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.

The Firm’s Next Frontier: The Universal Corporation?

There is no evidence in industrial chronology as to when the first firm came into being in this world. It may, however, be hypothesized that the concept of the firm got established when the first trade took place in the world, probably simultaneous with the origin of human being. The firm as an institution got rooted in different countries and communities as the concept of capitalism got ingrained in the human mind (probably from 1300 AD). Capitalism being creation of more wealth from available wealth, human beings found the need for collaborate as well as compete to gain access for resources, convert the resources into products and/or services and sell them. In this process, the firm emerged as the appropriate forum to conduct all such activities. There is, however, enough evidence when the first joint stock company was established in the world (Muscovy Company in Britain, circa 1555) and when the first international venture originated (East India Company of Britain, circa 1600). The Dutch East India Company was probably an earlier multinational corporation in the world, but it was the East India Company of Britain that was aggressively multinational, also gaining infamy as the Trojan Horse that brought the British conquest of India. Today’s firm has, of course, come a long, long way from the historical version of the firm. Keeping that in view, we also need to conceptualize how the firm of the future would look like. India, like China, offers an excellent backdrop to analyze the past evolution and forecast the future transformation of the firm.

MNCs in India, and of India

Over the centuries, the firm has taken various hues. From a strictly own country boundary to export to other countries had been the first evolution for the firm. An export-oriented firm thus took shape. In due course, the multinational firm took shape as the firm started having headquarters and/or principal manufacturing complex in one country, mostly a developed country, and having production and/or sales in different countries, mostly developing nations. Also called transnational corporation, the multinational corporation (MNC) has been a major feature of industrial development in the whole of the twentieth century. The growth of MNCs has been like the flow of water; from developed economies to less developed economies, from high technology countries to low technology countries, and from saturated markets to virgin markets. Market and structural imperfections such as differentials in skill levels, access to resources, policy inducements, local partnerships, and tax treatments provided additional impetus to the growth of the MNCs. Typically the need of the host country for the MNCs proprietary technology and the need of the MNC for new markets provided a platform of quid pro quo for such development. The journey for the MNCs has rarely been smooth however across the world, more so in less developed countries. India offers an educative case example.

The growth of the MNCs during 1950s to 1990s in India has been marked by both pragmatic and dogmatic considerations. Industrial evolution in the pre-independence India had to bear the bias of foreign occupation. Industrial development in the post-independence followed a very distinct model governed by the socialistic dogmas of the successive governments. All technology and investment-intensive industries were, by and large, reserved for the government owned enterprises, called public sector undertakings (PSUs). PSUs typically grew based on technical collaborations with engineering and technology majors from advanced countries without any equity investments. However, the areas that the successive governments considered non-strategic were left open for MNCs to enter India as branch offices, listed companies, joint ventures and in exceptional cases as wholly owned enterprises. Almost all aspects of MNC enterprise operations were closely monitored and controlled while in some cases either takeover by the government (nationalization) as in the case of Shell, Exon or Caltex or demands for alignment with public policy made certain MNCs in a few sectors disappear from India (for eg., Coca Cola and IBM). Until economic liberalization of the 1990s and beyond, most MNCs stayed on as bystanders than as active participants of economic development. The liberalization of economic policy and dismantling of licensing has seen a host of MNCs reenter India in 1900s and 2000s to benefit not only from India’s huge market base that could absorb MNC products and services but also from India’s educated workforce which could provide cost-competitive software and manufacturing solutions.

As one reviews the tryst between India and the MNCs, the need for public policy and private initiative to be aligned with each other becomes clear. Clearly, the MNCs in the initial days of Indian independence were reluctant to offer any more than low technology items (eg., oils and soaps) or dated technologies in otherwise high technology industries (eg., automobiles and electronics). MNCs in certain sectors such as pharmaceuticals were totally reluctant to participate in India due to lack of patent protection. The government, on its part, was perhaps justified in insisting that the MNCs should do better than offering cigarettes and aerated beverages to India. The government, in addition, had its own strange diffidence towards the Indian private sector, which could have been the natural ally for the MNCs in India on a much larger spectrum. Today, the history of India’s industrial development, despite the warp, offers two lessons: firstly, Indian government’s protectionist policies have given strength to a fledgling indigenous private sector (as was the case with several other emerging economies) as well as established a robust public sector, operating in technology and investment intensive sectors (a feature unique to India). Secondly, market imperfections being what they are, the market and the MNCs had to find workarounds to facilitate MNC growth in India. From re-jigging product and manufacturing strategies through a national lens (for eg., Lever and Colgate) to collaborating on a low-risk technical collaboration and minority equity route (for eg., auto components) MNCs and India had been moderately successful in retaining a relationship if not a tryst. As MNCs and a host of rapidly developing economies, including India and China, view the future the question to ask is whether the MNC as seen today would morph into a new avatar!

MNCs and societies under transformation

Some scholars believe that rapid economic growth around the world has reduced market imperfections, and as a result the MNCs and the nations now face a climate of mutual trust and dependency, in the background of market maturity. Some others believe that most MNCs are already becoming global corporations in the sense that the research, manufacturing and commercial operations are more widely dispersed across several countries than ever. They also believe that the sheer need for investible resources from the MNCs would keep the nations on the path of pragmatism. Both the schools inevitably come to the conclusion that the emergence of a global corporation, already underway, would make the classic MNC an even more relevant institution for the future. While these views have their merit, the fact is that both MNCs and societies are under such transformation that even the concept of a global corporation would fall short of the transformational change that would dictate new trends. There are two market and skill related facets of the transformation that the MNCs and nations must take note of even as they participate in the transformation, by design or default.

Markets as 3D Matrices

Just how effective the firm would in future be would in turn be dependent on how the firm is aligned to the markets, and how well the skills are aligned to the needs so that the firm could develop the products the markets would need. Hitherto, it has been assumed that the MNCs by virtue of their scale, scope and technologies are well positioned to address the needs of the markets and access the skills well. In doing so, it is also assumed that the markets can be segmented to accept products at different points, essentially specification-price driven, often depending on the purchasing power of economies and their citizens while countries and skills can be uniquely identified with each other to arrive at the most efficient means of development and manufacture. This finely honed model of the MNC, it is felt by them, would meet all foreseeable needs for the future. The classic MNC model, which ordains that certain economies need only certain types of products misses out the crucial point that more than the corporation, the consumer is global today. The citizen as the consumer has, in fact, transformed more than the citizen as the producer. This has important implications as below.

With information display and information flow reaching new highs through the Internet and all of global media systems the consumer is exposed to multiple technologies and functionalities. The consumer no longer views product differentiation merely in terms of a few features or price levels. Neither is the consumer interested in receiving products with generational lag depending on the development status of the country he or she belongs to. Under the transformation currently underway, the traditional one-dimensional layering of the market or two-dimensional market segmentation is yielding place to a more sophisticated three dimensional market cubing, the key dimensions being technological feel, functional performance and value pricing, irrespective of the development status of the country. These three dimensions are of transformational impact. Technological feel is the tactile, sensual and emotional experience that a device or equipment provides. Functional performance is the efficiency and effectiveness with which the device or equipment meets the performance needs of different market cubes. Value pricing is cost competitiveness enhanced by perceived superior value of the product in its market cube.

The corporation of tomorrow has to therefore develop a broad range of products, satisfying all of the market cubes, if it needs to achieve scale. The corporation has to master the ability to first start with the best of the three dimensions, and then downsize or vary the dimensions to meet various market cubes. This approach is antithetical to the wisdom that new products should be introduced at the lower end first to get as large a market toehold as possible and then upgrade to cover higher grounds. The transformation of the consumer from a price-sensitive persona to a value-conscious personality drives this need to stay at the top of the three dimensional axis. This hypothesis also upturns the established notion that different countries could be seen on the three dimensions of technology, performance and value depending on stage of their economic and social development. Nike, Rolex and iPhone are today seen as much in any interior habitat of Asia and Africa as they are seen in the upscale neighborhoods of New York Manhattan and Tokyo Ginza. The corporation of tomorrow has no option other than transform itself into a universal marketer, and consequently a universal developer and manufacturer as well.

Equilibrium of skills

A world leader implied in a recent exhortation to the developed industry that technology should flow to where markets are, and production should occur right in the midst of such needy markets. This, he argued, would create more jobs in developed countries as well, because as core technologies and components would continue to be developed out of developed countries. This, in fact, has been the theory and practice of the classic MNC. Unfortunately, the universalized market structure no longer deems the classic MNC model to be adequate. Sophisticated designs and products would need to be made in as many countries as possible to achieve universal appeal with country-specific value pricing. Fortune at the bottom of the pyramid applies to countries in economic pyramid as much as to economic strata in each country. This again requires as much universalized development and production across the globe as possible. There is a concomitant need therefore for several countries to ensure the availability of leading skills as an essential requirement for supporting universal production.

Not many would still endorse the proposition that there could eventually be better skill-sets emerging out of developing nations, leading eventually to equilibrium of skills across nations, developed and developing. That is probably a myopic view. None had, for example, hypothesized two decades ago that India would have leading edge automobile design and manufacturing skills. The fact, however, is that India over these two decades not only commenced design and manufacture of vehicles indigenously but could also create the world’s smallest but spacious Nano car as an innovative first in the world. Two decades into the future it is quite conceivable that India could be a hub of global innovation and manufacture in a wide range of industries, developing products truly for the first time in the world. Similar could be the opportunity for other innovation-aspiring countries. Technological leapfrogging could occur in respect of select rapidly developing countries on a much larger scale in future.

The essential requirement for the transformation would, however, be the availability of requisite intellectual capital in universities, laboratories and industries. Here again, the view could be that India or any other developing country would never reach the intellectual level of advanced countries, given the fact that thousands of Indian graduates still flock to the US universities for higher order education and research. That again would be a myopic view. There are clearly two waves of educational transformation sweeping India and China, whether or not attributable to tiger parents in these countries. The only inhibitor to a total global domination by the educational value chain of these two countries relates to certain major disconnects.

For example, aggressive private sector investments in secondary schooling have led to mathematical and scientific brilliance at school finishing levels in India. This is taken forward at graduation level by the Indian Institutes of Technology and Indian Institutes of Management which are among the top institutions globally already on their own. However, major failure in high quality primary education at the lower end, and significant inadequacies in cutting edge research in sunrise sectors are two major disconnects that constrains the educational value chain of these countries. As these countries recognize the need for fundamental investments in education at both the ends of the spectrum, the capabilities of their educational systems would increase manifold. Also, as more educational institutions and laboratories become multinational the intellectual transformation would be stoked further by their participation in the rapidly developing economies. In addition, the corporation that desires to cater to all the multidimensional cubes of the markets across the world has to make special efforts to advance the skill levels in the host countries. As skill levels reach equilibrium the intellectual markets would turn perfect providing flexibility to adopt multiple modes of development and manufacture in multiple countries.

The universal corporation

The age of the universal corporation is ready to dawn, primed by growth of new age economies such as India and China and the consequent diversification in development, manufacturing and marketing bases across the world. As customers become well informed and highly discerning, apparently homogenous markets would support heterogeneous products and services. The classic concept of a multinational corporation headquartered in an advanced country and having manufacturing bases in low cost countries, and accepting generations of products, and their manufacturing lines, sequentially would be a thing of the past in the next decade or two. The concept of a universal corporation which constantly seeks value arbitrage rather than mere cost arbitrage would simultaneously take root. The scale and scope of the markets in the rapidly developing economies combined with the accumulating and unstoppable intellectual power of youthful demographics in such economies would make the universal corporation a reality. What would be the strategies, structures and competencies of such universal corporations is, of course, a distinct area of research by itself.

Posted by Dr CB Rao on February 25, 2011