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International Business Project Study of International Business Initiatives of a Dream Company (Asian Paints Limited)

Submitted by: Academic Group 38 Divya Mulanjur: PGP-12-184 Latika Sharma: PGP-12-192 Nilotpal Ray: PGP-12-198 Nirmit Shah: PGP-12-201 Tushar Srivastava: PGP-12-233


International Business: Asian Paints Limited 2013

~Acknowledgement~ We would like to take this opportunity to extend our heartfelt gratitude to the following persons who have helped us immensely while preparing this Report: S.P. Jain Institute of Management & Research, Mumbai: Prof. Jiban Mukhopadhyay (Former Economic Advisor, Tata Group): For guiding us all along the course of the report and helping us to gain access to some very enriching literatures based on the subject which helped us immensely in formulating this Report. Asian Paints Limited, Mumbai: Mr. Somak Chakraborty (Manager, Supply Chain Management): For cooperating with us across a telephonic interview on 15.02.2013, giving us various insights and facts regarding the international expansion strategies of Asian Paints Limited. Mr. Chakraborty is an MBA from NITIE Mumbai, in the field of Operations Management and serving the Organization for the past four years.

Academic Group 38 (PGP-1) 20th February 2013


International Business: Asian Paints Limited 2013

Table of Contents 1.0 Introduction................................................................................................................................................ 1 1.1 Asian Paints in the International Markets............................................................................................ 1 1.2 Domestic Leadership .............................................................................................................................. 2 1.3 Globalization Initiatives ......................................................................................................................... 4 1.4 Internationalization Strategy .................................................................................................................. 5 1.5 Segmentation of Global Markets .......................................................................................................... 7 1.6 Organizational Structure: APL Globalization ..................................................................................... 7 2.0 Critically Evaluating APL’s Expansion Strategies through IB Frameworks: ......................... 9 2.1 UPPSALA Model .................................................................................................................................... 9 2.2 OCF Framework ................................................................................................................................... 10 2.3 Functional Model .................................................................................................................................. 10 2.4 Scale, Scope, Synergy Model ................................................................................................................ 11 3.0 Impact of Financial Meltdown on Global Expansion Plans: .................................................... 12 4.0 Remedial Measures/Plan: ................................................................................................................... 14 5.0 Suggestions to take Internationalization to next level ............................................................... 15


International Business: Asian Paints Limited 2013 1.0 Introduction: 1.1 Asian Paints in the International Markets:

Asian Paints Limited (APL) was set up as a manufacturing unit in a Mumbai suburb in the year 1942. This was a time when multinational paint companies dominated the scene. APL has been leading the Indian Paints Market since 1967 (See Table-1). In 1988, the company, along with consultancy from Booz Allen Hamilton started restructuring its activities. This effort crafted for a new vision: To secure a leading position (within Top 5) among all the decorative paints companies across the world by the end of 2020 (See table 2 for 2012 Ranking of decorative paints company). Another outcome of the restructuring initiative was a decision to embark upon the International Markets by tapping the emerging economies. Table 1: Asian Paints – International Timeline of Events: Year 1942 1945 1954

Event A partnership concern was established for the manufacture of paints The partnership firm was changed to a company First paint plant set up in Mumbai, India

1967

APL became the market leader in the Indian Paint Industry

1978

Entered Fijian Market through a JV

1982 1982

Entered Tonga, an island in South Pacific Went public, issues equity shares in the stock market of India.

1983 1985 1993 1995 1996

Entered Nepal Entered Solomon Islands Entered Vanuatu Entered Australia 50:50 JV with US owned PPG for local manufacturing of automotive paints

1998 1998

Introduced Colour World in India Restructuring with Booz Allen Hamilton; rediscovered merits of Fiji Entry.

1999 1999 2000 2001

Entered Sultanate of Oman Acquired Delmenge Forsyth & CO. in Sri Lanka Acquired Pacific paints in Australia Acquired powder coating business of Hawcoplast in India

2002 2002

Acquired SCIB Chemicals in Egypt Acquired Berger International and its 11 subsidiaries in Singapore

2003

Acquired Tabumans in Fiji

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International Business: Asian Paints Limited 2013 Today

The APL Group Operates in the following geographies:  Caribbean: Barbados, Jamaica, Trinidad & Tobago  Middle East: Egypt, Oman, Bahrain and UAE  Asia: Bangladesh, Nepal, Sri-Lanka and Singapore  South Pacific: Fiji, Solomon Islands, Samoa, Tonga and Vanuatu

Source: Company Files and Annual Reports Table 2: Top 15 Global Paint Companies (2011) Name (Country) 1. AkzoNobel (The Netherlands) 2. PPG (USA) 3. Henkel (Germany) 4. Sherwin-Williams (USA) 5. DuPont (USA) 7. RPM (USA) 8. Valspar (USA) 9. Kansai (Japan) 10. Nippon (Japan) 11. Sika (Switzerland) 12. Jotun (Norway) 13. Asian Paints (India) 14. Comex (Mexico) 15. Masco (USA) Source: Coatings World (2011 Top Companies Report)

Turnover (2011) $13 billion $10 billion $9.7 billion $6.5 billion $3.8 billion $3.41 billion $3.0 billion $2.8 billion $2.5 billion $2.3 billion $2.0 billion $1.9 billion $1.6 billion $1.5 billion

1.2 Domestic Leadership:

Continuous innovation in operations allowed APL to gain market leadership in a competitive Indian Market which had historically witnessed two local players viz: Jenson & Nicholson and Snowcem. APL strategized to apply innovation in the following 7 key areas. Each innovation process applied in the domestic market was later extended to the International Market (with increasing psychic distance) to provide a distinctive competitive advantage: 1) APL had a very structured process of collecting feedbacks right from the customer-touch-point through dealers and dedicated sales forces. This helped them to identify gaps in the customer needs and develop new market segments. It also helped APL to structure their pricing policies for the price sensitive Indian customers. Tractor Emulsion (2002), Color World (2002), AP Helpline (2003), AP Home Solutions (2005) are some examples how APL used consumer insights to build new revenue streams.

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International Business: Asian Paints Limited 2013 2) In 1971, APL in India was the first paint company to launch a mainframe computer system. In 1994, it became the first manufacturer to make use of V-SATS in the field of satellite telecommunications technology. This helped them to improve demand forecasting, reduce inventory and lower working capital costs. The company’s IT systems provided real time data easily accessible to employees across the hierarchies. 3) When APL started to make its mark in the Indian Paint Industry in early 2002, it was nearly twice the size of its nearest competitiors. The average capacity of a APL Plant was 67,000 MT, compared to 29,000 MT of Goodlass Nerolac; 17,000 MT of ICI and 13,000 MT of Berger Paints (India) Limited. This gave APL a head start in the Indian paints market w.r.t. operational parameters and working capital efficiencies. 4) APL religiously invested in internal R&D which has enabled it to secure savings from efficiencies in formulations. Regular improvements in formulation efficiencies have resulted in reduced cost of Operations. 5) An all India distribution network of above 16,000 dealers coupled with strategically placed Plants (Refer Table 3) gave APL the advantage of penetrating deep rural markets. 18-20% of the dealers of APL were only selling their products exclusively. 6) As per the McKinsey 7S Framework, APL also worked rigorously upon the ‘Staffing’ criteria. They were able to attract the best talent and retain them also. APL was known in the Indian Market to be very good pay-masters and giving foreign location postings (Singapore, Fiji, UAE) etc. Table 3: APL Plant Locations as of March 2011 Plant locations Asian Paints Ltd. Year-ended : March 2011 Location District

State

Product Maleic Acid Paints, Enamels, Varnishes & Blacks Phthalic Anhydride Synthetic Resins Paints, Enamels, Varnishes & Blacks Formaldehyde Pentaerythritol Sodium Formate Paints, Enamels, Varnishes & Blacks

Ankleshwar

Bharuch

Gujarat

Bhandup

Mumbai

Maharashtra

Cuddalore

Cuddalore

Tamil Nadu

Kasna

Bulandshahr

Uttar Pradesh

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International Business: Asian Paints Limited 2013 Khandala

Satara

Maharashtra

Patancheru

Medak

Raigad

Raigarh (MAH)

Andhra Pradesh Maharashtra

Rohtak

Rohtak

Haryana

Sriperumbudur

Kancheepuram

Tamil Nadu

Paints, Enamels, Varnishes & Blacks Paints, Enamels, Varnishes & Blacks Paints, Enamels, Varnishes & Blacks Paints, Enamels, Varnishes & Blacks Paints, Enamels, Varnishes & Blacks

Source: CMIE Prowess 1.3 Globalization Initiatives:

International Business of APL comprised of 35 subsidiaries as of March 2012 (See Table 4). Four of them were JV’s with local companies (in Samoa, Egypt, Australia and Sri Lanka). Following that, seven more was set up by APL (in Oman, Fiji, Vanuatu, Nepal, Solomon Islands, Tonga and Bangladesh). As a result of acquiring a stake in Berger International, a global player in paints ten more came up in Bahrain, Barbados, Jamaica, Trinidad & Tobago, China, Malaysia, Myanmar, Singapore, Thailand and the UAE). The following table gives the Global Subsidiaries of Asian Paints as on March 2012: Table 4: Global Subsidiaries of APL as on March 2012: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19.

Asian Paints Industrial Coatings Ltd. Asian Paints (International) Ltd. Asian Paints (Nepal) Pvt. Ltd. Maxbhumi Developers Ltd. Multifacet Infrastructure (India) Ltd. A P Coatings Ltd. [Merged] Technical Instruments Mfrs. (India) Ltd. [Merged] Asian Paints (Bangladesh) Ltd. Asian Paints (Middle East) Llc Asian Paints (Queensland) Pty. Ltd. Asian Paints (S I) Ltd. Asian Paints (South Pacific) Ltd. Asian Paints (Tonga) Ltd. Asian Paints (Vanuatu) Ltd. Asian Paints (Lanka) Ltd. Asian Paints (South Pacific) Holdings Ltd. Berger Building Services (Singapore) Pte. Ltd. Berger Contractor (Singapore) Pte. Ltd. Berger International Ltd. 4|Page


International Business: Asian Paints Limited 2013 20. Berger International Sdn. Bhd. 21. Berger Paints (Hong Kong) Ltd. 22. Berger Paints (Thailand) Ltd. 23. Berger Paints Bahrain W L L 24. Berger Paints Barbados Ltd. 25. Berger Paints Emirates Ltd. 26. Berger Paints Jamaica Ltd. 27. Berger Paints Singapore Pte. Ltd. 28. Berger Paints Trinidad Ltd. 29. Enterprise Paints Ltd. 30. Lewis Berger (Overseas Holdings) Ltd. 31. Nirvana Investments Pvt. Ltd. 32. Samoa Paints Ltd. 33. S C I B Chemical, S A E 34. Taubmans Paints (Fiji) Ltd. 35. Universal Paints Ltd. Source: CMIE Prowess It was in the mid 1970’s that the idea of entering the foreign markets first surfaced in APL. Mr. Jalaj Dani, the then President (International) APL described this as “intellectual curiosity”. This was to test the limits of APL, which was hugely successful in India against the competitive foreign markets. The first move was triggered in 1978 when a group of non- resident Indians in Fiji approached APL for creating JV with a startup paint factory in the Islands. This JV at the ratio of 51:49 required no financial outlay on part of APL. The JV built a thriving export pipeline to neighboring Tonga and Solomon Islands. Building upon its initial success, APL established its first overseas JV in Sri Lanka in 1999. By 2004, IB of APL accounted for 19% of the company’s consolidated revenues. 1.4 Internationalization Strategy:

Asian Paints used the Model as follows to identify the markets across the world where it planned to establish a footprint: Size of Economy

Size of Paint Market APL Business Investment Potential

Nature of Competition

Figure 1: Model of Internationalization used by APL 5|Page


International Business: Asian Paints Limited 2013 To make the first cut, the target market had to meet three minimum parameters: a) GDP in excess of 6% per annum. b) Very limited competition with no multinational company (MNC) present. c) A market which would provide APL an opportunity to be among the top three brands within five years of entry. The Globalization Strategy of APL focused on the following verticals: A Focus on Emerging Markets: The paint industry in the developed world had become mature, as evidenced by market concentration, high entry barriers and flatness of growth in demand. On the contrary, emerging markets in the Asia-Pacific Region, Latin America and Eastern Europe were growing. These markets exhibited low-per-capita paint consumption, ensuring APL’s own long term growth. Additionally:   

Emerging Markets had supply chain and distribution models similar to India. JV/Buying out a potentially threatening competitor is easier in the emerging markets. No single MNC had a presence across all emerging markets.

Localized Manufacturing:

APL’s focus on localized manufacturing was in line with the nature of the global paint’s industry. Asian Paints had a manufacturing plant in each overseas market with products calibrated to meet local consumer needs. Growth through Joint Ventures:

JV’s ensured ready-made platforms of distribution, brands and plant capacity. Organic growth was costly. In Egypt, by acquiring SCIB Chemicals, Asian paints paid onlt $5.33 Million in comparison to a greenfield venture cost of $8.9 Million. JV with Berger International in 2002 for $12.9 Million gave APL straight access to 11 countries in addition to savings of an estimated amount of about $24 Million in comparison to a similar greenfield investing. The JV with Berger was very synergistic because both APL and Berger operated out of emerging economies and had the same business DNA. In Bangladesh, APL set up a $2.22 Million greenfield plant due to the lack of a proper acquire.

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International Business: Asian Paints Limited 2013 1.5 Segmentation of Global Markets: After the acquisition of Berger International, APL extended its presence in more than 70 countries. IB Division of APL categorized these markets into three segments:   

Leadership Markets Growth Markets Turnaround Markets

Table 5: Market Segmentation by APL Segment Countries Leadership Markets Caribbean Region Bahrain Fiji Nepal Growth Markets

Turnaround Markets

Thailand Malaysia China Middle East UAE Bangladesh Sri Lanka Oman Australia

Characteristics 1. APL already a leader. 2. Combined market size approxly $100million. 3. Combined sales approxly $55million. 4. Per capita consumption close to market average. 5. Focus on market penetration and expansion. 1. Possibility of future growth. 2. Total size of markets approxly $3.3 billion. 3. APL typically has a near 10% share in each of these markets. 4. China operations was a bottleneck due to barriers in distribution. 1. Thrust these markets to get profitability of APL on track, not growth. 2. Combined size represented $575 million of opportunity. 3. APL is still a niche player in these markets. 4. Near to breaking even with their investments so far, but competitive stance was still challenging.

1.5 Organizational Structure: APL Globalization

APL’s International Business Division was based on a three spike approach: global, regional and local (See Figure 2). Expertise leveraged at the global level pertained to branding, material sourcing, business generation, new product development, balance sheet management, risk management and talent management. This was done because these areas required a common agenda, cutting across subsidiaries. At a regional level, synergies were sought in deploying resources through logistics, manufacturing, marketing, technology, HR etc. These resources were region specific with common characteristics across markets in a region. At the local level, there was decentralized decision making. This was done to ensure that decision catered to the local needs rather than the global needs. 7|Page


International Business: Asian Paints Limited 2013

Figure 2: International Business-Organizational Structure and Ownership Pattern Asian Paints Limited

Asian Paints International (100%)

Asian Paints Industrial Coatings (100%)

Asian Paints Nepal (51%)

Asian Paints Mauritius (100%)

Berger and its subsidiaries (50.1%)

SCIB Egypt (60%)

APL Sri Lanka (98%)

APL Bangladesh (71%)

Technical Instrumental (100%)

APL Oman (49%)

Pentasia Investment (100%)

APL South Pacific (51%) APL Tonga (51%) APL Solomon Islands (75%) APL Vanuatu (100%)

Source: Company Files APL Queensland (100%)

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International Business: Asian Paints Limited 2013 2.0 Critically Evaluating APL’s Expansion Strategies through IB Frameworks: 1. UPPSALA Model 1. The UPPSALA model states that additional market commitments are made in small incremental steps: choosing additional geographic markets with small Psychic distances: combined with choosing entry modes with few additional risks. 2. Thus four different models of entering an international market were identified, where the successive stages represent higher degrees of international involvement/ market commitment. a) No regular export (sporadic export) b) Export via independent representatives (export modes) c) Establishment of foreign sales subsidiary d) Foreign production/manufacturing units.

Figure 3: Market Parameters driving decision making The company should embark on its internalization strategies in the following three phases: 1) Phase 1 (green): The countries in this region represent the leadership markets where the company is a leader and the per capita consumption is close to the market average in the developed countries. Penetration led growth thus seems difficult and growth by acquisition seemed to be an option. 2) Phase 2 (orange): The countries in this region represent growth markets where APL’s current share is less than 10% share of the individual markets but the regions were the fastest growing regions. 3) Phase 3 (Red): The countries in this region represent the turn-around markets where profitability is a big concern and not growth. If successful in turning the corner, the two markets could impact the overall margins at IB.

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International Business: Asian Paints Limited 2013 Commitment

Sporadic

Regular

Export

License

Sales

Joint

Export

export

through

or

Office

Venture

Agents

Franchise

Market

Mfg/Sales/Subsidary

Caibbean

Increasing commitment

Region Bahrain Fiji Nepal Solomon Island Vanuatu

Increasing Internationalization

Thailand Malaysia Egypt UAE Bangladesh

Increasing geographic diversification

Sri Lanka China Australia Oman

Figure 4: Stages of Internationalization as per the UPSALLA model 2. OCF framework The OCF framework can be depicted using the table below: STAGES

I Domestic

II Foreign Domestic

Ownership ×

×

Control

×

×

Facilities

×

III Foreign Domestic

IV Foreign Domestic

× ×

Foreign ×

×

×

×

×

As per the OCF framework, the operations of company in various countries are in the following stages:

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International Business: Asian Paints Limited 2013 Stage 1

Stage 2

Indian Operations

Stage 3

Stage 4

Bahrain, Barbados,

Nepal, Solomon Islands,

Jamaica, Trinidad and

Tonga, Vanuatua,

Tobago, China,

Bangladesh, Oman

Malaysia, Myanmar, Singapore, Thailand, UAE, Australia

3. Functional Model The functional model explains the evolution of a global company: Stages

R&D

Engg.

Mfgr.

Mktg

Sales

Service

Export Direct sales

x

Mfgr. Co.

x

x

x

Full Co.

x

x

x

x

x

x

Global Co.

x

x

x

x

x

x

x= overseas market As of 2012, the company is in stage of full company in Caribbean region (Barbados, Jamaica, and Trinidad and Tobago), the Middle east region (Egypt, Bahrain, UAE, Oman), the South Asia region (China, Malaysia, Myanmar, Singapore, Thailand) and South Pacific region (Australia, Fiji, Tonga, Solomon Islands and Samoa). 4. Scale-Scope-Synergy Model The scale-scope-synergy model has three phases of operation: 1. Initial Entry 2. Local market Expansion 3. Global Rationalization 11 | P a g e


International Business: Asian Paints Limited 2013 The structure of Asian Paints was such designed to leverage expertise at the global level, synergize operations at the regional level and empower decisions at the local level. To leverage expertise at the global level pertains to branding, material sourcing, business generation, new product development, and risk and talent management. Such areas require a common agenda which cuts across all subsidiaries. Synergies are sought at the regional level by deploying resources such as technology, logistics, marketing and HR. These resources should be region specific with similar characteristics across markets in a region. At local level, the decisions pertaining to execution in particular should be de centralized. The purpose is to ensure that decisions taken at the local level is consistent with local needs. 3.0 Impact of recent financial meltdown and the continuing recession/ slowdown in some developed countries on the global expansion plans:

On January 28, 2013, Asian Paints reported Q3 2013 results for FY 2013, which surpassed the expectations by analysts. For the consolidated company, revenue and net profit increased by 19% and 31% y-o-y, respectively for the quarter. The high growth was driven by the demand during the festive season starting from and continuing after Diwali. The industry faces seasonal demands where the demand for decorative paints increases during period of January to June. The two main factors are: fall in input prices including the prices for titanium dioxide, company’s pricing power which is led by the strong brand loyalty. This suggests that Asian Paints’ profitability is majorly governed by the input prices where the prices of crude oil and foreign exchange rates play a major role. Hence, Asia Paints is exposed to the dynamics in the external environment. In addition to this, Asian Paints is receptive to the recent financial crisis and the continuing downturn present across the globe which is explained as below:

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International Business: Asian Paints Limited 2013

• There was a collapse in economic growth in USA, Europe and Japan which witnessed recessionary effects Areas serverely hit by the recession • There was a steep downfall in commodity prices with downturn in activities

• There was a slowdown in demand in both export as well as domestic market • Majorly hit sectors were servies, including IT, due to protectionary measures in the developed world • Fiscal and trade deficits were widening and there was a huge depreciation in INR

Effect on India

Figure 5: Global Effect of Financial Crisis 2008-09

GCC countires

• Bahrain, UAE and Oman were witnessing pressure on government budgets with significant decrease in iol prices • There was also a rapid decline in constructin and real estate industries

Egypt

• Witnesses a domestic unrest with inflation hovering around 10% • In addition, there was the problem of declining revenues from tourism

Carribean

• Barbados, Trinidiad and Jamaica were witnessing a drag in tourism and financial services industries

South East Asia & South Pacific

• The region was reeling under a challening environment

Figure 6: Effect of Recession on Global Markets of APL 13 | P a g e


International Business: Asian Paints Limited 2013 In 2008, the profitability of the company was hit by various tax write backs and losses from disposal of group’s stake in its Australian subsidiary. Internationally, the focus of the company was to grow top-line and maintain the level of profitability, for which the company had planned to expand capacity globally. Due to the sudden financial crisis of 2008-09, the company couldn’t follow the expansion plans in all the foreign markets. 4.0 Remedial Measures/Plan:

To tackle the global recession, the company had employed the means of capacity expansion in countries which were less affected by the downturn. The company also followed the strategy to continuously review the portfolio of global companies, so that it sold off the stakes in various lossmaking joint ventures in countries like Australia and started identifying the countries less hit by the recession including Middle East and South Asia explained by the following:

Table 6: Identifying less hit regions due to Global Recession 2008-09 Continuing the strategy of global consolidation, the company also divested operations in Honk Kong, Malaysia and China in the following years. Hence, as a remedial measure, the company should follow the strategy of global strategy identifying the high growth markets given by the following Table 7: Revenue growth (%) Caribbean Middle East Asia South Pacific Total

2008 -1.4 22.6 17.2 -24.5 12.2

2009 8.7 45.6 28.6 13.2 28.5

2010 -1.4 15.5 -9.2 16.3 33.4

2011 -2.6 -4 20 4 -18.8

2012 9.6 12.1 31 20.8 15.7

2013E 20 30 20 30 25.1

2014E 12 15 32 20 19

2015E 12 20 32 20 22

Table 7: Identifying High Growth Markets

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International Business: Asian Paints Limited 2013 5.0 Suggestions to take the company’s global businesses to the next level:

Adaptability to changing trends

Strong distribution network

The company should ride high in its areas of strengths which are strong distribution network and adaptability to changing trends. In relation to the latter, the company should upgrade its product portfolio to contain emulsions and branded paints which should be led by the innovation and efficient operations. The company should leverage on its competitive advantage as given below (Table 8):

Table 8: Benchmarking with Competitors Conclusion: There is a revival in construction industry post-recession, as well as resurgence of the automotive and consumer durable sector. This will lead to an increase in demand of paint led by the domestic and global automotive players. The segment with highest potential growth and hence the target for focus will be powder coatings and high performance coatings which will add to the top line growth of various paint manufacturers. In order to tap this growth, Asian Paints should focus on improving efficiency of supply chain and distribution mechanism in India, in conjunction with aggressive promotion. These steps should be replicated in the global operating locations to expand, increase profitability and compete against other global players who also have various plans of capacity expansions in their pipeline.

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International Business: Asian Paints Limited 2013

References: 1. Company Annual Report. 2. Asian Paints Website. 3. Media Reports from Public Domain. 4. Capitaline Database (SPJIMR) 5. CMIE Prowess Database (SPJIMR) 6. Richard Ivey HBS Case 906M58 on Asian Paints Business Strategy by R. Chandrashekhar. 7. Richard Iver HBS Case 906M58 on Asian paints IB Division by R. Chandrasekhar. 8. India Brand Equity Foundation (IBEF) Analysis and Report. 9. Ambit Capital Research Reports.


Asian Paints: International Business