Sunday, February 27, 2011

The Universal Corporation: India Inc’s Defining Goal

This blog post, the seventy-fifth post in my series of Strategy Musings, is a sequel to my earlier post titled “The Firm’s Next Frontier: The Universal Corporation” which concluded that the firm’s next frontier is a transformation into a universal corporation. This post analyses the concept of a universal corporation in terms of a strategy, structure and competency paradigm, and hypothesizes that the universal corporation is a defining goal for India Inc.

A clear practical path

It is tempting to define a universal corporation as one which manufactures virtually every product or one which is present in every territory of the globe. Apart from the fact that there is no firm that has ever attained that capability covering a total product spectrum and geographic canvas it is clear that any journey towards that goal would face not only challenging technical and economic hurdles but also insurmountable policy barriers. That said, a truly universal corporation is not an impossible option; rather, it would be a result of a journey that could span several generations that would need to be travelled by founders and chief executives with a completely open mind. Early successes in core technologies and core markets provide the competencies and cash for capable companies to cover total value chains, product-wise and/or market-wise.

There are certain Japanese and Korean corporations which come close to the concept of a universal corporation, demonstrating the feasibility of the goal. Japanese conglomerates such as Sumitomo and Mitsubishi have a formidable reputation for manufacturing anything from pins and pens to metals and medicines. Hyundai, the Korean conglomerate has the enviable reputation of manufacturing everything from chips to ships. The capabilities of such behemoths cover a whole range of technologies from electronics to automobiles, and consumer goods to industrial products. Their presence is also significantly global. Developing countries such as China and India have also been home to several diversified groups. The development of these large conglomerates has been spurred by several disconnected aspirations rather than by a planned strategy of universal coverage. Today, however, there is validity and feasibility for large conglomerates or large specialized organizations in India to pursue the strategy of a universal corporation.

Defining universality

A universal corporation is not necessarily only an integrated company or a diversified company, or even both. Neither is it a geographically dispersed company. As the previous blog considered, a universal corporation is more than a multinational corporation. To achieve conceptual integrity, a universal corporation may be defined as one which achieves total dominance in one technological domain, straddling complete product portfolio and providing global market coverage. If Sony decides that it would operate in any product that incorporates electronics and provides such range across the globe it would fit this definition; given the ubiquitous spread of electronics it is a moot question if it would ever be possible on a total basis. If Toyota decides that it would operate in every conceivable type of automobile from a two wheeler to earthmoving vehicle, serving every terrain in the world it would be a universal corporation; a journey which Toyota is entirely capable of but has not carried out because of its own volition. If Google decides that it would offer any and every product that deals with Internet, and would customize its products to all global languages Google would become a truly universal corporation; probably something a journey on which it is already set.

The concept of universality is best pursued by focusing first on a product-market dimension, and then expanding on either the technological dimension or the user dimension, or both. To take an example, one could start a foods business by opening a restaurant. Normal strategy aims at scale and scope in terms of chain of restaurants and multiple culinary tastes respectively, within the overarching umbrella of geographic coverage. Universal strategy, on the other hand, aims at leveraging the core technology of food preparation and service to extend the footprint to cover fast food restaurants, coffee cafes and tea kiosks on one hand, and processed food ingredients, processed foods and ready to have foods and beverages. Does the universal strategy militate against Porter’s concept of defining tightly the industry boundary, and developing a relevant competitive strategy? Does it also militate against Prahalad’s concept of defining core competencies in a focused manner, and building a business strategy around them? Certainly not, as universal strategy is an inevitable transformational journey in strategy formulation for a highly networked world, with multiple convergence points.

Formulating a universal strategy

Amongst all competitive strategies, formulation of universal strategy is the most challenging. Firstly, the company should have a basic critical mass to be able to enable, support and sustain a universal strategy. Secondly, the firm should be in possession of a core proprietary platform to be able to universalize itself. Thirdly, strategists should have a flair for identifying the multiple dimensions in which a firm can universalize itself and then prioritize the sequence. Taking the restaurant example given above, should the company move from restaurant to fast foods business first, and next to the processed foods, or vice versa? Or, within the processed foods side, which should come first: ingredients, foods or readymade foods? The decisions depend as much on the core competencies that are in possession of the company as on the market opportunities that become available. Many times, pursuit of parallel dimensions in one go could be an ideal strategy.

Technology determines a core competence but the manner in which it is deployed could provide a disincentive or incentive to universal growth. Without doubt Apple products are universal in appeal, backed by unique technologies of feel and function, and enablement of applications. Yet, by linking up with a personal computer and/or iTunes being mandatory and by not allowing a standard USB drive, by limiting the range to a few iconic models, and/or by ignoring certain countries in its pecking order, Apple is not really tuning itself to a universal strategy. On the other hand, Samsung which embraces multiple operating systems, including its proprietary Bada OS and developing products for multiple market cubes with value pricing is clearly set for a universal strategy. Such differences in strategy are quite understandable as universal strategy need not be the only compelling necessity for growth or profitability. However, one may appreciate that had Apple chosen to adopt a universal strategy, possibly the industry would have seen better consolidation and profitability in the overall.

Structuring a universal strategy

Universal strategy can rarely be one hundred percent organic. Though in a classic sense, structure follows strategy, in respect of a universal strategy structure is an integral part of strategy. However big a corporation or a conglomerate is, universal growth relative to the existing base is a challenge. Companies need to adopt a variety of strategies including equity owned relationships, joint ventures and franchising to expand the footprint. India has shown how simplest of ventures could achieve a national and even a global footprint by adopting appropriate structures. Apollo Hospitals, established as a Chennai based hospital in the 1970s by a physician as a business enterprise rapidly grew to become the leading corporate hospital chain of India and one of the largest healthcare groups of Asia, comprising 50 hospitals and 60 clinics, all of them largely in India, by appropriate structuring strategies. Its pharmacy chain, Apollo Pharmacy became the largest branded pharmacy chain of 740 plus round-the-clock outlets in India by adopting an aggressive franchising strategy. Innovative and aggressive corporate structuring arrangements enable companies leapfrog on the universality dimension.

Flexible structuring is based on the premise that the firm attaches greater value to achieving a universal brand presence than to absolute ownership capitalization. Flexible structuring also helps express global aspirations through local needs. As the firm gets universal, supply chain becomes simplified. It is, for example, inefficient for Marks & Spencer to market in its Indian stores garments designed in Sao Paulo, Brazil and stitched in Honduras when capable garment manufacturers of Tirupur in India can produce to a fusion of national tastes and global designs. Universal strategy which is based on leveraged structures builds speed and efficiency in localization.

Universalizing through local competencies

A review of the relatively more global corporations throws light on core competencies required for a universal corporation. An understanding of local needs and development of designs to suit such local requirements is a key factor for an MNC to emerge as a universal corporation. Japanese automobile companies have been successful in India because they have been able to appreciate the need for high ground clearance, short turning radius and large seating capacity and develop suitable designs. Having introduced products meeting the needs of multiple user cubes, developed a keen understanding of the tough operating conditions and appreciated the increasingly discerning selection criteria of users, the Japanese automobile users have started trending designs and manufacturing products exclusively for, out of India (Toyota Etios car, for example). GE has developed medical devices for India, and for other low cost countries out of India. As a universal corporation integrates local competencies, hybrid technologies develop at a faster clip.

An ability to express global capabilities through localization is a fundamental platform on which a typical MNC and a futuristic universal corporation differentiate themselves. The former would place a premium on global standardization in form and components as well as in overt and latent characteristics. The latter would keep the key drivers of excellence non-negotiable but be keen to enhance performance through local creative practices. Carlos Ghosn, the CEO of Renault-Nissan stated while inaugurating the Chennai plant of Nissan in 2010 that he chose to enter into Indian manufacture not because of labor cost arbitrage but because of the ability of Indian production engineers to design and establish facilities at costs that are fractional to the developed world costs. Japanese automobile makers found India’s ability to find economics in small batch manufacture to be synergistic to their own approach of lean manufacture (Indianized Toyota Production System, for example). The universal corporation bets naturally on hybrid state-of-the-art for its versatility and effectiveness.

Barriers and bridges

Any, or all, of the Fortune 1000 global corporations could have become universal corporations. Several of them, in reality, have not even become multinational. The reasons relate to the barriers that exist in cross-border evolution of companies, some of them external and some internal. Homogeneity of culture, market, skills and common law make it easy for a company to scale up in one country while heterogeneity of the very same factors make it difficult for firms to seek cross-border growth. The challenge is also one of dealing with multiple host country governments, each with its own plethora of complex laws and investment regulations. Internally, lack of a managerial bandwidth to cope with the multiple challenges of cross-border growth is a major self-constraining barrier. However, firms which have explored cross-border operations early have been at home as much as local companies themselves. Several fast moving consumer goods (FMCG) companies such as Unilever, Colgate, Nestle, Proctor & Gamble have discovered this decades ago. The balance Fortune 1000 companies who saw barriers where opportunities beckoned continue to remain anchored in flat, mature developed country markets. For several such companies, inability to foresee future competition from developing nations, unwillingness to dilute corporate policies to suit local laws, diffidence to localize to achieve competitiveness, and reluctance to share management with local partners have been great barriers to cross-border exploration.

It has taken a complete meltdown in developed economies and a visible climb up in developing economies for some of the Fortune 1000 companies to reassess their strategies. The bridges to developing economies clearly are local professionals, who are today as well qualified and experienced as the MNC professionals, and local corporations, which have today achieved requisite local scale and brand power. While Wal-Mart has been a slow collaborator with Bharti in the retail space, Pizza Hut has scored fast fame in the fast foods domain in collaboration with Jubilant Food Works, with Dunkin Donuts in tow to repeat the successful experiment. Starbucks’s recent collaboration with Tata Coffee is another example of complementary capabilities being harnessed for cross-border growth. The bridges such as these, however, require dismantling of barriers and delineation of opportunities in the backdrop of right perspectives, in the collaborating companies. Developing countries require massive investments in infrastructure, energy, education and healthcare. Fortune 1000 companies which see value in participating in this space will reap superior returns in future if they attempt to evolve as universal companies. However, there is no discernable evidence that more firms have appreciated the broader value of transforming themselves into universal corporations. Such continued hesitancy provides a great opportunity for aggressive Indian companies and conglomerates to be proactive.

Indian universal corporations?

The 2000s have seen a few Indian companies and conglomerates taking measured steps to acquire overseas brands, assets and companies, with partial or full equity ownership to emerge as Indian MNCs in their own right. Over the last ten years, India’s companies have made overseas acquisitions worth nearly USD 70 billion. Tata Group’s acquisition of Tetley tea, Corus steel and Jaguar-Land Rover assets, Bharti’s acquisition of Zain group’s telecom operations, Vijay Mallya’s snapping up of White and Mackay and Taiitinger spirits, Hindalco’s acquisition of Novelis, and moves by Indian oil and steel companies to secure oil and coke resources are but a few examples. Certain non-resident Indian groups, on the other hand, won abroad prior to entering India. Hinduja Group carried out flourishing international trade and global financial investment and banking services for decades before it made their first major investments in India in the 1980s. Laxmi Mittal’s Arcelor-Mittal, the world's largest steelmaker, has been a truly global powerhouse with only a marginal presence in India.

With the slowdown in mature economies and consequent availability of value buys on one hand, and the openness of other emerging economies to welcome overseas partnerships, even from other leading emerging nations such as India and China, India has a great opportunity to go beyond mimicking the MNC strategies. By adopting a whole new strategy aimed at universal growth, creating innovative structures to extend Indian corporate presence, developing a core competency of competitive collaboration, and building value propositions across product lines in a universal manner, Indian corporations can become truly universal. Tata Motors is a defining icon for universality in technological value chain (from Nano micro car to Jaguar luxury car, from Sumo SUV to Land Rover SUV and from 2 tonne Ace LCV to 60 tonne HCV) and in geographical value chain (with the largest automotive base covering cars and commercial vehicles in India, and its ownership of JLR luxury car assets in the UK and Daewoo heavy vehicle assets in Korea as well as exports to most countries). There is no reason why a whole multitude of Indian companies and conglomerates cannot become universal corporations sooner than later.

Posted by Dr CB Rao on February 28, 2011.

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