The sustained economic growth of over 7%, large population and rising incomes has made India a popular destination for several multinational firms. The success of multinational firms in foreign countries such as India is strongly influenced by the prevailing local business environment. Thus understanding the business environment is critical for a multinational firm that is planning to enter the Indian market.
According to Porter (1998) the Local Context (which is analogous to the business environment) is intricately linked to the performance of a firm in any industry. It defines the association between the four vital elements that govern the performance of a firm – 1) Factor input conditions, 2) Firm strategy and rivalry, 3) Demand conditions, and 4) Related and supporting industries. In general a good business environment is characterised by an efficient legal system, strong creditor and shareholder rights, small regulatory burden for conducting business, and tax system that does not discriminate against incorporated firms (Demirguc-Kunt et al., 2006).
The overall business climate in India is characterised by excessive red tape, lack of transparency, high levels of corruption, an archaic legal system, weak labour conditions and a volatile security outlook. Foreign businesses have to manoeuvre through a maze of rules and certifications to obtain the estimated 70 separate approvals needed for setting up businesses in India (unless they are operating within a special economic zone). Meanwhile, delays are routine and liquidating a bankrupt company can take up to 20 years (BMI, 2011). Moreover, opposition from strong labour unions and political constituencies has slowed reform in such areas as FDI, privatisation, exit policy, bankruptcy, and labour law. Additionally
a significant challenge affecting the business environment in India centre on its poor infrastructure. India‘s infrastructure output continues to lag behind overall GDP growth and appears to be restricting growth (BMI, 2011). Due to these issues, India scores relatively low for its business environment assessment by several organisations, including the World Bank. Tackling all these issues and improving the overall business environment in India will be a key challenge for the current government as well as governments to follow.
5.2 Level 2 Analysis
The parameters assessed, specific questions asked, scores obtained for each question, average score for each parameter and overall feasibility score of the project are presented in this section (Table 5.1). A brief explanation of the rationale behind the scores allotted is presented next. Additionally a detailed explanation is provided in Appendix IV.
i. Project Rationale & Context: The project obtained an average feasibility score of 4.4 for project rationale & context (Figure 5.1). The project rationale is clearly defined; the company has executed a similar model in China and has superior resources. It also fits with the vision and strategy of the company. But large farms like that proposed are non- existent in India. A typical large farm in India has about 30 to 50 animals.
1.00 2.00 3.00 4.00 5.00 6.00 7.00 8.00 Project Rationale/Context
Demand & Market Production &
Engineering
Material Input/Supply
Location & Site
Labour & Management Project Economics &
Financial Analysis Risk Issues Sustainability Implementation& Scheduling Political & Legal/Regulatory Issues Socio- Economic/Cultural Impacts Environmental Impacts
Good-will & Follow on opportunities
Other
Figure 5.1 Feasibility Profile of Nellore Diary Project
Score 1 to 3 = Yes (Feasible)
Score > 3 to 6 = Maybe (Further Study Required) Score > 6 to 9 = No (Not Feasible)
But even these large farms account for less than 5% of India‘s milk production. Since farming systems in India are essentially small-holder driven low in-put subsistence type operations, the proposed model does not fit into the local context (Table 5.1).
ii. Demand & Market: The feasibility score for demand & market was 4.5 (Figure 5.1). Demand for milk is robust and good markets exist in most Tier I and Tier II cities. There is an increase in consumer awareness about milk quality/safety issues and demand for quality milk is rising as well. A niche segment of affluent Indians (10% of the population) can pay a premium price and buy the product. Across India, the market size of this segment is expected to be 117 million customers. But since the customers for this project will be restricted to the large cities (Chennai & Vijayawada) near project location, market size will be around 1 million. Competition from local/regional players in these markets is intense. Moreover, quality alone might be insufficient to offset the high price for the product. Apart from quality, other factors such price, convenience, freshness also influence a consumers purchasing behaviour. It is not clear if the product will be able to outperform the incumbents on other measures as well. Also being new to India, the ability of the company to understand and respond to the market is also limited (Table 5.1).
iii. Production & Engineering: Although new to India, similar farming systems are wide spread in other parts of the world (USA, Canada, Western Europe, Saudi Arabia) and this model‘s broad technical specifications are well known. But it needs considerable local adaptation, which may not be possible. Moreover it cannot be executed with local technology & materials. Local supply services are essential for smooth operations. But reliance on ―un-dependable‖ local supply services poses a challenge. A value chain for the product exists, but not in the specific region. Logistical challenges are also significant, especially with sourcing of material input (feed). For production & engineering the project received a sore of 6.5 (Figure 5.1, Table 5.1).
iv. Material Input & Supply: The production of material input (feed) is constrained by climate, soil quality, water availability and land supply. Alternatives (feed) can be obtained from local sources but meeting quantity and quality requirements will be extremely difficult. The project received an average score of 8 for material input & supply (Figure 5.1, Table 5.1).
v. Location & Site: The average feasibility score for location & site is 7.0 (Figure 5.1, Table 5.1). The climate in Nellore is extremely unfavourable for executing this model. But the ability of IFFCO to acquire the site is a significant plus. The closest markets are far off- Chennai is 180 km and Vijayawada is 300 km away. The proximity to raw materials is also an issue because a large amount of raw material (feed) will need to be sourced from adjoining districts or states. The local infrastructure is inadequate especially in terms of power supply, water availability & roads. Although the project will need support from the political establishment/bureaucracy, being in a SEZ reduces the dependence (relatively).
vi. Labour & Management: Availability of un-skilled labour is not a big issue. But lack of adequate/requisite experience and imparting sufficient training is a concern. Availability of management personnel in the local area is an issue. Also, staff turnover and strife can be a challenge. The
labour & management feasibility score obtained is 6.0 (Figure 5.1, Table 5.1).
vii. Project Economics & Financial Analysis: Most costs can be determined accurately. But material input (feed) price can be un-predictable. Also, output price is uncertain. Assuming that the output will get a premium price, the projects RoI and economics appears to be good. The project received a score of 4.2 for project economics & financial analysis (Figure 5.1, Table 5.1).
viii. Risk Issues: There is market and product risk as indicated by the risk matrix. The price of inputs and output can show considerable volatility. There is also a significant animal health/bio-security concern. Due to the
extreme environment/climate, lack of quality feed, and considerable animal health hazards, the likelihood of productivity of animals falling below expectations is high. The poor infrastructure and lack of a robust political & legal environment introduce uncertainty as well. The average feasibility score for risk issues is 5.8 (Figure 5.1, Table 5.1). But given the nature of risks and their potential impacts, the overall risks associated with this project are not acceptable.
ix. Sustainability: The average feasibility score for sustainability is 3.6 (Figure 5.1, Table 5.1). The farm is not dependent on any government subsidies/payments. The cost of production is high (relatively), but so is the anticipated milk price. As a result, operating profit margin greater than 16% is expected. The labour price is quite low, and milk quality standards can be met. On the downside, feed efficiency can be poor because of the extreme environmental conditions (animal stress) and poor quality of feeds.
x. Implementation & Scheduling: Defining a timeline and meeting targets/project deadlines will be challenging, resulting in project overruns. Mainly because, bureaucratic red tape, hazy regulations and difficulty in enforcing contractual obligations makes this task difficult. The average feasibility score for implementation & scheduling is 5.3 (Figure 5.1, Table 5.1).
xi. Political & Legal/Regulatory Issues: The politically sensitive nature of dairy in India, un-stable political atmosphere, centre vs. state government rivalry, ad-hoc reforms/policy changes, and an archaic/inefficient legal system can pose significant challenges. Also a prevalent culture of corruption/graft can result in competitors gaining unfair advantages. The project received an average score of 5.6 for political & legal/regulatory issues (Figure 5.1, Table 5.1).
xii. Socio-Economic & Cultural Impacts: Industrial type dairy farming does not fit well in a culture where cows are sacred and dairy farming is
long run suggests that the project is not beneficial to the local community. Issue related to animal welfare and culling of cows also appear to be constraints. However, this project is a significant positive step towards development of local/Indian dairy industry. The average feasibility score for socio-economic & cultural impacts is 6.6 (Figure 5.1, Table 5.1). xiii. Environmental Impacts: This farm can cause environmental damage-
both directly and indirectly. However, it can be easily mitigated using proven practices/solutions. Given that the farm will implement environment friendly practices and comply with global & local standards, environmental impacts will be much lesser when compared to current farming practices in India. The average feasibility score for environmental impacts is 4.6 (Figure 5.1, Table 5.1).
xiv. Good-will & Follow on opportunities: Promise of reduced food safety risk, commitment to developing domestic milk supply and forging good local relationships might provide for follow on opportunities and new market access. But this project will be perceived as detrimental to small farmers and generating goodwill could hence be difficult. Hence it receives a score of 5.7 for good-will & follow on opportunities (Figure 5.1, Table 5.1).
xv. Other: The other parameter evaluated in the project was related to competition. Vertical integration with a focus on quality gives this model a distinct competitive advantage that cannot be matched by existing milk supply models. Fonterra has some of the best resources in the areas of management, engineering, service delivery, brand equity, and logistics. This ensures that the company can remain competitive. But if this model is successful, it‘s quite likely that existing or new dairy companies will imitate it. Hence sustaining advantage maybe difficult. For this parameter, the project received a feasibility score of 5.2 (Figure 5.1, Table 5.1).
Table 5.1 Feasibility Score of Nellore Dairy Project
S. No Parameters
(Weightage %) Questions framed
Score 1. Project Rationale/ Context (6)
Is model rationale sound? 3.0
Does model fit into the larger context?
8.0
Does company have prior experience in executing similar model?
4.0
Does company have superior resources?
4.0
Is it in line with the vision & strategy of the company?
3.0 Average Score 4.4 2. Demand & Market (8)
Is there a demand for the product? 3.0
Are factors driving demand known/clear?
3.0
Can customers buy it? 3.0
Is size of potential target market large enough?
5.0
Can an adequate market share be achieved
5.0
Will customers buy it? 6.0
Can company understand and respond to market?
6.0
Average Score 4.4
3. Production & Engineering
Are the technical specifications known?
6.0
Can technology & operational standards be met easily?
7.0
Are local supply/support services
NOT critical/ essential?
7.0
Are local support services
available/ dependable?
7.0
Does a value chain for the product
exist?
6.0
Can logistical challenges be easily
addressed?
6.0
Average Score 6.7
4. Material Input/ Supply
Can critical raw materials be produced/ sourced?
8.0
(8) Is it of sufficient quantity? 8.0
Is it of acceptable quality? 8.0
Average Score 8.0
5. Location & Site Are climate and environment conditions favourable?
9.0
(8) Can a project site be easily
acquired?
6.0
Is it at reasonably close proximity
to markets?
6.0
Is it at close proximity to raw
materials?
6.0
Is local infrastructure adequate? 7.0
Can it function without support of
political establishments and bureaucracy?
6.0
6. Labour & Management
Are sufficient un-skilled and semi- skilled workers available locally?
4.0
(4) Do they (local skilled and semi-
skilled workers) have adequate/appropriate experience/background?
7.0
Are sufficient supervisory &
managerial personnel available locally?
6.0
Do they (local supervisory &
managerial personnel) have adequate/appropriate experience/background?
6.0
Can project be implemented
without Ex-pat managerial presence?
8.0
Is threat & impact of industrial
strife low? 5.0 Average Score 6.0 7. Project Economics & Financial Analysis
Can costs be accurately determined?
5.0
(8) Will forecasted returns be greater
than costs?
4.0
Is forecasts riskiness low? 6.0
Is time to breakeven acceptable 4.0
Is ROI adequate (greater than
15%)?
4.0
Average Score 4.4
8. Risk Issues Is there a market risk* 6.0
(10) Is there a product risk* 7.0
Is there a significant input price
risk?
Is there a food safety/human health risk? 2.0 Is there an animal health/biosecurity risk? 8.0
Is there a security risk? 5.0
Are there any potential causes for
project failure that cannot be mitigated?
Are overall risks acceptable? 8.0
Average Score 6.2
9. Sustainability Can model be profitable without government subsidies?
2.0
(6) Is cost of production less than US$
30/100 kg milk?
8.0
Is operating profit margin greater
than 16%?
5.0
Is milk yield per cow greater than
7000 kg/year?
4.0
Is feed efficiency (kg milk/kg DM)
greater than 1.2
7.0
Is milk price greater than US$
40/100 kg milk
5.0
Is labour price less than US$ 6/hour 3.0
Is quality of milk good? (SCC less
than 2000,000/ml & Bacterial count less than 150,000 cells/ml)
2.0
Average Score 4.5
10. Implementation and Scheduling?
Can a definite project timeline be defined /designed?
5.0
(4) Can the targets in the timeline be
met?
7.0
Are significant project overruns
NOT expected?
6.0
11. Political & Legal/ Regulatory Issues
Is model NOT a politically sensitive issue?
7.0
(6) Is general political environment
stable and favourable
5.0
Do political threats exist? 5.0
Are impacts of political threats
small/ insignificant?
5.0
Can political system be prevented
from giving competitors unfair advantages?
6.0
Is legal environment stable and
favourable?
6.0
Are rules, regulations and policies
affecting the model clearly defined/ transparent?
7.0
Can legal/regulatory system be
prevented from giving competitors unfair advantages? 7.0 Average Score 6.0 12. Socio-Economic & Cultural Impacts
Does it fit with the local culture & norms
7.0
(6) Does it include participation of
local stakeholders
7.0
Does it deliver significant benefits
to local communities
7.0
Does it contribute towards
development of local dairy industry
6.0
Will it NOT cause displacement of
local farmers
6.0
13. Environmental Impacts
Does model pose a threat to environment?
6.0
(6) Can environmental damage be
mitigated/contained /limited?
4.0
Is environmental damage (if any)
significantly less than existing practices/systems? 4.0 Average Score 4.6 14. Good-will & Follow on opportunities
Will project generate good-will locally?
7.0
(4) Will it enhance companies brand
equity?
5.0
Does it provide for follow-on
opportunities & new market access?
4.0
Average Score 5.4
15. Other Does model have a competitive advantage?
4.0
(6) Can the advantage be sustained? 7.0
Is it known how competitors will
respond?
6.0
Can company be competitive? 4.0
Average Score 5.3
* For the assessment of Market Risk & Product Risk the guidelines (Risk Matrix) prescribed by Day (2007) were followed.
The overall weighted average feasibility score of this project was 5.5. This indicates that the project falls in the ―Maybe‖ spectrum and further investigation/study is definitely required (Figure 5.1). Although answers to a few specific questions fell in the feasible spectrum (score <3), none of the 15 parameters had a feasibility score less than 3 (Table 5.1). Ideally, for a project to
be feasible, the answers to all 15 parameters should fall in the feasible spectrum (score < 3). Moreover answers to a number of specific questions for this project fell in the No (not-feasible) spectrum (Table 5.1). Also, 6 out of the 15 parameters had an average score greater than 6 (Figure 5.1). This suggests that the project is Not Feasible on many counts. Importantly, Production & Engineering, Material Input/Supply, Location & Site, Risk, and Socio- Economic/Cultural issues appear to be significant constraints for the project (Figure 5.1). Unless more feasible options for these parameters can be identified or developed, it is recommended that the project in its current form is not worth executing at this point in time.