The Reason for Choosing the Option of Franchise Business in South Africa - Research Paper Example

 The food retail industry of South Africa has evolved as one of the most competitive industry these days. Investing in a market like this is not an easy task. According to (CROUCH, 2011, p215), there exists a profound relationship between investments of a company and the competitiveness of a market. The competitiveness of the food industry of South Africa depends on a lot of factors which include social, political, technological and economic factors. One significant influencing factor on the food industry of South Africa is external environment. In the following paragraphs we will discuss briefly the porter’s five forces analysis of the South African food retail industry. The methodology of Porter will be summarized followed by a brief analysis based on the diamond model presented by Porter. The management issues which are likely to face when extending business to South Africa will be covered followed by recommendations for improvements and the entry strategy in to the South African market. Methodology How can an industry be globally competitive? How an industry can be sustainable? According to Porter, the answer lies in the following attributes that figure out the environments in which the industries operate and compete successfully in order to gain competitive advantage in the market. (DOERN & WILKS, 1996, p97) These attributes are as follows: Factor conditions: This includes a country’s position in the factors of natural resources, production costs like labour charges, raw materials, machinery etc, the infrastructure and the knowledge base which are necessary to survive and compete in an industry Demand Conditions: This includes the demand for the industry’s product line or services and the ability to cope up with this demand for instance, internationalisation of local demand, demand size and demand composition. Related Industries: The presence of related industries plays a vital role in any business. Firm Strategy, Structure and Business Rivalry: the conditions and circumstances in which the firms are created, managed and organized, and the extent of local business rivalry Government Policies: The government policies play an extremely important role in any global business. Government can either attract investors or distract them by their policies. Chance: This includes events which are likely to influence the business but they are uncontrollable by the firms. Such events include natural calamities, wars or shifts in world financial market. Application of the Porter’s Analysis For a preliminary analysis, data was collected by sending out questionnaires via email to the managers of some food chains doing business in South Africa. The population size was uncertain and could not be predicted so a non-probability method was used to determine the sample size. A total of 20 questionnaires were sent whereas we received only 10 of them hence the response rate was about 50%. This method was adopted based on the awareness and experiences of the executives and management of different organizations running their businesses in South Africa. It was predicted that this method would point pit the strengths and weaknesses of the food retail industry as well as will bring an insight to the critical strategic factors which should be considered by new businesses planning to operate in South Africa region. Factor Conditions of Production The table below determines the production factor conditions of the food retail industry’s competitiveness in South African market. The purpose was to determine if the production factors contribute to the competitiveness of a firm either by enhancing or constraining; or if it does not have any impact on the competitiveness of an organization. It was found from the questionnaire results that the factor contributions have the aggregate score of 1 to 2 which implies that overall factor conditions are a weakness to the competitiveness of the food retail industry of South Africa. Those factor conditions which constraint the firm’s competitiveness are the cost of the production, the quality and cost of skilled labour, quality of infrastructure, cost of technology, cost of capital and the quality and cost of unskilled labour. Serial No. Factor Conditions Average Score 1 Production Cost 1 2 Labour cost Unskilled labour cost Unskilled labour quality Unskilled labour’s availability Skilled labour cost Skilled labour quality Skilled labour’s availability Administration costs related to labour (1-2) 1 1 2-3 1 1-2 1 1-2 3 Natural Resources 2 4 Infrastructure Availability Quality (1) 1 1-2 5 Location 1 6 Capital Availability Cost (1-2) 1-2 1-2 7 Knowledge Availability Cost Quality (1-2) 1-2 2 2 8 Technology Availability Cost Quality (1-2) 2 1 1-2 Aggregate Score for all the factor Conditions (1-2) Where 1= Negative Impact, 2= Neutral Impact and 3=Positive Impact Table 1: Production Factor Conditions in South African Food Retail Industry (Source: own data) Demand Conditions The table below describe the average rating for the demand conditions of the food industry of South Africa. The aggregate score as per the questionnaires results in 2 which implies that the demand conditions do not affect the competitiveness of a firm in the food retail industry, which means they have a neutral impact and hence neither are a hindrance or support in the growth and competitiveness of a food retail organization. The local market size was found to be a hindrance whereas the quality of products was found to be the supporting factor in the growth and competitiveness of an organization. Serial No. Demand Conditions Average Score 1 Market Size 1 2 Market Knowledge Availability Cost Quality (1-2) 1-2 1-2 1-2 3 Product Quality 3 4 Growth of Market 1-2 Aggregate Score for Demand Conditions (2) Where 1= Negative Impact, 2= Neutral Impact and 3=Positive Impact Table 2: Demand Conditions of South African Food Retail Industry (Source: own data) Related Industries The table below describes the scores for related and supportive industries to measure their impact on the growth and competitiveness for the food retail industry. According to the questionnaire results, the respondents have rated the related industries to contribute positively to the growth of the firms operating in the food retail sector. Serial No. Related Industries Average Score 1 Financial Institutions 2-3 2 Transport companies 2-3 3 Research Institutions 2-3 4 Packaging Material Suppliers 2 5 Utility Suppliers (Electricity etc) 2-3 6 Agricultural Suppliers 2-3 7 Related industries 3 Aggregate Scores for Related Industries (2-3) Where 1= Negative Impact, 2= Neutral Impact and 3=Positive Impact Table 3: Related Industries in South African Food Retail Industry (Source: own data) Firm Strategy, Structure and Business Rivalry Table 4 the impacts of business strategy at firms, business structure and rivalry are indicated in the South African food retail sector. The adaptability and the marketing capabilities of the food sector are the contributing factors in the growth and competitiveness of the industry whereas the threat of new entrants and the tremendous growth of competitors are the threatening factors. Overall, business strategy, structure and rivalry have a positive impact on the growth of the food retail industry of South Africa. Serial No. Firm Strategy, Structure and Business Rivalry Average Score 1 Adaptability 3 2 Culture 2-3 3 Flexibility 2-3 4 Structure 2-3 5 Pricing Strategies 2-3 6 Marketing capabilities 3 7 Market power of suppliers 1-2 8 Market power of buyers 1-2 9 Threat of competitors 1 10 Threat of new entrants 1-2 Aggregate Score for Firm Strategy, Structure and Business Rivalry (2-3) Where 1= Negative Impact, 2= Neutral Impact and 3=Positive Impact Table 4: Impact of Firm Strategy, Structure and Business Rivalry in Food Retail Industry of South Africa (Source: own data) Government Policies Table 5 summarizes the impact of government regulations and policies on the growth, sustainability and competitiveness of the firms operating in the food retail sector of the South African industry. According to the questionnaire results, the aggregate scores for government support is 1 which means that the government regulations and policies are a hindrance in the growth of firms operating in this sector. Serial No. Government Policies Average Score 1 Trade policy 1-2 2 Labour Policy 1 3 Fiscal Policy 1 4 Indirect Support 2 Aggregate Scores for Government Policies (1) Where 1= Negative Impact, 2= Neutral Impact and 3=Positive Impact Table 5: Impact of Government Policies on the growth of Food Retail Industry of South Africa (Source: Own data) Chance Factors Serial No. Chance Factors Average Score 1 Economic Stability(inflation rate etc) 1 2 Aids 1-2 3 Price Stability 1 4 Political Stability 1 5 Crime rate 1 Aggregate Score for Chance Factors (1) Where 1= Negative Impact, 2= Neutral Impact and 3=Positive Impact Table 6: Impact of Chance Factors on the Growth of South African Food Retail Industry (Source: Own data) From the above analysis it has been indicated what the critical success factors for organizations are operating in the food retail sector of South Africa. In order to gain competitive advantage, growth and sustainability in the South African food retail market, organizations should focus on products quality, utility supplies, strong marketing capabilities and adaptability in their businesses. Management Issues Likely to face when doing Business in South Africa The following section will discuss briefly some of the management related issues which are likely to face when expanding business to South Africa. Business and Human rights in South Africa Though the debate on the topic of human rights and business has continued internationally on various levels, this issue is particularly relevant to business in South Africa. The regulations and the policies of Broad-Based Black Economic Empowerment (BBBEE) have been initiated and implemented in order to support the underprivileged South Africans to get access to the formal economy of their region. According to BBBEE laws, a business can be granted a licence or government procurement contracts only if it abides by the policies. These policies include black people’s partial ownership in organizations, their share in senior management, equal employment opportunities, trainings and development, small business development and preferential procurement. Important to note that as per international laws for human rights this discrimination is permissible as a special incentive to their citizens, but these should not be implemented indefinitely.[HIL08] Hence, organizations planning to expand their businesses to South Africa face a significant pressure to show that they actually contribute to “broad based empowerment” in order to benefit the previously deprived South Africans. Companies operating in South Africa have to face serious human rights challenges, especially in states which have been characterized as “weak governance zones”. This can also be supported by the internationally famous controversy concerning AngloGold Ashanti’s bribe payments to a militant group which was accused of human rights violation. Recently, a foreign ANC policy discussion paper has emphasized that there is a need to address the role of South African industries behaviour. The Government is now taking this issue seriously with frequent discussions in the topic within government corporations like Trade and Industry, Foreign Affairs and Environmental Affairs and Tourism.[MOL10] A concern has been raised by business representatives that increased expectations of human rights compliance in South Africa may put the companies at a competitive disadvantage internationally. There are some Chinese and Indian companies operating in South Africa which show little respect to human rights which enables them to gain competitive advantage by avoiding moral and legal norms. Organizations planning to extend their businesses to South Africa, should therefore adopt a collective standard approach. This has been also experimented in Malawi where the firms have organized collaborative and collective approaches and policies against corruption. This approach would also be in line with the developments in which the governments provide privileged access to licences and other benefits to the companies which they consider are more compliant with human rights practices. This will also enhance and complement the competitive advantages as a result of a proactive approach to human rights. Moreover, the companies should try to establish best practices with the assistance of international initiatives like UN Global Impact and negotiating their agreements which include environmental and social considerations. High Inflation in South Africa During the past few years there has been a tremendous increase in inflation rates in South Africa. High inflation has a lot of effects on a business. High inflation adversely affects the consumer behaviour. The buying ability of people decreases due to the fear of high prices. Generally, they tend to buy their demands beforehand resulting in unnecessary shortage in the market. The purchasing power of people is affected badly specially for the ones who are fixed income earners. Due to high inflation rates, there is also an increase in the demands of the labour wages. High wages if accepted by the employers results in a wage-price spiral which may make the situation even worse. It is also difficult for the organizations to predict future and handle risks effectively during high inflation periods hence they are unable to calculate investments returns and prices for their products. This results in undermining the business confidence. For companies expanding their business to South Africa, it is recommended to improve labour productivity in order to survive wage inflation. Companies should purchase technology and equipment to improve automation in order to hire less number of employees. Moreover, investment-intense companies should improve their competitiveness in the areas of research and development. Also worth noting, as wages rise, companies will be more inclined towards hiring only skilled labour which will eventually lead to a higher demand for training and education among the labour class. Market Entry Strategy in South African Food Retail Industry There exist a lot of market entry strategies that an organization can adopt when expanding business internationally. Different levels of risk and different legal obligations are involved with every kind of market entry strategy. According to our understanding and knowledge we suggest that the strategy adopted for entering into the South African Food Retail Industry should be franchising. A franchise is an ongoing business relationship where the franchisor grants the right to distribute goods or services to the franchisee using the brand and the system for an agreed upon fee. A more sophisticated franchise arrangement would be beneficial for the company where the franchisee would have to ensure that besides carrying out the operations, the same customer experience should be maintained throughout the network. Franchising will enable the business to grow rapidly utilizing the intellectual property of the owner of the firm (the franchisor), and the capital of a network of operators. The essential features of Franchise business would be as follows: Collective Purchasing arrangements Exclusive region for each franchisee Collective Advertising programs Preliminary and ongoing training and support from the franchisor Assistance from the franchisor The reason for choosing the option of franchise business in South Africa is due to a number of advantages that it will offer. Since Franchising requires less amount of capital to be invested it is appropriate for operations in South Africa. The capital will be shared by the franchisee. Franchising will enable us to open multiple units of operation simultaneously and would eventually gain competitive advantage. Since multiple locations will increase market dominance, the company’s competitive advantage would be increased as compared to the similar business. As part of our business strategy, franchises will be required to contribute some percentage of their sales to the advertising and marketing budget which would be managed by the franchisor. This will enable us to advertise in locally or internationally for the benefit of the franchises. Bibliography CROUCH, G. (2011). Destination Competitiveness: An Analysis of Determinant Attributes. Journal of Travel Research. 50, 27-45. DANIELS, J. D., RADEBAUGH, T., ERWEE, R., HOUGH, J., & NEULAND, E. W. (2000). 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