Business Diversification of a Confectionary Food and Beverage Business of the United Kingdom - Essay Example

? Report Writing Table of Content Executive summery 3 Introduction 3 Answer a) 4 National business system 4 Cultural conditions 6 Answer b) 8 Answer c) 9 Answer d) 10 Answer e) 11 Conclusion 11 Reference 13 Bibliography 15 Executive summery This is a business report about business diversification of a confectionary food and beverage business of United Kingdom into a developing country like India. For foreign market diversification, the business needs a detailed analysis of the business culture and national business system in India. Therefore, this report will analyse national business systems, business culture, market trend, and culture and consumption behaviours of the target customers with respect to confectionary food and beverage industry in Indian market. This report assesses the trends and pattern of international trade between these two countries especially trades and investment in the beverage industry. Implication of the international institutions on its initial entry into Indian market will be analysed. Finally, this report will recommend whether and how the company can diversify its business into Indian market. Introduction Globalization has stimulated many successful firms in all many countries for diversification of their business into foreign market. It allows two different ways for international business expansion for these successful companies in their domestic countries. One is trade and another foreign direct investment. These factors have influenced one UK based Food and Beverage Company named Crazy Food Private Limited to decide start its international diversification. The company has decided to diversity into a developing country i.e. India. The company has successful portfolio that consist of processed food, ready to eat food, snacks foods as confectionary items and soft and energy drinks as beverage items. It has well developed two popular brands in UK market, Crazy Bite and Crazy Cola. The company wants to launch these two popular brands in India and it has noticed this confectionary market in India to be growing more in next five years. So, this report will provide a detailed investment analysis for this company to assess the viability of its international business diversification into Indian market. Answer a) National business system India is a developing country having a growing economy that is 12th largest economy in the world by nominal value of gross domestic product. The country has approximately more than 17% of world population among which more than 200 millions can be segmented as high consumption oriented urban people. This segment of people is having above average income level and higher purchasing power. This is one of the major strengths of the country for attracting foreign business institutions to enter into Indian market. According an analysis by World Bank, India is 4rth largest country in the world in terms of overall consumption and purchasing power of the total population of the country. 40 percent of this 200 million people are youth (IFC, n.d.). Therefore, growing purchasing and consumption trend of this large segment of people is the key attraction of this company in terms of potential customer base as youth are usually the most potential target customer for any confectionary food and beverage producer. Apart from the huge customer base, next important key resources of the country has is sufficient youth labour and expertise. This is one of the most important recourses of the country which has become the main attraction of the foreign companies especially companies from developed countries like Crazy Food. The company can get sufficient labour in comparatively very low wage rate as compared to UK market rate due to the higher difference of currencies of these two countries. As a food and beverage company, Crazy Food needs huge work force for production and packaging, bottling etc. National political environment of India is stable as current government and only one major opponent do not have many conflicts that can affect any areas of business national business environment. Economic liberalisation since 1991 has been moving this economy for getting international exposure and market based system. The economy has been reformed and better economic and trade policies have been developed in 2000 which has been accelerated the economic growth rate of the country. India has recognised as second fastest growing economy and developing country by 2008. The country represents itself as community where 17 official languages and many regional languages are there where English stays alongside with national language Hindi in all over the country (The World Bank, 2011). The government has started focusing on increasing the domestic production as a mixed economy and increasing the role of different market forces for optimum allocation and usage of county’s valuable resources. For development of domestic business environment new policies have been developed for import of advanced technologies, equipments, machineries. Gradual changes in the economy in terms of business and agriculture have made this country more interesting (Grainger & Chatterjee, n.d., p.25). Along with these qualitative strengths, the country has three major barriers for long run growth like lack of developed infrastructure, environmental degradation and many bureaucratic obstacles. Inadequate transportation facility and insufficient electric production and storage systems are the key barriers for advanced industrialization. Agriculture is major contributor of gross domestic production of the country and maximum percentage of export is agricultural and food products. Availability of low priced agricultural products is the major opportunity of Crazy Food in India. So, the company will get sufficient auricular raw materials for production of confectionary food products and sufficient labour and expertise. Cost of production will be very lower compared to UK market as cost of raw materials and wage rate are much lower. So, India is the only developing country that provides a competitive advantage to the firms of developed market in terms of two main resources of business i.e. labour and capital especially to the firms of food and beverage industry. Increasing demand of processed food, confectionary food and beverage food have made this industry a rapid growing industry. This industry is new and consumption trend of the consumers are constantly changing. The company can utilize this cost effective production opportunity to make this country as a production base for its domestic and international market export business. It can export its products in labour countries of India and also can target another developing market i.e. China. Cultural conditions Concentrating on the to the package ingredients for the home cooked food since long years have been passed and now the time came to provide quick food processing and its marketing environment for Indian food industries to provide good quality hygienic food like ready to eat food. It has opened a new strategic window in the developed countries like US, Japan and as well as in the worldwide scenario as quality, taste and acceptance is concerned (USDA, 2005, P.5). For this reason Indian Govt. is investing more in this sector like 0% excise duty and 100% tax deduction for the initial 10 years of the a new production units for the domestic as well as foreign investors. These strategies will help a company to minimize operational cost which will affect on price minimizing and better penetration in the market. Ready-to-eat foods market in India is highly expected to touch $55 cr. to $60 cr. by 2015. The current market size of this category of food market is Rs. $6 cr. This category of food market is not totally penetrated in all over the country because of the factors like franchise acquisition in new sector, low household income to purchase ready food from the market especially in the semi urban and the rural area and for the hygiene factor Indian housewives generally prefer home cooked food for the family members (GAIN, 2011, P.10). It is the fastest growing food category in the total food market in India. There is a big opportunity in the untapped market because of increasing family income in different demographic segment, willingness of urbanization of rural people and growing percentage of working women in urban or semi urban areas in India. This industry requires an increasing penetration in the Indian consumers. Ready to eat food has not only the popularity at a special occasion but it has a increasing demand for daily consumption because now a day’s people are concentrating on the value for the time and they don’t want to spent more time in processing of food. Processed food industry is one of the largest industries in India. In terms of consumption, production and availability of raw material and expected growth it has been ranked fifth in all over industry review (MOFPI, 2007). Popularization of confectionary and ready to eat food are increasing due to the globalization in the Indian food industry. Retail outlets i.e. supermarkets, departmental stores are spreading in urban and semi urban areas the consumer’s buying patterns for grocery products have been changing from community based grocery shops to the retail outlets which influence the distribution and the market presence of this type of product. Product self life is 12 to 18 months with good quality, taste and hygiene factor till the expiry. Another two product potentiality are housewives willing to spent time out of kitchen more and more employed bachelor staying away from homes and make food by their won. Finally, a growing change in people’s eating habits especially in the younger generation like school and college goers is catalyzing the potentiality and the demand of confectionary food and beverage products (Alok, 2007, p.2). India is a diversified country in terms of people, religion, food habit, languages, customs and tradition. The population of the country can be easily segmented based on geographic and demographic segmentation. Different cultural people have different food habits and also it is changes from one region to another like north Indian, south Indians etc (India Gov, 2005). Food habits of people also vary state wise in the country. Diverse sub-cultured people spread all over the country which is the key reasons diverse food habits of Indians. Strong sporting mentality and culture among youth is indicator of potential target consumer behaviour for soft and energy drinks of the company (Hirekenchanagoudar, 2008, p.a5). Answer b) Laidback approach and bureaucratic hurdles in the working environment of government agencies result overload of due works, major delays in processing of registrations, lack of confidence in the system. As well as aspirant domestic business, the foreign companies also need to have much patience for working with the government agencies. It is one of the treats of the Crazy Food. Indian firms follow hierarchical systems in both business operation and decision making. So, workers and employees here will deserve the same from a foreign company also. So, the company needs to make changes in the organizational structure best suited for Indian business environment. There no major British institutions in Indian food and beverage market. This might be due to lack of infrastructure and inadequate supply chain management in the country. The company can ignore the cultural difference of the Indians in favour of low wage and low cost raw materials for food production advantage. These factors influence the firm to select India as a best location for production of food products and supply those to other developed and developing countries and also to home country as well. It will help the company to get competitive advantage in terms of low cost of production and lower market price in the domestic as well as foreign market. United Kingdom face repeated trade deficit with the foreign countries and current trade deficit of 4308 million GBP as on June, 2012 has proved this fact (Trading Economics, 2012). The get more import from India than export in this country. It is world’s fifth largest trading and highly depends on foreign trade. It import maximum of its raw cotton and food from India and Bangladesh. Main trading partners of this country are European Union countries. Answer c) For diversifying into foreign market, Crazy Food has to face foreign exchange risk. Currency value of GBP is much higher than Indian rupees. So, the company have to generate much revenue in Indian rupees to earn substantial amount of GBP. Foreign exchange rate between these two currencies changes very frequently. Therefore, the company cannot trade in this country especially for food products which are comparatively low priced fast moving goods. Because, cost of production is much higher in UK and it need to sell the products in higher price in Indian market. Inflation in the foreign market is major risk for the foreign firms especially whose domestic currency is higher than foreign currencies. So, in inflationary environment in Indian market the company will face risk of lower GBP earnings from the same or higher sales in India. This is because, in inflation the value of Indian rupees much decrease than other high valued foreign currencies. Translational risk of the company will be higher as it needs to translate the financial values in GBP for making financial reporting. To counter foreign currency risk the company needs to enter into agreement of foreign currency option and forward contract with the multinational financial institutions that operates in both the countries. Main objective of this strategy to account with foreign exchange risk associated with foreign assets and liabilities, transaction with foreign firms, future projected cash flow and investment in different instruments in foreign currencies. It might apply value at risk (VAR) model to counter its foreign translational risk associated with foreign currency derivative position of the company Dunning, 1993, 29). The objective of implementing this model in their foreign currency risk management strategy is to assess the potential negative impact of frequent fluctuation of foreign currencies against GBP. Answer d) After the globalization India has become liberal in terms of foreign export and also foreign direct investment in the especially from the developed and developing countries across the world. But, there are many policies have been developed for applying many types of charges on the foreign businesses. Import into India in food and beverage and other strategic sectors charges a tariff by the Indian government for protection of the domestic firms’ interest. Custom law of India charges various types tariffs from the foreign traders. These are like basic duty, Anti Dumping duty, Additional duty etc. The company will have to pay charge at 16% as basic duty if it imports food and beverage products in India (Blomstrom & Kokko, 2002, p.36). As agricultural is the major contributor of India’s gross domestic production, the country restrict import of food product to protect the demand of domestic resources in the country as protects the interest of many food companies and households business. Therefore, Crazy Food needs to operate its foreign business in India as foreign direct investment in Indian food and beverage market. Producing and selling the food products in India will give the better advantage than importing into Indian market. It will be benefited in multiple ways if it produces business in India. The company will get cost effective production in terms of sufficient labour and raw material in low price. Low cost of production can help the company to compete with the domestic firms in terms market price of the products (Viswanadhan, n.d., p.11). Answer e) Political environment in India has a complex situation. Though two major parties are there in national level but, political conflicts among the regional parties are very common in every states and territories. For international relation in terms of foreign investment and many other issues both the national level parties have equal intervention. Regional political disturbance have substantial effect on the domestic as well as international firms in the country. But internal security and defence system counter this political conflicts and disturbance in a high extent. One positive side of political environment is all parties, national and regional welcome foreign investment in India. But import is not expected in many states especially for food products as there are many states where major people live depending on agriculture and food business. So, production of food product is highly accepted in this country as increases employment efficient use of domestic resources of the country which are key attention of the government for foreign direct investment in the country. Conclusion After analysing national business system and cultural environment of the selected country, it can be recommend that current scenario of India in terms of business, cultural and political aspect is favourable for foreign direct investment of Crazy Food Private Limited in Indian market. Current market and consumption trend analysis of food and beverage market shows that demand of confectionary food is growing day by day due to the modernization of urban and semi urban people with respect to food habits and consumption. So, FDI can be encouraged for the company in India for large market size, low wage rate, sufficient agricultural raw material for production of confectionary food and government’s intervention and encouragement for the foreign business. Reference Alok. J. (2007). Food Processing Industries in india. [Pdf]. Available at http://www.iiml.ac.in/events/C5_04_Alok_Jha.pdf. [Accessed on August 11, 2012]. Blomstrom, M. and Kokko, A. (2002). FDI and Human Capital: A Research Agenda. OECD Development Centre. Brushett, L. & Franklin, G. (2001). Market Planning for Value-Added Agricultural Product. [Pdf] Available at: http://agmarketing.extension.psu.edu/Business/PDFs/market_planning.pdf. [Accessed on August 11, 2012]. Dunning, J. (1993). Multinational Enterprises and the Global Economy. Essex: Addison-Wesley. G. Hofstede, (1983). The Cultural Relativity of Organizational Practices and Theories. Journal of International Business Studies. GAIN. (2011). [Online]. Exporter Guid. Available at: http://gain.fas.usda.gov/Recent%20GAIN%20Publications/Exporter%20Guide_New%20Delhi_India_12-29-2011.pdf. [Accessed on August 11, 2012]. Grainger, R. & Chatterjee, R. (No Date). Chinese and Indian Business Systems: Divergent in the midst of Global Trends. [Pdf]. Available at: http://ehsanz.econ.usyd.edu.au/papers/Grainger.pdf. [Accessed on August 11, 2012]. Hirekenchanagoudar, R. (2008). Consumer Behaviour Towards Ready-To-Eat Food Products. [Pdf]. Available at: http://etd.uasd.edu/ft/th9670.pdf. [Accessed on August 11, 2012]. IFC. (No Date). India Gov. (2005). India Business Environment. [Pdf]. Available at: http://www.ifc.org/ifcext/tokyo.nsf/AttachmentsByTitle/IndiaP/$FILE/Tsitsiragos.pdf. [Accessed on August 11, 2012]. India Gov. (2005). Ethnicity of India. [Online]. Available at: http://india.gov.in/knowindia/culture_heritage.php?id=70. [Accessed on August 11, 2012]. MOFPI. (2007). Ready To Eat Food. [Pdf]. Available at: http://mofpi.nic.in/ContentPage.aspx?CategoryId=186. [Accessed on August 11, 2012]. Regmi, G. & Gehlher, M. (2005). New Directions in Global Food Market. [Pdf]. Available at: http://www.ers.usda.gov/publications/aib794/aib794.pdf. [Accessed on August 11, 2012]. The World Bank. (2011). Business Environment Snapshot. [Online]. Available at: http://rru.worldbank.org/BESnapshots/India/default.aspx. [Accessed on August 11, 2012]. Trading Economics. 2012. United Kingdom Balance of Trade. [Online]. Available at: http://www.tradingeconomics.com/united-kingdom/balance-of-trade. [Accessed on August 11, 2012]. Viswanadhan. N. (n.d.). Can India be the food basket for the world? [Pdf] Available at: http://www.isb.edu/faculty/Working_Papers_pdfs/Can_India_be_the_Food_Basket_for_the_World.pdf. [Accessed on August 11, 2012]. Bibliography Acharya (1998). “The Open temple”. Director, Volume Fifty-Two, Number Five, December 1998, 71-71. Beaman, A, J. & Johnson, J, A. (2006). Food Distribution Channel Overview. [Pdf]. Available at: http://ir.library.oregonstate.edu/xmlui/bitstream/handle/1957/20443/em8921.pdf. [Accessed on August 11, 2012]. Bhat, T.P. (2011). Structural Changes in India’s Foreign Trade. [Pdf]. Available at: http://isid.org.in/pdf/ICSSR_TPB.pdf. [Accessed on August 11, 2012]. Economic Department. (2002). Economic Survey 2001-2002. Ministry of Finance & Company Affairs, Government of India. Economic Department. (2003). Economic Survey 2002-2003. Ministry of Finance & Company Affairs, Government of India. Economic Department. (2004). Economic Survey 2003-2004. Ministry of Finance & Company Affairs, Government of India. Economic Department. (2005). Economic Survey 2004-2005. Ministry of Finance & Company Affairs, Government of India. Edwartd, T. & Kuruvilla, S. (2005). International HRM: national business systems, organizational politics and the international division of labour in MNCs. Routledge Ltd. IMDR. (No Dtae). Changing Dimensions of Indian Business. [Pdf]. Available at: http://www.imdr.edu/Changing%20Dimensions%20of%20Indian%20Business-Pranati%20Bapat.pdf. [Accessed on August 11, 2012]. MEA, India Govt. (2008). India-UK Relations. [Pdf]. Available at: http://www.mea.gov.in/mystart.php?id=50044539. [Accessed on August 11, 2012]. Read More