Business Success in India: Romans, Wine, and Relationships

There is one perennial question that plagues several multinational corporations (MNC)…and this is “what does it take to be successful (including make money) in the India market”. Multinationals often find it difficult (so it seems) to replicate their global success mantra in India? While many struggle, there are several multinationals that have been able to crack the code…so what do they do differently?
 A multitude of factors that contribute to “success” and this is true of any business anywhere.  In India, there are some unique factors that are uniquely Indian and these play a vital role in improving success probability.  To keep it simple, I will pick the key factors using the title of the blog as a guide.

Romans, Wines, Relationship…these if done correctly can lead to Business Success in India.

#1 – Romans behave differently.  As the saying goes…”be a Roman when in Rome”…but this is often a lot more difficult to execute than give lip service to.  Companies get caught up in “business is business”…leaders lack the essential flat-world global mind-set of “Think global-act global, AND think local-act local”.  Also, some confusion stems from the use of English as a business language this confuses multinationals into thinking “how different can it be”?

In the business culture in India, what you say, how you say (what you say), what not to say, when (and what) not to say, importance of silence (and meaning of it), when to ask for payments due, the role these of these payments etc... are uniquely Indian. Net-net, it is hard from someone from Rome to be an “Indian when in India”…unless someone fully understands the underlying belief system that drives behavior.  Finding the right Indian(s) to help with business leads to challenges for multinationals….can we find the right person to represent us?, do they know our business?, can they be trusted? etc.

#2 – Wine delivers Value.  Wine we know is not Toddy (Toddy is cheap India country liquor).  Both can get you high….toddy is a lot cheaper, wine in contrast delivers experience-centered value. Indians love “value”, want “value for money”, and interestingly will open wallets…”no questions asked” if value is clear.

Ask any most Indian (or India origin person), what TV they would like to buy (likely answer; Sony by a big margin), and there will be little negotiation.  Another example; Toyota’s recent troubles aside, ask any India origin in person in the US what car they will buy…the answer likely will be Honda, Toyota, or Nissan (and their pricier avatars..like Lexus etc.)…why?…well in the minds of Indians (or India origin people) the value is not in doubt.

For businesses then the big question is; what is the intrinsic value of their product/offering and how to make the value embedded in the minds of the customer? Unfortunately, if an Indian customer cannot be convinced that you offer wine….then you are in the cost trap and here…the best one can make is toddy rates.  Businesses have to get to TCVO (Total Cost and “Value” of Ownership)…this is true in all geographies…but the relationship between “C” and hard to quantify “V” is paramount.

For those who think it is all about “C”, the lack of success of the Tata Nano is a great example of the “V” seeking mature Indian consumer. Guess what Tata is doing….aggressively enhancing “V”, while trying to stay on the promise made on “C”.

As an aside, culturally sensitive advertising/branding…i.e. advertising that appeals culturally but emphasizes that value is a tool to build value. Interestingly, multinationals are on strong footing on “V”, since value has been demonstrated in other geographies……this needs to be capitalized upon.

#3 – Relationships beyond Business.  In the culture relationships are important because they are taken “literally” and “personally”.  So the fact that you have a “relationship” implicitly ensures that each party is interested in other’s success.  Hence, Indians (like peers from eastern cultures) do business with people they trust, or with someone with a second degree of trust/relationship separation…which may mean the 1.2 billion people.

Secondly, once you have relationships then you need to maintain the relationships (and reputation)…if not for anything else, then for saving “face”….in a society with two degrees of separation, bad reputation can be problematic.  Maintaining the relationship includes; going beyond the contract, providing good after sales services, not talking about money till the “fat lady sings” etc. Trust is taken for granted and the understanding is that “I cover for you and you cover for me”…since we know there will be problems along the way. For multinationals this gets tricky because local expectations from the relationship conflicts with the role of payments and contracts. From the customer perspective; we have relationships--then “why can’t you wait for the money till success is demonstrated”, I’s dotted, and T’s crossed in the contract - “why do we need a contract…all these items make me think that you are only interested in protecting yourself”.

None of the above are showstoppers and the customer is not against a provider making money, it is a question of WHEN and HOW.  Net-net, customers need to be managed a lot more and providers need to be flexible, and yes customers are “high maintenance”….what is maintenance within family anyway!!!

#4 – Success the final variable is simply the sum of others...and comes from the fact the companies have to innovate to overcome the challenges/constraints outlined.  For example; a) How to embed “V” in people’s minds--could mean innovative marketing, b) How to ask for money after success—could mean innovative business models dependent on customer success, c) How do ensure that you understand market needs—could mean that you market shampoo in single use pouches that the poor can afford (without compromising on margins/unit volume), d) How to understand culture better—could be overcome with local leadership or local origin repatriating leadership.

Interestingly, when businesses are flexible and innovate aggressively in these aspects they not only achieve success, make money, but become better global organizations in the process.

Let me end with some examples of companies who have deciphered the above….this is not a complete list….I should also state that the list is growing at an accelerating pace; IBM, Dell, Cisco, Nokia, Nokia Siemens, Oracle/Sun, Pepsi, Unilever, Siemens, ABB among others.  More recently making the shift are Capgemini, Accenture, GE, Boeing..and others.
I am interested in your views, so what do you think? Are there other "big" factors that orgnaizations should consider?

Jugaad, Innovation, and India traffic

Clearly you must be thinking what is the relationship between the above three items (Jugaad, Innovation and India Traffic)…it is tricky and maybe a stretch but I will try to share my views and see if they help in building the connection.

Let us pick the Hindi term “Jugaad” (pronounced literally as written with an extended and loud “gaaa” after the short “Ju”, and terminating with a quick “d”) at random to start out. Wikipedia describes jugaad as an arrangement or a work around, which has to be used because of lack of resources.  It goes on to state that "Jugaad" is a colloquial Hindi word that can mean an innovative fix, often pejoratively used for solutions that bend rules, or a resource that can be used as such or a person who can solve a vexatious issue.  It is used as much for enterprising street mechanics as for political fixers (the lesser said about political fixers the better!!). In essence, though it is a tribute to native genius, and lateral thinking. Ahh…”lateral thinking” and “innovative fix”…..truly unexpected…but thank goodness…the connection starts to build up with some of the other words…especially innovation!!!

Having fortuitously arrived at a semblance of “association” between Innovation and Jugaad, even though we have to develop this further would now like to switch to India traffic.  Clearly, for any visitor to the country the India road traffic is; “daunting”, “challenging”, “amazing”, “crazy”…..people (including I) watch with wonderment as an innocuous two lane road at an intersection becomes a six lane super-highway with a row of six parallel vehicles who have somehow made it to the front at a red light, waiting for the green and be the first to get across to the other side of the intersection. 

If one were to see a bird’s eye view of the phenomenon of how the front row evolves (while the light is red) one would not see random “Brownian motion” but a purposeful, deliberate, and relentless push to get ahead, by finding interesting work-arounds…all done in face of limited resources, in this case the road itself, which ideally needs to be a lot lot “better”, “wider” to support actual needs. I would call this jugaad and hence innovation…which is executed day in and day out, millions of times a day, throughout the country.  There is also this question of the “pH” factor associated with every road that contributes to the need for Jugaad……pH factor being the “pot-Hole” factor (a 0 to 10 scale, 10 being the highest) something applicable to every road in the country. Navigating the pH’s while keeping up with everything else on the road (that may or may not rightfully belong to the road) is innovation as well. The purists among you may argue; well “innovation is idea into value” or “fresh thinking that creates value”….so where is idea and what is the value.  To me the value is measured in “time” saved by the actions, and the “idea” is the navigational path.  The above is an example of how inventiveness of the jugaad variety is integral to challenging resource constrained environments common in developing economies.

While jugaad is good, most jugaad solutions are unique, one-time, not replicable, and do not translate into sustainable innovation. My contention is that while the solution may be unique or one-time…..the thinking behind is not.  What is required is for corporations and individuals to institutionalize and formalize a process to capture and unleash the thinking behind the jugadd to help solve the myriad business, technological, and social problems that are common place in a challenging resource constrained environment. 

Then there is cultural inertia that needs to be overcome…."let someone else do it",“Chalta hai” (complacent) attitude, “Jane do” (let it be)…to overcome these each and every one of us has to look within and have the desire to make a difference, the personal commitment to apply the jugaad logic/thinking (that exists for sure), stay with the problem till it is solved, and once solved improve or maybe take on the next problem.

If one steps back to look at the global macroeconomic view, one sees that world’s developing economies and companies operating within are going through an interesting evolution; where because of rapid growth a large pool of domestic customers are being added annually.  Many of these customers have just started consuming, and interestingly do not have high expectations as developed market customers.  Further, the buying power of these consumers is very low and hence low cost solutions are an imperative.  There are 2 important implications;
a) Companies providing goods and services can “experiment” with these consumers, improve quality and then be in a position to export to developed markets (just like how the South Korean cars started out and are challenging American and Japanese) and
b) Consumer driven innovation (often disruptive) will happen in these companies because of constraints that they are forced to operate under….this in-turn will have an impact on developed economies and incumbent companies.  Like I stated earlier, the jugaad mindset that taps into native genius but is institutionalized to deliver lasting innovation is critical for companies to be successful in this environment.

There are positive signs in China and in India to indicate that processes are evolving to do just that. Would like to share examples in each country; in China’s Chongqing city motorcycles are made using designers, suppliers, and manufacturers who have organized themselves into a dynamic and entrepreneurial network. Upstarts like Longxin and Zongshen use a simple and flexible business model.  Here instead of every detail of the parts they want from suppliers, the motor-cycle makers specify only the important features, like size and weight, and let outside designers improvise.  This approach has delivered massive cost reductions and quality improvements.  In India, the “People’s Car” (the Nano) is the latest incarnation to change the way business is organized and managed to produce low-priced products services for people at the bottom (or near to the bottom) of the pyramid. India is pioneering in low-cost eye surgeries, low-cost telecom services and low-cost retailing (with tiny sachets of shampoo and other products)….all very profitable. Interestingly all this is coming from the innovative jugaad mindset that combines irreverence for existing business models with a goal of creating through frugality.
 
I am sure there are other examples that you can think of, and yes progress is being made, but in my view there is a lot more that needs to be done globally for us to solve the greatest challenges the world faces namely; hunger, poverty, global warming, space exploration, and defining/envisioning business and technical solutions that organizations will need in the future. Institutionalized innovation strategies that tap into the hitherto untapped intellectual capital (jugaad mindset) of billions and connect it better with financial capital/sponsorship will go a long way in helping solve some of these challenges. This is not to say that the role of developed markets in fostering, financing innovation will (or can) diminish, it is simply saying that an inclusive collective approach will improve our chances of success.....and success is important.

Then of-course there is this need for over $500 billion in investment required over the next several years to reduce the pH factor on India roads…..how can we forget that!!!....no innovation here, pure common sense….the question, is there enough of it? :) As a side note, you continuously get amazed with the power of collective intelligence/knowledge (and open innovation) as demonstrated by Wikipedia…am not sure if one can better capture the meaning of the word than what is stated above…..I would just add that jugaad is also solving very difficult problems with resourcefulness and inventiveness but at ZERO (or near zero) incremental cost.  For those who watched the movie “Outsourced”, you may remember the approach taken to continue the call-center operations when the office was flooded; this was a classic example of operationalization of jugaad.

“Rule of Three” and Indian Telecom Industry

In reference to one of my earlier blogs, (“India IT industry…”) it would be interesting to see how Satyam saga impacts the Indian IT industry, even though the recent moves being made by stakeholders are very positive. Also, one of the comment was a request to discuss the impact of the economic slowdown on the Indian Telecom industry; so here goes…my views on how this sector could evolve over the next few years… 

Rule of 3 (Ro3)

Before we begin, let us review the”Rule of three”; the contention in this rule is, in a mature market where competitive forces are allowed to thrive free of government interference or other special circumstances, the market driven result will be the situation where three companies and only three will dominate any given market. Whether it's U.S. fast food restaurants (McDonald's, Burger King and Wendy's) or South Korean chipmakers (Goldstar, Hyundai and Samsung), or US car manufacturers (Ford, GM, and Chrysler), each industry, has its "big three" dominant players. 

The current challenge, in the US with the auto industry could be attributed to this rule playing out…where the Japanese makers, especially Toyota, and Honda have become “domestic” manufacturers and now, the space is clearly crowded…resulting in competitive pressures on the “auto big three”, where it is unlikely, that all of them will continue to exist in their current form (it is simplistic to blame employee pension costs for the problems that the US auto big three faces).  The CSP industry in the US has AT&T, Verizon, and Sprint.

 

Many of you will think “So why not two or four?”

The proponents of this rule explains that, consumers value a manageable choice between three suppliers, but that additional choice just creates `clutter', and confusion in the market. Finally, the dilution of market share with four major players can also lead to instabilities, driving the weakest into the ditch. Industry consolidation is the key force playing a major role in the application of the theory, and this trend gathers steam whenever growth slows.

Indian Telecom industry

The Indian Telecom industry is shining belying slowdown blues. It’s the fastest growing telecom market globally with subscriber base of 384 million (please do not quote these numbers….they may have changed already!!!) and expected to go up to 500 million by 2010 and 750 million by 2012. Financial projections also indicate that the revenue generated from this sector will grow from current $ 20 bn to $ 35 bn in 2010.

It’s been a long journey (albeit rapid) for an industry that started with just one government player, i.e. BSNL, catering to the communication needs of the entire country. Not very long ago, BSNL operated with antiquated switching equipment and cumbersome manual exchanges. Today, there are multiple players–domestic and international catering to the ever increasing demands of the Indian consumers.With startup spectrum provided to 6 new operators and 3G spectrum auction round the corner, Indian telecom industry is surely changing rapidly. 

The Indian telecom market is in rapid growth stage where incumbents and new entrants are vying for “market space” (adding new mobile phone users both in rural and urban India). Interestingly, profitability of successful Indian service providers continues to improve, despite of continious investment in network coverage expansion, and declining ARPUs (Average Revenue Per User, typically expressed in $ revenue/user/month). 

One of the ways service providers are able to achieve improved performance is by rapid product, service, and business model innovation, examples include;

a) Reliance’s leverage of the CDM IT and Network Infrastructure for GSM launch,

b)Bharti’s revenue/usage sharing models for IT and Network. 

As I mentioned earlier, Ro3 is relevant when growth has slowed and competition is for “market share”.  My view is that in 5 years (by 2014) the competition will be for the “market space”. With penetration levels reaching ~65% of the population, network coverage exceeding 95% of the population and the government allowing market forces to dominate, we should see the Ro3 playing out. The leading effects of Ro3 forces should start shaping the market by 2013.

The Players

1.    The Clear Incumbents: Airtel and Reliance—are the two largest players in the market today and there should be no doubt that these 2 providers are the clear Ro3 incumbents.

2.    The Contenders: Vodafone, Tata Teleservices (TTSL), Idea, Aircel.

3.    The Start-ups: Unitech Wireless, Shyam Telelink, Swan Telecom, Datacom, Loop Telecom, and Stel.

4.    Propped up Navratna Players: MTNL (Mahanagar Telephone Nigam Ltd—services the Delhi and Mumbai metros), and BSNL (Bharat Sanchar Nigam Ltd—services the rest of the country) are promoted by the government

Of the above, only Reliance, BSNL and Airtel are triple play operators providing voice (wireless and wireline), data (high speed), and/or DTH (Direct to Home) satellite services.

Vodafone, Idea and Tata Teleservices are limited to providing voice and data.  The others focuses on voice.

Ro3 Influencers

The way I see it, the following factors could play a role in influencing the outcome when the Ro3 plays out: 

1.    Government: Regulatory direction on Mobile Number Portability (MNP), the minimum holding period before M&A can occur, 3G/Broadband Wireless Access (BWA) spectrum allocation guidelines, and divesting ownership in BSNL/MTNL (if and when).

2.    Foreign operators: Interest in expanding their brand into India;Vodafone is a successful example, the DoCoMo stake in TTSL, and others like Telenor, Telecom Italia, Sistema and Eilisat have taken stake in the start-ups.

3.    Spectrum availability and congestion: Currently all GSM and CDMA operators have crossed the DoT criteria for spectrum congestion and hence some of the small operators (possibly the start-ups) could get acquired for the spectrum that larger operators need (essentially there could be “spectrum” plays)

4.    Corporate Governance: It is hard not to add this as a determining factor on who survives and thrives because of the corporate governance concerns, in a post-Satyam India.

Ro3 Crystal ball:

As I share my view on the possible end state, I want to assert that getting to the “Three” is a process, and in a free market this process will inevitably take time to play out…a lot of water will flow down the Ganges, and a lot of money will be made between now and then. 

Clear Incumbents:

Airtel is the leading provider, has demonstrated brilliant market strategy, is innovative in products and services, has a great brand, and is a well-run organization. It has continued to one-up the completion and has increased their market lead despite fierce competition. Finally, the chances of acquisition by a foreign player are remote…the other way around is more likely.  Airtel is here to stay.

Reliance with its deep pockets, ability to compete on price, strong dealer network, brand recognition, and successful launch of GSM services, and BIG entertainment vision will inevitably be a very strong force here and abroad and it’s fierce completion with Airtel will imply that there are no marriages there, and hence it will certainly be the another one to be around. 

Finally, Reliance and Airtel both being fiercely nationalistic, it is hard to see them sell out to foreign operators (Vodafone had expressed an interest in Airtel before it settled for Hutch Essar).

Reliance and Airtel thus gets my first 2 votes of the future Mega carriers.

Contenders:

I see the impact on the contenders as follows:

1. Idea and Aircel strengths are very complimentary.  Aircel has strong presence in the enterprise market and is a Wimax player.  Idea is primarily focused on the consumer segment.  I can see a merger here.  The other possible option is for a foreign operator to acquire stake in one or both of them, they are better candidates than the start-ups.  Either way, I see that eventually either the combined entity, or acquired entity(s) will consolidate with the Mega Carriers above or the one below.

2.    Vodafone has made impressive gains since the acquisition of Hutch Essar, and is well positioned with the global Vodafone brand and has deep pockets.  It is likely Vodafone will use 3G to survive and thrive.  This would be the 3^rd Mega Carrier in my view and gets my final vote

3.    TTS will leverage the benefits that  comes from being a part of the Tata empire and it will take longest to give up or go away, it is hard to see how it could survive even with the strength coming from the group companies and sister company, 'Tata communications'.  The only way I see that TTSL could be a player is, if corporate governance issues impact on any one of the Mega carriers. The staying power and Tata group’s reputed corporate governance will allow TTSL to capitalize on that opportunity and join the big league

Start-ups:

The start-up operator story has been interesting, in most cases it is a story of successful business houses, with reasonable liquidity (at the time when they initiated moves), who felt that they could partake in the rapid growth of the telecom market and probably make money (at some time in the process) by selling out.

I believe that all the companies involved have smart business people and they know that their ability to be a Top 3 player is between remote and non-existent. 

My initial thought was that one or more of these start-ups would come to the market with disruptive strategies like; pursuing the most profitable segment of the population (Top 9% of the current subscribers contribute to 29% of the revenues, and 45% of the margins across all providers) and by getting them to switch.  Further, being a subscriber myself (and I am sure many of you will agree with me), I know that with the poor quality of service…I am yearning for THE ONE who can promise better quality of service.  Instead, in listening to industry insiders and analysts, it appears that the start-ups are gearing up to capture customers in the low income category, and in the rural masses, this segment across all operators comprises of 71% of the subscriber base, 27% of the revenue, and 15% of the margins.  Servicing this population incurs a higher network operating cost (driven by unavailability of electricity, logistics issues etc.), and hence the task for these folks is really uphill.  All combined, it is hard to see how the start-ups will capture more of that mid-single digit market share over the next 3 years (the government mandated lock-in period).

 

What the foreign operators see? in the start-ups, to me is questionable. It could be the desire to participate in the growth story or maybe do a “Vodafone”—this in my view is not possible anymore and not certainly with the start-ups. 

The current market environment and the inevitable risk-averse future will raise questions about these moves…and I believe some will look for a way out, or simply back out. 

Summerizing it, I do not see a single one of these operators being around in their current shape and none of them will be a contender when the Ro3 plays out.  In the most likely scenario, I see them end up (following different paths) as spectrum plays for the Mega carriers.

Navratna (translates as nine gems, term used for successful public sector enterprises majority owned by the government) players:  One has to give credit to BSNL/MTNL for adoption of competitive business practices; aggressive pricing, good branding and advertising etc. and become relevant in the current cut-throat marketplace. 

BWA offering launched recently at compelling prices is another great move...however, it rides on preferential treatment that they get from the government providing them with the first mover advantage. BSNL/MTNL assets are significant...and I see them of great value to anyone who can acquire them. The question of the government divesting stake in BSNL/MTNL or letting them be acquired, in my view is a matter of “when” not “if”...the decision boils down to electoral politics.  The journey BSNL/MTNL take will not impact the Ro3 outcome, unless TTSL gets hold of them (as was the case of VSNL being acquired by the Tata group…currently called Tata Communications Limited). 

I do not believe the Mega carriers will allow this to happen, but I did want to rule out that possibility.

So the Mega carriers of the future in my view are:

1.    Airtel

2.    Reliance

3.    Vodafone

Back-up: Tata Teleservices. NOTE: Used only if corporate governance issues, or other unforeseen events (like selling of BSNL/MTNL to TTSL etc.) impede the growth and success of one of the Mega carriers above.  The one of the three that drops out in such a scenario is difficult to predict…this would depend on the nature of the events.

The Inevitable comparison

It is hard to write an article about the Telecom growth and possible evolution in India and not talk about what could play out in China.  So here goes….

There are some key differences in the business environment in the two countries...The basic ones are that in India, entrepreneurship and competition in the Telecom space is vibrant, service providers are making significant EBIT, and most India providers (one can argue) are successful in-spite of the government red tape etc. 

Market forces will play out and we will see the unfolding of the Ro3, along the way the process will give rise to interesting opportunities for big, small, domestic, and international players alike. 

In China, the government is the entrepreneur, and a good one at that. So, in China we see that the government has fast-tracked the process to generate the outcome.  I see that China is taking the Ro3 seriously and has virtually folded the major Telco’s into China Mobile, China Unicom and China Telecom…the new kings in China’s $100 billion-plus telecom kingdom with 625 million mobile phone users. 

What is interesting is that, the government has even done the Technology selection/allocation for the operators.

It is hard not to fall into the trap and question; which is the better approach? my view and suggestion is that rather than falling into that trap, let us understand the journey that these two economies are taking that are inherently different and are governed by culture and values of each system...One should read/listen to Tarun Khanna (HBS professor) who argues compellingly that both cultures are powerful and are very complementary.

In summary, a constant and updated understanding of the Ro3 and how it could shape the world’s growth markets allows products and service providers to strategically position themselves for long-term growth and success. 

Long-term growth is important to deliver enhanced value to a company’s shareholders.