The International Business Entry Strategy, Aussie Fresh in Vietnam - Essay Example

The International Business Entry Strategy - Aussie Fresh in Vietnam Executive Summary Vietnam, one of the emerging nations across the globe, is a densely populated country that hosts around 100 million people in 2009 – 2010. The country recorded real GDP growth of over 5% in 2009 even during challenging global business environment. The agricultural output of the nation and its share in Gross Domestic Product has reduced to nearly 20% in 2009 in comparison to output of 25% in 2000. In simple words, there is immense potential for Aussie Trade to commence vegetable and fruits trade business in Vietnam because the demand for these food products is highly inelastic, as the above mentioned products are basic necessities. In addition, Vietnam is in a transformation process as the country is moving fast towards implementation of capitalist principles against its traditional planned economy. In fact, the country now also exports its Vegetables and Fruits products to over 50 nations worldwide because of its free market mechanism. Nevertheless, the domestic fruits / vegetables demand is not completely met from domestic agricultural produce; hence, these products are also imported in Vietnam (Vietnomics Update, 2009) & (CIA Fact Book – V, 2009). It is, therefore, recommended to Aussie Trade to commence operations in Vietnamese market through proper branding and packaging of agri-products. The company should adopt Joint Venture strategy because the currency risk is relatively high, mainly attributable to current account deficit of Vietnam. The imports, therefore, become expensive that may negatively impact growth of Aussie Trade if forms its own subsidiary in Vietnam. It is feasible to minimise such risks by partnering with locals (who have knowledge in this sector) and establishing distribution networks for sales of Fruits and Vegetables (CIA Fact Book – V, 2009). Chapter# 1 - Introduction / Purpose / Methodology The world today is viewed as a global village because recent technological developments have helped reducing communication barriers and borders among nations worldwide. The creation of information / communication networks and transportation routes has significantly contributed in increasing trade volume and business activities. Not only developed countries like USA, France, UK< Germany, Japan, etc are beneficiaries of these advancements but also the developing nations have joined international arena as they have focusing on international integration, economic prosperity and sustainable development . Australia is viewed as a small, yet rich economy because of high purchasing power. Its per capita income was estimated to be $39,000 in 2009 and the country was ranked 21st in the list of high income nations. The Australian government aims to develop its economy on sustainable grounds; hence, it believes in building strong diplomatic and economic relations with world’s leading (developed) and fast growing (emerging) economies. The country formed a ‘Partnership Agreement’ with emerging Vietnam in 2009 so that both nations could further strengthen their trade ties and provide new business opportunities to firms of both countries (DFAT Report, 2009). In fact, Australia is inspired from on average 5-7% real GDP growth of Vietnam and considers it as a lucrative and ideal place for foreign investment (CIA Fact Book - V, 2010). This paper will discuss how attractive Vietnam’s Vegetable and Fruit Industry is for an Australian company named Aussie Fresh. The paper is based upon analysis, findings, conclusions and recommendations from latest available secondary research. For instance, the researcher will present an analysis over Vietnam’s external business environment, the underlying problems, the perceived opportunities and threats. For this purpose, the researcher has used PESTEL, Porter’s Five Forces and SWOT models to understand the external environment in Vietnam. Finally, the researcher will provide conclusions and recommendations to the CEO of Aussie Fresh that will facilitate in strategic decision-making about entrance in this new business market. Chapter# 2 - The Business Problem: Vietnam has become an attractive destination for investment because of increase in market size and economic growth. The country has GDP (PPP) of nearly $257 and a Per Capita income of around $2900 as estimated in 2009 (CIA Fact Book, 2010). However, it was adversely affected from recent global turmoil when its growth rate decreased from expected 8% to just over 5%. The economy provides opportunities to foreign companies because the tariffs are being reduced and investment is encouraged because of state incentives (tax free industrial zones). However, Vietnam still records current account and budget deficits that put downward pressure on its currency Dong. The vegetable / fruit sector is quite attractive because there is supply/demand gap in the local market, which is further intensified from exports. Vietnam is self-sufficient in production of “dry chilies, tomato, cucumber, watermelon, onion/garlic, bananas and pineapples” etc. that are exported aboard (Johnson et al, 2009 & Vietnam Net 1, 2010). Also, it imports various vegetable / fruit products to meet local demand. In short, Aussie Fresh could also export its high quality food products to Vietnam and sell by forming its dealership networks or from establishing its own stores in collaboration with locals. Chapter# 3 - PESTEL Analysis - Vietnam: 3.1 - Political: Vietnam, a largely socialist country, is today viewed as politically stable country. However, the nation has remained a victim of internal and external conflicts. For example, it was formerly a part of Soviet Block; therefore, implemented communist principles throughout the nation but later (during 1990s) changed its foreign policy and moved towards international integration. The country is ruled by Communist Party of Vietnam (CPV), which enjoys majority across all 59 provinces. For instance, Vietnam is penchant to strengthen political and economic relationships with leading Western and Asian nations so that it could expand its economy and become a developed country. The country is already a member of organizations such as ASEAN, WTO, G-77 and IAEA. Vietnam has also reinforced its diplomatic relationships with USA with which it fought a gruesome 10-year war during 1966 – 1975 (CIA Fact Book - V, 2010). 3.2 - Economic: Vietnam is a socialist country, where government enjoys most of the economic decision - making power and authority. However, in last few years, the nation has started implementing free market enterprise policies and principles in order to reduce state’s intervention in decision making. In fact, this is the major reason that resulted in opening of economy, which was further facilitated when Vietnam became the member of World Trade Organization (WTO) and reduced tariffs on imports from foreign nations. For instance, the country is attractive because it has been constantly expanding its economy since last 10 years. The inflation and unemployment rate are under 7%, while around 13% people are below poverty line. The currency risk is high; hence firm should better consider the option of forward hedging to avoid monetary losses due to exchange rate fluctuations (CIA Fact Book - V, 2010). On the negative side, Vietnam has relatively high trade and budget deficits that increase its public sector loans. In fact, the estimated $12 billion trade followed by $9 billion budget deficit is the main reason behind currency devaluation, which later makes imports of food products and raw materials expensive. Nevertheless, it also benefits exporters of agricultural and domestically manufactured products. Overall, the country has been attracting Foreign Direct Investment (FDI) from many developed nations because of its large population (market size) and rapid economic growth (Vietnam Net 2, 2010) & (CIA Fact Book - V, 2010). 3.3 - Socio-cultural: People across Vietnam are interested in purchasing international brands and endorse new ideas and innovations. Although, Vietnamese is the official language, yet Vietnamese are inclined to learn and speak language English, which is now the second most famous language across the nation. Power Distance in Vietnam is medium. There is mixed culture including acceptance of individualistic and collectivistic values. Women are today permitted to work in corporate world; however, men are still viewed as leading bread-winners (relatively higher masculinity). Uncertainty Avoidance is relatively low, which indicates the Vietnamese society appreciates novel events and values differences. There is High long-term orientation across Vietnam because of relatively strong family system, work ethics and socialist principles etc. (Vietnomics Update, 2009). 3.4 - Technological: It should be highlighted that the Vietnam does not have sophisticated and modern agricultural technology at its disposal, which is the evidence of its technological backwardness. In contrast, Australia uses latest machinery, modern agricultural production methods and techniques to increase per acre yield and quality of products. However, the quality of fruit and vegetable products has always remained a grave issue in Vietnam likewise other developing nations. Vietnam’s Government authorities have, therefore, also paid attention to resolve this matter, still much more is required for maximum improvement. In the wake of above, there is great opportunity for Aussie Fresh to market its top quality hygienic packaged food products, with high inelastic demand for consumers, across Vietnam (World Bank Report, 2006) & (Vinafruit Report, 2009). 3.5 - Environmental Forces: Vietnam is already a part of international environmental protection agreements regarding “Endangered Species, Environmental Modification, Hazardous Wastes, Law of the Sea, Ozone Layer Protection and Desertification etc.” (Johnson et al, 2008). The major problems faced by Vietnam include water scarcity, contamination and pollution, deforestation and soil degradation, overfishing, groundwater, rapid industrialization and urbanization because of economic growth in last 10-12 years. (Johnson et al, 2008) 3.6 - Legal: There are definitely core legal formalities for foreign / international companies such as registration, documentation, code of conduct, understanding and compliance with Vietnamese environmental protection, health safety, import and corporate business laws and regulations. In addition, there are political pressure groups (including DPV, Alliance for Democracy and People’s Democratic Party) and industrial institutions (Vina Fruit and Vietnomics) that endorse implementation of all defined laws for the welfare of country (Johnson et al, 2008). Chapter# 4 - Porter’s Five Forces – Vietnamese market: 4.1 - Bargaining Power of Buyers: The bargaining power of customers is low because fruits and vegetables are basic foods products demanded by every individual (from elite to low income groups). The price hikes because of supply shortfalls do not adversely impact demand of these products because it is highly inelastic in nature. Also, the exports of these aforementioned products from Vietnam are supported by government to reduce trade deficit; however, this also create shortages in local market amid increase in population and growing needs. 4.2 - Bargaining Power of Suppliers: The bargaining power of suppliers in Vietnam is higher because the government is interested in increasing exports of high quality products to foreign countries. Also, the growth in market size has increased domestic derived demand; therefore, suppliers truly benefit in this scenario and sell at their own prices. However, the bargaining strength becomes medium when government imports heavily to stabilize prices in domestic market (Vanzetti, 2006) & (Vinafruit Report, 2009). 4.3 - Potential New Entrants: The threat of new entrants is higher because there is great business potential in fruits / vegetable sector across Vietnam. The government has taken steps to increase area under cultivation and yield (through process innovation), which increases annual output and business volume. Hence, the sector is highly lucrative for new investors and firms that want to establish supply chain across Vietnam. 4.4 - Threats of Substitute Products: The threat of substitute products is very high because the vegetables or fruits have perfect substitutes. However, the competition increases when a supplier offers better or high quality food products, which enable it to attract more customers. 4.5 - Rivalry among Competitors: Rivalry among competitors is very low when demand exceeds supply and prices observe a natural increase. However, the rivalry increases significantly when supply of perishable food products exceeds demand. Indeed, this exerts downward pressure on prices because each seller is interested to clear off inventories to avert losses. Chapter# 5 - SWOT analysis – Aussie Fresh: Strengths: Efficient purchase and distribution networks of food products across Australia. High quality food products. Stupendous financial resources. Opportunities: Supply – Demand gap in Vietnamese market. Inelastic demand. Top quality products will entice high income groups. Weaknesses: Not practically feasible to commence green field venture. Greater number of management issues may arise in Vietnam as compared to Australia. Threats: Greater price fluctuations. Devaluation of Dong. Competition may increase in future. Chapter# 6 - Conclusions 1) Vietnam has higher growth rate and the food sector will expand in future because of increase in population. Next, the urbanization will further increase consumption. 2) This is the ideal time to enter in this potential market because of greater demand of top quality food products. 3) No real threat of political uncertainty and instability. 4) Fewer language and no cultural barriers in this case. English has already received the status of second most popular and spoken language. 5) Local partners will play extremely important role in success for this Joint Venture. Chapter# 7- VRIO Framework VALUE RARITY IMITABILITY ORGANIZATION COMPETITIVE ADVANTAGE TANGIBLE PHYSICAL YES YES YES YES PARITY FINANCIAL YES YES NO YES ADVANTAGE TECHNOLOGICAL YES NO YES YES ADVANTAGE ORGANIZATIONAL YES YES NO YES ADVANTAGE INTANGIBLE HUMAN RESOURCES NO NO NO YES DISADVANTAGE REPUTATIONAL YES YES NO YES ADVANTAGE INNOVATIONAL YES YES YES YES ADVANTAGE Chapter# 8 - Recommendations: 1) It is recommended to CEO to use ‘Joint Venture’ strategy because the fruits/ vegetables sector observes frequent volatility (supply and demand forces) and a foreign firm may not succeed in this sector without the assistance and advice of local partners. Also, Vietnamese currency fluctuates (depreciates or appreciates) depending upon foreign currency (US Dollar) inflows and outflows, in addition to domestic price fluctuations. 2) It is feasible to exports products only when prices in Australia are relatively lower than prices across Vietnam. It is also not recommended to Export consignments at a predefined fixed annual price. 3) Aussie Fresh could establish its retail sales outlets that will top quality offer vegetables / fruits under company’s brand name. This will enhance brand name and create sound reputation in the market. Also, the stores could attract higher income groups, in general, to the stores that prefer quality over money. Appendices 10–yearly statistics on exports and imports of Fruits / Vegetables products References: CIA Fact Book (2010) “Vietnam” Cia.gov [Online] Available at https://www.cia.gov/library/publications/the-world-factbook/geos/vm.html CIA Fact Book (2010) “Australia” Cia.gov [Online] Available at https://www.cia.gov/library/publications/the-world-factbook/geos/as.html DFAT Report (2009) “Vietnam country brief” Australian Department of Foreign Affairs and Trade Dfat.gov [Online] Available at http://www.dfat.gov.au/geo/vietnam/vietnam_brief.html Johnson, G., Katinka Weinberger and Mei-huey Wu (2008) “The Vegetable Industry in Tropical Asia: Vietnam” AVRDC – The World Vegetable Center [Online] Available at http://www.avrdc.org/publications/socio/veg_industry/Vietnam.pdf Keohance, R. and J. Nye (2000) “Globalization: What’s New? What’s Not? And So What?” Foreign Policy, No. 118, pp.4-19 Maitland, Elizabeth and Stephen Nicholas (2002) “Internationalization of Australian Firms in Asia” International Studies of Management & Organization, Vol. 32, No. 1, pp. 79-108 Vietnam Net News 1 (2010) “Fruit and vegetable exports far from meeting demand” [Online] Available at http://english.vietnamnet.vn/biz/201001/Fruit-and-vegetable-exports-far-from-meeting-demand-887326/ Vietnam Net News 2 (2010) “Vietnam economy expands 5.32 per cent in 2009” [Online] Available at http://english.vietnamnet.vn/biz/201001/Vietnam-economy-expands-532-per-cent-in-2009-887284/ VINAFRUIT Report (2009) “Introduction about Vietnam Fruit and Vegetables Association” Vinafruit.com [Online] Available at http://www.vinafruit.com/web/index.php?option=com_contentlist&cat=1&id=26 Vanzetti, David (2006) “Open Wide: Vietnam’s Agricultural Trade Policy” AARES Annual Conference [Online] Available at http://www.aares.info/files/2006_vanzetti.pdf Vietnomics update (2009) “Business Opportunities in Vietnam” Vietnomics.com [Online] Available at http://www.vietnomics.com/update.pdf World Bank Report (2006) “Vietnam Food Safety and Agricultural Health Action Plan” Worldbank.org [Online] Available at http://siteresources.worldbank.org/INTVIETNAM/Resources/vietnam_sps_report_final_feb_06.pdf Read More