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International Business Strategy

Arani Das (10A) Page 1

Challenges likely to be faced by Businesses in Emerging Economies Internationalizing at a Fast Pace

Submitted by: Arani Das (10A)

Introduction Globalization is a continuation of developments that have been going on for some considerable time. Today, globalization involves numerous features, but the following three seem to be the main engine driving global economic integration:

a) internationalization of production accompanied by changes in the structure of production b) expansion of international trade in trade and services c) widening and deepening of international capital flows

Globalization is now a forceful process that is unlikely to be reversed. The future policy alternatives for countries and regions have thus to be analyzed in the context of the global economy with free trade of goods and services, free movement of capital, technology and skills and with improvements in transportation and communication links. The investment firm Goldman Sachs estimates that by 2050 the Chinese and Indian economies will be respectively the second and third largest economies in the world. Already, companies from these countries are emerging as important players on the global landscape. Greater access to developed country markets and technology transfer hold out promise of improved productivity and higher living standard. But globalization has also thrown up new challenges like growing inequality across and within nations, volatility in financial market and environmental deteriorations. Another negative aspect of globalization is that a great majority of developing countries remain removed from the process. Till the nineties the process of globalization of the Indian economy was constrained by the barriers to trade and investment liberalization of trade, investment and financial flows initiated in the nineties has progressively lowered the barriers to competition and hastened the pace of globalization. Factors to be considered before Internationalization

Where?

What? How?

INTERNATIONALIZATION

Organizational Capacity

Organizational Structure

Resources

Skills



Internationalization Challenges The challenges for businesses in emerging economies like India internationalizing at a fast pace can be grouped into several categories depending on the different facets associated with internationalization. Export Challenges –

Non tariff barriers Phyto-sanitary barriers Foreign regulatory environment High transportation costs Visa related issues Inspection and certification related issues Taxation

Debt/Cash Management Challenges –

Raising debt/cash in Indian market is difficult and expensive, because of high interest rates and underdeveloped bond market in India

Underdeveloped foreign exchange market in India pose another challenge as Indian currency is very volatile and leads to frequent forex losses for Indian firms

Indian Government’s foreign exchange laws – FEMA, which are not very supportive of Indian firm wanting to business abroad

Firms which are raising substantial portion of debt from abroad find it difficult to pay off debt because of foreign exchange volatility, which makes even this debt expensive

Valuation of foreign firm, which is being acquired are generally very high and the high premium paid of such acquisition doesn’t easily translate into real benefits in terms of cash

Most Indian firms are small in size and many of the target firms which are being acquired are much large size, posing challenges with assimilation of these firms

Integration Challenges -

Because of cultural difference, it is difficult to integrate acquire firm fully in terms of workforce Also inexperience of Indian managers in this area is posing major challenges in fully integrating

the facilities Indian firms have never been leaders in innovation and research, which is a major challenge

when it comes to acquiring firms which are innovation centric

Marketing Challenges – Marketing knowledge is dependent on the relevance and depth of marketing information

available to the firm. Firms that use relevant, accurate and timely information are in a better position to respond to export problems. Information about exporting and more specifically market information are the most serious problems of manufacturing. Getting concrete information on respective foreign markets is essential before exporting can occur.

Distribution is another major problem area in exporting. Many SMEs in developing countries lack information about marketing channels and fail to establish marketing networks. Sound financial position is one of the keys to secure price advantage in the target market. Many SMEs in developing countries run into problems for lack of timely and adequate working capital, which not only adds costs but can also endanger the entire production operation. The importance of



financial barriers to exporting, such as difficulty in acquiring the necessary funds to initiate expansion, is immense.

Quality is often indicated as one of the most important conditions for entering and remaining in foreign markets and logistics management. It concerns packaging, meeting importers’ quality standards and establishing the suitable design and image for export markets. There are different quality standards in developing countries. However, many of the quality problems are the result of inadequate knowledge about market requirements, product characteristics and production technologies. Several researchers indicated that local product standards, customer standards and buying habits may be unsuitable for foreign sales and may require adaptation. In most studies successful firms adapt their products to foreign markets.

Export market barriers are related to product requirements in the export market, the country of origin, cultural similarity and brand familiarity. Lack of similarity of legal and regulatory frameworks of the exporting and importing countries and lack of familiarity with market export procedures are also mentioned as export market barriers. These factors are regrouped into customer and procedural barriers.

Export procedures, namely the time and paperwork required to comply with foreign and domestic market regulations are one of the most cited obstacles with regard to exporting concerns. Governments do not solely impose these procedural requirements. Also independent organizations such as banks, shipping organizations and insurance companies, have their own procedures. A firm that wishes to enter the export market or intends to increase its export activity will have to acquire the knowledge and skill to deal with administrative procedures. In particular for inexperienced managers foreign documentation and paper work may appear very difficult to cope with.

Talent Challenges –

Top management teams lack international experience. Rapid-growth market companies are not confident that their organization has or can build an effective international management team.

Top management teams lack awareness of local cultures and understanding of global markets in many cases.

Lack of an internal management pipeline forces companies to recruit from rivals. Companies in rapid-growth markets are building their international management teams through the development of internal pipelines as well as recruitment from other organizations. While building an internal pipeline requires time and investment, the latter can result in high turnover and salary inflation. Companies are unable to retain and reward high performers in different markets. Some companies report it can be difficult to appropriately incentivize performance across different markets and cultures. Top management and lower-level managers hold conflicting views on talent management. The gap in priorities across top management and operational managers presents an additional challenge to talent management. There seem to be significant differences in viewpoints around recruiting locally from new markets, effectiveness in rewarding high performance and aligning business strategies with an individual’s performance objectives. Illustration: Suzlon Energy a Best example for Handling Challenges of Internationalization Introduction Suzlon was founded in 1995 by Mr. Tulsi Tanti and his brothers when they were exploring alternative sources of power for their textile business in western India. The unreliable electricity grid was then creating many inconveniences for the business, prompting the family to explore wind energy as an



alternative. After the family installed two windmills to power their textile business, Tanti and his brothers envisioned that they could actually make a very profitable business out of generating wind energy. Shifting focus away from textiles, the new foray of Suzlon into wind energy was financed with USD 600,000 put together through the sale of some family assets. Tulsi Tanti and his brothers bought ten turbines from Sudwind, a small German company, assembled a group of former engineering classmates, rented a factory, and hired a German consultant for 90 days to teach them the business. When Sudwind went bust in 1997, the Tantis hired its engineers and created a R&D center in Germany. In 1999, the company started selling its partly homegrown turbines in the Indian market Following this foray, Suzlon has grown over the last 10 years to become a top-5 wind energy producer worldwide with sales of over USD 3.4 bn in 2008 and a global footprint. Suzlon Today Suzlon has a global market share in the wind-turbine business of about 18.5%.The company operates in 21 countries and employs almost 14,000 people from 15 nationalities The company derived 68% of its revenues in FY 2014 from outside India against 34% the earlier year. The USA accounts for almost 26% of total revenues, while Europe and the rest of the world together account for about 32% of revenues. As part of its internationalization strategy, in 2006 the company acquired Hansen Transmissions of Belgium for USD 565 mn. Hansen was the world’s second largest gear box maker and Suzlon expects that the acquisition will give it manufacturing and technology development capability in wind gearboxes, and enable an integrated R&D approach to design more efficient wind turbines. In May 2007, Suzlon acquired a 33.6% stake in REPower for USD 698 mn. RePower is one of the world s largest manufacturers of off shore and onshore wind turbines and the acquisition is expected over the years to add to Suzlon’s technological capability, especially in the production of large wind. On the importance of international markets, Mr. Tanti expects about 40% of Suzlon’s future revenues to come from Europe, 30% from the US, 10% each from India and China and the balance from the rest of the world. Company Structure Suzlon’s global marketing center is located in Amsterdam, Netherlands; the international business headquarters are based out of Aarhus, Denmark; while the Indian operation’s headquarters are in Pune, India As on 31 March 2008, Mr. Tulsi Tanti was the Chairman of the Board at Suzlon, while Mr. Toine van Megen, a Dutch national, was the CEO of the wind energy business at the company. In a subsequent reorganization in December 2008, Tulsi Tanti retook direct operational charge of the company s operations to better deal with the difficult business environment, while Mr. van Megen shifted back to supervisory responsibilities at the Group level. Suzlon seems to have been moving towards increased decentralization in the last few years. Until a few years back, Suzlon 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 about 70% weight to line manufacturing and about30% to the functional heads. This led to a need for balance, but since 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. The chief executive in Amsterdam is empowered to hire his own team for the international operations. Some functions like CFO and CHRO are located at Amsterdam. The choice of location is decided upon what makes best sense for the business and what makes for the most effective way of working. Each country is responsible for creating its own deployment strategy, team, etc led mainly by respective country heads who could be of any nationality. Promoters have steadily decentralized



decision-making autonomy to the global management team. This change to being more international is also changing the company culture to being more diverse. Professionalization is increasing at Suzlon. Human Resources Suzlon employs more than 14,000 people from 15 nationalities and is a very strong financial brand. The challenge lies in making it an employment brand. Green industry and the company s growth and success story give the company a strong pull. Leadership After envisioning the future potential for wind energy, Tulsi Tanti and his brothers helped develop a business model offering end-to-end and hassle-free solutions, and worked towards impressing policymakers in India, and companies in India and abroad to go for their wind-energy solutions . Suzlon has grown at twice the industry average over the last few years .Recognizing his efforts and success in the area of fostering renewable energy, like many family-owned businesses in India, leadership at Suzlon has so far been centered around the family patriarch Mr. Tulsi Tanti and the Tanti family. But, recognizing the importance of introducing professional management and people with international experience in the business, the family appears to be moving into the background and focusing on more strategic roles. The Group Executive Council led by the CEO reports to the Group Supervisory Council led by the promoters of the company in order to ensure effective corporate governance. The Board of Directors at Suzlon has a couple of members with several years of international banking experience. Processes Suzlon has also undertaken full backward integration of the supply chain by developing a comprehensive manufacturing capability for all critical components in wind turbines, thus ensuring economies of scale, quality control and assurance of supplies. This approach stands in contrast to the more piecemeal approach taken by many of its competitors. The company is moving more and more towards a process orientation and the increasing process orientation has meant a certain amount of cultural adjustment. Culture Suzlon s corporate culture is undergoing a certain transformation as the company internationalizes. For instance, there has been an increasing call for greater transparency in decision making as the company internationalizes, and international employees are demanding greater empowerment. There is also a need to substitute promoter involvement with process orientation. In order to facilitate this change, the company is conducting programs for leadership development at its Corporate Learning Center. In Sum Suzlon appears to be transforming itself from a family-owned and family-driven business to acquiring qualities of a professionally-run MNC. A part of Suzlon’s success can be attributed to its being in the right place at the right time, in terms of the timing of its founding and the sudden international focus on renewable energy. At the same time, Suzlon’s strategy emphasizing aggressive international expansion and organizational transformation migh thave played a role. Key features of organizational transformation and excellence at Suzlon include:

Decentralization and professionalization in its structure over the last year Investment in international R&D and innovation A change in focus towards performance-orientation in its HR and compensation policies Increased presence of international managers in its top management team Efforts to emphasize the binding and motivating effects of corporate culture



While Suzlon has been successful in the international environment over the last few years, the fast growth track inevitably means that there will be 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 organizational and operational excellence to world standards. Conclusion Some of the major patterns and conclusions that this study converges upon are as follows:

From comparative to competitive advantage: With shift towards advantages based on availability, lower cost and skills of the technical and scientific manpower, companies’ need to create complementary skills and the success are governed by competencies developed within a company and aspirations of its top management.

Favorable ‘push’ and ‘pull’ conditions for overseas successes: For an increasing number of industries, companies are reaching the point of having global advantages—favorable factor conditions, domestic demand characteristics comparable to that overseas, presence of ancillary and supportive skills, and pervasive confidence for looking beyond domestic markets. On the ‘pull’ side, from the situation of origin being a handicap, the world has come to acknowledge national advantage.

Three strategy types for businesses in overseas markets: ‘Outsourcing,’ where the domestic market is either very small or unattractive; ‘Internationalization,’ where companies are aiming to expand market or balance business downturns and risks of domestic market; and, ‘Multi-nationalization,’ where companies are aiming to create sustainable competitive position in several geographies.

Differing requirements of the institutional and the retail customers: Joint ventures are generally not viable for institutional customers, while being a useful option for reaching the latter—with benefits related to local knowledge, capital, brand, and distribution.

Organizing for growth and capability building: Structure for the three strategy types is different and a ‘dual-core’ model could balance requirements of risk-taking in new areas with efficiency in stabilized activities. While carrying national imprint, the culture will be company-specific and should be allowed to evolve in a directed way.

Critical role of conviction-laden leadership: This is a common element across all the businesses in emerging economies that have made overseas breakthroughs and the leadership traits of being clear, fundamentals oriented, and planned need to be supplemented with international orientation and preparedness for longer haul for success in overseas markets.