How do successful multinationals approach India?

Part III: Isn't China the richer opportunity?

How do successful multinationals approach India?

Foreign companies have been active in India for years, sometimes decades. Citigroup, Hindustan Lever (Unilever's Indian arm), and ITC are among the successful multinationals with a long-term presence there. Other multinationals -— Hutchison Whampoa, LG Electronics, and Samsung, for instance —- have built businesses with more than $1 billion in annual revenues in just a few years.

Successful foreign companies in India share three characteristics. First, they have invested for the long term and made a strong organisational commitment by assigning senior managers to work with established local teams.

One of the biggest mistakes is treating the country as the 'flavour of the month', with the CEO and senior executives flying in to announce an investment without thinking through the commitment required for success. Inevitably, top management's attention then wanders off to the next big thing, and a small group of managers remains to carry on the struggle without sufficient resources.

Second, the successful companies have adapted their businesses to local conditions rather than forcing foreign models on India. In general, prices are substantially lower there, so products and supply chains must be radically redesigned to cut costs. Successful companies also assemble national third-party distribution systems to bypass fragmented local ones. This model, when implemented well, can be a source of long-term advantage.

Finally, multinationals that succeed in India help to create and shape the market. Hindustan Lever, for example, created a new category for personal hygiene products and expanded the market considerably by offering single-use sachets of shampoos and other soap products. Unit prices are low, but prices by volume are higher than those of larger-sized packages.

Next: Is offshoring in India worth the political risk?

Adil S Zainulbhai is a director in McKinsey's Mumbai office. This commentary first appeared in India Abroad, the newspaper owned by rediff.com, courtesy McKinsey Quarterly.