Challenges to indian businesses

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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-2

Q. Write an essay on the „Challenges faced by Indian businesses internationalising
at a fast pace - A Cultural Perspective‟.

INTRODUCTION

1. In the early nineties, India faced major financial crises, led by foreign exchange
crunch that dragged the economy to the brink of Defaulting on loan repayments and
Balance of payment crisis. In the face of these crises, the Indian polity, prompted by
immediate needs and demands from multilateral agencies, adopted a slew of domestic
as well as external sector reforms. The policy changes radically pushed for more open
market oriented economy.

2. During the same time, with the end of the cold war, Globalisation became the
buzzword on the world economic stage. The reforms in the Indian economic policies
saw a host of foreign companies land on the Indian shores. The Indian market which till
then, was under a protectionist regime had to face the challenge of the foreign
companies and catch up with the markets of the developed countries. This led to quick
learning by Indian businesses in internationalisation both in scale and speed.

3. To overcome the challenges of the developed markets, Indian businesses initially
enhanced their growth by adopting an Organic Growth concept and after achieving
sufficient growth under a liberalised policy environment and their own entrepreneurial
abilities, rose up to face the challenges posed by global markets, adopted inorganic
growth concept. This saw a spurt in the Merger & Acquisition (M&A) activities, which
predicted overtaking of the inward FDI by outward FDI. In the course of the
internationalisation process, the Indian businesses moved away from the traditional
lower cost labour and infrastructural costs and rose up the value curve, by offering
increasingly sophisticated products and services for the international markets.

4. While the Indian businesses are internationalising at a fast pace, they are faced
with numerous challenges common to all businesses while internationalising. However
due the inexperience of the Indian businesses in internationalising, these challenges
may pose a difficult hurdle to cross in the absence of support from the Indian
government or research in these aspects from an Indian perspective.

CHALLENGES FACED IN INTERNATIONALISATION

GROWTH THEORIES.

5. The objective of every business enterprise is to increase its revenue, profit or
assets. The process of increasing the revenue of the enterprise, can be achieved by
either through the enterprises‟ own business activity i.e. increase its growth rate with the
help of an efficient management or by acquiring a technology developing company in
order to enhance its competitive advantage and growth rate. The former process is

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known as Internal Growth also called Organic Growth; while the latter process is known
as External Growth also called Inorganic Growth. Thus, to achieve growth, business
enterprises can choose to build in-house competencies, invest to create competitive
advantages, innovate in the product line to achieve Organic Growth i.e. develop core
competencies and sales; in contrast growth achieved through expansions met through
mergers & acquisitions achieve Inorganic Growth.

6. The growth of Apple Inc. is a perfect example of organic growth, where growth
was driven by trend setting technological breakthroughs and product innovation. On the
other hand growth of Microsoft is a classic case of inorganic growth where growth was
driven by large scale acquisitions. In the Indian scenario, growth of TATA motors by
developing its core competencies and sales, Indian IT companies like wipro and Infosys
and classic examples of Organic Growth; on the other hand growth of TATA motors
driven by foreign acquisition of Jaguar, Landrover, Corus steel etc... and growth of
Suzlon 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 to
share a common vision and deliver the vision. Companies growing organically not only
measure their success on financial metrics alone but take careful note of other metrics
like customer satisfaction metrics, product quality metrics, logistics and supply chain
metrics etc. While both Organic and Inorganic Growth offer intrinsic value in their own
way and the choice being dependant on the market and industry scenario as well as the
strategic vision of the business. Matter of fact, a good management principle would be
to use a combination of both methods to gain a steady growth pattern in the domestic
market as well international markets. For example, TATA motors initially adopted
Organic 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 for
expanding its business potential.

CHALLENGES TO GROWTH.

8. The challenges faced by businesses adopting organic growth can be overcome
by innovative and home grown management principles and practices; on the other hand
for achieving success in adopting inorganic growth, the businesses should have ability
to cope with diverse institutional, cultural, people oriented and competitive
environments, so as to coordinate geographically dispersed resources and to leverage
resources across national borders.

9. The challenges faced by businesses adopting Inorganic Growth may be broadly
categorised 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

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consumers in other parts of the world and creating localized marketing
communications to reach these consumers necessitates adoption of marketing
strategies which take care of cross cultural differences in consumption patterns
and media habits.

(b) Manpower. To cater for global manpower requirements, the businesses
need to adopt global human resource policies. These policies need to address
qualities pertaining to the global mindset of the employees - their
professionalism, talent growth & change areas and work ethics and leadership
issues. The qualities of the employees can be nurtured through proper process
management, systems thinking and competency development, especially domain
and soft skills. While towards addressing leadership issues, the management
needs to adopt a decentralised style of leadership and need to shed their
feudalistic management style.

(c) Technology. The businesses need to keep pace with the global
technological trends and thereby frequently update the technology in use.

(d) Quality Management Systems. The Indian industries have
always been lacking in quality when compared to their western counterparts thus
Quality has always been a contentious issue in Indian industry. The inadequate
attention towards quality has often been attributed as a reason for India lagging
behind in industrialisation against the global rivals. However, the opening of the
Indian economy in the 90s brought about a sea change in Indian companies
attitude. Indian businesses since then realised the importance of quality as it
enabled them to stand up against global competition. The initial phase of the
changing scenario was marked by a spate of companies going in for different
levels of ISO certification. The second phase was ushered in by the emergence
of a vibrant IT industry where quality consciousness was always important and
introduced international quality management standards like PCMM and Six
Sigma thereby bringing in new techniques in product and process quality
assurance systems.

(e) Governance and Ethics. Different geographical areas have
different kinds of parameters in terms of governance and ethics. Thus
businesses need to understand them and accordingly incorporate a transparent
and responsive administration towards local laws and government regulations.

(f) Risk Management. The businesses need to leverage past
experience of analysts and the knowledge base they are exposed to; to evaluate
the risks that can be taken. Financial companies/banks play an important role in
making companies aware of the risks and also help in constant evaluation and
elimination of credit, currency and financial risks. Thus Design and
implementation of Enterprise Risk Management solutions need to be adopted by
the Indian businesses.

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(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 effectively
engaged by employing consultants in relevant fields, Management of Change and
Organisational Culture poses the most difficult challenge for any M&A to be successful.
Thus the Indian businesses adopting Inorganic Growth need to understand the issues
pertaining to this critical challenge for ensuring positive and successful growth through
M&A.

CULTURE & ITS IMPORTANCE.

11. Mergers & Acquisitions (M&As) are the most happening strategy for
organisations attempting to gain a competitive advantage. Business corporations spend
millions 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 early
stages of most M&A are characterised by high hopes, elation about the deal, and not to
mention plenty of media attention. The long term reality however is often disappointing;
under achievement in terms of shareholder value, level of internal conflict or even
divorce of the merged partners or resale of the acquisition. Research has however
stated that the success rates are less than commendable i.e. 83% of all M&As do not
improve share holders value and only 25% of them succeed. Research has identified
that post M&A, the integration process holds the key to its success. The make-or-break
of a M&A is shaped by; One - Whether the integration management succeeds in getting
very culturally diverse, real people to work together constructively in order to achieve
tangible goals; Two - Putting people on the centre stage will do much to turn strategic
intent into reality. Thus the human and cultural facets play the most important role
during the integration phase.

12. Research has identified that Culture and Integration of Cultures as the main
reason for failures of M&As and also the most difficult areas for integration of a M&A. A
national culture is a set of beliefs, perspectives, motivations, values and norms shared
by the majority of the inhabitants of a particular country. It is reflected in the laws of the
country, its institutions, values and social standards. Culture has three primary
characteristics; It is shared by a group of people, It is something that people learn, It
depends on environmental conditions. A crucially important function of culture is to
define Concepts – which helps people to differentiate or enable comparison between
various items of information Eg. Conceptions can determine how a message is
interpreted, or how a recipient reacts. The culture in an organisation is created by the
people working in the organisation (if there are no people in an organisation, then there

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are no cultural issues to contend with), and these two components taken together
transcend all other parts of the organisation. Thus people and cultural components are
interrelated and complications arise because these issues don‟t fit cleanly into any
formulaic approach and no “silver bullets” exist that can resolve many of the people and
cultural 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 following
categories:-

(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, as
language is the vehicle through which ideas and perceptions are expressed. Many
aspects of a community‟s culture are reflected in the language it uses; and a detailed
knowledge of that language provides illuminative insights into the relevant culture. On
the other hand ignorance of a language results in scope for boundless
misinterpretation of messages. Also translation would be difficult if the usage of words
and phrases in a particular language would be dependent upon the concept of the
particular culture. Eg. Fords‟ Pinto small car sold poorly in certain parts of Latin
America - where the word „Pinto‟ is used to represent „small sexual male organ‟;
Chrysler for power – in Spanish this means „Chrysler is an Aphrodisiac‟, Come alive
with Pepsi – in Germany it means „Rise from the grave with Pepsi‟.

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16. Non-linguistic influences. Similarly the meaning of body language varies
from one country to another. Eg: Disagreement is indicated by shaking of head from
side 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 a
grave insult in some cultures.

17. Lifestyle. Culture is a major determinant of lifestyle. Other important
influences on lifestyle are income, upbringing, personal experiences and relationship
with the community at large following. Lifestyle involves a pattern of living habits, leisure
pursuits, types of entertainment purchased, degree of involvement in community
etc...Observing or studying lifestyle can help in identifying certain common
characteristics, 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 factors
characterised 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 culture
that have been identified as hurdles to growth are fully applicable to Indian businesses.

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While the cultural factors required to be considered are numerous, certain principal
characteristics, which are nation based need to be addressed by the businesses before
attempting M&A. In any M&A, the participants are human and are driven by both their
shared cultural and individual personalities. Thus the factors affecting M&A can be
broadly 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 company's 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 the
western cultures, except in few cases where certain attributes of Indian culture match

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with that of the host countries. Despite the fact that the Indian culture is dissimilar to that
of the other countries/continents, Indian businesses have mostly been successful in
expanding abroad. A few cases of Indian businesses having going global are
considered to show how these businesses have been successful despite the odds
against 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

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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.

CONCLUSION

21. Till the early 1990s, Indian entrepreneurs or business families developed their
businesses within the country despite the unfavourable business atmosphere within the
country. Post the liberalisation; the Indian businesses were faced with growing

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competition from the foreign businesses invading India. To overcome this challenge,
some of the Indian businesses developed horizontally by adopting Organic Growth
while a few of them expanded by adopting Inorganic Growth. While there are challenges
posed to either type of growth, the challenges posed to Inorganic Growth are tougher in
comparison. While there is ample research available for western companies or
companies from the developed markets, adopting Inorganic Growth, the same is not so
for companies from transitional economies or developing countries.

22. The challenges posed to any business adopting Inorganic Growth i.e. M&A are
tougher and of these, Cultural Challenges are the toughest. Thus in striving for success
through M&A, organisational design and transformation is considered as the most
important. Organisational Culture is akin to Personality of an individual, which is highly
individualistic and having a sizeable Ego. Thus as such a personality cannot be
changes overnight, Organisational Culture also cannot be changed. An M&A is akin to a
Love-Marriage between two individuals having diverse Individualistic Personalities. As
the two individuals understand each other, respect each others‟ personality and adjust
to suit the other personality, the marriage grows to become a success. Similarly in the
case with an M&A, where the organisational culture of the organisation needs to be
understood, respected and adjustments need to be made for its growth and success.

23. The Indian businesses have been greatly successful in handling the M&As
despite the high failure rate of M&As and that Indian businesses who have ventured into
M&As are the traditional feudalistic organisations run as family empires. These Indian
businesses had flourished in an atmosphere prevalent with multi-cultural, plural society.
Hence it is likely that the Indian businesses could have shown remarkable
reorganisation 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 and
acquisitions: 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.

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