Guest Lecture FHSG

Business Development in Emerging Markets

Market Entry Challenges in India

Dr. Roger Moser

Director, Asia Connect Center-HSG, University of St.Gallen

Visiting & Adjunct Faculty, IIM Bangalore & IIM Udaipur

Session Objectives: Market Entry Challenges

#1: To know the most relevant market entry steps

#2: To understand the most challenging market entry steps

#3: To discuss potential solutions for the most important market entry issues

#4: To understand the relevance of trust in developing business in emerging markets like

India.

#5: In sum, to get basic understanding of the market entry process into India

Switzerland/India, February, 2012

Mathias Imbach, Roger Moser, Philipp Rehbock, Winfried Ruigrok

India Competence Center

University of St. Gallen www.fim.unisg.ch

[email protected]

The bumpy road to India

«Market entry challenges for Swiss companies:

Lessons learned»

Insights from recent research with Swiss-Indian Chamber of Commerce: Challenges and solutions along 13 market entry steps.

http://www.fim.unisg.ch/

mailto:[email protected]

Executive Summary (I/II)

This presentation is based on semi-structured personal interviews and an online survey with Swiss/ EU and Indian SME executives (N=45) aimed at identifying key market entry challenges for Swiss SMEs in India and practical recommendations to successfully address them

13 critical incidents along the market entry phases “evaluation, entry planning, entry implementation, local operations” are identified – the root causes of many challenges are related to “soft factors” (Swiss experience clashes with Indian reality)

Overall, SME executives rate market evaluation phase as most critical for overall entry success, challenges in the implementation phase as most complex to address

Specifically, executives perceive the following challenges as most important for overall market entry success:

Correct evaluation of market potential

Rigorous financial planning

Developing a strong and trustworthy leadership team in India

Quality management (ongoing) 3

Executive Summary (II/II)

The online survey reveals that addressing the following challenges successfully seems to be most complex:

Right adaptation of own product portfolio for Indian market

Taking the right entry mode decision (independently vs. with Indian JV partner)

Finding a business process design which works (Swiss vs. Indian way of doing business)

IP/ Technology protection (ongoing)

Swiss/ EU SME executives rate complexity of market entry challenges solutions significantly higher than Indian peers – tendency particularly distinct for “people management related challenges”

Analysis suggests that the most complex challenges along the market entry process to India can be efficiently addressed by following certain guidelines:

Allocate sufficient time to “know your market”

Invest in personal overlapping networks (Is your “red” button at least as big as your

partner’s?)

Calibrate Swiss vs. Indian way of doing business

Align IP/ Technology protection measures with overall business strategy/ value chain

This presentation describes all entry challenges and related recommendations in detail 4

Objective: Identify most critical incidents along the market entry process and develop practical recommendations

suitable for resolving related challenges

Market entries in emerging markets

heavily impact firm financial &

operational performance

Even well managed Swiss SMEs have

experienced significant challenges

when entering the Indian market

Underlying issues related to the key

market entry challenges have yet to be

thoroughly researched and understood

Current situation:

Identify the most critical incidents

along the market entry process

Understand underlying challenges/

problems associated with these critical

incidents

Develop practical recommendations

to enable SMEs to respond to identified

market entry challenges

Project objective:

Project objective

5

Approach – Project followed a 4-step approach

Step 1: Identify major market

entry process steps

Step 2: Identify critical incidents

from a Swiss pers-

pective

Step 3: Evaluate critical

incidents through Swiss

and Indian experts

Step 4: Develop recommen-

dations

Phase A: Market Evaluation

Phase B: Entry Planning / Preparation

Phase C: Market Entry Implementation

Phase D: Local Operations

Identification of critical incidents by means of

qualitative interviews with Swiss and Indian executives

with relevant management experience at the interface

of Switzerland and India

Evaluation of critical incidents through

Qualitative personal interviews

Online questionnaire targeted at Swiss/ European

and Indian SME executives

Development of hands-on recommendations enabling

SMEs to address identified challenges in a structured

manner

6

Results are based on interviews & online question-naire – Sample consists of Swiss/EU & Indian exec.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Indian

European

Swiss

150 - X

50-150

10-50

0-10

Other

BusinessDevelopmentManager

Country Head

Chairman,CEO,MD

Note: N=45

Source: India Competence Center interviews; India Competence Center online questionnaire

Nationality Position Companies Company Size

in USD M

Other

Chemical &Pharmaceutical

Software &Technology

Retail & ConsumerGoods

Automotive

Industrial Services

Machine Construction

7

13 critical incidents along four major market entry phases identified

Market Evaluation

Entry Planning/

Preparation

Market Entry Implementa-

tion

Local Operations

1. CEO

expectations

2. Evaluating

market potential

3. Adapting

product for

Indian market

1. Choosing the

right location

2. Financial

planning

3. Entry mode

choice

1. Business

Process design

2. Managing Indian

partner(s)

3. Developing a

leadership team

in India

4. Land acquisition

1. Managing the workforce

2. Technology protection

3. Quality management

9

Securing

independence

through

forward

looking

contract

negotiations

Results Overview: Challenges & Recommendations

Swiss

experience

vs. Indian

reality

Key challenges along market entry

phases

Major recommendations to address

challenges successfully

IMP

OR

TA

NC

E O

F C

HA

LL

EN

GE

HIGH

LOW

Relation-

ships x

Trust =

Market

Insights

Price –

Margin –

Quality

Trade-off

Finding

YOUR

location

Planning

the

unexpected

Staying

indepen-

dent

Identifying

right level of

adaptation

to “the

Indian way”

Ethics–

Time–

Corruption

Trade-off

Attracting

and

preparing

the right

leadership

team

Retaining

your people

– efficiently

SO

LU

TIO

N C

OM

PL

EX

ITY

HIGH

LOW

Build long-

term

incentive

systems

Apply

Jugaad

where

necessary

Match IP

protection

measures to

overall

business

strategy

A3

A2

C2

Capture and

clarify all

eventuali-

ties in

contract

C4 B3

B2

Know your

market

A3

Apply fact-

based,

individua-

lized

location

analysis

Swiss

quality – de-

livered the

Indian way

Keep

control of

your IP

D2


Passion and

personal

presence

A2

Deploy

financial

contingency

planning

from the

outset

Invest in

personal

overlapping

networks

B3 Include,

empower,

control

Do not

compro-

mise on

corporate

policy

C4

C1

B1

D3 D2

10

D1

C1

Ex ante

analysis of

financial,

reputational

and organiza-

tional

consequen-

ces

D3

C2

Patience

and

persistence

A1

B2

C3

Market

Evaluation

Entry

Planning

Entry Imple-

mentation

Local

Operations

Market

Evaluation

Entry

Planning

Entry Imple-

mentation

Local

Operations

B1

C3

A1 D1

2

3

4

5

6

7

A1 A2 A3 B1 B2 B3 C1 C2 C3 C4 D1 D2 D3

Evaluation of market potential and financial planning perceived most important by SME executives

How important do you perceive the proper handling of this situation for the final market entry success in India?

A:

Evaluation

B:

Entry Planning

C:

Entry Implementation

D:

Local Operations Note: N=45


CE

O e

xp

ec

tati

on

s

Eva

lua

tin

g m

ark

et

po

ten

tia

l

Ad

ap

tin

g p

rod

uc

t fo

r In

dia

n m

ark

et

Ch

oo

sin

g t

he

rig

ht

loc

ati

on

Fin

an

cia

l p

lan

nin

g

En

try m

od

e c

ho

ice

Bu

sin

es

s p

roc

es

s d

es

ign

Man

ag

ing

In

dia

n p

art

ner(

s)

De

ve

lop

ing

a le

ad

ers

hip

te

am

in

In

dia

La

nd

ac

qu

isit

ion

Ma

na

gin

g t

he

wo

rkfo

rce

Te

ch

no

log

y p

rote

cti

on

Qu

ali

ty m

an

ag

em

en

t

11

2

3

4

5

6

7

A1 A2 A3 B1 B2 B3 C1 C2 C3 C4 D1 D2 D3

Overall, addressing key challenges in implementation phase perceived most complex According to your experience, how complex is it to address this challenge successfully?

CE

O e

xp

ec

tati

on

s

Eva

lua

tin

g m

ark

et

po

ten

tia

l

Ad

ap

tin

g p

rod

uc

t

to In

dia

n m

ark

et

Ch

oo

sin

g t

he

rig

ht

loc

ati

on

Fin

an

cia

l p

lan

nin

g

En

try m

od

e c

ho

ice

Bu

sin

es

s

Pro

ce

ss

de

sig

n

Ma

na

gin

g In

dia

n p

art

ne

r(s

)

De

v. a

le

ad

ers

hip

tea

m in

In

dia

Lan

d a

cq

uis

itio

n

Ma

na

gin

g t

he

wo

rkfo

rce

Te

ch

no

log

y p

rote

cti

on

Qu

ali

ty m

an

ag

em

en

t

12

Note: N=45


A:

Evaluation

B:

Entry Planning

C:

Entry Implementation

D:

Local Operations

Executives rate evaluation phase most important for success – implementation phase perceived most complex

A:

Evaluation

B:

Entry Planning

C: Entry

Implementation

D:

Local Operations

Note: N=45


13

• Importance for

market entry

•Solution complexity

2

3

4

5

6

7

Overall, only few significant deviations between CH/ EU and Indian executives‘ importance judgement

14

6.0

6.3 6.1 6.3 6.0 6.3 5.8 6.5 6.3 6.2

6.0

6.8 5.6 5.7 5.9 6.3 6.1 5.5 5.2 6.0

0 -0.5 0.5 0.6 0.1 0 -0.3 1.0 1.1 0.2

Imp

ort

an

ce

of

Ch

all

en

ge

CH

/ E

U S

ME

ex

ec

uti

ve

s

Ind

ian

SM

E

ex

ec

uti

ve

s

Note: Numbers refer to arithmetic average of all respondents for respective critical incident (CI)

*Average answers: CH/ EU SME executives – Indian SME executives

N=45


Δ*

Δ > 0.5

CH/ EU executives rate complexity of market entry solutions significantly higher than Indian peers

15

5.5 5.0 4.9 5.0 5.3 5.8 5.3 5.7 5.6 5.7

2.0 4.0 2.8 3.7 2.8 3.7 3.7 2.9 3.8 3.6

3.5 1.0 2.1 1.3 2.5 2.1 1.6 2.8 1.8 2.1

So

luti

on

Co

mp

lex

ity

CH

/ E

U S

ME

ex

ec

uti

ve

s

Ind

ian

SM

E

ex

ec

uti

ve

s

Note: Numbers refer to arithmetic average of all respondents for respective critical incident (CI)

*Average answers: CH/ EU SME executives – Indian SME executives

N=45


Δ*

Δ > 2.0 Δ ≥ 2.5

Summary of recommendations along market entry phases

Market Evaluation Entry Planning/

Preparation

Market Entry Implementation

Local Operations

Allocate

sufficient time to

“know your

market”

Cultivate local

network:

Ongoing

passion and

personal

presence

Set expectations

right from the

outset: Patience

and persistence

key prerequi-

sites for

success

Invest in

personal

overlapping

networks

Apply fact-

based,

individualized

location

analysis

Deploy financial

contingency

planning from

the outset

Calibrate Swiss

vs. Indian way of

doing business

Local leadership:

Include,

empower, control

Regulator: Do

not compromise

on corporate

policy

Capture and

clarify all/ most

eventualities in

contracts

Match IP protection

measures to overall

business strategy

Quality mgmt.: Apply

Jugaad where

necessary to deliver

Swiss quality the

“Indian way”

HR: Build long-term

incentive systems

A D C B

16

Indian reality does not reflect typical Swiss experience – Setting expectations right from the outset is key

Market Evaluation: CEO expectations

The CEO is completely excited about the market opportunities in India and is already dreaming of capturing a part of this multi-million

$ market next year.

„Sometimes I meet SME managers on the plane who

already feel sick when thinking about soon landing

in India – probably not a good prerequisite for doing

business successfully there.“

Managing Partner, Services Company 1

Challenge: Swiss attitude may clash

with Indian reality

A1

Recommendation: Think long-term

& show persistence


„Drawing up a business plan for at least 5–10 years is

key for success – don’t expect to make money in

year 1.“

CEO, Machine Construction Company 14

„If I have learned one thing while setting up our

business in India it is this: Without relentless

persistence one will never succeed. Growing very

fast is not possible without doing immoral things …“

CFO, Machine Construction Company 5

17

Many „Swiss givens“ do not apply to India

(e.g. process efficiency, reliability of business

partners, …)

Swiss SME decision-makers report that this

can lead to early discouragement and

frustration

Setting expectations right from the outset

is thus key for a successful market entry

Winning in India means thinking long-term,

being willing to invest and showing

relentless persistence

„Europeans tend to be more subtle/ careful in their

expression than Indians – the latter may take

advantage of this ...”

CEO, Software & Technology Company 4

Recommendation: Think long-term &

show persistence

Overall

average

(Com.)

Overall

average

(Imp.)

Importance Complexity

HIGH

LOW

Market Evaluation: CEO expectations

The CEO is completely excited about the market opportunities in India and is already dreaming of capturing a part of this multi-million $

market next year.

In relative terms, SME decision-makers believe “setting expectations right” is not particularly complex

A1

Rationale & Comments

N=45


„It is a fact that many entry failures have allegedly

been caused by 'faults' on the parts of the Indian

partner or issues with the regulator. However, I

believe the actual cause often also lies in wrong

expectations and related mismanagement on the

side of the Swiss company.“

Country Head, Machine Construction Company 6

18

Survey results show significant spread

between rated „importance“ vs. perceived

„complexity“

This can be interpreted as indication that

SME executives may not focus enough on

„setting expectations right“ in relevant

parts of their company

2

3

4

5

6

7

Respondents emphasize importance of personal interest for India of key for SME decision-makers

Market Evaluation: Evaluating market potential

The CEO reads various articles which mention that India is the future growth market. To explore whether there is an opportunity for his

company too, he attends several fairs and gets connected to interested partners from India. They all confirm that the market

opportunity for his product portfolio would be huge. He decides to team up with the Indian company he thinks is most trustworthy.

„Some Indians would not mind signing a MOU when

meeting you accidentally at an airport – be careful.“

CEO, Service Company 3

A2

"Successful approaches start with neutral and

independent market studies."

CEO, Industrial Services Company 6

„Show commitment and visit the country regularly to

get a flavor and to build your local network.“

CEO, Machine Construction Company 13.

“For a small SME true personal interest for India is a

key success factor – you need to get your own ass

over there regularly and enjoy it.“

Managing Partner, Services Company 1

19

Challenge: Build local network you can

trust

Recommendation: Passion & personal

presence by top mgmt.

Building a network of trusted sources in

India is the only way to build the market

knowledge you need to make the right

decisions

Lack of access to the right knowledge

leads to information asymmetry (e.g. with

partners) and fosters wrong decision-

making in the early stages of the market

entry process

Therefore, strong personal interest

(passion) and commitment from the very

top and willingness to spend time „on the

ground“ in India are vital



Correct evaluation of market potential rated as most important challenge in early entry stage


„At early stages Swiss companies often make one (or

both) of the following mistakes:

1) No clear statement of purpose (why do I want to go

to India?)

2) Do not invest sufficient resources in finding the

right local partners."


20





A2

Correct ex ante evaluation of market

potential perceived as most important in

the early stage of a market entry in India

These results reflect how crucial it is to find

the right sources of information and

partners to work with in India

2

3

4

5

6

7

N=45


Overall

average

(Com.)

Overall

average

(Imp.)

HIGH

LOW

Trusted local relationships required to generate true market insights

„When collaborating with an Indian

partner always ask yourself : What

will these guys bring to the table

on a sustainable basis over the

next 5-10 years? Think long-

term.“

Country Head, Machine

Construction Company 6

„Start with informal visits to India

to feel the pulse.“


Relationships × = Trust Market Insights

„India = Country of

relationships. However, be

careful to enter a JV out of 'deep

friendship' – you might regret it

fast.“

CEO, Machine Construction

Company 7

„Only a few partners will

represent your interests properly

– don’t trust too easily.“

CEO, Automotive Company 1

„Establish contact to key potential

users early on and build trust.“

CEO, Machine Construction

Company 13

„Your analysis should include a

wide variety of aspects e.g.

government regulations, market

size, the local image of your key

players, …“

CEO, Industrial Services

Company 6

„India is a huge country with

many sub-cultures and

requirements. With the right help

you can figure it out.”


Company 3

„Having the right partner you can

trust is key for success in India.“


Company 4 21





A2


Indian price consciousness triggers difficult to handle „price – margin – quality“ trade-off

Market Evaluation: Adapting product for Indian market

Although the CEO is aware that India is a price conscious country he is very optimistic. His rationale is to reduce the quality

level for ABC’s products for the local Indian market and apply “proven” but not latest technologies to maintain their usual

profit margin.

Challenge: Navigating the price –

margin – quality trade-off

Recommendation: Don‘t give in to

short-term thinking

A3

“In our case an old technology was good enough to

make profit and gain first market shares in India. We

also benefited from low local sourcing and labor

cost."

BDM, Machine Construction Company 2

“It might be wise to enter India with state-of-the-art

technology. Once customers value the higher

quality, the initially low acceptance due to price-

consciousness will disappear."

Creative Director, Apparel Manufacturing Company 1. “We followed the strategy 'Swiss quality knows no

compromise‘. However, we had a tough time

defending our margin following this credo.”


“Our customers demand the best quality. Once price

negotiation is on we often hear: ‘A Chinese supplier

is cheaper‘. It’s tough to remove this inconsistency

…”

CFO, Machine Construction Company 5 22

Indian customers are extremely price cons-

cious, often demanding„best available

quality for impossibly low prices“

It is a challenge for SME executives to

navigate the resulting price – margin –

quality trade-off in a sustainable manner

Study responses reveal that there is not one

right answer. Overall, respondents agree

that taking a long-term view is crucial


Overall

average

(Imp.)


Adapting product portfolio for Indian market perceived most complex challenge in early phase


"Identifying the right customers and adapting the

product accordingly is very difficult."


2

3

4

5

6

7

23




profit margin.

A3

SME executives rate challenge of adapting

their product portfolio to the Indian market

as very important (in relative terms)

On average, respondents perceive it as the

most complex challenge to deal with in

the early market entry stage

N=45


Overall

average

(Com.)

HIGH

LOW

Adequate handling of P-M-Q trade-off varies depend-ing on overall strategy (distribution vs. local operations)

Price – Margin – Quality Trade-off Adapt product portfolio to be in line

with chosen market strategy

Margin

Price

Quality Margin

Price

Quality

24

Short-

Term

Long-

Term




profit margin.

A3

SMEs distributing products in India:

SMEs manufacturing products in India:

“I am no friend of entering India with lower quality

products. Better invest in educating local customers

that quality pays-off in the long-run. We found this to

be very tough with OEMs, but easier with mid-sized

customers."


“Even if you try hard, you won’t manage to

manufacture ‘Swiss quality like products‘. Adapt to

local sourcing and labor conditions and come up

with solid quality, lower cost products the local

market demands.”



Following others to „popular locations“ is tempting but might not be the right choice for own endeavor

"You have to consider many aspects, e.g. type of

operations, employees, customer base, infrastructure,

education…”

COO, Machine Construction Company 1

“Following others to a popular location without

detailed investigation is not advisable. It might not

be the best location for your needs."


“It helped us a lot to answer the following questions in

a structured way:

1) Which location fits best to our operations

requirements?

2) Where do we have access to good people?

3) Are there identifiable customer clusters?

4) General business environment (universities,

infrastructure, …)?"


Entry Preparation: Choosing the right location

The CEO ponders about where in India he should start his operations. After discussing this with a few Swiss SME

colleagues the decision seems easy. Almost everybody seems to have launched their operations in India in Maharashtra

(mostly in or around Mumbai). The CEO decides to follow suit.

B1

"Build two or three small plants at different locations

compared to one big one. It will pay-off in the long-

term."

Purchasing Manager, Automotive Company 2

25

Challenge: Prioritize requirements &

bet on most suitable location

Recommendation: Fact-based,

individualized location analysis

Independent, individualized and fact-

based location analysis perceived as best

strategy to find YOUR location

Most respondents agree that following

others to popular locations is tempting but

may be counter-productive for own

endeavors

“Used to Swiss standards, no location in India is

perfect. The challenge is to prioritize and find the

location which covers most of your requirements.”



Overall

average

(Imp.)

Overall

average

(Com.)

HIGH

LOW


Executives acknowledge importance of location choi-ce but do not rate challenge as particularly complex


“I do not think that in recent years many Swiss SMEs

took wrong location decisions. While it’s a critical

step in the market entry process there are other

challenges which are much more complex."

CEO, Services Company 2

2

3

4

5

6

7

26





B1

While choosing the right location is a

critical incident when planning a market

entry in India, compared to other key steps

respondents rate it – in relative terms – as a

moderately less important and much less

complex challenge

N=45


Business environment, industry clusters and import-ance of customer proximity key decision criteria

Customer

Proximity

Industry

Cluster

Is customer proximity a

prerequisite for your business

model to work?

How geographically dispersed

are your target customers?

Is your industry geographically

concentrated?

Do you need highly specialized resources?

Human resources (e.g. engineers)

Natural resources (e.g. clay)

Rare, specialized suppliers?

Do you have trusted personal relationships in a

specific geographic area?

Can you benefit from special development

programs in particular states?

General

Business

Environ-

ment

27

Prioritize





B1


Financial contingency planning will help to deal with high uncertainty in India and provides confidence

Entry Preparation: Financial planning

The CEO`s discussions with the CFO have shown that they can easily finance the basic operations for two years before

getting close to break-even. Even so the CEO is aware that there is only limited certainty on the overall investments, he is

convinced that his estimations are pretty accurate.

B2

"Very likely there will be some important points

missing. Expect the unexpected. Add a contingency

of 50-100% to the original budget."


"You need clear targets. Put them down on paper. Also

include different contingencies because you never

know what comes tomorrow in India.“


“Financial planning in India? Don’t get frustrated –

just include different scenarios in your thinking.”


29

Challenge: Making the right

assumptions for financial planning

Recommendation: Financial contin-

gency planning from the outset


Uncertainty should not lead to attitude

proclaiming that exact planning is

unnecessary

Force yourself to adapt and include

detailed contingencies in your financial

models

Detailed financial planning is an extremely

difficult task in India – „uncertainty is

everywhere“

In such an environment, making realistic

assumptions for a business plan is a

major challenge and risk

"Feelings should not be the driving force behind a

strategically important decision such as the one to

enter a key market like India.“


Overall

average

(Imp.)

Overall

average

(Com.)

HIGH

LOW


Financial planning perceived most important but not particularly complex challenge in planning phase


2

3

4

5

6

7

“We push hard to meet financial plans, even in an

uncertain environment such as India. I think the

Swiss are good at that.”


30

Entry Preparation: Financial planning

The CEO`s discussions with the CFO have shown that they can easily finance the basic operations for two years before

getting close to break-even. Even so the CEO is aware that there is only limited certainty on the overall investments, he is

convinced that his estimations are pretty accurate.

B2

SME executives agree that financial

planning should be a top priority

The complexity of this task, however, is

rated below average. This may reflect

Swiss executives‘ trust in their well-

structured, process oriented and

analytical management style

N=45


Keeping enough independence crucial when partner-ing up – investing in overlapping networks helps

Entry Preparation: Entry mode choice

Over the last five years, ABC Ltd. has successfully exported products to India through a local agent. The CEO is now

considering to relocate parts of his operations to India without partnering up with his agent. His agent said: “If you want to

start operations without my involvement I am convinced you will lose your most valuable customers."

B3

"You need to involve the agent in one way or another

that he can "save" at least his face and that you can

benefit from his long-term relationships with the

customers.“


"Involve your agent financially or at least as a

member of the Board. He shall depend on you and

you on him – to the same extent.“


"Create long-term benefits for both parties."


“Whenever possible enter India completely

independent. I know from my own experience that

there’s so much that can go wrong with (the wrong)

Indian partner. They’ll make sure you depend on

them very fast.“

CEO, Machine Construction Company 7 31


Challenge: Staying independent/ in

control when parnering up

Recommendation: Invest in personal

overlapping networks

If possible (big enough?) evaluate whether

entry without local partner might work

Invest time and resources in finding the

right partner – and make sure he/ she

depends on you as much as you depend

on him/ her mid- to long-term

For small(er) SMEs it is often impossible to

build local presence without an Indian

partner

The result can be a power game – securing

own positions („staying independent“) is a

major challenge

Overall

average

(Imp.)

Overall

average

(Com.)

HIGH

LOW


Executives rate entry mode choice as challenge of average importance and complexity


2

3

4

5

6

7

"Try to have two or three persons representing the

company in India. It will avoid overdependence on

one.“


"Identify a trusted strategic Indian partner who can

co-invest in as well as manage the business. This will

enable you to take advantage of readily available

skilled manpower and systems.“


32

Entry Preparation: Entry mode choice

Over the last five years, ABC Ltd. has successfully exported products to India through a local agent. The CEO is now

considering to relocate parts of his operations to India without partnering up with his agent. His agent said: “If you want to

start operations without my involvement I am convinced you will lose your most valuable customers."

B3

Study respondents rate decision whether to

enter India with/ without a local partner as

of slightly below average importantance –

complexity of challenge perceived average.

Significant deviation between Swiss and

Indian executive views (Δ = 1.3)

N=45


Swiss/ EU

executives rate

challenge as

more complex

than Indian

peers

FOCUS: Trust and business relationship development in India: Why do relationships and trust matter so much in India?

• Insights from Negotiation Strategies in India: Trust improves the chances to

create win-win

(1) “Indian negotiation partners do generally not have a preferred negotiation strategy. Their cultural

background allows for integrative as well as distributive negotiation approaches.”

(2) “In India, the relationship quality to the negotiation partner is often more important than the

organization he/she represents or the content that is negotiated about.”

(3) “The higher the perceived relationship quality between the negotiation partners, the more the

Indian negotiation partners tend towards an integrative negotiation approach.”

or

“The lower the perceived relationship quality between the negotiation partners, the more the

Indian negotiation partners tend towards a distributive negotiation approach.”

(4) “The development and maintenance of trustful relationships is the most important success

factor for negotiations with Indian business partners.”

(5) “In negotiations with Indian business partners, the pre-negotiation phase is more important than

the negotiation phase or the follow-up”

Trust development is key to success. However, how do we

develop trust and what kind of trust are we actually talking about?

Source: Pesic, Thesis on Negotiations in the Chinese Context, 2007

FOCUS: Trust and business relationship development in India: Basics: Trust is…

• Trust…

• … is not the same as confidence

• … is more than the assumption of competence

•… requires a non-opportunistic behavior /motivation from the

trustee

• … is based on the existence of uncertainty resp. contingency

• … does not include any other safeguards

Source: Eberl, Schmalenbach Business Review, 2004

FOCUS: Trust and business relationship development in India: Trust “exists” at different levels in the business environment – and it strongly determines the “trust situation”

What is the trust context in emerging markets for your

business?

What are your objectives (as individual, as organization)

SYSTEM Trust

INSTITUTIONAL Trust

ORGANIZATIONAL Trust ORGANIZATIONAL Trust

INTERPERSONAL

Trust

INTERPERSONAL

Trust

INTERPERSONAL

Trust INTERPERSONAL

Trust

Source: Renouf, Thesis on Trust Development in Emerging Markets, 2012

FOCUS: Trust and business relationship development in India: Managers also make decisions based on the expectations towards trusted business partners.

• Elements of trust resp. trustworthiness…

• …Ability/Competence Good intentions are not enough, skills are required to

justify trust; especially in business context (e.g. Mechanics, Surgeons).

•…Benevolence Demonstration of concern for the welfare of others. The expectation

of benevolence is the confidence that one’s well-being or something one cares about will not

be harmed by the trusted party.

• …Integrity Refers to the moral aspects of trust. Benevolence needs to be the ethical

(e.g. Mafia Boss).

• …Reliability Consistency in behavior and signaling of predictability (e.g. Traitors,

Killers).

• …Openness The extent to which an organization practices open communication and

does not withhold relevant information (e.g. Enron).

What are your expectations towards a trustworthy business

partner?

Source: Eberl, Schmalenbach Business Review, 2004

FOCUS: Trust and business relationship development in India: Basic trust development framework

Trust SITUATION

Objective

Trust CONTEXT

• Personal

• Organizational

• Institutional

• System

Trust DECISION

Trust APPROACH

• Emotionality

• Rationality

Trust

EXPECTATIONS

• Competence

• Integrity

• Openness

• Reliability etc.

Trust ACTION «Risky» Investment

• Initiation

• Establishment

• Maintenance

• Termination

Tru

st

OU

TC

OM

E

Trust ACTION

Feedback

Avoidance,

Mititgation,

Prevention Having clarified the situation and decision the

challenge is to manage the implementation

Trust development: The red-button “theory” – “cold war” reloaded.

Question for

Discussion:

How important are

“networks” in Western

Europe for business

development?

The “red button”:

In business development projects

both parties (Western and e.g. Indian

business partner) must have the

power to credibly threat the

counterpart to press the “red button”

and “hurt” him/her significantly. This

balance of power ensures that both

parties need to work together to find

solutions when first problems occur .

The mistake of most Western

companies is to neglect to build this

power from the very beginning.

Comparison to

“Cold War”:

In most emerging

markets conflicts

are normally

solved by the

CEOs directly

because only

they can decide,

like the former

USSR and US

presidents, to

finally press the

“red button”.

FOCUS: Trust and business relationship development in India: Reputation, Signaling, Emotional Bonding

Invest in Problem SolutionWalk Away --> Dominant for

Indian

Invest in Problem

Solution --> Domnant

for European

I: High risk of financial loss

E: Break-even

I: Medium risk of financial loss

E: High risk of financial loss

Walk AwayI: Very high risk of financial loss

E: Very high risk of financial loss

I: Low risk of financial loss

E: Very high risk of financial loss

Behavior of Indian Business Partner (I)

Be

ha

vio

r o

f E

uro

pe

an

Bu

sin

ess

Pa

rtn

er

(E)

Financial Capital Perspective

Invest in Problem Solution -->

Domintant for IndianWalk Away

Invest in Problem

Solution --> Dominant

for European

I: Low risk of reputation loss

E: Low risk of reputation loss

I: Very high risk of reputation loss

E: Very low risk of reputation loss

Walk AwayI: Very low risk of reputation loss

E: Very high risk of reputation loss

I: Low risk of reputation loss

E: Low risk of reputation loss

Be

ha

vio

r o

f E

uro

pe

an

Bu

sin

ess

Pa

rtn

er

(E)

Reputation Captial Perspective

Behavior in Indian Business Partner (I)

FOCUS: Trust and business relationship development in India: Reputation – integrating reputational capital into the equation.

FOCUS: Trust and business relationship development in India: Trust development process summary in the context of emerging markets.

Successful ventures to India manage to adapt to local conditions without loosing “Swissness”

Market Entry Implementation: Business Process Design

The CEO is looking for a JV partner to establish their own production in India. During almost any meeting with potential

partners he gets the feeling that his discussion partners are almost over self-confident, strongly emphasizing that European

companies have to adapt to the Indian business terms if they want to survive in the long-term.

„Indian customs and the way of doing business are

different, but it is key that the local partner

understands and identifies with your business

philosophy.“


„Interact with Swiss companies which are already in

the market to understand where you have to adapt

and where you have to stay put.“


35


Challenge: Adapt to Indian way without

loosing „Swissness“

Recommendation: Benefit from others‘

experiences

Respondents report that interacting with

other Swiss SMEs established in India

helps to find the balance between adapting

to the Indian way and not compromising

Swiss business virtues

Comprise and evaluate the financial,

reputational and organizational

consequences of going forward the Swiss

vs. the Indian way

„In Rome, do as the Romans do“ – It is not

as simple as that when venturing to India

Executives report that balancing adaptation

to the Indian way without loosing

Swissness can be a challenge

„Swiss SMEs must show a lot of resolution and not

just give in. Else one will loose touch with what’s

going on on the ground in India very fast.”


C1

Overall

average

(Imp.)

Overall

average

(Com.)

HIGH

LOW 2

3

4

5

6

7


Defining optimal business process on the ground per-ceived most complex challenge during implementation

„Finding the right partner and figuring out how exactly to

work with him will be most difficult and yet most

important.“

CEO, Machine Construction Company 13 36






Study results illustrate that identifying the

right business process design for India is

often characterized by major insecurities

and risks – challenge perceived most

complex in the entry implementation

phase

„As a Swiss company we brought the technical and

commercial know-how to the table. Indians display a

high customer focus and are extremely good at

handling the unexpected – this combination works

quite nicely.“


N=45


C1

37






Swiss vs. Indian way of doing Business

Character-

istic 1

Extreme A Extreme B

Handling corruption

Government relations

Social engagement

Administrative processes

People management

Financial planning

Quality management

…

…

Character-

istic 8

Clear decisions in what dimensions to follow the Swiss/ Indian way provides helpful point of reference

Business

Characteristics ILLUSTRATIVE

C1

Capturing as many eventualities as possible in contracts ex ante reduces risk, particularly in disputes

Market Entry Implementation: Managing Indian partner(s)

Due to the success of the company ABC Ltd and the extensive network that the CEO could personally establish he is

considering launching his own fully controlled operations in India. However, when looking at the Joint Venture contract he

realizes that there is no sentence in the agreement on how to exit the JV.

„Exiting a JV can be very messy, time consuming

and expensive. It is difficult but key to build a

relationship built on trust from the beginning – this

will help when issues arise. At the same time, always

remain cautious …“


„Do not sign the contract before all aspects are

clarified between your partner and you.“


„Your agreement should always address the exit

situation and dispute resolution. Again, stay as

independent as possible … and in control.”

CEO, Industrial Services Company 1 "This should be less of an issue now. "Press Note 1”

in relation to JV agreements has been withdrawn by

the Govt of India with effect from 1 April 2011."

BDM, Machine Construction Company 4 „Pay enough attention to the exit clause while drawing

up your JV agreement.“

Controller, Chemical & Pharmaceutical Company 1 38

Challenge: Managing relationships with

Indian partner(s) effectively

Recommendation: Capture & clarify all

eventualities in contracts


SME executives‘ responses are strongly

aligned: The only effective way of avoiding

unwanted surprises is „control“ – try to

capture as many eventualities as possible

in contracts

Managing Indian partners effectively remains

challenging, particularly when disputes arise

– this still holds true after „Press Note 1“

C2

Overall

average

(Imp.)

Overall

average

(Com.)

HIGH

LOW 2

3

4

5

6

7


Swiss/ EU vs. Indian executives: Significant discrepancy regarding perceived challenge complexity


„Since India has relaxed the rules (such as earlier Press

Note 1) managing Indian partners has become much

easier.“


39

Market Entry Implementation: Managing Indian partner(s)

Due to the success of the company ABC Ltd and the extensive network that the CEO could personally establish he is

considering launching his own fully controlled operations in India. However, when looking at the Joint Venture contract he

realizes that there is no sentence in the agreement on how to exit the JV.

N=45


Other than expected, study results show that

managing Indian partners, in relative terms,

does not seem to be perceived particularly

important or complex – recent

abolishments of ancient regulatory obstacles

(e.g. Press Note 1) may have impacted

results.

However, Swiss/ EU executives alone rank

complexity significantly higher (Δ = 2.5).

Swiss/ EU

executives rate

challenge as

much more

complex

C2

Include and empower a local mgmt. team early on – but remain present to keep up close monitoring

„You have to very soon find a trustful local person

who has an existing network and can take over a

leading role. Without such a contact you will

undergo a lot of delays.“

BDM, Industrial Services Company 2 „You need a local MD who has experiences with

foreign companies. Additionally, you require a Swiss

employee as technical adviser and as trusted

source for the Swiss HQ.“

CEO, Industrial Services Company 1 „A good idea is to send over a Swiss mgr. to set up the

key processes and then hand over to local mgmt.

after 1.5-2 years.“


Market Entry Implementation: Developing a leadership team in India

The CEO wants to send his best employee Thomas Muster to India, however, after 10 months of waiting to move to India

due to different delays in getting local registrations, concessions and permissions done, Thomas becomes more and more

disillusioned. Moreover, the CEO is convinced that he needs to send a Swiss manager as MD for his Indian operations.

40

Challenge: Attract and prepare the right

leadership team

Recommendation: Include, empower,

control local mgmt. team


Respondents agree that building a local

management team is a key success factor

Include and empower local mgrs. early on,

but at the same time keep up close

monitoring

Study results reveal two main questions

related to attracting and preparing the right

local leadership team as major challenge:

Which expats are prepared and willing

to take on the challenge in India?

At what stage (if at all) should a local

mgmt. team take over and where do

we find suitable candidates? „It’s good to build a strong local management team

from the start. But also guarantee you do not depend

too much on him – maintain Swissness.”


C3

Overall

average

(Imp.)

Overall

average

(Com.)

HIGH

LOW 2

3

4

5

6

7


Developing a local leadership team rated most important and very complex challenge in implementation phase

„You need a strong expat on the ground from the very

beginning. Many Swiss SMEs do simply not manage

to find the right people to send to India.”


41






N=45


Development of leadership team for

operations in India clearly rated as most

important and very complex challenge in

entry implementation phase

On average, Swiss/ EU managers perceive

challenge as much more complex than

Indian peers (5.8 vs. 3.7)

C3

Investing in key management personnel often necessary to build local leadership team which thinks long-term

„Teach them [the employees] to see the big picture (i.e. the steps

before and after their job in the value chain), to think more about

the consequences and requirements of their work . In short, lift

them out of the black boxes they are working in …“ 42






„We find that our local Indian management often

struggles to see the big picture and to act

accordingly. The predominant hierarchical

structure leads to a culture where people just

follow orders without challenging supervisors.

Investing in our key people by flying them to

Switzerland and trying to really bring across our

long-term strategy and including them in our

discussions helped.“

CEO & Chairman, Machine

Construction Company 11

C3

Decide on your position in „Ethics – Time – Corruption“ conflict – follow it and be aware of consequences

Market Entry Implementation: Land acquisition

With the help of OSEC’s Swiss Business Hub the CEO has identified a piece of land where he can build his factory. Very

soon he realizes that it does not seem to be feasible to buy this land without bribing people here and there. The CEO is

alienated.

C4

"Involve a partner you can trust to handle all these

issues. Foreign companies cannot bribe and would be

cheated anyhow."


„Bribing is black mailing and will never stop after the

first payment.“

CFO, Retail & Consumer Goods Company 3

„Without bribing it will take you a long time to get

things done in India. One has to play the system!“

BDM, Software & Technology Company 1

43

Challenge: Find position in Ethics –

Time – Corruption conflict

Recommendation: Do not compromise

on corporate policy


SME executives present different

approaches for dealing with corruption in

India – the gist is: Find your own corporate

policy and then do not compromise on it

Respondents agree that corruption is a big

concern when entering India (land

acquisition case in point)

Main challenge is to decide on own

position in „Ethics – Time – Corruption“

Trade-off and follow it consistently "Think about your goals and decide how you want to

achieve them. The outcome may mean to change the

goals or not be present in India."


Approach 1:

“Bribes are not necessary! The clean way is

cumbersome and requires long breath. However, it is

feasible and we feel good to follow it."


Approach 2:

"Let your Indian partner do the dirty job. Some little

kick backs here and there …You won’t succeed

without."


Approach 3:

Overall

average

(Imp.)

Overall

average

(Com.)

HIGH

LOW 2

3

4

5

6

7


Existence of corruption is common knowledge – issue importance for entry success rated bellow average


“Doing business in India is a daily frenzy – corruption

in the region is like a cancer tumor. Everybody

knows what’s happening.“

Chairman, Machine Construction Company 12

44 N=45

*India ranks 87 behind e.g. Colombia or China in Transparency International’s Corruption Perception Index 2010

Source: Transparency International; India Competence Center interviews; India Competence Center online questionnaire




alienated.

C4

Existence of corruption issue in India is

common knowledge* – respondents rate

both importance and challenge complexity

as around average in relative terms

Where in the “Ethics – Time – Corruption” triangle is your company/ your management positioned?

Bribe

money

Business

Ethics

Practicability

(Speed money)

According to Transparency

International we differentiate types of

corruption by motive:

"Speed Money" is according to rule

corruption.

"Bribe Money" is against the rule

corruption.

"We haven't paid a single bribe since

we set up operations in 1989."

Duncan Watkinson, MD,

Turbocam International

"Leave these issues to your strategic

local partners who understand local

language and culture …"

CEO, Automotive Company 3

„Bribing in India became even worse in the

past few years.“

CFO, Retail & Consumer Goods Company 3

45

Source: Transparency International; India Competence Center interviews; India Competence Center online questionnaire




alienated.

C4

? „Bribes are mainly used to take

shortcuts and in order to avoid

compliance with rules and laws …“


Executives’ experience shows that retaining people in India is difficult – but effective tools exist

Local operations: Managing the Workforce

The Swiss management team in India faces the challenge that the local union representatives want hourly salaries for the

blue-collar workers that are more than 25% above the local average with the argument that a Swiss company can afford it.

D1

"Unions can give you a real headache. Do not argue

with them as a foreigner. Have your local mgmt.

dealing with them."


“Due to low employee loyalty, often driven by many

outside opportunities (high growth), employee

fluctuation rate can be as high as 60%. If you do

extremely well you can get it down to 10-15% in the long-

term. "

Chairman, Machine Construction Company 12

"You should offer long-term intangible advantages such

as family benefits or further training – Loyalty will rise. CEO, Machine Construction Company 14

46

Challenge: Retaining your people in

India – efficiently

Recommendation: Invest in people,

build long-term incentive systems


Respondents‘ recommendations can be

summarized as follows:

1. Let locals deal with unions/ politicians

2. Adapt recruiting strategy to India

3. Invest in people, but secure your interests

through long-term incentive systems

Dealing with Unions/ local politicians and

keeping employee fluctuation as low as

possible is a major challenge in operations

phase

“We have learned that when we need 10 people we

have to start the process with ~30, many will drop-out. CEO, Machine Construction Company 7

“When we train Indian workers in Switzerland we hold

back part of the money, we have employees sign

binding contracts and increase wages regularly.” Chairman, Machine Construction Company 12

Overall

average

(Imp.)

Overall

average

(Com.)

HIGH

LOW 2

3

4

5

6

7


Importance for success & challenge complexity rated slightly below average – Swiss mgrs. use higher rating

„My Indian workers rarely indicate when they do not

understand a task – they just don’t ask back and then do

the wrong thing. I am glad we have put in place a local

mgmt. structure.”

CEO & Chairman, Machine Construction Company 11

47

N=45


Local operations: Managing the Workforce

The Swiss management team in India faces the challenge that the local union representatives want hourly salaries for the

blue-collar workers that are more than 25% above the local average with the argument that a Swiss company can afford it.

D1


Overall, executives perceive importance for

success and challenge complexity of

managing the local workforce comparatively

low (slightly below overall average)

However, Swiss/ EU executives rate

importance (Δ 1.0) and complexity (Δ 2.8)

much higer than Indian peers

IP protection is an ongoing challenge for Swiss SMEs in India – measures should be aligned with strategy

"As long as I can earn money with my latest

technology in Europe, I do not want to use it India. It

will be copied."


"Go to a high level court if your partner violates the

contractual obligations (reg. IP). You will win.”


48

Local operations: Technology protection

After three years the investment of ABC Ltd. has still not reached break-even. Overall, it has become increasingly

challenging for the Swiss team to monitor what is actually happening on the ground in India. Recently, the CEO has heard

from a supplier that his Indian partner has started another, separate company on his own buying the same inputs.

D2

Challenge: Keeping control of your IP Recommendation: Match IP protection

measures to strategy


SME executives report to be cautious when

it comes to exporting the latest technology

to India – when the market requires it the

following is suggested:

Make sure that R&D activities/ IP related

activities are led by trusted expat

executives

Build strict IP protection clauses in

contracts

Align protection measures with overall

strategy (see following slides)

Study respondents agree that keeping

control of/ protecting IP is an ongoing

challenge when operating in India

“Also in this regard JVs are a headache and should be

avoided if possible […] I would see that all the steps

etc. are well documented and supervised by a law

firm to have sufficient evidence in case of a dispute."


Overall

average

(Imp.)

Overall

average

(Com.)

HIGH

LOW 2

3

4

5

6

7


Technology protection perceived most complex ongoing challenge when operating in India

„Key will be speed, smartness and precise contracts

to prevent partners from going on their own taking

advantage of leaked IP.“


49

N=45






D2


Overall, IP protection does not seem to

belong to the „hot topics“ when entering

India (as e.g. compared to China)

However, respondents perceive technology

protection as most complex ongoing

challenge when operating in India (in

relative terms)

IP protection requires diverging measures depending on overall business strategy

Technology Generation

De

gre

e o

f lo

ca

l

Op

era

tio

ns

Low

Earlier Latest

High Local R&D (if at all)

only led by trusted

Swiss executives

Enforce processes to

keep technolgy

transfer as low/ slow

as possible

Build explicit clauses

in all contracts

Protect technology

(IP) by working with

several Indian sales/

distribution partners

Build credible threat

with your overlapping

networks

If products not

technologically

advanced: Reputation/

sound customer

relationships & access

most important

Often perceived as

valid market entry

strategy

Use of earlier

technology to cater to

local market

characteristics (e.g.

price sensitivity)

50






D2

„Which IP protection measures

should be put in place varies and

largely depends on the overall

business strategy.” CEO, Machine Construction

Company 10

Quality management in India: Finding the best way to deliver „Swiss Quality – the Indian way“

Local operations: Quality management

After a successful marketing campaign the production volume in India needs to be fast increased leading to more frequent

quality management challenges. The “Swiss High Quality” branding advantage, profit margins and the business model in

general are at stake.

D3

“Indians sometimes demand the best quality for no

money, which is not possible. Therefore, Swiss SMEs

often have to adapt their products – also in terms of

quality – to make money in India."

CEO, Machine Construction Company 8 "It must be clear from the beginning how close to

Swiss standards the products for the Indian market

have to be."

CFO, Retail & Consumer Goods Company 3 51

Challenge: Delivering Swiss quality –

the Indian way

Recommendation: Don‘t shy away from

Jugaad for local production


Adapt to local conditions and apply

„Jugaad“ where necessary to produce

solid products the Indian market demands

Put in place structures and processes to

guarantee chosen quality standards

Swiss SME products stand for high quality

and reliability. However, market conditions

in India demand product adaptations which

can also impact quality

Finding the best way to deliver „Swiss

quality – the Indian way“ can be

challenging, particularly for smaller SMEs “Appoint a strong Quality Manager who reports to the

MD. Get ISO certificated from the beginning. Introduce

quality audits at vendor site. Critical material can not

leave the vendor place before quality approval is given

by the own employee or agent.”


Overall

average

(Imp.)

Overall

average

(Com.)

HIGH

LOW 2

3

4

5

6

7


Executives rate quality management as most important challenge in operations phase

52





D3


N=45


Study respondents perceive quality

management as most important challenge

to be successful in operations phase

Complexity is rated above average,

particularly by Swiss/ EU executives (Δ 2.1)

“Even if you try hard, you won’t manage to manufact-

ure ‘Swiss quality like products‘ in India. Adapt to

local sourcing and labor conditions and come up

with solid quality, lower cost products the local

market demands.”


What quality level is perceived as „Swiss quality“ in India and how can this quality be produced locally?

„It will be hard to achieve high quality results when

manufacturing in India.“

BDM, Software & Technology Company 2

53






D3

Average

Swiss

Quality

Average

Indian

Quality

Expect-

ed

„Swiss

Quality“

in India

Swiss

Quality

– deliv-

ered the

Indian

way


HIG

H

LO

W

A B Manufacturing in India will often not allow

for „100% Swiss quality“ products – local

market is highly price sensitive and expects

„Swiss quality“, but delivered the Indian

way

Swiss SMEs can answer the following two

questions to define quality standard for India:

Which quality level works for my product

portfolio to be sold in India/ other markets?

How can I produce this quality under local

conditions (sourcing, labor skills, …)?

A

B

Summary / Lessons Learned: Market Entry Challenges

1

2

3

4

5

Documents

Guest Lecture FHSG