Professionally Managing the Advent of Indian MNCs:
Role of Professionals
Dr A K Sen Gupta ¹ & Mr Raju Ananthanarayanan ²

Backdrop: The advent of globalization has created a new paradigm of opportunity for the business enterprises all over the world. All the four modes of liberalization under market access and relevant agreements of globalization ab initio had presumably the advantage for the business enterprises of the developed countries towards their expansion in developing counterparts. However, things have undergone dramatic transformation during last few years and leading corporate of several developing countries have taken advantage of the provisions of WTO and have moved ahead towards becoming MNCs in true sense of the term. The inorganic or organic routes adopted by them for expanding overseas have taken various shapes and form. These include setting up branches, opening up of fully owned subsidiaries, forming joint ventures, entering into strategic tie-ups with foreign counterparts, and so on. The path followed has depended on several issues that include the company's strategic perspective, legal provisions of the host country, anticipated cost benefit analysis of the various options and so on.

Strategic Framework: The strategy of a corporate can be defined in terms of its intent and action to achieve what it wants to under a given set of controllable as well as uncontrollable constraints. The word strategy used here is in the context of business logic of a corporate. Over a period of time, several models have emerged to provide different approaches to this logic. The most important among them include the 3Cs model (incorporating the 3 parameters of customers, cost and competitiveness), the 7Cs model (including 4 more indicators namely, context, capital, capabilities and channels), the 5 forces model of Michael Porter, the 7S framework (McKinsey & Co.), confrontational strategies (Cooper, 1995), and so on. However, the most popular and the exhaustive in the parlance of strategy continue to be the classical theory by Michael Porter in early 80s. According to him the three strategies that companies normally adopt in a given market are:

1. Cost Leadership: The focus here is to be the least cost producer among the peers with the given resources and processes.

2. Differentiation: The approach here is to do something different that what is being done by others, may be even at a premium.

3. Focus: The idea is to achieve either cost leadership or superiority position following differentiation strategy but for a given target market. It is something akin to a “niche strategy”.

The basic steps in formulating any strategy thus involve incorporating a  vision (where the company wants to go in a reasonably longer time frame), the analysis of core competence and SWOT (to find out whether it will be possible to go) and finally the route to follow including setting up the strategic roadmap and laying specific goals and objectives.  The strategic theories described above were developed during 1980s when the external environment was much less turbulent and changes were more anticipated and expected. Strategies were comparatively stand-alone and company specific (organic in nature). Global mergers and acquisitions were relatively unknown techniques at that point of time. The world since then has undergone dramatic transformation and much more unpredictable. The history of the mergers and acquisitions can academically be divided in three distinct phases:

1. Pre-1960 period when mergers were primarily domestic and comprised mainly horizontal and vertical mergers.

2. Post-1960 upto 1980s when mergers were primarily domestic but the concept of diversification and conglomerate came into being.

3. Post-1980 period when all the concepts of horizontal, vertical and conglomerate came into focus with an important difference i.e. the mergers became global in nature.

Theoretically there are several rationales for mergers & acquisitions including the global ones. The prime objective before any firm is growth and higher profitability that results into greater value creation for shareholders. This is how a business enterprise can sustain and become bigger. There could be three possible ways of growth; organic that might be very slow as one has to compete and win, through innovation that might be costly and finally inorganic (through the route of mergers & acquisitions) that might relatively be easier from operational perspective. This is because there is a given name, systems and process and the acquirer has to leverage on the same to get the best of it. In reality it may not always be the case, as the integration must result in a win-win situation for both the parties thereby induce value creation and should not cause value destruction. More than a third of mergers in the corporate world fail as integration in the true sense of the term does not take place giving rise to what is know as “anergy” in lieu of the traditional “synergy” that is the at root of success of all mergers or acquisitions.

Globalization Strategies: The global expansion / entry strategies have to be looked into with a slightly different perspective and can not be equated with a situation where two players are purely domestic. The considerations for such transactions are also, therefore, different. The key drivers among others include becoming global market leader, saturation of the domestic market, taking advantage of the proximity to the critical inputs or the final products / customers. According to a recent study conducted by KPMG, the consulting firm covering more than 300 cross-border acquisitions across the continent of Europe, the most important reasons found has been:

• Increase / protection of market share (41 per cent)

• Gain or increased presence in other geographical areas (28 per cent)

• Acquiring new products / services (11 per cent)

• Economies of scale (11 per cent)

(KPMG Survey on cross-border acquisitions, 2003)

The first theoretical model developed for identification of the driver processes of FDI investment for the purpose of cross-border acquisition strategy is known as “Eclectic Paradigm” (Dunning, 2000). This model known as “OLI Model” comprises three components:

1. Ownership decision to weigh the competitive advantage the firm has got in terms of exploitable capacity (market seeking and resource seeking) to own and start production in a foreign location.

2. Locational decision to evaluate the advantage in terms of superiority (trade-off between push effects from the home country and pull effects from the host country) to have location in a foreign location compared to the home country and the subsequent advantage for exporting to third countries. This could include other motives like currency rate or providing ancillary services (accountancy / legal / other professionals) to the companies of the host countries.

3. Internationalization decision to appraise various alternatives for growth outside the home country in terms of own production or expansion through other collaborative modes like alliances, partnerships, acquisitions, mergers, etc. This approach endeavors to look at various options and tries to identify the best possible methodology to expand overseas.

The model suggests that the strategic resolution to globalize depends on careful analysis of all the three legs of the OLI model and then taking the final decision.

Routes adopted for globalization have also been different. These include:

a. Expansion through branch overseas (green field operations),

b. Incorporating a fully-owned subsidiary in the host country,

c. Entering into strategic alliance with a foreign partner. This may take various forms like alliance among various international airlines for flying on a collaboration manner across the continents or taking over a rival / competitor in a foreign country while allowing the latter to maintain its identity / management (so that the resistance level is minimal).

d. Taking over a foreign entity / company,

e. Buying out the assets of a foreign counterpart,

f. Joint venture with a foreign counterpart in terms of equity participation.
 

The main strategic thrust is, however, in terms of perspective for the future with respect to the desired positioning of the company. A global positioning strategy might involve global presence either in terms of physical presence or strategic alliances / partnerships. The structured approach for any company before going in for global would involve the following steps:

a. Vision for next 10-15 years,

b. Analysis of own core competence,

c. Analysis of competitors,

d. Positioning strategy,

e. Global market analysis & choice of route (internationalization strategy),

f. Implementation options including communication (internal as well as external),

g. Value creation analysis (including due diligence and valuation and methodology for acquiring / takeovers / mergers / partnership, etc.),

h. Implementation (including monitoring & control).

If one looks at the global mega-mergers during the decade of 1990s, it becomes obvious that they were all driven by economies of scale and scope and efforts to create mega companies in the world (oligopoly). The ten largest mergers of the twentieth century that occurred between 1997 & 1999 (table-1) bear testimony to this phenomenon.

Table - 1 

However, the million-dollar question remains whether such acquisitions have created value (shareholder value or stakeholder value in the larger context) as per the expectations. The answer in many cases has been negative. Studies all over the world during 1980s and 1990s have shown that in more than a third of the cases the mergers have failed to deliver the requisite or anticipated synergy; rather they have destroyed value. Some of the important reasons of such failures have been:

• Faulty due diligence,

• Lack of preparedness,

• Lack of industry  knowledge,

• Over reliance on numbers,

• Poor organizational auditing,

• Defective communication and implementation strategy,

• Wrong valuation,

• Over financing,

• Not learning from prior lessons.

(Source: Global Acquisitions by Stan Lees, Plagrave Macmillan, 2003)

It has also to be appreciated that there are several barriers in any globalization process. This becomes much more complex when compared to domestic expansion as laws and rules & regulations vary widely across countries. The barriers can broadly be classified under the following heads: 

1. Structural barriers:

                 Statutory: laws, company act provisions, protection of rights of the unions / workers, etc.

           Regulatory: regulations (domestic as well governed by regional blocks) as regards global mergers,   
           acquisitions,

                 Infrastructure: institutions of action like accountancy, etc.

2. Technical barriers: management and other related issues like voting rights, etc.

3. Information barriers: various knowledge sources like accounting, legal, structural, etc.

4. Culture and tradition: value systems of various societies.

 (Source: Creating value from mergers and acquisitions by Sudi Sundasanam, Pearson Education, 2003)

The internationalization growth approach involves understanding the barriers, developing appropriate coping strategies to counter them and finally ensuring that the global integration strategies deliver the expected results. In many cases the globalization efforts have failed because the expanding / acquiring company could not properly understand the underlying explicit or implicit barriers. Often times some of the barriers appear to be trivial and deserve no or little attention. For example, the cultural barriers appear to be simple but in fact they are not. Today they are more talked about and considered the most important driver of a successful integration process. The people involved in the internationalization process are therefore required to be careful about such apparent trivial issues.

Indian Scenario: India is no exception to this global trend. The apprehension existing at the beginning of the reforms process in 1991 that the Indian corporate would fast become the hunting ground for the foreign players resulting in India being taken over by the global giants has belied. The “power of Indian story” reveals that contrary has been the case. Several Indian corporate have during last few years expanded globally and come to be known as MNCs in true sense of the term. In a recent report of Merrill Lynch, the global investment giant, one of the driving factors for this trend is the lack of growth opportunity observed by Indian corporate in the overseas market due to absence of distribution networks whereas the global companies have been increasingly using India as a sourcing base. The saturation of the domestic demand and huge opportunities in some other parts of the world has been the other driving factors. This phenomenon has forced Indian corporate to go global through any of the routes mentioned earlier. The fundamental premise for all these actions has been two-fold:

• Value creation for the shareholders, and

• Ensuring sustainability on a longer-term basis.

Several success stories in recent past have shown that given the right type of leadership and proper strategic perspective, Indian corporate can endeavour to become global players in true sense of the term. Some of the recent Indian corporate stories of takeover / mergers are worth mentioning. These include: 

1. Flag Telecom, the giant global submarine cable network and Reliance

2. Expert Information Services, an Australian company and Infosys

3. Daewoo Commercial Vehicles and Tata motors

4. Forging Business of CDP, Germany and Bharat Forge

5. Copper Mines in Australia and Hindalco

6. Aventis’ Generic Unit in France and Ranbaxy

7. Redrock, the British Cosmetic firm and Dabur

8. Precision Forging Unit of Dana Spicer, UK and Sundaram Fasteners

9. Propack, a Swiss Company with Essel.

(Source: Business Standard, 23^rd August, 2004)

These are only some of the several such cases that have taken place in recent past with substantial consideration money involved in each case. The driver in each case has been distinct and unique.  For example, the prime driver of Tata’s acquisition was to enter the Korean and other markets like Chinese; the economy of scale was the main motivating factor for the action of Bharat Forge. Market penetration strategy was the key issue behind the acquisition act of Ranbaxy. Some companies are finding the global expansion as a normal strategy as good as their domestic policy of expansion. Having established their superiority in terms of production capability, functionality, quality and price, they are confident and finding the global expansion as an exclusive means of augmenting their zone of competence and presence. For example, Aditya Birla Group has presence in more than 18 countries with overseas revenues forming around one third of their gross earnings. Acquisition of Berger Pints has provided Asian Paints access to more than 22 countries all over the globe. The setting up of the motorcycle plant in china by TVS group, the buying of the mining companies in Australia by the Aditya Birla group, and the floating of the subsidiary in South Africa by Tata Steel are some of the recently found comfort levels of the Indian corporate in spreading their wings off-shore. There have also been cases of joint strategy as manifested in a joint construction bid in Mauritius by two of the Indian leading construction companies. The success story of Essel Propack is a clear indication as to how the global leadership vision can drive a company to adopting such successful strategies. The company set a very clear vision to become the world’s largest manufacturer of laminated tubes as early as in 1995. Thus started the journey and the company achieved the goal in 2000 when it successfully acquired Propack in the year 2000.  Today Essel Propack is successfully operating in more than 10 countries that include both developed and emerging economies (US, UK, Germany, China, Nepal, Indonesia, Mexico, Columbia, and so on). The company has successfully followed a deliberate policy of global expansion primarily through 100 per cent ventures. There are other instances where Indian companies are successfully engaged in manufacturing operations abroad. For example, the US outfit of Mahindra & Mahindra is producing more than 10,000 tractors annually. The conducive and flexible guidelines and norms prescribed by the regulators particularly during last 4-5 years have been one of the key facilitators for this trend. Not that the journey has always been easy. There have been several barriers / constraints in terms of regulations / rules / approvals of the host countries. However, the propensity and the appetite of the Indian corporate to become global have in the long run survived and the success stories reflect this trend.

Key Issues: The successful roadmap of the strategic agenda of globalization by the Indian companies (and for that matter any acquiring company) requires deep insight into understanding the key issues involved. These primarily depend on the route the company is taking to expand globally. Some of the key issues that need careful consideration are:

a. For Joint ventures (applicable for both the parties):

          Strengths: technological, financial, complementarity,

          Common strategic objectives,

          Strong commitment,

          Market share and  increase in geographical reach,

          Research and development capabilities,

    Economies of scale,

    Functional skill transfer,

    Key management personnel.

b. For green field route:

    Whether the Indian company is a market or technology leader?

    Whether the overseas venture is on the invitation of a customer? Whether the customer would provide the 
    necessary support, at least in the initial stages?

    Whether the Indian company has adequate strength at the ground level to enable it to obtain approvals from the 
     government?

    Whether the Indian company has a ready market for its products?

c. For acquisition / take-over / strategic alliance:
    Will the acquisition make financial and techno-commercial sense?

          Whether it will help in acquiring leadership position?

          Will it create positive EVA & MVA?

    Whether the alliance is sustainable in the long-term?

Required Skill Sets: The world of globalization has opened up a new vista of opportunities for the corporate houses of India. However, the process is not as simple as it appears and requires specific skill sets on part of the people involved in the process of strategy formulation and implementation. No doubt some of the skill sets are necessary even for managing a company in the domestic parlance. However, they become more important in the global context as the counter parties are located in two different parts of the world and therefore any successful strategy and subsequent negotiation calls for upgraded and modified skill sets. It is to be remembered that strategy, people, structure, processes, and culture are at the core of any merger process and the failure in any one of them may endanger the entire process. The skill sets are, therefore, needed to take care of all these issues.  Some of the skill sets / attitudes essential for a merger process to be successful particularly in the global context are:

• Vision and goal orientation,

• Good planning and organizational ability,

• Good communication ability: effective, speaking, writing, active listening, continuous communication, clarity,

• Good negotiation and persuasion,

• Problem solving,

• Technical knowledge,

• Social skills: understanding, friendliness, trust, respect for others’ feelings,

• Legal and financial knowledge,

• Good judgement and decision making,

• Critical thinking and analytical ability,

• Good co-ordination ability,

• Ability to manage cross-cultural differences / conflicts,

• Ability to work in teams,

• Propensity to build strong relationship and respect for relationship across cultures (GUANXI: a Chinese word),

• Flexibility to respond to change to global conditions,

• Ability to set appropriate deadlines and monitor commitment to deadlines, as delays are unacceptable in global relationships. One will lose respect and the JV could break,

• Being open and transparent,

• Ability to learn new things for eg. foreign language and etiquettes,

• Understanding body language of the counter-party,

• Positive attitude and desire to form strategic alliances,

• Adaptability to various situations and stress bearing ability,

• Ability to take positions / play games  (in inevitable situations during negotiations),

While all other skills are important, the most critical factor remains managing the cross-cultural issues. This spans across the life of the deal from pre-alliance negotiation to managing successfully the post-alliance cross-cultural diversity. Success or failure of many of the global transactions to a large extent depends on the strategies to manage this critical issue. While the fundamentals of HR strategy remain the same for any alliance / acquisition, whether domestic or global, the complexity increases as one is involved in managing cross-cultural issues not only of two companies but of two nations as well. The usual theory of managing people suggests that in any proper merger case the vital HR strategy comprises three phases:

1. Commitment and openness of the two parties at the beginning of the negotiations, 

2. Open and transparent communication to all concerned immediately after the negotiations reach the concluding stage belying all fears and apprehensions, and

3. Honesty in implementing the promises made during the negotiation and communicated to all concerned.

Therefore, for successful cultural integration the essential pre-requisites include clarification of culture, predicting culture clash, identifying the boundaries upto which the cultural integration can take place and moving upto only that level, explaining the cultural change to the counterparty and finally the most important part i.e. protecting the target culture if that does not affect the merger to a damaging extent. The problem in the global context is accentuated as different nations have different ways of looking at things and their value systems also vary widely. One has to be aware of this as a successful negotiation to a large extent will depend on this. For example, a US company would like to be brief, crisp and expect professional approach; a German may need detailed analysis and explanation with bars, charts, graphs, etc.; building relationship i.e. Guanxi is very important from Chinese perspective before one can start a business transaction; a South-American negotiator may need a relaxing conversation pre-and post business talk and so on. The complex cross-cultural contour, therefore, calls for a separate set of skill sets for the negotiator / implementer of a successful global merger process.

Role of Professionals: The Indian professionals under the given situation have a critical role to play. While in almost all the global strategic transactions involving alliance or acquisition, the acquiring company appoints a globally well-known Law / Accounting / HR Firm to undertake the corresponding due diligence of the to-be acquired company, the Indian professional-counterparts have a very important character to enact. There are certain inner advantages India as a nation enjoys. The Indian professional fraternity, by and large, is technically competent, possesses necessary analytical skills, and has a reasonable command over English spoken as well as written that gives them an edge over others. Indian law is based on English Law and therefore, many a times have universal application or it enables Indian professionals to easily understand and interpret the laws of other countries. Similarly, our accountants are well equipped as our GAAP is broadly on the same lines as that of US or UK GAAP. Indian accounting standards are based on IAS. India being a country of diversity, the professionals are in a position to handle the cross-cultural differences with relative ease. However, in the changing world they need to keep pace with the evolving issues. There is a need for upgradation in all contours of knowledge, skills and attitude for making the globalization process a success. The areas in which they need to upgrade themselves include: 

1. Knowledge of legal, accounting, and cultural issues of other countries,

2. Understanding of the mathematical models of valuation of a company and also the concepts relating to EVA / MVA,

3. Professional approach to handle the global issues,

4. Expertise in country risk analysis,

5. Cognitive abilities to interact, coordinate and negotiate with people with different cultural background,

6. Knowledge of basic business communication in a foreign language other than English,

7. Positive attitude towards people with a strong sense of empathy,

8. Emotional maturity with an attitude towards avoiding confrontation / conflicts, and

9. Leadership skills as expected from a professional so that the commitment for alliance is observable.

There is an added dimension to the situation. In many of the foreign ventures promoted by Indian companies, the top management team is Indian. There is thus a need to develop professional managers who can lead teams of foreign nationals in an alien country, which is not an easy task. The traits and temperament of such a top management team is totally different. As the process of globalization by Indian MNCs become more prevalent, there has to be consistent efforts by Indian companies to develop a cadre of such professionals at the top.

With particular reference to the Company Secretaries, their role is crucial particularly in the context of interpreting the local laws for his / her management, liaising with the local lawyers, coordinating with the JV partner and the Indian company. These are primarily restricted at the pre-alliance stage. Negotiation teams should ideally comprise people with diverse background like legal, finance, technical, and so on. The team should have a leader as well as a coordinator. While the leader is usually a strategist from the top management, the Company Secretary fits ideally into the role of the coordinator. Being a professional it is relatively easier for a Company Secretary or for that matter any other professional to develop a sense of mutual trust and belief with the foreign counterpart and hence discussions / negotiations can be much more open and transparent. Unfortunately, the course content of the professional bodies in India does not touch many of these issues. Though the current syllabus of the ICSI does have a paper on WTO & JV, it is not exhaustive and its coverage should extend to managing various issues relating to international business environment and management of MNCs. This possibly will enable the Company Secretaries to become better professionals and more competent to understand the intricate issues involved while negotiating and striking an international deal.

Concluding Remarks: With arrival of the era of irreversible globalization, multinational and transnational companies will soon become the hallmark of the world economy. As the concept of global competitiveness becomes a reality, there are increasing trends towards oligopoly arising out of mega-mergers and alliances among larger players of the world. The efficiency of a local economy will to a large extent depend on how it has integrated with the world economy both through the internal absorption and creation of domestic global companies. India has rightfully taken a big leap in this regard with emergence of a number of significantly large global players including world leaders. It is slowly moving into the League of Nations that will propel tomorrow’s world economy. The professionals working at all levels in the Indian companies have thus to be aware of the crucial role they have to play in this transition from mere compliance or auditing to knowledge and facilitating role. To be able to be catalytic in such a scenario as professionals they have to be global in their approach and attitude. Possessing only knowledge and skills will not be adequate in this challenging and eventful transition. What will be of essence is the change in mind set from local to global. The acid test of survival of a true professional in the coming decade will be how he / she can adopt and adapt to the global standards. The professional bodies also need to be aware of the ground realities and modify their interventions accordingly.

1.Director, SIES College of Management Studies (SIESCOMS), Navi Mumbai 2. Company Secretary, Essel Propack, Mumbai. The views expressed by the authors are their personal.

References

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3. "Do You Really Have a Global Strategy?", HBR, July-August, 1985

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