978-1259913747 UPS In India A Package Deal Case Part 1

subject Type Homework Help
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subject Authors Frank Rothaermel

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Structure of the Case
As the recently appointed Chief Strategy Officer of United Parcel Service (UPS), Robin Page must
devise a strategy for penetrating the Southeast Asian market, with an emphasis on strengthening UPS’s
presence in India. UPS established two alliances with Indian partners (Jet Air and AFL) in the mid-
2000s, but has since focused more intently on China and Malaysia, leaving India wide open for its
in 1907 to a global delivery services firm with a presence in over 200 countries. Early on, the com-
1980s, which facilitated the company’s shift from a national to an international carrier. By the time UPS
went public in 1999, it was well on its way to becoming a full-fledged “solutions company” that offered
“synchronized commerce” services tailored to its clients’ business process value chain. Today, UPS
maintains its core businesses but seeks new revenues through its “Four Quadrant” growth strategy.
74 percent of India’s rural population lacks adequate road access. The aviation sector includes 126
UPS in India—A Package Deal?
TEACHING NOTE
MHE-FTR-013
1259420477
REv: JANUARY 6, 2012
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Teaching Note — UPS in India—A Package Deal?
of McGraw-Hill Education.
functional airports, but struggles under high oil prices, fuel sales taxes, and airport charges. India’s
rail system is the most advanced. Nationalized in 1951, it constitutes one of the largest rail systems in
the world, with 39,233 miles of track that reach both metropolitan cities and rural villages. Meanwhile,
India’s 12 seaports account for 90 percent of India’s trade in terms of volume, but only 0.1 percent of
inland freight traffic is carried by ships.
India has a “highly fragmented services industry” that suffers from heavy government control, a
limited private sector, and inadequate infrastructure. As a result, transportation takes significantly lon-
ger and can cost three times more than in other countries. Yet, the Indian logistics industry is expected
to grow at an annual rate of 15 to 20 percent, achieving revenues of $385 billion by 2015. A recent
study identified three main growth drivers for the near future: improvement of physical infrastructure,
increased demand for integrated logistics solutions (due to the introduction of a value Added Tax), and
the globalization of manufacturing. The growth of e-commerce may also serve to increase demand.
Currently, India comprises only 2 percent of the five-trillion-dollar global logistics industry.
UPS entered the Asia-Pacific region in 1986, but did not form its first Indian partnership (Jet Air)
until 2005. This agreement led to India’s first full-service retail outlet for business services, while UPS’s
2008 alliance with AFL provided access to AFL’s field stocking locations and access points for inter-
national delivery. Competition in India is intense due to the sheer number of companies, all seeking
to differentiate based on cost, speed, and territorial coverage. Larger players have stronger infrastruc-
Suggested Questions
ANALYSIS: FOCUS ON EXTERNAL AND/OR INTERNAL ENVIRONMENTS
1. Why are foreign MNEs like UPS seeking to invest in India?
2. What risks come with investing in emerging as opposed to developed markets?
FORMULATION: FOCUS ON BUSINESS, CORPORATE,
AND/OR GLOBAL STRATEGY
3. Compare and contrast the national cultures of the U.S. and India using Hofstede’s dimensions. How
might these differences affect UPS’s formulation and implementation of an expansion strategy in
India?
4. What advantages might accrue to local competitors? How might foreign MNEs gain a competitive
advantage in the Indian market?
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Teaching Note —UPS in India—A Package Deal?
IMPLEMENTATION: FOCUS ON RECOMMENDATIONS
AND HOW TO EXECUTE THEM
5. What mode(s) of entry would you recommend that UPS consider? How would you structure any
potential deals?
6. Which lessons from UPS’s past history might be helpful in entering the Indian market? Which ones
might not be transferable?
Sugguested Answers
ANALYSIS: FOCUS ON EXTERNAL AND/OR INTERNAL ENVIRONMENTS
1. Why are foreign MNEs like UPS seeking to invest in India?
Globalization suggests that companies expand internationally in order to:
• Gainaccesstoalargermarket
India is a very large country in terms of land mass (1.27 billion square miles), population (more than
one billion people), and economic productivity. In fact, India is the second most populous nation in the
world, after China (CIA World Factbook). Approximately 25 percent of the population lives below the
• Gainaccesstolow-costinputfactors
India boasts a technical workforce of 4 million and trains 60,000 software engineers each year.
Combined with lower wages, these factors make India a prime source for information technology (IT)
• Developnewcompetencies
Another prime reason that firms expand internationally is to develop new competencies. This does
not appear to be a driving motivation for UPS with respect to India, where it is mainly seeking to
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Teaching Note — UPS in India—A Package Deal?
of McGraw-Hill Education.
expand its current operations into a new territory while taking advantage of specific location econo-
mies. Nevertheless, UPS should be open to learning new capabilities in every new market it enters, so
as to increase its overall effectiveness.
• Country-specificreasons
India is particularly attractive to foreign MNEs for several additional reasons. First, governmental atti-
tudes toward foreign direct investment have become increasingly favorable since the early 1990s. In 2004,
political leaders set a goal of doubling India’s percentage share of global merchandize trade, viewing
trade expansion as a way of generating employment opportunities and achieving economic growth. In
2006, the governmental established several Special Economic Zones where both domestic and foreign
companies receive significant tax benefits and face simpler compliance procedures. More information
about these SEZs is available here: http://www.sezindia.nic.in/about-introduction.asp. Meanwhile,
Third, several trends in India’s external (PESTEL) environment are likely to contribute to an increased
demand for logistics services. Globalization in the manufacturing sector is creating a need to integrate
fragmented and independently operated functions (for example, transportation, warehousing, freight
forwarding, and so on) in order to achieve greater efficiency (see Case Exhibit 12). This has been accel-
erated by the recent introduction of a Value Added Tax (VAT), a consumption tax levied on any value that
is added to a product. Manufacturers are seeking to reduce the number of independent warehouses
2. What risks come with investing in emerging as opposed to developed markets?
The unique benefits associated with investing in an emerging market such as India include access to a
large market that is experiencing rapid economic growth and which provides a variety of location economies.
Competition is often less established, giving firms an opportunity to establish a dominant position as
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Teaching Note —UPS in India—A Package Deal?
the market develops over time. These benefits nevertheless come with a significant amount of uncer-
tainty and risk, including:
• Liabilityofforeignness
Lack of familiarity with a country’s formal and informal institutions can create a competitive dis-
advantage. Formal institutions are the political and legal factors that can be analyzed according to the
• Increasedeconomicrisk
Economic risk varies significantly among countries, but is generally higher when a nation’s eco-
nomic well-being is dependent on a few key industries (which is more likely in emerging countries).
India, for example, has been highly dependent on the oil industry as a main driver of commodity prices
across multiple economic sectors (see Case Exhibit 5). This was largely due to the fact that the govern-
• Poorinfrastructure
The Eleventh Five-Year plan, which detailed the latest plans for the Indian economy, projected that
$500 billion was needed to achieve comprehensive growth in aviation, roads, railways, and water-
ways combined. Currently, transportation accounts for over 40 percent of the total cost of production
in India, while operating expenses generally exceed the costs of raw materials (see Case Exhibit 11).
Similar problems are present in many other developing countries. Some of the specific (and challeng-
ing) statistics that UPS faces in India include:
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Teaching Note — UPS in India—A Package Deal?
They also face major challenges in acquiring land, developing infrastructure, and other issues
such as environmental clearance.
• Shipping is plagued by high operating expenses, staffing costs, and depreciation. It takes about
20 days to clear import and export cargo at India’s ports, while the same process takes only 4
FORMULATION: FOCUS ON BUSINESS, CORPORATE,
AND/OR GLOBAL STRATEGY
3. Compare and contrast the national cultures of the U.S. and India using Hofstede’s dimensions. How
might these differences affect UPS’s formulation and implementation of an expansion strategy in
India?
Hofstede’s cultural dimensions may be considered microfoundations that influence how strate-
gic leaders formulate and implement strategic plans. Being aware of cultural differences is especially
important when engaging in international business, as it helps managers to understand the national
institutions of the host country, why certain business arrangements might be preferred, and how to
implement strategies more effectively. To stimulate class discussion, you may want to show students
Exhibit TN-1, which contains the index scores and rankings for the United States and India in each of
the five categories.
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Teaching Note —UPS in India—A Package Deal?
7
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of McGraw-Hill Education.
is grounded in the social system and interpersonal relationships play a much more central role. This
manifests as a need to know the right people, to consult with others before making a decision, a prefer-
ence for hiring family members and friends, and taking time to build relationships before engaging in
direct business activities.
India significantly outranks the United States on power distance, or the degree to which people
accept differences in equality or power between individuals. This is not surprising, given India’s
deeply rooted caste system (see: http://defeatpoverty.com/ articles/India%20Caste%20System.gif).
4. What advantages might accrue to local competitors? How might foreign MNEs gain a competitive
advantage in the Indian market?
Case Exhibit 14 provides data on metrics and key success factors for micro and small companies
compared to all logistics companies in India. Case Exhibit 15 provides a comparative study of key
success factors by size of firm, for Indian express delivery providers. Exhibit TN-2 indicates that local
competitors and foreign multinationals each have distinctive advantages in the Indian logistics market.
Just because local competitors start out small does not mean that they remain small. An increasing
trend in international business is the rise of so-called “emerging giants” or multinationals which start
in emerging markets like India, China, and Brazil and then grow rapidly to challenge more established
players in the world marketplace. One of their primary advantages is that they learn to compete in cut-
throat local markets where they have to fight against both domestic competitors and foreign MNCs.
Because of the relatively low level of economic development and intense competition in their home
Established multinationals still have several advantages, including expertise in low-cost manufac-
turing and engineering and vast managerial experience. However, they can no longer wait for emerg-
ing markets to develop and then use their size to dominate the local competition once they decide to
com/magazine/content/06_31/b3995001.htm.
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Teaching Note — UPS in India—A Package Deal?
IMPLEMENTATION: FOCUS ON RECOMMENDATIONS
AND HOW TO EXECUTE THEM
5. What mode(s) of entry would you recommend that UPS consider? How would you structure any
potential deals?
Both the nature of UPS’s business and intricacies of doing business in India indicate that higher levels
of investment and control are necessary. UPS is in the service business, which means it does not have a
physical product that can be easily exported. Rather, package shipping and integrated logistics services
require close contact with clients, necessitating some sort of physical presence in the foreign market.
This fact, combined with India’s cultural emphasis on social relationships, inadequate infrastructure,
and complex governmental bureaucracy, means that UPS should consider some form of an alliance,
acquisition or greenfield venture when penetrating the Indian logistics market.
company is either sequential (UPS handles international shipping and then hands it off to the local
delivery company or vice versa) or reciprocal (where the two companies integrate their systems for
greater efficiencies).
In truth, all of these forms are viable. Of the three, nonequity alliances are probably the least desirable
in India because of the high degree of market uncertainty, intense competition, and the low level of
control provided. Contract-based relationships have the advantage of being easy to form and dissolve,
but are reliant on a transparent legal system which is often lacking in emerging markets. India is also
Applying Dyer et al.’s (2004) criteria indicates that either an equity alliance or acquisition represents
a more feasible mode of entering the Indian logistics industry. The advantages of an equity alliance
include sharing the costs of investment and risk with a local partner; of course, the benefits are also
shared. In a culture where relationships are valued, equity investments can also signal an intent to

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