Sharma Industries (SI) : Structural Dilemma

Mr. Palkan Sharma was reviewing the consulting firm’s proposed changes in organization
structure for Sharma Industries (SI). As he read the report, he wondered whether the changes
recommended by the consultants would do more harm than the good for SI. Although Palkan
had been the Chairman of SI for over a decade now, he is keenly aware of the latest
organizational and coordination problems that need to be corrected in order for SI to improve
profits and growth in its international businesses.

Sharma Industries (SI) was started in the 1970s at the outskirt of Bangalore by Rammonahar
Sharma, an engineer from Glasgow was an entrepreneur by heart. He started the business by
first making pipe and then glass for industrial houses, quickly branched into new areas such
as industrial sealants, coatings, and cleaners. Much of his expansion occurred by acquiring
small firms in the southern and northern parts of the country during the 1980s. SI had a
conglomerate type structure with diverse subsidiaries scattered around North and South India,
all reporting directly to the headquarter at Cubbon Road Office, Bangalore. Each subsidiary
was a complete local business and was allowed to operate independently so long as it
contributed profits to SI. During the 1990s, following the opening up of the Indian economy a
strong international expansion focus was adopted by the company. The strategy was to
acquire small companies worldwide with the belief that they could be formed into a cohesive
unit that would bring SI synergies and profits through the low cost of manufacturing and by
serving businesses in international markets. Some of the acquisitions were done because they
were available at a good price, and SI found itself in new lines of business such as consumer
products (paper and envelopes) and electrical equipment (switch boards, light bulbs, security
systems), in addition to its previous lines of business. Most of these products had local brand
names or were OEM partners for major international companies such as GE, Siemens, or
Corning Glass.

In early 2000, Mr. Palkan Sharma (son of Mr. Sharma), an MBA graduate from Wharton,
took over as the Chairman, and focused on three lines of business – industrial products,
consumer products, and electronics. He initiated buying out overseas firms that fitted into
these three categories, and also divested a few businesses that did not fit. Each of the three
divisions had manufacturing plants as well as marketing and distribution units in India,
South-east Asia, Middle-east and Europe. The industrial products division included pipe,

----------------------------------------------------------------------------------------------------------------

This case has been prepared by Dr. Koustab Ghosh for the explicit purpose of using it as a
basis for class discussion. It is not designed to present illustrations of either correct or
incorrect handling of administrative problems. Also, the names and incidents mentioned in
this case are fictitious, and do not match with any real life figures or situations. The
circulation is strictly restricted to the course participants.
glass, industrial sealants, coatings, cleaning equipment and parts. The electronics division
included specialty light bulbs, switch boards, computer chips, resistors, and capacitors.
Consumer products included dishes, glassware, paper, envelopes, pencils and pens. The
present structure was based on four major geographic blocs mentioned above. The various
autonomous units within those regions reported to the office of the regional vice president.
When several units existed in a single country, one of the subsidiary presidents was also
responsible for coordinating the various businesses in that country, but most coordination was
done through the regional vice president. Businesses were largely independent, which
provided flexibility and motivation for the subsidiary managers. The headquarters functional
departments at Bangalore were rather small. The three central departments – corporate
relations and public affairs, finance and acquisitions, and legal and administrative served the
corporate business worldwide. Other function such as people management, new product
development, marketing, and manufacturing all existed within individual subsidiaries and
there was little coordination of these functions across geographic regions. Each business
devised its own way to develop, manufacture, and market its products in its own country and
region.

The new chairman started facing problems into three areas. First, each subsidiary acted as an
independent business, using its own reporting systems and acting to maximise its own profits.
This autonomy made it increasingly difficult to consolidate financial reports worldwide and
to gain the efficiencies of uniform information and reporting systems. Second, major
organizational decisions were made to benefit individual businesses or for a country’s or
region’s local interests. Local projects and profits received more time and resources than did
projects that benefitted SI globally. e.g. an electronics manufacturer in Singapore refused to
increase production of chips and capacitors for sale in the UK because it would hurt the
bottom line of the Singapore operation. However, the economies of scale in Singapore would
more than offset shipping costs to the UK and would enable SI to close expensive
manufacturing facilities in Europe, increasing the company’s efficiency and profits. Third,
there had been no transfer of technology, new product ideas, or other innovations within SI.
e.g. a cost-saving technology for manufacturing light bulbs in Sweden has been ignored in
Asia and Middle east. A technical innovation that provided homeowners with cell phone
access to home security systems developed in Europe has been ignored in the South Asian
countries including India. The company report said that no one at SI understands all the
products and locations in a way that allows SI to capitalize on manufacturing improvements
and new product opportunities. That report also pointed out that better worldwide
coordination would reduce costs by 7% each year and increase market potential by 10%.

A globally reputed consultancy firm was approached and two alternate solutions were
recommended. First, a new international department at headquarter should be added with the
responsibility to coordinate technology transfer and product manufacturing and marketing
worldwide to the existing organization structure. This department would have a product
director for each major product line – industrial, consumer, and electronics. He would have
authority to coordinate activities and innovations worldwide. Each product director would
have a team that would travel to each region and carry information on innovations and
improvements to subsidiaries in other parts of the world. The second recommendation was to
reorganize into a worldwide product structure. All subsidiaries worldwide associated with a
product line would report to the product line business manager. The business manager and
staff would be responsible for developing business strategies and for coordinating all
manufacturing efficiencies and product developments worldwide for its product line.

This worldwide product structure would be a huge change for SI. Many questions came to
Palkan’s mind. Would the subsidiaries still be competitive and adaptive to local markets if
forced to coordinate with other subsidiaries around the world? Would business managers be
able to change the habits of subsidiary managers toward more global behaviour? Would it be
a better idea to appoint product director coordinators as a first step, or jump to the business
manager product structure right away? He had a haunch that a move to worldwide product
coordination made sense, but he wanted to think through all the potential problems and how
SI would implement the changes.

Exhibit 1: Financial Performance of SI (Rs. Billion)

2009 2010 2011 2012 2013

Sales 802 793 817 757 809
Sales outside India as percent 67% 68% 71% 62% 65%
Capital expenditure (including 45 38 41 35 39
R&D cost)
Materials & consumables 297 316 328 331 336
Salaries & wages 103 109 116 119 123
Others 138 144 156 161 164
Profit after tax 83 76 87 69 72

Exhibit 2: Headcount by Region

2009 2010 2011 2012 2013

India 2267 2349 2372 2420 2624
South East Asia 2018 2123 2207 2468 2512
Middle East 2358 2583 2610 2792 2840
Europe 3465 3501 3626 3698 3851

Exhibit 3: Business Demand Projections by User Industries (Rs. Billion)

2009 2010 2011 2012 2013

Industrial Equipment Users 2,30,000 2,43,000 2,57,000 2,62,000 2,77,000

Electronics Product Users 4,50,000 4,75,000 4,86,000 5,01,000 5,17,000

Retail Consumer Distributors 3,70,000 3,82,000 3,91,000 4,02,000 4,18,000

(Electronics Products)
Retail Consumer Distributors 2,05,000 2,17,000 2,23,000 2,27,000 2,38,000
(Consumer Division Products)
(Figures include for India, SE Asia, Middle East, and Europe).
Exhibit 4: Comparative Average Cost of Operations (Rs. Billion)

India SE Asia ME Europe

Industrial Equipment Manufacturing 100 120 152 183
Industrial Equipment Sales and 162 133 142 158
Distribution
Electronics Product Manufacturing 98 89 110 156
Electronics Product Sales and 76 78 102 146
Distribution
Consumer Products Manufacturing 58 61 73 98
Consumer Products Sales & 68 52 63 91
Distribution
(Figures indicate estimates within each region)

Exhibit 5: Select Responses from Major Customers

• The major consumers of industrial products in Europe and ME complained of slow and not
on-time delivery of orders. As a result many times their own scheduled activities were
hampered as well as the third party agreements were affected. Whereas in India and some
parts of the SE Asia, the customers expressed unhappiness about the quality of the
equipment and accessories procured including not meeting the specification of orders at
times. Recently two major clients cancelled a number of orders half way through and
passed onto the SI’s close competitors. SI suffered a financial loss on those accounts.

• In the electronics product business, company faced the major problem in the areas of
product durability and non-competitive pricing compared to rivals especially in the context
of Chinese and some of the Asian branded products. As a result despite the steady growth
in the industry, the company could not capture substantial market share. Another
bottleneck was the fragmented dealership (scattered in small numbers) who did not want
to deal in all the related products under this business. Lack of uniform commission
structure also augmented the problem.

• On consumer product business, the company found a shift of usage from glass to
unbreakable materials especially in domestic segment, whereas in the commercial
facilities the demand more or less remained stable. The company felt lack of product
diversification and expanding dealer network hampered its potential business in the
growing hospitality and entertainment sector. On domestic segment, the company has
recently decided to launch a variety of decorative items including glass paintings, flower
vas, glass top table etc. through its own retail outlets. So far as consumables and
stationeries were concerned, the company witnessed a steady growth and developed
effective distribution network.