Deccanet_Case_05_ResearchPaper

Deccanet_Case_05_ResearchPaper - David Wright, MBA04...

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David Wright, MBA’04 prepared this case under the guidance and with Professor Melvin Goldman as the basis for class discussion rather than to illustrate either effective or ineffective handling of a business situation. 1 Deccanet Designs Ltd. (A) Deccanet was at a crossroads by the summer of 2001. In March, the company had reported a loss for FY-2001 and the finance division was expecting more losses in FY- 2002. Globally, the telecom industry was in crisis, and Deccanet was having difficulty collecting receivables from various clients, especially those in the U.S. There was also turmoil within the company, as a vigorous debate divided management over the future strategy of the company. Starting in April, Deccanet had entered discussions with Intel Capital over a possible $1 million investment in the Bangalore based engineering firm. However, the negotiations were dragging on and Deccanet’s senior management worried that Intel, mindful of industry developments, might pull the plug at the last minute. In fact, Intel’s India team did have questions about Deccanet, mostly about its fundamental business strategy. What should the various players (Deccanet, GVFL, TDA and Intel) do? The Indian Economy in the 1990’s For several decades after gaining independence from the British in 1947, India followed a path of state-directed economic development. Although India did become much more industrialized during this period, the country remained heavily dependent upon agriculture, with some 33% of GDP coming from the farming sector as of 1990. 2 Furthermore, despite developing the industrial base of the country, the statist model failed to produce the rapid growth rates needed to support India’s massive population, leading many economists to refer to annual growth rates of 3.5% (1% growth in GDP per capita) as the “Hindu rate of growth.” A balance of payments crisis in 1991 led the government to implement an IMF and World Bank supported reform package, which stabilized the economy and set the stage for an export-led recovery. Various liberalization, deregulation and privatization measures over the ensuing decade led to accelerated 1 The authors acknowledge the complete cooperation of all parties particularly GVFL and Deccanet management. 2 “Understanding India’s Services Revolution,” Jim Gordon and Poonam Gupta, International Monetary Fund, November 12, 2003, p. 6. 1
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growth, with GDP growth averaging 5.8% between 1996 and 2002 ( see Appendix I ). 3 Rapid growth in the services sector, in particular IT/telecommunications and financial services, drove this economic boom. Communications services alone grew at an average annual rate of nearly 13.6% during the 1990’s. 4 Meanwhile, the IT sector as a whole grew at an average rate of 46% between 1993 and 2003, while IT exports grew at 52% per year over the same period. 5 Although much of India’s growth came from servicing the domestic market or product exports, a new phenomenon also contributed to the boom – outsourcing. By late 2003, countless U.S. and European corporations had contracted out the provision of a variety of
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Deccanet_Case_05_ResearchPaper - David Wright, MBA04...

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