In Africa, coconut oil is not associated with hair care. So we adapted the brand to suit local requirements by launching olive hair oil under the same brand. 

(As told to Prasad Sangameshwaran)

B M Vyas
Managing Director, Gujarat
Co-operative Milk Marketing Federation Ltd

The Indian economy is one of the most vibrant ones in the world today. And the Indian market, with its billion-plus population, presents lucrative and diverse opportunities for both Indian and foreign firms.

Multinationals are making a beeline to bag a share of the Indian pie. Is it not prudent then for Indian companies to look at growth opportunities within the country rather than outside?

With a burgeoning consumer class, changing lifestyles and attitudes, and high level of savings, the market size for products in India can only increase. India has a huge middle class population with high levels of disposable incomes.

The movement of population from rural areas to cities has resulted in a spurt in demand. With rising urbanisation and education levels, the Indian consumer is shifting from loose to packaged products.

The challenge is to boost sales to tap the hitherto untapped potential of the Indian market rather than look outside.

Consider, for instance, the dairy products market: the penetration of milk and other dairy products has increased significantly in the last few years. At the same time, the per capita consumption of ice-cream is just 200 gm, compared to four litres globally.

Amul has always reposed its faith in the Indian consumer and the market. Our product portfolio has consistently changed with time in terms of both variety and packaging, which is why this farmer's cooperative is now the nation's largest products marketing organisation. If a brand is strong internally, it is bound to make an impact outside the country as well. Which is why Amul products are exported to 40 countries across the world.

Arvind Subramanian
Partner,
Boston Consulting Group India

This is not an either-or issue. Companies should look at multiple avenues of growth "" like growth in newer geographies along with getting deeper into existing markets.

Both these growth opportunities, however, require different mindsets. While tapping deeper into markets within India, it requires companies to adopt a new business model, introduce new products and build newer capabilities. But pursuing international growth is an extension of existing capabilities and does not compete with growing within India.

But won't companies pursuing both opportunities spread themselves too thin? There is always the issue of resource allocation of both people and capital. But companies typically do an evaluation of what is the bigger bang for the buck for them and allocate resources accordingly.

For instance, Unilever is deeply entrenched in markets like India and with initiatives like Project Shakti, it is tapping the "next billion" consumers. But that doesn't stop it from launching premium brands in existing and newer markets.

Tapping deeper into markets like India is not an evolutionary change, but a fundamental rethink. This requires extensive collaboration at three levels "" assets, capabilities and knowledge. Instead of individual companies tapping a new market, interesting possibilities open up when two unrelated companies join hands.

Distribution is an area where such a collaboration could be explored. For instance, a company with a wide distribution network could easily allow other companies from non-competing industries to benefit from its network. Its distribution asset can then fetch additional revenues.

In capabilities collaboration, a micro-finance company can easily tie up with banks, as self-help groups in smaller areas have access to key information like credit-worthiness of individuals. In the absence of systems like the credit bureaus, this knowledge can help banks mitigate risk.

The third is knowledge collaboration and it is most difficult to get companies to collaborate on this front as companies are not necessarily open to sharing knowledge.

But a company like say, ITC, which has enough information on which regions in the country will have a good harvest could share the information with a consumer durable company like LG and get amazing results. 

(As told to Prasad Sangameshwaran)

Nazeeb Arif
Vice President, Corporate Communications,
ITC

These are indeed exciting times for India. Rising incomes, aspirations and a large young population are today seeking world-class products and experiences. As a result, the best of corporations from all over the world are vying for a share of the market and mind space in India, making it a truly global market.

At the same time, this spectacular growth story has bypassed a significant proportion of the population, specially in rural India, making inclusive growth an agenda of national priority.

ITC is an Indian business conglomerate deeply rooted in the country and committed to creating enduring value for the nation and its people. Our unmatched ability to craft consumer value propositions that are distinctly superior, our focus on creating world class quality products and services,
and our excellent execution capabilities have positioned us uniquely with a winning edge in this emerging global Indian market.

At ITC, we are also inspired by the opportunity to make a big difference through the enlargement of our contribution to the national economy. The company's abiding vision, articulated by our Chairman, Mr Y C Deveshwar, as a "commitment beyond the market" has led us to adopt innovative corporate strategies that have not only created superior shareholder value but also generated livelihood opportunities for over 5 million people in India, many of whom represent the poorest in the country.

It is our vision as an Indian enterprise to create and capture value for the nation's economy by contributing to a virtuous cycle of investment, creation of sustainable employment, generation and redeployment of surpluses for national economic growth, with a fair reward to our shareholders.

For almost a century, ITC has been in the forefront of creating and nurturing livelihood opportunities in Rural India, which indeed is the heart of the nation. We have remained committed to enabling inclusive and sustainable growth, borne out by our deep engagements with the Indian farmer and rural communities.

Our bond with rural India through numerous farmer partnerships and other stakeholders will continue to anchor the company in the Indian soil. As one of India's fastest growing Foods Company, we will sustain our efforts to drive competitiveness of the entire agri value chain of which we are a part.

Our aspiration to be a leader in all the FMCG segments we are engaged in will also inspire us to create value in diverse segments of the Indian economy. At the same time, some of our businesses which operate across several countries, for example Information Technology, will continue its foray into overseas markets and bring pride as a world class company. Similarly, we are scouting for opportunities to take our Hotels business beyond India.

ITC has fully leveraged its diverse competencies by synergising its businesses and creating multiple drivers of growth. An example of this synergy is the growing Foods business of the company, which sources its inputs from the Company's e-Choupal initiative, processes branded food
products based on recipes of the Master Chefs from ITC's top of the line hotels, then brings them to the consumer  through ITC's extensive trade marketing and distribution channels. ITC's Packaging & Printing Division chips in with innovative packaging solutions.

Moving forward, ITC will continue to sustain its leadership position as one of India's most valuable companies measured along the triple bottomline benchmarks of building economic, ecological and social capital for the
nation. A commitment that is exemplified in ITC's credo.