The Market Opportunities Available to Carrefour in a South Africa - Assignment Example

The Market Opportunities Available to Carrefour in a South Africa Executive Summary There are various factors that motivate international expansion of retail businesses. Currently, Carrefour is considering the opportunity to enter the South African retail business. For this purpose, the company must study the size and growth of the target market, distribution and advertisement channels, deregulation of the foreign markets, potential for growth of the retail marketing in the country and level of competition in the country. This paper provides a detailed outline of the market entry strategies that the Board of Directors should consider for entering the retail business sector in South Africa. It has been recommended that the joint venture would be the safest and most profitable method of market entry. Brief Synopsis of the Issue The proposed market entry strategy for Carrefour is joint venture since this is the best option available to the firm for minimizing threat involved in entering the new market and for gaining knowledge of the local market. Recommendation(s) South Africa is a developing country and the national government is making efforts to attract foreign direct investment Carrefour is a multinational firm with advanced technological knowhow Joint venture with a well performing local firm in the same business is the best strategy to enter the South African market Background Recently, Carrefour has made an unsuccessful attempt to enter the Russian market with the aim of establishing a hypermarket in the country. The causes behind the failures have been found to be lack of potential demand (particularly for organic food items) and low opportunities for acquisition and growth. This paper presents a case study, which acts as the platform on which the company should build its strategy to enter the South African market. Through this paper it has been recommended that Carrefour should adopt the strategy of joint venture for entering the South African retail industry. Company overview Carrefour was founded in France in the year 1960 by two entrepreneurs, one textile retailer and the other a food wholesaler. In 1960, the first store was highly successful and it marked the beginning of the company’s successful journey. In 1975, the company made its first venture outside Europe and opened a hypermarket in Brazil. Since then Carrefour has expanded its business across the globe. Presently, the company has 4635 stores in France alone and more than 5200 stores in Europe, Asia, Latin America, Caribbean and North Africa and Middle East (Carrefour, n.d.). However, in 2009, the company faced a setback while trying to establishing a hypermarket in Russia due to lack of demand for its organic food products (Indu, 2011). The company was forced to quit their business in Russia and exited after four months. It is currently considering South Africa as a prospective country for making investments. Theories of international trade and investments In the modern globalised business world, there is wide agreement on the benefits of international trade among the economist, politicians and academic researchers. Investments made in foreign countries are believed to boost up business operations around the world and also lead to economic progress of the host countries. These countries are encouraged to modify the economic policies pertaining to international trade in such as way, that they can promote international trade and investment. One of the key features of these policies embraces the commitment to reduce barriers to international trade and foreign direct investment (FDI) by the countries. Such changes in international trade policies have led to “greater examination of the benefits and costs of international trade and investment” (Saxton, 2002). Therefore, they further promote trade and investment. There are studies that claim the existence of strong correlation between international trade and investment and economic growth. There are four distinct ways in which international trade and investment might increase national income and economic growth. These ways are growth of international trade and investment from trade liberalization, gains in economic welfare from lower trade barriers, changes in the pattern of international trade and investment from comparative advantage and gains in total factor productivity and technology diffusion from greater international trade and investment. Currently, many companies are considering FDI to be the most appropriate policy of expanding their businesses to foreign countries (Mallin, 2011). Therefore, there is significant interaction between trade and foreign direct investment (FDI). At present, Carrefour is considering expansion of their business to foreign locations and has selected South Africa as their destination. South Africa is a developing country that receives low level of FDI. The country is a part of the sub Saharan African region and is making efforts to attract higher levels of FDI. Hence, after exiting from Russia due to “absence of sufficient organic-growth prospects and acquisition opportunities in the short-and medium-term” (Indu, 2011) the Board of Directors have considered it ideal to invest in this country. There are other ways of entering into the new market, such as licensing and joint venture. However, Carrefour has considered FDI as the most viable option for their expansion into the new market. Analysis of Market Opportunities in South Africa Accessing market opportunities: Porter’s diamond Model The six points on Porter’s diamond are factor conditions, demand conditions, firm strategy, structure and rivalry related and supporting industries, government and chance. These factors lead company to bring comparative advantage to the nation in which the firm is operating. The necessary ingredients required for achieving the comparative advantage are availability of resources, information used by the firms in making the decision about the opportunities that the firm should pursue, goals and objectives of the company and the stress faced by the companies to make investments and innovate. Figure: Porter’s Diamond model (Source Author’s creation) Factor Conditions The most important factors in a country that are needed for operating its industries are its resource base and the technological foundation. The extent of upgradation of the technological base of the country is more important than the initial level of technical knowhow. In this respect, South Africa is progressing satisfactorily. Innovation is an outcome of the problems faced by the business enterprises due to certain disadvantages. These innovations bring national comparative advantage. In South Africa changes are affecting the production process in almost all industries (Nations online, 2013). Various indigenous industries operating in South Africa domestically are also catching up fast with the technological advancements. As the country is adopting the technological changes and fast implementing it in the economic activities within the country, significant development is occurring in the infrastructural facilities (Leelapanyalert and Ghauri, 2006). Good communication and transportation facilities, easy availability of raw materials, power and water supply are some of the basic necessities for a new entrepreneur (CIA, 2013). With technological advancement, the country is being able to improve its water supply conditions. Since Carrefour is a retail chain, transportation and communication is one of the most important necessities for smooth running of the business. Demand Conditions Demand conditions often push the success meter of the enterprises operating in an economy. It is imperative for the company to assess the market conditions before investing in the economy. Often, when the local demand rises, the local entrepreneurs cannot produce sufficient quantity of the product. Thus, it is a positive boost for the foreign entrepreneurs to invest in this economy. South Africa is a growing economy. It is a middle-income economy with a per capita GDP of USD 11,600 (according to 2012 estimate) (CIA, 2013). Recent research shows that the country has a well-developed financial and legal framework, good communications channels, abundant availability of energy and developed transportation sector. In 2011, the human development index (HDI) of South Africa was 0.62. Local demand by the population is rising for various kinds of products. In 2012, the real growth rate of GDP in South Africa was 2.5 percent (CIA, 2013). HDI for the entire sub Saharan region is 0.46, which is considerably below the average of South Africa (Hansen and Müller, 2006). Hence, in comparison to the development index of the sub Saharan region, South Africa looks most promising among the other nations for making investment. Related and Supporting Industries Competiveness in the local market and among the supporting industries allows price level to be low and provides space for innovation. When a foreign company enters the local business, it increases healthy competition by transfer of technical knowhow among the local workers. Since Carrefour is a retail outlet selling various kinds of products under the same roof, it would boost up the activity level of supporting industries in the country, such as, iron and steel industry, textile industry, food industry and chemical industry. Firm Strategy, Structure, and Rivalry Local conditions put significant influence in firm’s strategy making. The structure of the firm and the local conditions should be considered in making the strategy for the firm. The local condition of South Africa is inviting, since the market is still developing and completion is not very high. But, in the long run there would be several firms offering similar services and products. This would be beneficial for the firm since it would face the pressure to innovate. Besides, since Carrefour would invest before the other firms it would be in the advantageous position to enjoy the first mover’s advantage. It would enjoy lower cost of factors. It would also be able to operate in compliance with the environmental standards (Panda, n.d.). Government's Role Since the mid 20th century South Africa has gradually increased its participation in the international trade. With increased openness, foreign investors are also increasingly considering this country as a good ground for investment. In this light, Carrefour has a good opportunity to enter the South African market. The “customs management system” (South Africa, 2013b) of the country has recently been automated. This new system is designed to reduce cost incurred by entrepreneurs for doing business in South Africa. It would “promote intra-African trade” (South Africa, 2013a) and also improve the competitive positioning of the country in the exports market. The latest automated system uses a single platform and a uniform process that can replace the multiplicity of the existing older systems including paper-based administrative processes. This would make the government formalities faster and less tedious (Bach, 2007). Chance There are certain events that occur outside the control of the firm. These often lead to discontinuities, which sometimes allow the firm to gain competitive advantage, while at other times it might put it at a loss. Carrefour would have a contingency plan in advance to deal with such events (Bach, 2007). Company Situation Analysis Firm-level analysis VRIN analysis helps in analyzing the internal strengths of a company with respect to organizational resources (Mitchell, 2010). Rare Valuable Inimitable Non substitutable Core Competencies Product Innovation The company is the first retailer to introduce organic food in retail chains in multinational Yes Yes It is difficult for competitors to offer similar products and in the wide range that are offered by Carrefour Strong networking and lump sum investment in R&D is required Brand Equity Yes Yes Since Carrefour has a strong brand equity in the global market it is tough for local competitors to overcome it Competitors find it difficult to procure such large amount of products from different producers and offer it under one retail store. It requires vast scale operation to reduce transportation cost Resources & Capabilities R&D Carrefour makes constant innovation to develop modern facilities and make new ways to offers products Yes Yes Requires huge entry cost The Intellectual Property possessed by this multinational retailer is not possessed by smaller companies Global Operation Yes Yes Cost of replication is high Although replication by other firms is possible it is not feasible due to high cost Economies of Scale Operates in all major countries and business hubs (Europe, China, United Arab Emirates, Argentina, Dominican Republic, Brazil, Saudi Arabia and Qatar) Yes Yes Enjoyed only at large scale operations Regional companies cannot enjoy it EDI or Electronic Data Interchange Since many companies are using this technology, it is currently not rare Yes (since it is newly introduced in South Africa) No No (ERP technology might replace EDI) (Source: Carrefour, 2013) Analysis of various types of market entry strategies Production and logistics Consumer price inflation rate in South Africa is accelerating and cost of production is rising (Estrin and Meyer, 2004). Rising cost of electricity and fuel are the main concerns for the business enterprise. Both these elements constitute important ingredients to the processes of packaging and transportation. Increase in cost of electricity would increase the overall cost of doing business since electricity is the basic element for running every process. Rising price of fuel would imply that transportation cost would rise (Basson, 2005; Graul et al., 2006). This would lead to a rise in price of the products offered by Carrefour. Production cost is the factor working as the main driver of cost push inflation. This would value growth but would not be supported by sufficient growth in volume. With rising inflation consumers would cut spending and volume of sales would dwindle (Euromonitor, 2013; Cavusgil, Ghauri, and Akcal, 2012). The retailer therefore has to develop strategies to enhance its sales volume. This rise in price has positive implications for the current value of sales. In the retail sector in South Africa a significant growth of 10 percent was recorded in 2012 (Euromonitor, 2013). During last year, unit price increase across all the major retail channels in the country stimulated growth in current value. The company has to develop a strategy to enter into the South African market and make its business flourish. The most appropriate strategy would be the one that allows the company to reap the profits of high value growth and alongside also increase its sales volume. To achieve this end, decision makers in the company would have to consider a number of strategies for market entry (Klug, 2007). The figure illustrates the possible market entry strategies that might be adopted by the firm. Figure 1: Market entry strategies (Source: Palgrave, n.d.) Carrefour must choose the most appropriate strategy for entering the South African market given the different economic and social criteria under which the company is operating. Since Carrefour is facing increasing cost of production and logistics, it has to increase productivity of the workers in order to reduce cost of production. Market entry Strategy: Joint venture Joint ventures between two or more than two companies relate to the situation in which the companies pool resources for conducting the new business. This kind of venture is generally made when the entrepreneur is entering a new or budding industry in which substantial risk is involved. The South African market is still developing and value growth of current sales shows that there are opportunities to expand business in this market. The company would be encouraged to make investments in the new market jointly with another retail firm that operates domestically in South Africa and accepts FDI facilities (Drabner, 2003). Joint venture would help the company to utilize the knowledge and experience of the staff of the domestic firm and combine the modern technological knowhow of Carrefour to establish its position in the new market (FAO, n.d.). Implementation of Market Entry Strategy Carrefour should opt for making joint venture with a retail firm that offers the same service in the domestic market of South Africa. Before entering into joint venture Carrefour has to study the target market of the domestic firm and ensure that the firm occupies a leading position in the domestic market. The employees of Carrefour should mingle with the staff of the domestic firm to gather extensive knowledge of the local markets so that the products offers by it might match the preferences of the customers (Tielmann, 2010). It would lead to sharing of business risk and combine knowledge of local markets with advanced technical knowhow of the foreign partner. Both companies would also be get financial strength. Strategy makers in Carrefour would have to keep it in mind that price inflating in South Africa is high. Therefore, in order to penetrate the local market, it has to follow a low price strategy (Lymbersky, 2008). Keeping the cost of transportation unchanged, the company has to reduce production costs. Low price would enable the company to increase its sales volume. Table of Contents Executive Summary 1 Brief Synopsis of the Issue 1 Recommendation(s) 1 Background 2 Company overview 2 Theories of international trade and investments 3 Analysis of Market Opportunities in South Africa 4 Company Situation Analysis 8 Analysis of various types of market entry strategies 11 Market entry Strategy: Joint venture 13 Reference List 16 Reference List Bach, B., 2007. International marketing entry strategy for the Red//Green Company. Munich: GRIN Verlag. Basson, P. M., 2005. International market entry: A South African SME perspective. Cape Town: University of Stellenbosch. Carrefour, 2013. Turkey: Opening of the Maltepe Park Shopping Centre. [online] Available at: < http://www.carrefour.com/news-releases/turkey-opening-maltepe-park-shopping-centre > [Accessed 13 September 2013]. Carrefour, n.d. Carrefour Stores Worldwide. [online] Available at: < http://www.carrefour.com/content/carrefour-stores-worldwide > [Accessed 13 September 2013]. Cavusgil, S. T., Ghauri, P. N. and Akcal, A. A., 2012. Doing business in emerging markets. London: SAGE. CIA, 2013. The World Fact Book. [online] Available at: < https://www.cia.gov/library/publications/the-world-factbook/geos/sf.html > [Accessed 13 September 2013]. Drabner, T., 2003. Market entry strategies and their applicability to SMEs - The winding road to foreign business. Munich: GRIN Verlag. Estrin, S. and Meyer, K., 2004. Investment strategies in emerging markets. New Jersey: Edward Elgar Publishing. Euromonitor, 2013. Retailing in South Africa. [online] Available at: < http://www.euromonitor.com/retailing-in-south-africa/report > [Accessed 13 September 2013]. FAO, n.d. Market Entry Strategies. [online] Available at: < http://www.fao.org/docrep/w5973e/w5973e0b.htm#entry%20strategies > [Accessed 13 September 2013]. Graul, et al., 2006. Procter & Gamble, Unilever and the Personal Products Industry. [pdf] Available at: [Accessed 13 September 2013]. Hansen, M. W. and Müller, S. H., 2006. Transnational corporations and local firms in developing countries: Linkages and upgrading. Copenhagen: Copenhagen Business School Press DK. Immi, 2012. Country Profile: Republic Of South Africa. [online] Available at: < http://www.immi.gov.au/media/statistics/country-profiles/_pdf/south-africa.pdf > [Accessed 13 September 2013]. Indu, P. 2011. Carrefour’s Misadventure in Russia. [online] Available at: < http://www.icfaiuniversity.in/Cases/BSTR363.pdf > [Accessed 13 September 2013]. Klug, M., 2007. Market entry strategies in Eastern Europe in the context of the European Union: An empirical research into German firms entering the Polish market. Berlin: Springer. Leelapanyalert, K. and Ghauri, P., 2006. Managing international market entry strategy: The case of retailing firms. Advances in International Marketing, 17, pp. 193 – 215. Lymbersky, C., 2008. Market entry strategies: Text, cases and readings in market entry management. Hamburg: Management laboratory. Mallin, C. A., 2011. Handbook on international corporate governance: Country analyses. New Jersey: Edward Elgar Publishing. Mitchell, W., 2010. Strategic Analysis Primer. [pdf] Available at: [Accessed 13 September 2013]. Nations online, 2013. South Africa. [online] Available at: < http://www.nationsonline.org/oneworld/south_africa.htm > [Accessed 13 September 2013]. Palgrave, n.d. Entry Strategies in Foreign Markets. [online] Available at: < http://www.palgrave.com/business/lambin/students/pdfs/Note%2013.pdf > [Accessed 13 September 2013]. Panda, n.d. Environmental Problems in South Africa. [online] Available at: < http://wwf.panda.org/who_we_are/wwf_offices/south_africa/environmental_problems__in_south_africa/ > [Accessed 13 September 2013]. Saxton, 2002 http://www.jec.senate.gov/republicans/public/?a=Files.Serve&File_id=ee48a33a-bb45-4cae-8f56-6882214bda65 South Africa, 2013a. SA Unveils Modernised Customs System. [online] Available at: < http://www.southafrica.info/business/trade/export/customs-230813.htm#.UjLHJ395HEQ > [Accessed 13 September 2013]. South Africa, 2013b. BRICS Business to Grow Partnerships. [online] Available at: < http://www.southafrica.info/news/international/brics-210813.htm#.UjLHL395HEQ > [Accessed 13 September 2013]. Tielmann, V., 2010. Market entry strategies. Munich: GRIN Verlag. Read More