Rules and Strategies for Effective Entry of the Company into the International Market - Essay Example

?International Business Management Table of contents Introduction……………………………………………………………………………2 Overview of Company-Primark……………………………………………..…………3 History……………………………………………………………………………………3 Product line of Primark………………………………………………………….…….3 Expansion spree undertaken by Primark……………………………………………4 Entering a foreign market………………………………………………………………4 Factors to be looked upon…………………………………………………….……….5 Selecting the best foreign market-India………………………………………………6 Entry methods available to enter into India……………………………...……………..9 Wholly owned subsidiary………………………………………………………..……..9 Franchising………………………………………………………………………….….10 Joint venture……………………………………………………………...…………….10 Mergers and acquisitions……………………………………………………………..10 Entering India through acquisitions………………………………………….………..11 Probable risks associated with acquisition……………………………….……………13 Recommended strategies to combat the issues………………………………………..14 Conclusion…………………………………………………………………….………17 References………………………………………………………...…………………..19 Introduction With levels of globalization soaring high, every company is now trying to enter into different markets to increase its scope and reach out to a higher number of customers worldwide. This paper aims at taking the example of one such national company and identifying the best market entry method. The company selected here for the purpose of international strategy analysis is UK clothing giant- Primark. The selection of Primark is based on certain grounds. First of all, the industry which it operates in is fast booming across the world and capturing the most attention in terms of eased entry norms and regulatory frameworks by developing nations. Secondly, the history of Primark encourages to study its international disposition till date and to apply it further in the context of a well planned future strategic plan. It had embarked upon organic growth in its home country Ireland but resorted to acquisitions when entering into UK. This makes Primark worth analysis and correlates its current foreign entry strategies with that of future plans and identifies strengths and possible gaps and suggests ways to mitigate them. The paper firstly begins with an overview of the company. Here the main aim is to identify what the company deals with and to identify the potential markets for the company. This is then followed by the potential markets that the company can choose to enter into. Here once this has been identified, details of the best market entry method are then discussed. As in the case of any market entry method, there are a number of possible issues that will be encountered. Hence these issues and problems are further discussed along with providing strategies to overcome these issues and problems. On the whole the paper will detail a market entry plan for a company. The chosen company here is Primark. Firstly it is crucial to gain a clear overview of the company. Overview of company History Primark was started way back in 1969 under the name of Penneys in Ireland. The company has worked its way up and has been able to be known for its continuing success. The company has grown from a simple first store Penneys in Ireland to the latest flagship store in Liverpool. The company showed immense success in the first year of its beginning and by the end of the third year of its incorporation, the company had as many as sixteen stores in Ireland and Northern Ireland (Primark, 2010). As years passed the company went on to move into Great Britain. The company had started as many as 18 stores in Ireland by 1973 and now had started as many as four out – of – town stores. Within the next year, the company has been noted to have started as many as 22 stores each in Ireland and Britain. Later in 1984, the company was known for the multiple acquisitions that took place. Primark had acquitted as many as five Woolworth stores. With years to come there were further expansions of the company and Primark showed immense ability and success. The company has been well received within the country. Product line of Primark Primark is touted as a discount clothing retailer placed at the budget end of the market segment. With reasonable pricing strategy and garments for every age and size, Primark is the first choice of middle income groups. This is the market positioning of Primark which it has adopted in all its ventures across different nations it operates in. Because Primark is itself a subsidiary, its brands are not sold at other retail outlets and thus, Primark exercises complete control of its departments, functions and strategies. Expansion spree undertaken by Primark Ireland was the first operating place for Primark but innovative strategies and quality offerings by Primark found Ireland to be too small to operate for long. As such, it resorted to expand to cross-borders. In Ireland, it progressed by means of organic growth but if we talk of its international entry strategies, it has always done so through acquisitions. As for example, it acquired the One up chain (16 stores at a whopping cost of ? 20 million) in UK and revamped the overall management and outlook of One up chain stores to make it an integral part of Primark Group. As a result, its market share in UK instantly soared up to 40% (Penneys n.d.). It has also acquired Woolworths in UK which was one of its stark rivals. Entry through acquisitions serves as a proactive approach to minimize on issues arising from cultural, financial and expertise if completely embryonic stores are opened in new locations. This way, Primark received an already established market, supply chain, infrastructure, human resources and national and cultural compatibility in the form of local player which it acquired. Entering a Foreign market To enter into the markets, companies need to consider the macro level and also the market conditions and the competition in the markets. The countries can be chosen based on the needs of the business and the nature of the business. The macro economic conditions, i.e. like the level of the Gross domestic product, disposable income and also the potential size of the markets is the first and the most important aspect that needs to be considered (Johnson, Scholes, & Whittington, 2006). Also, it is important to focus on the currency of the country which has a major impact on the income stream of the company as well. The next essential element is the infrastructure. Here it is necessary for the company to consider the transport and communication infrastructure as well as the barrier to trade in terms of traffic and non traffic aspects (Mintzberg, Lampel, Quinn, & Ghoshal, 2002). Also, aspects like the cultural norms and the social structure play a major role in the business and the overall working of the company. Other elements that also impact the business and the choice of the markets also include political and legal risks, sovereign risks, the level of effective regulation and control, security risks and the international risks. Factors to be looked upon In terms of expanding businesses nowadays, countries which first strike the mind are India, China, Brazil and similar developing ones. However, whenever a company thinks of making its entry in a foreign land, it often overlooks the crucial decisions which actually cumulate to form an informed strategic framework to base its entry decision upon. On a very calculated note, it is always recommended to enter into a market which has got diverse routes opening to other markets as well because sooner or later, the company would be willing to expand in the entire subcontinent of the chosen foreign market. Keeping this point in mind, the following four variables should be carefully analyzed by Primark in making its market choice (Lasserre 2008). Market size- India offers immense opportunities in terms of market size and vastness because of its vicinity with other nations like Bangladesh, Nepal, Pakistan, Sri Lanka, et cetera. All of these neighbouring nations are fast treading the path of economic success with high growth rates. Products served in India reach out to these nations as well. Thus, indirectly, India serves as a hub for any business where the sum total of Indian and its neighbouring nations’ market size gives nightmares to the total market size of China. Even with China, both the governments are desperate in bettering their strategic relationships and join hands for shared growth. Indian market is full of Chinese products and hopefully, India will also gain entry into the Chinese market which will further increase the size of Indian market capturable. Investment opportunities- Retail sector in India is growing at an unprecedented rate and Government has also liberalized norms for foreign players to enter into Indian retail market. Major benefits include freedom to repatriation of income, low investment barriers and full capital account convertibility, tax incentives and liberalized policies. Technological expertise- India is on its way to become the next technology superpower. From the intellectual capital and majority of youth population, the Indian middle strata are very inquisitive of latest technological inputs which can be used as a very good business opportunity by Primark. Internet usage is fast increasing in India which accounts for high speed innovation and advancement of Indian business scenario. Marketing compatibility - Primark’s target market is youth and middle age consumers under the age of 35 who look for design, simplicity, quality and low prices. This market segmentation gels in well with the Indian population which currently comprises of youngsters, working people and teenagers whose needs and perceptions are more or less same as the targeting and positioning strategy. Thus, Primark could get an instant market ready with a huge demand for its brands and quality offerings. Selecting the best foreign market From the above discussion, India seemed to be the most viable option for Primark owing to its marketing compatibility, vast market size, access to neighbouring nations and increasing levels of technological expertise. To further anchor upon the selection of India as the best choice available, PESTEL analysis has been conducted to look at the external governing factors separately. Political- Indian political scenario is characterized by federal form of government and total democracy. India is a diverse nation with many castes and creeds. Politics in India is based on caste-community votes and lobbying has fast entered into Indian politics. As such, Primark has to remain cautious of corruption which can make its investments aggravated and majority of it going into the pockets of politicians creating scams and scandals and degrading the image of the entering company. Economic- economically India is a very lucrative destination as its retail sector contributes around 10 percent to the total GDP of the nation and government has also loosened the norms for foreign direct investment in this sector. The per capita income of India is also expected to rise at an annual rate of 10 percent which is positive for the entry of Primark in India (IBEF 2010). Social- India ranks first in the majority of young people in its population (My Sensex 2008). This factor is the biggest advantage Primark can have as teenagers and young population is the primary target market for its apparel, clothing and garment brands. Huge population also promises availability of cheap labour which can help in cost cutting for Primark. Technological- India, though having the second largest population is still lagging behind in terms of skilled labour, education and acceptable levels of professionals. However, foreign players could enter into the market and train the employees of local retailers which can be of great help in preparing initial grounds for operation. Environmental- recently, India has shown increased awareness and responsibility towards environmental degradation and ethical stances taken by multinationals. In this regard, any foreign player entering into India might have to face stringent regulations if it does not comply with the environmental laws. Primark might also have to face challenges in this category of dynamics. Legal- legal structure in India is some what moderate with half rigid and half liberalized. FDI in retail sector in India is still not completely open for foreign players and this has been done to secure the cannibalisation of local players. Indian laws are also very strict against unfair consumer practices which any foreign player has to pay special attention to. Based on the above factors, one of the most eligible markets for Primark will be India. India is a developing country and has proven to be home for a number of other UK brands like Marks and Spencer, BhS, GAP, Zara and many more. Indian markets are fast becoming an excellent opening for numerous brands. For companies that plan to move into Asian markets, this market is the most promising. Considering factors like the current market conditions, the openness of the markets and the wide range of possibilities in this market are a positive aspect of the country. India has a huge population with high levels of disposable incomes (ICMR 2010). India has clearly been noted to have an increase in the disposable income and the country has seen a major change in the net worth of people as well as brand knowledge of the customers. It is also evident in a report by the ICMR India that there are a number of changes in the markets and the needs of the consumers of this market as well. The report clearly states, “Shopping habits of Indians are changing due to their growing disposable income, relative increase in the younger population, and the change in attitudes towards shopping. The emphasis has changed from price consideration to design, quality and trendiness. The desire to look and feel good is also guiding factor for customers while making their purchase decisions”. The report also focuses that with the higher levels of disposable income, the spending behavior has also changed to a great extent. With these changes and improvements in the market it is evident that the company has a wide scope for expansion in this market. Hence this has been chosen as the main market for expansion for Primark. Entry methods available to enter into India Entering international markets requires high level of strategy and planning. With the increasing levels of technological innovation helps create markets for new products and services. A mode of entry into foreign or international markets is the normally referred to channel adopted by the company to gain entry into the new international markets (Mintzberg, Lampel, Quinn, & Ghoshal, 2002). There are a number of alternatives for these, however choosing the right alternative is the most essential aspect. Every company irrespective of its industry or market that it operates within has a few possible entry techniques for the international markets. It is pretty much clear that a FDI juggernaut is waiting to enter into India. FDI is made by a foreign firm in a local firm and is done in the areas of technology, expertise, management and shares transfer to establish and sustain a long term relationship. Currently, 51% FDI is allowed for foreign investors in single brand and 100% FDI in case of cash and carry wholesale trading operations. For Primark, entry options available under FDI head are: Wholly owned subsidiary It connotes incorporating a separate branch or company in India with complete control of Primark. Benefits include managerial efficiency because there is no intervention of any other partner. However, certain legal and political restrictions from host country can arise and more specifically, labour and trade unions might not accept such subsidiaries with outside employees. It would also entail incompatibilities in understanding local culture and preferences. Franchising Franchising does not involve any direct investment and confers the benefits of financial and managerial leveraging. However, the entering firm cannot keep a check on the quality and management of the business as the entire administration stays in the hands of the licensee or franchisee. Joint venture Unlike mergers and acquisitions, joint venture is characterized by control of both the partners in the operations of the aligned business and thus, philosophical clashes cannot be denied in such cases. Also, it takes time for both the partners to develop trust on each other and the entering firm might have to depend upon the local partner for few or many of the skills and technology. This setting is beneficial in cases where the local partner is very influential and entering firm can gain insider advantages into the foreign market with the expertise and penetration of the local player. Merger and acquisitions In this entry option, equity exchange between partnering companies take place. As per India’s FDI norms, Primark would be having 51% controlling shares of the local retailer merged or acquired. This presents the best option so far as MNC gets readymade access to the foreign market and other strategic capabilities in terms of infrastructure, human resources, information systems, local knowledge of culture and brand preferences and most importantly, respective knowledge of both the partners help achieve synergistic gains and combined competitive advantage. Though, post-merger or post-acquisition culture alignment might pose a threat, but planned approach can lead to benefits outweighing the threats (Velden 2005: 63). Entering India through acquisition As discussed above, there are a number of methods that can be adopted by Primark to enter into India. Based on the current company position and the market type, the most appropriate method that can be adopted by Primark to enter is the adoption of a Foreign Direct Investment through acquisition. It is also supported by the fact that Primark enjoys a glorious history of successfully managing the acquisition of One-up chain stores in UK. Thus it is well acquainted of the possible concerns which could come along its way and equipped too to handle them well. Acquisition will prove to be the most beneficial for Primark. Primark has already got a number of suppliers in India. The company’s products are manufactured in South India and the company has a higher scope of entering into the Indian market and to continue production for the local markets as well. There are a number of clothing retail chain in India like Pantaloons, Biba, Vishal, N-Mart, etc and Primark can gain entry into India by tying up hands with any of them and moulding its operations according to its own will. Using this method for entry into India will prove to be very beneficial in the following ways: Adopting this method will allow the company to have complete control over resources and capabilities of acquired firm. Also there will be easier facilities integration and coordination of the activities across the national boundaries. The environmental factors also have a major impact on the overall success of the foreign direct investments. It is also important to note that the FDIs allow for better and more transfer of technologies. This although is based on the capital inputs, it has a major impact on the overall business. The importance of the technologies in the foreign direct investments is very high. The benefits of the technologies in the markets cannot be otherwise gained in terms of the trading of the goods and services. Also, there a numerous benefits in terms of the financial resources as well which the company can benefit from based on the foreign direct investments. The technologies are also beneficial in the promotion of the company and in facing the local competition. Also, considering the human resources that are available in the country, there is a higher chance for the organization to benefit from these and to gain cheaper labour and high quality human resources as well. Also, this will assist the company in cutting their costs in terms of the human resources and also assist the company build their revenues to a great extent. Overall benefits for the company to adopt this method of investment are much higher and assist the company in an overall improvement and expansion of the business. The foreign direct investment allows the company to rapidly as well as expansively penetrate into the markets. Also, with this method, the company can attract financial support and assistance from the host government as well. However the overall benefits of the FDI on the company is very high and will not only allow Primark to enter newer markets but also helps the company gain higher revenues from the decision as well. As explained by Economy watch, “Foreign direct investment assist in increasing the income that is generated through revenues realized through taxation. It also plays a crucial role in the context of rise in the productivity of the host countries. In case of countries that make foreign direct investment in other countries this process has positive impact as well. In case of these countries, their companies get an opportunity to explore newer markets and thereby generate more income and profits” (Economy Watch, 2010). Hence based on the above discussion and based on the current position of Primark, it is clear that Foreign Direct Investments prove to be the best option for the company to expand its business. The benefits of this form of expansion are high and will definitely not only allow the company to have a wider market but will also assist the company in increased revenues and improved performance as well. However there are a number of issues and possible problems that also need to be considered in the implementation of these plans. The next section will details these plans following which detailed recommended strategies to overcome the issue will also be discussed. Primark has a very high scope to improve and expand in the markets and this method will prove to be very beneficial and helpful in the development of the business. Probable risks associated with Acquisition There are a number of issues and problems that can crop up in the implementation of the foreign direct investments. Firstly, the company is faced with much higher levels of investments and is also needed to increase its spending on various other aspects of the company like travel and communication. Also, the company can face a number of issues which pertain to the local laws, taxes and also the governmental regulations as well. The laws and regulations of the UK markets are relatively different from the Indian markets and hence there could be a major challenge faced by the company in relation to the regulations. Other major issue for Primark and for successful foreign direct investments include the political and currency risks. There are a number of elements of the political conditions of the company which can create a number of issues for the company. Other aspects that can also cause issues for the company include the language and cultural differences as well. India has been known for the continuous foreign direct investments that various major investors have made. One major issue with India is the lack of an integrated approval process for both the national as well as regional approval. As explained by Economy Watch, “Federal democracy is perversely an impediment for India. Local authorities are not part of the approvals process and have their own rights, and this often leads to projects getting bogged down in red tape and bureaucracy. India actually receives less than half the FDI that the federal government approves” (Economy Watch - FDI, 2010). Indian retail sector is divided into organized and unorganized retail which can hinder its much awaited growth. Primark can also face a few issues relating to the ease of logistics in the country. However there are possible recommended solutions to overcome these issues. The next section details these solutions in detail and these can be used to overcome the issues and successfully enter into the markets. Recommended strategies to combat the issues As has clearly be explained by Dey (2007), “Though FDI in retail trade is as yet restricted, the Government of India has a more liberal policy towards wholesale trade, franchising, and commission agents’ services, thus preparing the ground for FDI in retail as well.” The issues discussed above are relatively smaller when compared to the benefits FDI through acquisition can bring to the company. To overcome these barriers the company needs to undertake the following steps: Cultural revamping Primark can start work on changing the culture within the firm and the mission of the firm. The company needs to concentrate on the all sections; hence the company needs to recruit local people with knowledge in the field and also with prior experience in this field. It is also essential to recruit people with knowledge of the local language in the country. Doing so will help in better negotiations and also easier manners to attain contacts. This will help the organization develop the new clothing line and will permit the organization to cater to the needs of the market. The introduction of new staff into the organization along with an overall improvement in the systems will permit the organization to face the marketing challenges and sustain balanced effort in the new venture. Primark can use their strength the brand image that they have created to overcome these issues. Marketing In terms of marketing its products, the company can prove to have a strong competitive advantage as they currently have in the UK markets. The company does not spend in terms of marketing or advertising and this proves to be a successful mix in the UK. Here however, the company will require focusing on the brand image. Branding plays a very essential role in every business. Management of products and brand play a very essential role in the marketing success. A brand helps the consumers differentiate between two competitors and the name, packaging and design of the products becomes the brand of the product. Creating a brand image and name for a company ensures that customers are able to differentiate the products and recognize the product that satisfies their needs the most and thus improving the customer loyalty. In simple words branding is the process of creating a different image from that of the competitors (Jobber, 2004). Modern branding is gradually focusing its interest on preserving and putting together a combination of values either tangible or intangible. These values significantly and properly make a distinction of a company from the others and are pertinent to consumers (Jobber, 2004, Kotler et al., 2002). The choice of products has a major impact on the company and can have a major impact on the sustainability of the competitive advantage. In the case of Primark the company is currently performing well and has been able to sustain its competitive advantage in the markets over the years (Volpe, 2008). The most important element of the sustaining competitive advantage for an organisation is to ensure that the products and services meet the needs of the customers along with the competitive landscape and emerging technologies that the company operates within (Jobber, 2004). To be able to sustain the competitive advantage, the four P’s need to be concentrated upon and focused on rather than simply developing products and then finding the appropriate markets for them. Here in this case, the company improves its products and services based on the customer reviews and feedback and the company ensures that the products are based on the latest styles and trends thereby also meeting up with the competition (Jobber, 2004). In the case of Primark, the company prices its products at a relatively much lower range however the customers do not mind buying from the company as the quality provided is relatively high and the perceived value of the products is also high (Dobni and Luffman, 2000). In terms of the pricing context and the processes, the company has an upper hand in the markets and customers from different segments prefer to use a Primark product for the level of quality. This should be a major factor that Primark takes into account and uses to its benefit to enter the markets effectively. Finally the most important aspect that Primark needs to concentrate on is keeping up the competitive advantage of the company. Here in the case of Primark, the advantage clearly is the ability to sell without the need for high marketing and advertising. The company’s product alone due to the high quality and excellent pricing leads to word of mouth marketing. The company can use this to their advantage and can work on improved and easier entry into the Indian markets. Conclusion It is evident that the Indian market is an excellent option for the company to gain entry into. Although there are a number of possible issues and concerns that the company can face with entry into this market, the strengths and benefits are much higher. Hence considering the benefits of the foreign direct investments, this proves to be a very effective method and entry into the Indian markets. Primark has an added advantage the company has suppliers based from India. Considering this, it will prove to be very useful to move into the Indian markets. The company will not only be able to easily achieve the suppliers and the management of the manufacturing process but will also be able to source their business effectively. One of the most important benefits that the company can face presently is that the retail trade of the country is now relatively freer. Also, with the current market conditions and the currency rates the company can take complete advantage of these factors and make a strong entry into the markets. It is also evident that in the current times, India is working hard to improve its markets and industry as a whole. Hence entry into these markets will prove to be relatively simpler and easier. Also, the industry in India is so large, that the company will definitely be able to profit from the expansion and will also see high results even if the same strategies are continued to be adopted. Bibliography Dey, D. (2007, July). FDI in India’s Retail Trade: Some Additional Issues. Retrieved November 25, 2010, from http://rupe-india.org/43/retail.html Economy Watch - FDI. (2010). India Foreign Direct Investment. Retrieved November 20, 2010, from http://www.economywatch.com/foreign-direct-investment/fdi-india/ Economy Watch. (2010). Benefits of Foreign Direct Investment. 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