india’s next wave of growth

7/31/2019 INDIAS NEXT WAVE OF GROWTH

1/7

the middle path to growthRiding the Wave of Indias Mid-Segment

Indias industrial landscape has been dominated by a powerful host of conglom-eratesthe Tatas and the Reliancesthat have steered Indias rapid growth andtechnological advancement in the past couple of decades.

However, just beneath these lies an informal web of small and medium-scaledsubcontractors, microenterprise operators and third-party manufacturers; really

garage businesses similar to Mr. Shahs. As these firms in Indias mid-segmentpass generational hands, a deep set of opportunities arise.

The current ownersusually the second or third in line of ownershipfrequentlydo not have the manual expertise or talents that their founders did, and are turn-ing to technological systems to optimize production.

This shift in mindset and increase in technology spend among the mid-segmentwill generate the next wave of growth in India.

INDIAS MID-SEGMENT IS FRAGMENTED AND HARD TO REACH

The story of Indias inscrutable middle-segment businesses is strikingly parallel toChinas new industrialism narrativeboth feature deep pockets of demand, anelusive clientele, and frankly, puzzling inconsistencies in terms of investment po-tential.

The fragmented industry structure leaves much of the productive business oppor-

tunity out of the reach of traditional marketing strategies.

INDIAS NEXT WAVE OF GROWTH,

DRIVEN BY THE MID-SEGMENT

Forty-five-year-old Narendra Shahs two-

room paint chemicals operation is essentially

a dimly lit garage with cheap, foldable

chairs, dozens of paint tubs and a few hand

mixers.

When asked if he would spend $200 to up-

grade his office, Mr. Shah shrugs disinter-

estedly. However, when asked if he would

consider spending $25,000 on technology

that would add precision and value to his

production, Mr. Shah wants to hear a fully-

fledged business plan. By the way, the

small enterprise he runs out of this space is

worth $4 million, annually.

Indias mid-market segment is teeming with

such apparent contradictions.

The inherent competitiveness within the mid-segment is the key pivot to drive smaller scale rms up and into the wake of

automation and mechanization.

STAX HELPS UNCOVER THE OPPORTUNITY, QUANTIFY IT AND DEVELOP A MARKET STRATEGY TO TAP IT

So how can this market be served, and what is the underlying opportunity?

Stax answered these questions for a European technology client by quantifying and assessing the business opportunity

that lay just beyond their core, saturated market. We also provided actionable market data that helped the client to con-

figure a product specifically for the mid-segment.

The lessons drawn from that study gave Stax a unique opportunity to understand the true nature of the mysterious SME

animal.

DESPITE THE COMPLEXITY, THERE IS A LARGE HIDDEN OPPORTUNITY IN THE MID-SEGMENT

The numbers are exhilarating. For instance, take the textiles and apparels sector of India, where estimates show that 95%

of establishments are mid-to-small scale providerscut and sews, niche fabric mills and small back-door dye houses.

They are all competing to cater to the needs of the increasingly exacting Indian domestic consumer.

2011 Stax Inc., www.stax.comPage 1 of 7 BOSTON | CHICAGO | NEW YORK | COLOMBO


2/7

CATCHING INDIAS NEXT WAVE OF GROWTH

Our findings show that prospective adopters of technology

in Indias mid-market have 10x the spending power of large

firms.

Mid-segment enterprises will also scale up quickly and de-

mand more sophisticated and expensive products within a

short period of time.

With the anticipated flood of investors and Western com-

petitors in the Indian market, early movers will be at a dis-

tinct advantage in capturing market share and establishing

brand recognition and loyalty.

The future winners in India will be companies willing to

serve the mid-segment now by:

- Engaging for the long haul

- Embracing product adaptation

- Exploring new distribution patterns

UNPRECEDENTED AND UNTAPPED OPPORTUNITY

The premise of our investigation was that there was a

sizeable untapped opportunity among small and mid-

segment Indian firms in manufacturing. Our natural first

step was to quantify this opportunity and to understand

how small and medium enterprises (SMEs) are currently

being served.

For instance, across a section of three manufacturing

verticals, we found that over 60% of firms were consid-

ered to be medium-sizedtypically firms with less than

400 employees. This was a significant enough oppor-

tunity to warrant a scaled assessment of the true

spending potential of these firms.

Stax launched an independent study to understand the

market for mid-sized firms use of a client technology

used in multiple industrial applications.

Understanding the needs, wants and behavior of firms of this size and obscurity meant that if we were to survey them,we would have to go to them. We sought, through interviews, analysis and a macroeconomic perspective of the market,

to size the approximate opportunity in terms of real spending potential.

Key areas we explored were usage behaviors, spend, and types of products utilized in the mid-market. We were also

keen to understand attitudes towards technology and the types of technology or tools that small-to-mid sized firms

would like to purchase in future.

Several manufacturing verticals in India are showing double

digit growth. Within these industries, the mid-market seg-

ment has a current CAGR of 30%40%.

The mid-markets total volume of spend will grow dramati-

cally with this compounding growth, and these businesses

will also be leapfrogging to more advanced technologies.

Gaining foothold into that future market today is critical, as

to the early seller will go customer familiarity and industry

acceptance.

The mid market is growing, definitely the biggest

market for industry. Most of the customers in the mid

have 34 machines and the small to medium sized

have the aspiration to grow. Large guys have alreadyinvested in technology so they are not interested.

Smaller guys are looking to cut costs and wastage by

investing in technology.

Technology Products Distributor

Western India

Interestingly, we found that the largest portion of this market was also the least well served by technology. The largestaccounts were well saturated with leading international manufacturers products, including those of our client.


3/7

However, there was no appropriately priced and designed product that was truly targeted at the mid-market, for just their

processes and requirements. This represented a large untapped opportunity, which our clients chose to address based on

the actionable solutions we provided.

UNDERSTANDING THE CONTEXTA CHANGING DOMESTIC LANDSCAPE

Its firms are difficult to reach through traditional means. Our best estimate is that no more than 30%40% of these types

of firms have a visible trade directory presence, or are reachable via associations. The little information that is available onSMEs is both anecdotal and unreliable. For an honest assessment of the purchasing behaviors of these enterprises, ex-

tensive primary research has to be undertaken.

The mid-segment itself is disparate, fragmented and complex

Although many mid-segment businesses are currently

using outdated equipment, our findings indicate that sev-

eral firms are ready to move up the technology adoption

curve. They have budgets prepared and articulated, but

simply do not have enough information to make decisions

on the right type of technology, which will enable higher

productivity, more streamlined processes, less wastageand shorter turnaround.

Legacy systems dominate the mid-segment ofrms

Mid-market competitive differentiation is coming less from and long-established skills and reputations, and more through

the kind of technology that can provide the standards required by the new, more demanding Indian consumer. SMEs are

increasingly relying on better technology to give them an advantage.

Domestic customers are becoming increasingly exacting

It [technology] has given us an edge over our competi-

tors; we are now able to produce fast with better quality.

The customers are happier, when they find substantial

difference in the quality of our products over others.

This has helped us in retaining customers for longer term.

Mid-Sized Manufacturing Business Owner,Madya Pradesh

While many firms simply did not have the information, not all mid-segment firms floundered. Even among the traditional-

ists, select firms had already made significant headway in adopting new technology. This trend was confirmed by severaldistributors who indicated that the mid-segment was their fastest growing clientele.

THE TECHNOLOGY-READY GROUP


POTENTIAL MARKETIN ONE INDUSTRIAL VERTICALFOR CLIENT TECHNOLOGYPRODUCTS IN INDIA

High

Low

Low High

Generic

IndianCompe-

titor

Stax Client

EuropeanCompetitor

EuropeanCompetitor C

JapaneseCompetitor A

EuropeanCompetitor B

IndianCompetitor

EuropeanCompetitor A

Stax Client

Indian

Compe-titor

JapaneseCompetitor B

ChineseCompetitor

IndianComp-etitor


4/7

This is just another indication that the time is now to approach

the Indian mid-segment with the appropriate technology.Initially we invested around USD 55,000-65,000

for the software and related equipment. Due to

continuous change in the market we have had to

update our software on a constant basis. Gener-

ally our budget for upgrades and new licenses issomewhere between USD 10,000 -20,000.

IT Manager

Mid-Sized Packaging Company, Uttar Pradesh

The group that interested us the most constituted of firms on the

cusp of adoption. These firms were far more receptive of technol-

ogy as a differentiating factor in their manufacturing and operating

processes.

TECHNOLOGY AT THE RIGHT PRICENothing comes easy in India. Technology providers

can rarely match the fledgling needs of this mar-

ketpricing tolerance is low, there is little flexibility in

financing schemes, distribution points are scattered,

and servicing requirements are doubly high due to

extreme humidity.

Several firms are delaying their purchase decisions

due to the technology price vacuum. However, Indias

mid-segment although sensitive to price, was not

overwhelmingly so. Having grown their enterprises to

levels where more effective technology was neces-

sary to scale up their operations, many forward-

looking business owners are considering such an

investment to be worth the cost, and indeed essen-

tial, to ensure future success.

For our client, the challenge was that their current

portfolio of solutions was priced significantly higher

than those of domestic and international competitors.

In some cases, solutions available in the market were

90% cheaper than the clients current product. How-ever, the pricing differential narrowed significantly the

more advanced the technology.

We determined that this group would be the best target for a

customized product, designed to suit their needs at a price point

and service level that would be completely devoted to their

unique requirements and operating environment. The actionable

data Stax provided enabled our client to do just that.

THE PRICE POINT CHALLENGESTAX CLIENT VS. THE CHEAPEST COMPETITION

Technology 1 Technology 2 Technology 3 Technology 4 Technology 5

Domestic Competitor

Global Competitor


TECHNOLOGYADOPTION CURVE

Yes, we are willing to digitize some processes in the com-

pany. But the major concern is that we are not well in-

formed. We have a lack of knowledge and would have to

survey the other companies in the same sector to learn

about all of these systems that are now available. I have

with me a budget of almost $4,000 to spend on [client

technology] but my first priority would be to buy a boiler.

Small Manufacturing Business

Owner, Uttar Pradesh

No Solution/Fully Manual

Entry-LevelSolution

PartialSolution

CompleteSolution

Small

(


5/7

TRAINING AND EDUCATION AS A GAME CHANGER

Throughout our exploratory study we uncovered that though workers are literate and semi-skilled, their exposure to tech-

nology is limited. Those with spending potential had limited visibility and market access; manufacturers and developers who

needed to reach them were often unable to do so.

Conservative attitudes towards learning about technology, and careful consideration of trade-offs meant that in the heat of adecision on whether to streamline processes or whether to add to production capacity, firms almost always went for the

latter. Thus, they expanded their output, but at the guaranteed risk of diminishing quality returns.

We realized that if our client were to tap this opportunity, they would ultimately have to configure, design and develop a new

entry-level product for this market. Further, to make a commitment to India meant that they would have to advance their

presence from third-party distributors to a gradually built up sales, training and marketing presence on the subcontinent.

While all this calls for heavy investment, the rapid growth rate of Indian manufacturing verticals promises ballooning sales

in future, which will bring a huge return to those willing to invest today.

Our client also understood the need to enter India right now, in order to build client networks and brand loyalty whileanticipating future growth in mid-market demand for technology.

HOW DO YOU DESIGN AN ENTRY-LEVEL TECHNOLOGY FOR A SEMI-SKILLED INDUSTRY?

Our client was keen to understand what type of product or solution would serve as a suitable introductory point to Indias

mid-segment. To define a configuration, we had to first be certain of the opportunity, then understand how best to serve

that need by asking the following questions:

Stax launched a multi lingual online survey of over 230 SMEs in India, leveraging our field-team in Delhi and throughout

the country. With limited access to terminals, poor internet connectivity and the busy festival season around the corner,

our team accelerated the fill-rate of the survey through in-person visits.

Our survey included an in-depth assessment of the profiles and decision-making behavior of Indian SMEs. We also

supplemented our survey with a deep-dive to quantify and validate our preliminary estimates of market spend.

We segmented our respondents by their indicated levels of interest, purchase drivers, and preferences across a menu of

possible product attributes. Ultimately, we sought, through conjoint analysis, to understand the features, pricing, and

service levels which would yield the most utility across each of these segments, and to recommend the exact design of a

product that would be the best foot-in-the-door to India.

IDENTIFY TARGET SEGMENTS AND DRIVERS OF PURCHASE BEHAVIOR

How does Indias mid-market shake out in terms of

price sensivity and technological expectations?

- Are they price sensitive, or feature driven?

- Are they service-oriented and less price-sensitive?

What are the relative trade-offs across different

product and service attributes? For example:

- Are they willing to spend more on after-market services,

but not as much on training?

- Are they willing to sacrice certain features for increased

product portability?

QUESTIONS FOR PRODUCT DESIGN

What conguration or congurations appeal the most

to Indias mid-market?

What are the different bundles that appeal to indi-

vidual segments? i.e, price sensitive vs feature-driven

What is your best rollout strategy?

- Is it two-product market? One high-end, one basic?

- Can you offer one basic product with the option for a

paid upgrade?

Do you have a similar product in your current portfolio?

Can your internal economics support the conguration?



6/7

Stax used choice-based conjoint (trade-off) analy-

sisa research technique that helps determine the

relative importance of preferences among product

attributeswhen surveying over 230 SMEs in India.

We provided our client with the tools and resources

necessary to recognize early adopters and other

potential targets through our process of segmenta-

tion. Based on our actionable recommendations, the

client will be launching a new product designed just

for the Indian mid-market.

Whereas large Indian firms operate in a business culture that is familiar to Westerners, SMEs are wholly Indian in

their outlook and operations. Capturing the interest and trust of this mid-market segment without being familiar

with local mores can be near impossible.

Although the license raj of Indian bureaucracy is far more lax than it used to be, navigating the layers of local,

state and federal bureaucracy and regulations, and how they do or do not apply to SMEswho may or may not

be in the informal sectorcan be challenging.

CHALLENGES OF GOING TO MIDDLE MARKET IN INDIA

Products targeted at the mid-market segment need to

factor in the context and culture within which they oper-

ate, as well as the price points and payment options that

make them viable. The larger Indian firms are buying the

existing global solutions at international price points. Not

so the next layer.

They will need a migration path from entry level products

to the higher priced solutions typically sold in the global

marketplace.

Price Points

The fragmentation of the mid-market segment means that establishing effective channels of distribution will be hard.

While infrastructure is improving rapidly in India, delivery scales and timetables will have to factor in the difficulty of

accessing some of the less developed areas SMEs operate in.

Distribution

The mid-market segment in India representssome of your best clients of the future. Innova-

tively surmounting the initial obstacles of going to

market in India will be well worth your while.

These clients need to be served today with entry-

level products, and then be migrated to your

more sophisticated solutions as they grow, and

grow quickly.

STRATEGIES TO ENTER THE MID-MARKET IN INDIAStax can help clients navigate through the general challenges

of doing business in India, and the specific hurdles of capturing

share in the growing mid-market segment.

Through an honest assessment of the mechanics and proc-

esses operating in both demand and supply chains, we can

offer our client companies actionable advice and a range of

strategies to engage with the Indian mid-market.

Designing a product for the more fiscally and techno-

logically conservative Indian mid-market can be com-

plicated. A key complaint made by owners of SMEs

in our interviews was that products in the global mar-

ketplace did not understand their specific needs.

By virtue of serving a very different type of market ona very different scale, the products they needed for

value addition in their businesses also tended to be

very different.

Product Conguration

Using the comprehensive profiling of the technologically

forward firm by size, type, and even estimated spend on

client technology that we provided, our client is designing

marketing and sales strategies and deploying resources

accurately to prepare for market entry.

Unfamiliarity with Social and Political Landscape

There is a bewildering array of social and cultural nu-

ances that are part and parcel of doing business in India.

Stax is uniquely positioned to help Western clients enter the Indian mid-market segment because of our regional and

industry expertise in India as well as our understanding of Western client needs.



7/7

Real success will be likely for those companies that are willing to engage with this market for the long haul through

an evolutionary roadmap of price points and products. Even though the adoption of technology solutions will be at

a basic level now, we expect these enterprises to scale up quickly and demand more sophisticated and expensive

products within a short period of time.

Furthermore, the regulatory landscape in India is becoming increasingly more favorable toward foreign investment.

This trend is projected to continue, bringing a flood of investors and Western competitors into the market. Thus,

early movers will be at a distinct advantage in capturing market share and establishing brand recognition and loyalty.

Engaging for the Long Haul

The winners in the mid-market segment are likely to be those companies that are willing to adapt their products

and innovate, in order to better suit the true needs of Indian SMEs, and to commit the resources to develop clients.

Stax can help in product configuration by mapping out the mid-markets true technological needs and wants.

For instance, the European client that Stax conducted the initial mid-market survey for will be launching an entry-

level device designed exclusively for the Indian mid-market segment in 2011. Having heard Staxs insights, theclient decided that investing in an adapted device at the present time would reap rich rewards for them in the future

by capturing market share.

Embracing Product Adaptation

ABOUT STAX

Stax Inc. is a global strategy consulting firm with offices in Boston, Chicago, New York, and Colombo, Sri Lanka.

Stax provides clients with actionable answers based on deep research and analysis. Founded in 1994, Stax works

with clients ranging from the Fortune 500 and ten of the top global LBO firms, to middle market private equity firmsand their portfolio companies. Stax applies a nimble, collaborative approach to drive well-informed decisions and

tangible results.

There are opportunities for players in the distribution space to answer the need for better networks within the mid-

segment. An early mover will be able to establish a platform of distribution for products across multiple technolo-

gies, and can expect the volume of traffic to grow rapidly in the next decade.

Despite the difficulty of contacting some of these businesses, our research team was able to access them for inter-

views. Companies wishing to capture the mid-market segment can establish successful distribution and sales net-

works, if they are willing to invest some field time in a similar manner.

Smaller enterprises already use the connections they have made with medium or large enterprises to access new

products. With our on-the-ground presence, Stax will be able to assess the most cost-effective distribution platform

that will help channel a clients products to elusive SMEs. We can help identify ways to leverage such partnerships,

as well as ways to use natural nodal points as distribution centers for a variety of technology needs.

Exploring New Distribution Patterns

CONTACT US

Ra Musher, CEO

+1 (212) 299 0375 [email protected]

Arj Wignaraja, Managing Director

+94 11 2 887 815 [email protected]

Projects include business and market strategy, customer analyses,

marketing analytics and commercial due diligence, with targeted en-

gagements around revenue generation, ROI maximization, and M&A.

Since 2005, Stax Colombo has been helping clients assess opportuni-

ties in the Asian region within industries as varied as education, manu-

facturing, IT, agriculture, and financial services. We provide the perfect

interface for Western clients who wish to operate in India, as we are

experienced in delivering the high-quality, actionable data required byglobal companies, while understanding the nuances of the working

environment in Asia.


india’s next wave of growth

Documents