Being Subsidiary – a bliss or misery?

By:-Ritesh sood Rashmi srivastavBharat Sharma

Safique

Case facts This case talks about Kenwa International (KI) and Kenwa

Hindustan Ltd (KHL) . KI was present in India with a name of Kenwa Co. in 1970’s with

a stake of 70% but was asked to reduce its stake to 40% or shut down its function in India by FERA.

Then KI left and KHL started functioning in India with a stake of 60% and was able to manage the business somehow after KI left

Today after liberalization India has growth opportunities so KI wants to increase its stake to 51% and KHL to be its subsidiary

characters Mr. Nagpal the MD of KHL & Ted Hunte vice chairman of KI

• KI demands KHL to be subsidiary or it will sell its stake.• KI showed its interest in KHL being its subsidiary earlier also after liberalization but Nagpal was able to convince board not to agree • this time KI warned of selling its stake• KI mentioned various advantages for KHL to be a subsidiary like 1. use of Kenwa which will help you acquire priority market

status globally 2. source from central purchase pool 3. Use of the latest technology • Mr. Nagpal was able to see many ill effects of being a subsidiary & was not in favor of it

Implications for KHL being a associate now to becoming a subsidiary access to centralized pool of resourcesKHL would get all the resources which it requires in long run to

be successfulKenwa’s a brand name that will give KHL a chance to cater to

global market & improve its equity In case there is recession then KHL would not face danger of

shutting down its operations as they will get the funds from KI to keep operating

KI would advertise heavily as they launch new products so to cover the cost they will do cost cutting which would lead to employees being fired or paid less , leading to decrease in employees morale.

Individual decision making power of KHL would be lost (exporting to Sri Lanka and Bangladesh not possible if parent Co. not interested)

Due to rationalize process KHL would have to produce those product which fall under parent Co. product portfolio.

KHL was cost competitive which was an advantage for the company over foreign players but as subsidiary it would be lost

The R&D department of KHL would be axed or not be allowed to function the way they did once KHL becomes a subsidiary

Should KHL allow KI to increase its stake ? And its consequences As a group we decided YES KHL should allow KI to Increase its

stake

Consequences

PositiveA brand name that will give them the platform to go global.Better management guidance to the management @ KHL Availability of latest technology for which other wise KHL

would have to pay heavy royalty fees

Negative KHL may have to over rule the option of catering to global

market Cost cutting may be done on the cost of employeesKI showed interest in KHL because of growth in India But if

they are unable to sustain the growth then they might close the unit

Pool resources from central process and lose cost competetiveness

Advice to the management on current situationKHL should become a subsidiary to KI is our advice to the

management .

It will help them in different waysAt time of recession Against foreign playersAdvanced technology

Management still will hold the power to question and to stop KI from making changes in the working process As KHL would have 26 % which required to do so.

In case if there is still some doubt to be a subsidiary then

management could adopt the globalization cum multi domestic strategy.

They would be facing some challenges

1. complexity and differentiation

2. Need for integration

3. Knowledge transfer

THANK YOU