Market Entry Strategy Essay
The report uses Porter’s National Diamond model’s attributes factor conditions, demand conditions, related ND supporting industries and firms strategy, structure and rivalry and external variables to evaluate the competitive advantage of South African food industry. The analysis shows that the South Africa is self sufficient to meet its domestic food needs, has high domestic demand with Increasing paying capacity, possess relatively well developed supporting Industries and has high competition among the companies operating in the food industry.
South Africa however lacks basic infrastructure, has a shortage of skilled workforce and has high unemployment and inflation rate. The Porter’s national model thus shows that the South African food industry does not have all the attributes to possess the competitive advantage in the food retail industry. However, the government’s plan to Invest In infrastructure and related industries Is expected to Improve the situation In the next few years and thus could be a good option to enter the south African food retail industry.
The report also evaluates the management issues that a foreign company could face while entering and operating In South Africa. Introduction South Africa (henceforth AS) Is Africans biggest economy (Male, 2012) and Is a part of BRICKS (Brazil, Russia, India, China
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Part 1: Porters National Diamond Analysis conditions, related and supported industries and firm’s structure, strategy and rivalry. These attributes are discussed in the case of AS food retail industry as allows: Factor Conditions Factor conditions are further divided into basic and advanced factors. Basic factors include natural resources like land, labor and capital AS possess to have a competitive advantage in the food retail industry. Basic factors l. Climate- AS has a diverse climate to support the growth of grains, fruits and vegetables.
AS, thus, is self-sufficient in agriculture produce that make a considerable part of the retail industry (AMA, 2012). The country produced 5. 5 million tons of fruits and around 4. 5 million tons vegetables in 2011 sufficient to feed the domestic population (Appendix-3) (MAC, 2012). II. Labor market- According to a world bank report, the labor costs in AS are quite high compared to other emerging economies like Brazil, Argentina and Chile (Fin, 2010). Although the country has good educational infrastructure (Appendix-I), AS labor market is characterized by a shortage of skilled labor and surplus unskilled labor.
As a result of shortage of skilled workforce, the companies operating in the country will witness 75% increase of expatriate staff by 201 5 (Razz and Fury, 2012) that could increase the cost of operations for the companies in AS. Advanced factors l. Infrastructural facilities- AS has very poor road and port infrastructure. The country is ranked 63 by a World Bank (2011) report of global competitiveness for infrastructure (Appendix-2). However, the AS government has set up a plan to invest $97 billion in the next three years to upgrade roads, ports and transportation networks Momma, 2012).
II. Power Crisis- According to an COED report, electricity production in AS is not sufficient to support its fast growing manufacturing and services industries mainly due to failure to invest in new power generation projects (Sanders and Pink, 2008; Salaries, 2011). Electricity, like any other industry, would be an important input for retail industry and related industries like food processing industries which could have a negative impact on the growth of the food retail sector in AS.
Demand Conditions Demanding and sophisticated consumers in AS will force the companies to come up with quality products which will increase the competitive advantage of a nation. Population size and distribution- AS has a population of around 50 million (Appendix- 1) further expected to reach to mm by the year 2050 (Barnes, 2011) meaning increased need for food products to feed it which is further expected to increase in population is expected to move to urban areas by 201 5 which would also lead to increase in food sales in the urban areas (Thomas White, 2011). II.
Increased consumer spending- The income is fast increasing among middle class Africans leading to increase in spending (Thomas White, 2011). The consumer spending per capita increased from SIS$ 3,739 in 2007 to SIS$ 4,889 in 2011 (Appendix- 1) which is further expected to rise to SIS$ 9,308 by 2050 (Barnes, 2011) indicating increasing demand from the domestic consumers. South Africans retail sales are expected to grow by 47. 4% from SIS$ 82. Ban in 2012 to SIS$ 121. Ban in 2016 (Business Wire, 2012) which means that demand is expected to remain high in the coming years. Ill.
Size and sophistication of AS consumers- South African consumers are increasingly becoming health conscious leading to rise in demand of healthier food products such as organic and fresh produce. At the same time due to rise in the income of middle income families, there is an increase in the import of high quality processed food as well, especially from US, as they are considered superior impaired to local produce. South African consumers also emphasis the importance of ethical behavior and environment which force retailers to ensure the food is not sourced from a supplier using unethical practices (USDA, 2011).
IV. Unemployment and Inflation- According to a Nielsen report, retail sales fell to 3. 3% in 2010 compared to 14. 6% in 2009 due to declining growth in the fast moving consumer goods (FMC) sales in the country (Durham, 2011). Inflation is one of the reasons cited for lower growth rate. Unemployment among the South African population is also quite at 25. 2%, and is even higher at 51. % among the youth in the age group of 15-24 years (Cohen and Martinez, 2012). The high inflation and unemployment rate could reduce the consumer spending power on the food in the future.
However, South African economy is expected to grow by 3. 6% in 2013 and 4. 2% in 2014 (South Africa Treasury, 2012) and consumer spending could increase in the near future due to increasing wages and low interest rates (World Bank, 2012). Related and Supporting Industries l. Increased in import of processed food has resulted in decline in the investment of domestic processing industry thus affecting the long-term viability of food recessing industry in AS (Barnes, 2011). II.
Cost of packaging is high that neutralists the advantage gained from economies of scale of large South African canning industry (Barnes, 2011) Ill. Food processing industry largely depends on uninterrupted power supply for its units and need skilled employees to operate and maintain the technology. The lack of electricity and shortage of skilled manpower is further affecting the growth of ‘V. Process knowledge is high with many universities such as Pretoria, Statelessness, Attaches and Cape Peninsular having tie ups with international research institutes offering practical advice and assistance (Harcourt, 2011).
V. Some of the strongest food process engineering companies such as Tetra pack, AGE and APP have their presence in AS providing the most up to date technology to dairy industry (Harcourt, 2011) VI. According to a World Bank report on global competitiveness of African countries (Appendix-2), AS ranks as top three countries in goods market efficiency and technological readiness (World Bank, 2011). Firm Strategy, Structure and Rivalry l. The spending per visit by the retail customers to branded stores is increasing compared to independent stores.
Consequently more branded retail stores are coming up in AS increasing competition between the companies (Durham. 2012). Pick n Pay, Master, Shoppers, SPAR and Woolworth are the top five food retailers in AS (Sustainability, 2012). Strong domestic rivalry between firms in food retail sector will force the firms to constantly innovate and produce quality products and services. With the acquisition of 51% stake in Master by American retail giant Wall-Mart in 2011, the South African retail industry is expected to witness further increasing competition among the major players (Dolomite, 2011).
Consequently, economies of call and advanced procurement due to the presence of local retailers and foreign companies will also lead to reduction of food prices (Dolomite, 2011). Porter’s five forces model asserts that the least degree of rivalry among the industry players is preferable to enter into an industry; however, increased competition reduces costs, makes companies more vibrant and proactive and is beneficial for the companies and the growth of the industry in the long run (Henry, 2008). II.
E-commerce is gaining momentum among South African consumers driving the online sales as nearly 71 per cent of six million internet users are online shoppers. Consequently, more retail players are participating in the increasing competition to increase market share. However the cost of using the internet is quite high, the cheapest Mbps unlimited broadband costs SIS$118 per month. Furthermore, high costs to access and long waiting period for the line installation limits the expansion of the internet to every part of the country (MUNCH, 2012) limiting the growth of online shopping in the country.
External Variables The role of chance weather changes could increase the chances of lower production which in turn can increase the prices of food products. II. Higher than expected rate of inflation can increase the price of commodities, fuel and fast moving consumer goods (FMC) in the domestic market. Unfavorable currency exchange rates could increase the cost of imports that would also lead to the increase of prices of food products. The increase in food prices could lead to decrease in the consumer spending that could affect the growth of the domestic food industry. The role of government l.
Reforms of agriculture trading structures and trade liberation’s started in 1994 by the AS government have been the main driver in increased agricultural production making AS self-sufficient. The marketing of Agricultural Products Act 1996 included phasing out some export and import controls and elimination of subsidies. Liberation’s and deregulation also led to the innovative response from the AS wine sector that was followed by the entry of new players in the wine industry, increase in foreign direct investment (FAD) in this sector and synergistic relationship between wine producers and foreign marketing (Sanders and Pink, 2008).
II. The government plans to spend $78 billion on nuclear, coal-fired and hydroelectric power plant to reduce the shortage of power in AS that would add 9,600 gestalts of energy by 2029. The investment in turn would help reduce the power crisis in the country. Furthermore, the plan to spend $97 billion on roads and ports in the next three years is expected to increase the connectivity across the country and provide growth to the retail sector (Cohen, 2012). ) Cultural Issues This section analyses the cultural differences between the I-J, where BBC Pl is based, and the South Africa using Hypotheses, Halls’ and Tramper’s cultural dimension model. (Figure-I) Hefted cultural dimension- UK versus South Africa Source- Egger Hefted . Power Distance Index (PDP) – Hefted describes PDP as the extent to which a society accepts the fact the power in the institutions and organizations is distributed unequally (Robbins, 2009, p. 105). I-J ranks at lower at 35 in the PDP index compared to AS that sits at 49.
Trampers’ achievement versus ascription dimension is similar to Hypotheses power distance dimension. People from achievement oriented countries will respect a person based on previous achievement whereas the people from an ascription society respect a person based on his level in a hierarchy (Binder, The difference in the power distance will affect the nature of leadership, management and the type of structure of the organization (Storehouse, Campbell, Hamlin and Purdue, 2004).
The BBC Pl with the low PDP score is more likely to have a flat organizational structure with participative decision making process whereas there would be strong hierarchies in the South African organizations where employees are more willing to accept the decisions made by the leaders. II. Individualism (DIVIDE) versus Collectivism- Hypotheses individualism dimension refers to the societies in which the individuals are loosely connected to each other whereas collectivism is characterized by strong ties between the individuals and the societies (Jail, 2006).
With the highest individual score of 89, the I-J is a very individualistic society compared to AS with the score of 65 (Hefted, 2012). More emphasis is given to the individual shareholders and less to the society in which the company operates in the I-J whereas the companies from AS will emphasis on the value of society and particularly local stakeholders (Run and Turner, 2009).
Johnson and Turner (2010) further emphasis that devising a reward system for the employees of the collective system should be different from the individualistic society and thus, using an individual reward system in a collective society like AS may not be effective as in individualistic society used by BBC Pl in the I-J. Ill. Masculinity (MASS) versus Femininity- A high masculinity score is characterized by the societies where men are expected to be tough and the society is driven by competition, achievement and success (Hefted, 2012).
The masculinity score of the I-J and AS are 66 and 63 respectively, indicating that both I-J and AS are largely masculine societies as per Hefted dimensions. Therefore BBC Pl would be able to implement the similar culture of competition and achievement in their operations to motivate their employees in AS as are used in the I-J. IV. Uncertainty Avoidance Index (AJAX) – the cultural dimension of uncertainty avoidance is described as the lengths to which an organization or society will go to escape uncertainty (Storehouse et al. 2004, p. 57). UK has a score of 35 on Hypotheses cultural dimension whereas AS has a relatively high score of 49. The low uncertainty index of the parent I-J Company BBC Pl means that management and employees would be informal, have high freedom of taking risks and a degree of non-conformity. On the contrary, the employees of an organization in AS will have a low tolerance of risk and non-conformity and will try to reduce risks through rules and laws (Storehouse, 2004).