THE INDIAN ECONOMY AND THE INDIAN CONSUMER
The economy of India has been on a steep elevated trajectory for some time now growing well over 9% in 07 after nearly 10% in 06( Ministry of Finance 2007). Reforms have certainly fueled the growth, be it in the markets or a more liberal FDI regime. This has resulted in the foreign exchange reserves growing steadily. The IT industry, real estate and capital markets are also on a steady forward march. The Indian economy is the world's twelfth largest economy measuring in market rates of the rupee, but measured on purchase power parity basis it is the fourth biggest (Greenbucks 2009). This is truly surprising for a country which was under the "Hindu rate of growth" for nearly four decades after independence of under 4% annually. Socialism, corruption, regulations and protectionism marked those decades.
In 1991 this all changed under the Prime Minister-ship of P.V. Narasimha Rao who in conjunction with the then Finance Minister Manmohan Singh opened up the Indian markets. The economy was liberalized and started becoming market oriented and since then there has been no looking back. India's service industry compromises more than 50% of the country's GDP. Industrial sector is just under 30 % and agriculture which is the mainstay of 60% of the Indian population contributes only 17% of the GDP. The country's employable population is over 500 million, which is more than the population of all countries except China. It is more than the population of Europe and a lot more than the population of the United States. Agricultural products include rice, wheat, sugar cane, oilseeds, jute, tea and cotton. Cattle, poultry and fish are also predominant in Indian Agriculture. Textiles, chemicals, food processing, steel, transportation equipment, cement, mining, petroleum, machinery, information technology enabled services and software are one of the larger industries.
While the per capita income in India is still very low both by PPP and exchange rate standards, it is on a fast growth trajectory. India has a share of 1.5 percent of the global trade (Greenbucks 2009), and this is growing rapidly as well both in exports and imports. Year on Year it has been growing substantially with an increase of over 70% in 2007 over 2006(. This growth has somewhat slowed down in the global recession but remains strong at over half a trillion dollars of annual trade volume. As a percentage of GDP trade is still only about a quarter, which is low; but even that is growing and the Indian economy has something which most trade oriented economies do not have. A strong domestic demand fueled by many Indians entering the Indian middle class, which currently is nearly 400 million people, which is again more than the population of the entire United States (.Indian Brand Equity Foundation. (2009))
India still has issues such as inflation which has lead to a tight monetary policy which has kept the interest rates high. This also dampens domestic demand. Foreign funds have been leaving India as much as they have been coming in. But that has been mostly due to economic conditions beyond India. There is a perception that the Indian stock market is still overvalued. But it is not all bad news most investors (Ministry of Finance 2007) feel that the fundamentals are still very strong. There is a need to invest in India's creaking infrastructure. The Government estimates that nearly $ 600 billion dollars will be required over the next five years to keep up the growth rate. It is ports, roads, railways and airports which need investment to upgrade and build new ones. Indian companies are not only growing on domestic demand but are aggressively pursuing acquisitions globally. India has contributed many companies to the global 2000 in the last four years, in fact most among all countries. Before the recent downturn the Indian economy had grown at 7 plus rate for over a decade and over 9% for the last three years. Even during the global downturn the Indian economy has been growing at well over 6% annually. (Greenbucks 2009 )
India also has a high rate of savings which is more than many countries. In fact in a recent survey, most Indians preferred to save any extra money as opposed to people in the western countries who preferred purchase of things or to pay down debt. Most Indians do not carry a lot of debt, and live within their means. However the personal debt market is also on the rise, but the lessons from the global credit collapse have been learnt and the lending in India is far more conservative (Indian Brand Equity Foundation. (2009)). According to a Goldman Sachs survey India will become a third largest economy in the world in under three decades. India further is expected to be one of the few countries to have substantial growth for the next half a century.
The Indian Customer:
The Indian customer is a different kind of breed. By their very nature they are an optimistic group. Despite the wide diversity, India has a whole has been topping 45 country survey in consumer confidence index conducted by A.C. Nielsen. But the Indian consumer is not somebody who is willing to spend a lot of money. In fact the Indian customer does not appear in the top 10 spender's list in any category except investing in financial instruments like stocks and mutual funds. This is probably due to the propensity to save. More than half the Indians who responded prefer to keep their spare cash in a bank account (Greenbucks 2009). The number of people who wanted to spend money on Vacations and wardrobe were substantially less in India. Russia and Thailand who were also fairly optimistic topped that list. In the list of concerns, there is one which is terrorism. But apart from that India is seventh on the list with no worries at all.
In a nutshell Indians are optimistic and confident but will not spend a lot of money. Almost a contradictory phenomenon; In the U.S high consumer confidence translates in more consumers spending. Does that mean anything? It definitely does imply that the surface is just being scratched for the potential of the Indian market to be unleashed, because the Indian consumer may be a discerning buyer of only things which they feel will add value.
So how do companies target the Indian consumer? This needs a totally different approach than what the companies have been using throughout the world. The companies need to make their brands relevant to the Indian consumer by regionalizing their brand. There is also a need to identify what are the future areas where growth will happen and it is important that a lot of information be collected to build a knowledge base. A lot of marketing assumptions which may be true in the rest of the world will simply not work in India (Indian Brand Equity Foundation. (2009)). finally the companies should ride on trends which have already been established but be able to jump on new trends which are emerging in the Indian market.
It has been difficult to get income distribution data in India. There is a lack of homogeneity in the Indian customer demographics. A product can be different prices in different parts of the country and sometimes the prices can vary substantially. This results in the purchasing power becoming location specific than income specific which is again drastically different from way this has been looked at in the rest of the world.
It can be assumed with a certain degree of caution that the purchasing power is linked to the personal income despite other factors such as taste and location. Companies would be better served to vary their vary their strategy from area to area as opposed to having a Pan India strategy, Income data is not completely sufficient. Therefore, it must be used along with product-specific information and existing rate of customer purchases. It would also be a good idea to refine the market size by taking into account factors based on social, cultural demographic areas. The prime market for consumer products in India is aware of the cost-benefit or value for money, aspect. Their concept of value incorporates socio-cultural benefits in addition to product utility
Conclusion: The Indian economy is booming mainly on domestic demand and it is important for any company who has global aspirations to enter it. But at the same time Indian market and Indian consumer is a very complex for anyone to grasp. It is best to enter the market with someone who already knows the landscape of the market.
LITERATURE REVIEW IN MARKET ENTRY
The market entry methods used by international retail companies are usually considered with reference to factors of control, cost and risk (Burt,1993; Doherty, 2000a). This continuum owes much to Treadgold's (1988) early contribution to the discussion of international retail strategic development. Thus, acquisition is considered to be high control, high cost and high risk whereas franchising is considered to be low control, low cost and low risk. To some degree this perspective has been perpetuated by other authors such as Dawson (1994). This conceptual framework, while useful in many respects, fails to take account of the complexity of market entry strategies and the management context in which market entry decisions are made and operationalised. One reason why market entry methods have been perceived in the way that they have is due to the fact that they have been seen as an end or process in themselves rather than as a response to market conditions in the environment or management requirements within the firm. A further fundamental issue remains that while market entry is a pivotal aspect of every international retailer's internationalisation strategy, research on entry mode strategy is very limited (Doherty, 2000a).International retail research has tended to focus on three broad areas, that is, motivations (Alexander 1990a; 1990b; Williams, 1992; 1994), extent and direction of activity (Kacker, 1985; Robinson &- Clarke-Hill, 1990; Muniz-Martinez, 1998; Vida, 2000) and individual company experiences (Moore, 1998; Arnold & Fernie, 2000; Wrigley,2000; Burt et al, 2002). As such, apart from the work of Doherty (1998; 2000a), entry methods have traditionally been examined as a part of larger studies that examine the internationalisation process in its entirety (Alexander, 1989; Burt,
1993). This contribution aims to illuminate the complex issue that is entry mode strategy by discussing the traditionally accepted view of entry mode research and how this needs to evolve in the context of international retailing as international retailing activity reaches a more mature phase in its development.
Both early attempts to internationalise retail businesses and early attempts to describe the internationalisation process indicated that market entry methods were essentially a product of domestic operations and strategic development
experience in the home market. That is, firms that had grown organically in the domestic market established international operations through organic or 'store on store' developmental means. Likewise, franchise operations in the domestic market expanded through franchising in international markets. This orientation to a single international market entry method was confirmed by Alexander's (1990a; 1990b) research that showed that most UK retailers surveyed favoured
one market entry method and few had or were inclined to use more than one.
However, in response to market experience, this mono-cultural approach to market entry has changed in the face of commercial experience. As Quinn & Alexander (2002) note, franchising has become the refuge of a number of retail operations that failed to achieve international status through the organic growth methods that distinguished their domestic development and initial development in international markets. Indeed, market divestment has been a characteristic experience of a number of retailers that have re-evaluated their market entry
methods (Alexander & Quinn, 2002).Likewise, as retailers have entered markets that exhibit different characteristics to the domestic market or have particular local conditions, retailers have moved beyond their initial choice of entry method. Thus, many retailers could no longer be placed in a single position on Treadgold's (1988) perceptual chart but would occupy a number of positions dependent on their entry method and geographical expansion using that method. Indeed, building on Treadgold's (1988) initial findings and the activities of retailers in international markets since that time, it might even be possible to identify a continuum ranging from the use of entry methods in markets that distinguish cautious internationalisation to entry methods that distinguish aggressive globalisation of the retail format as retailers seek to account for risk factors and issues surrounding managerial control. That is, retailers favour organic growth in psychologically proximate markets whereas they favour joint ventures and franchise methods in more psychologically distant markets. There is a neat intuitive quality to such a framework that takes account of the environmental conditions with which retailers have to cope in international markets. In such a schema, management response is dependent on market conditions. However, it is equally valid to consider international market entry methods that place management constraints at the heart of the strategic development decision. Doherty's work (Doherty, 1998; 2000a; 2000b) has shown that the choice of market entry method is as much determined by management know-how and attitudes as it is by market conditions. In terms
of the internationalisation of UK-based fashion retailers she found that entry mode strategy is not predetermined but rather "it emerges over time as a result of a combination of historical, experiential, financial, opportunistic, strategic and company specific factors such as changes in management structure" (Doherty, 2000a, p.237). Franchising emerged as the major entry mode choice of these fashion retailers and the basis of their future entry mode strategy despite, in many cases, experience of using alternative entry modes such as organic growth and acquisition. The 'management knowhow' factors influencing the choice were found to be changes in senior management and company restructuring. She also notes that 'the impact of individuals' affects entry mode strategy as many of the senior managers in her study were appointed around the time of strategic restructuring. This ultimately impacted on future entry mode choice within these retail firms. Senior managements' extensive experience of working within their present company or with other international brands was also deemed to significantly influence the entry mode choice decision. Thus, entry modes are as much a product of the constraints placed upon management from within the firm as they are a product of environmental constraints. Indeed, environmental challenges or management's failure to deal with environmental challenges may be interpreted as the recognition of a presence or the lack of a presence of international skills within the firm, rather than inherent to the conditions exhibited within given markets. Thus, entry modes could be considered in terms of management capabilities however, that would ignore the management skills required to successfully manage joint venture or franchise relations at the expense of expressing the capacity or lack of capacity of management to internationally operationalise experience gained in the domestic or other international markets. As Doherty (2003) has shown in relation to the international franchising of fashion retailing, franchising does not Necessarily mean low control: Indeed, controlling the retail brand offer was a key strategic objective of certain fashion retailers in her study. While franchising is certainly lower cost and lower risk for the franchisor because the franchisee bears the burden of these issues, controlling the brand in the international market is the overriding concern for fashion retailers with well-defined brands to protect. In the context of an evolving understanding of entry mode strategy, it is clear that entry mode strategy needs to be examined in the context not only of managerial and environmental constraints but also, as the development of international retail research over time shows, in the context of the evolution of the retailer as an international firm. Doherty (2000) highlights this point by emphasizing that entry mode choice among UK international fashion retailers evolved from modes based on significant investment such as organic growth and acquisition to less financially intensive entry modes namely licensing and franchising. In more recent work on the motivations of fashion retailers who chose franchising as an entry mode in international markets (Doherty, 2003) she cites a number of organizational and environmental factors that influenced their choice. This recent empirical work would contest the traditional view of franchising as a low risk, low cost and low control entry mode. While in the main, relative to entry modes such as acquisition, franchising is found to involve less risk and less cost, this is not synonymous with low control. Indeed the franchisors in her study with retail brands to protect exhibit high levels of control. Perhaps without a well-defined brand to protect, franchising could be seen as low control but this 'traditional' view does not hold in practice. Nonetheless, it would be wrong to criticise Tread gold's framework in light of these issues. However, what must be acknowledged are the dynamic nature of international retailing and the temporal issues that are always present.
International retailing has evolved over the past twenty years to a point where the complexities of operating in international markets, characterised
for example by recent research on divestment (Alexander & Quinn, 2002; Burt et al, 2002), are now more to the fore. A further issue that cannot be overlooked is that where recent insights into why and how retailers choose entry modes are available in the literature, such insights have been developed through the use of in-depth qualitative research rather than the observational and quantitative research that characterises early work such as Treadgold (1988)and Alexander (1990a; 1990b). This again is a feature of an evolving and developing research area. As Alexander (1995) has noted, while the observational and quantitative findings of earlier research helped to establish a broad understanding of international retail activity and identify research questions, other innovative methodological approaches are required to answer such questions. If research on international retailing is to address new issues and begin exploding old accepted frameworks such as those on entry mode strategy then one key way to address this is through qualitative research. Indeed the qualitative work by Quinn (1999), Quinn & Doherty (2000), Sparks (1995; 2000) and Doherty (2003) have gone a long way to informing the debate on international retail franchising but more of this type of work is needed. Nevertheless, the two elements of environmental impact and management skills are clearly at the root of entry method selection within the international retail environment. As Alexander & Myers (2000, p.347) have indicated, "the internationalisation process must be...considered in both market and corporate terms". That is, where the internal facilitating competencies of leadership, functional coordination, experience, perceptions and attitudes determine the predisposition of retailers toward certain entry mode strategies that are incorporated within a wider strategic framework that itself is a product of a retailer's corporate perspective, whether it is ethnocentric or geocentric, and informed by conditions in the markets of destination. These issues however cannot be seen to be static given the dynamic nature of international retailing. Therefore, the fact that entry mode choice and strategy will develop over time within the firm is an acknowledgement that the environment and the management skills and firm-specific issues change over time. Marks & Spencer's disposal of its international owned store business is a case in point. The firm is now essentially reliant on franchising to develop its presence overseas, a point to which it has evolved as an international retailer operating in a dynamic environment with changing management skills. Thus, entry method strategies are essentially the product of a dynamic, evolving, ongoing dialogue within the international retail firm. This dialogue within the firm is informed by the firm's corporate perspective and takes place between the countervailing factors of management competencies and environmental conditions. The outcomes of this dialogue have an impact on the decisions of where and how to locate international retail operations Understanding the entry mode selection process and the establishment of entry mode strategies is therefore far more complex than initial assumptions would lead observers to believe. The complexities involved suggest that further research will benefit from in-depth qualitative studies that are able access and interpret the complexities and interrelationships of factors that impact on the decision-making and implementation process.
MARKET ENTRY ANALYSIS.
Choosing the best way to enter a market is no simple task. Should the market entry objective be rapid acquisition of significant market share or stay below the radar to secretly build market share? There is no single strategy to fit all companies, products and markets. However there are a variety of tools which are available to enter a market. First the decision has to be made whether the market should be entered and then a decision should be taken how it should be entered finally a decision should be taken how strongly it should be entered. This thesis centers around Joint ventures, but there are modes of entry such as acquisition or licensing. In broad terms, the decisions are around a forceful or a focused market entry strategy or both. Forceful is about a highly aggressive entry, using significant marketing, sales and production effort and resources. Focus is about the extent to which the effort is narrowly focused or on a broad front. All combinations of force/focus have their advantages and disadvantages, so therefore two further factors can help decide the most appropriate entry strategy - the extent to which the market being targeted is bountiful (or sparse) and hostile (or benign). In this context it seems that the Indian market is both bountiful and hostile. It is bountiful because of its sheer consumer market size and it is also hostile because of regulatory reasons and because of very small margins. A forceful entry like Vodafone acquiring Essar will work every now and then but that cannot be the best norm. India should be treated as a long term project and cannot be entered in a blitzkrieg at-least in any project where market share is sought to be built. Judging market size and growth for a new venture is difficult, all the more so when it is an unfulfilled market need. Traditional market research is limited in what it can reveal. Feel, intuition and personal contact with customers in the market may be the most revealing. This is where entrepreneurs come in, with their visions of a future market and their personal immersion in the task to alter, modify and adapt to fill the need that has been perceived. In addition to the potential market size factor in deciding bounty - three other characteristics are recommended for review: customer risk, technology turbulence and category lifecycle. The insurance sector in India is one example of this unfulfilled market need. Is there really an unfulfilled need? Yes there are hundreds of millions of people without insurance. But do they need them? Can they afford them? Intuitively it looks like yes there is a need. But what kind of market research can be done in a situation like this. What is the level of customer risk attached to buying the new product? If customers perceive major risks in switching from their current product and its inherent sets of processes, then they will be slow to buy. This might be relevant when the Indian consumer is being asked to change purchasing habits from unorganized retail to organized retail. Perhaps they prefer the informality of the unorganized retail. Maybe they like bargaining. That familiar feel may not be there in organized retail. Again there is not enough data to support it one way or the other, but it is building and some habits will change over time. A decision needs to be taken what those habits are and how much time it would take. Rapid change in technology can reconfigure a market. Word processors irrevocably altered the market for electric typewriters. A critical question and judgement is about how long market bounty will last. Opportunities for success are higher quality for first movers with products in the early stages of their life cycle. If a foreign company is looking to enter a local market they need to know if they are too early or perhaps too late. Cell phone industry is one such example. If a foreign entrant comes into the industry now would they be able to shake of the disadvantage of not being in the market from the very beginning? Will they be able to compete against low tariffs and high penetration? They may not have the means to compete effectively. Competition is the principal key to determining hostility of a market. If a market is crowded with competitors and the business is crucial to their success, then the market will be very hostile. Fragmented competitors and no clear leadership may mean a benign market. The cell phone market in India would be a very hostile market for any entrant at this time. The combined market share of the 3 or 4 main players is a strong indicator of the extent to which they are entrenched and an indication of how much may be left for the new entrant. Salience of the product to the competitor will determine their competitive response. So if the insurance sector was being looked at, a look at the top players would indicate perhaps only one player which is LIC and hence a lot of room for growth. If they are highly dependent on the product for their success, then they will respond aggressively. Market hostility is also affected by industry capacity compared to market size. When capacity is greater than market size, competitive action will be intense and entry may not be sensible at all. In Indian motorcycle Industry for example, can all the market participants combined provide the capacity to take care of future growth? If the answer to that is yes, then there may not be enough incentive for a new entrant into the market.
Regulations may make a market hostile, in terms of onerous compliance. India is again a good example of that. With numerous regulation and a lots of bureaucratic red tape which can make entry into the market very complex and difficult and often unpredictable. The degree of aggressiveness will be in the timing, spend and effort put into activities like; advertising, sales promotions, marketing and sales organizations, pricing, production, services to customers, discounts, introductory deals and publicity. It is often better to focus on just one product and really aggressively promote it. For example in Insurance, the product to be focused on first should be just life products. The other non life products can be put on back burner for the immediate penetration. The degree of focus will be about the number of market segments initially addressed, geographical reach and the size/range of product line. This is a highly aggressive, broad-front strategy using all forces across a wide scope of geography and market segments. Because this strategy requires rapid market penetration, it probably would not be appropriate where there is not a bountiful market. This strategy is highly aggressive and focused. All the elements of aggression are still used, but in limited deployment to specific market segments and geographies. In building a strategy like this for a technology product, one application would be promoted in a concentrated way to ensure early success. This strategy requires a munificence market, but not so hostile that market segments into which entry is deferred are not lost to competition. This is a non-aggressive and focused entry strategy. It is a low key, calculated entry into a narrowly defined market. This strategy might be appropriate to a market that is sparse and hostile. It is a back-door', below the radar, mode. There are other approaches to enter a market with low resources. One such approach is the guerrilla approach. The guerrilla approach is a non-aggressive and broad-front market entry. It uses relatively low resources to target the most promising positions in markets that are munificent, but hostile. It can also be used to explore markets to focus on later without generating strong competitive interest or counteraction. A low resource approach might work in certain parts of India, but a Pan India guerrilla approach might be difficult.
Another approach to do a study would be through SWOT analysis:
A scan of the internal and external environment is an important part of the strategic planning process. Environmental factors internal to the firm usually can be classified as strengths (S) or weaknesses (W), and those external to the firm can be classified as opportunities (O) or threats (T). Such an analysis of the strategic environment is referred to as a SWOT analysis. The SWOT analysis provides information that is helpful in matching the firm's resources and capabilities to the competitive environment in which it operates. As such, it is instrumental in strategy formulation and selection.
SWOT Analysis Framework
A firm's strengths are its resources and capabilities that can be used as a basis for developing a competitive advantage. Examples of such strengths include:
- Strong brand names
- Good reputation among customers
- Cost advantages from proprietary know-how
- Exclusive access to high grade natural resources
- Favourable access to distribution networks
The absence of certain strengths may be viewed as a weakness. For example, each
of the following may be considered weaknesses:
- Lack of patent protection
- A weak brand name
- Poor reputation among customers
- High cost structure
- Lack of access to the best natural resources
- Lack of access to key distribution channels
In some cases, a weakness may be the flip side of strength. Take the case in
Which a firm has a large amount of manufacturing capacity. While this capacity may be considered a strength that competitors do not share, it also may be a considered a weakness if the large investment in manufacturing capacity prevents the firm from reacting quickly to changes in the strategic environment.
Opportunities The external environmental analysis may reveal certain new opportunities for profit and growth. Some examples of such opportunities include:
- an unfulfilled customer need
- Arrival of new technologies
- loosening of regulations
- Removal of international trade barriers
Changes in the external environmental also may present threats to the firm. Some examples of such threats include:
- shifts in consumer tastes away from the firm's products
- Emergence of substitute products
- New regulations
- increased trade barriers
The SWOT Matrix
A firm should not necessarily pursue the more lucrative opportunities. Rather, it may have a better chance at developing a competitive advantage by identifying a fit between the firm's strengths and upcoming opportunities. In some cases, the firm can overcome a weakness in order to prepare itself to pursue a compelling
opportunity. To develop strategies that take into account the SWOT profile, a matrix of these factors can be constructed.
Another approach which can be used is the Porter's 5 forces.
Porter's 5 forces
The model of the Five Competitive Forces was developed by Michael E. Porter in his book Competitive Strategy: Techniques for Analyzing Industries and Competitors" in 1980. Since that time it has become an important tool for analyzing an organizations industry structure in strategic processes (Recklies 2001).
Porters model is based on the insight that a corporate strategy should meet the opportunities and threats in the organizations external environment. Especially, competitive strategy should base on and understanding of industry structures and the way they change.
Porter has identified five competitive forces that shape every industry and every market. These forces determine the intensity of competition and hence the profitability and attractiveness of an industry. The objective of corporate strategy should be to modify these competitive forces in a way that improves the position of the organization. Porters model supports analysis of the driving forces in an industry. Based on the information derived from the Five Forces Analysis, management can decide how to influence or to exploit particular characteristics of their industry.
The Five Competitive Forces are typically described as follows:
The term 'suppliers' comprises all sources for inputs that are needed in order to provide goods or services. Supplier bargaining power is likely to be high when the market is dominated by a few large suppliers rather than a fragmented source of supply, There are no substitutes for the particular input, The suppliers customers are fragmented, so their bargaining power is low, The switching costs from one supplier to another are high, There is the possibility of the supplier integrating forwards in order to obtain higher prices and margins. This threat is especially high whenthe buying industry has a higher profitability than the supplying industry,forward integration provides economies of scale for the supplier, The buying industry hinders the supplying industry in their development (e.g. reluctance to accept new releases of products), The buying industry has low barriers to entry. In such situations, the buying industry often faces a high pressure on margins from their suppliers. The relationship to powerful suppliers can potentially reduce strategic options for the organization.Similarly, the bargaining power of customers determines how much customers can impose pressure on margins and volumes. Customers bargaining power is likely to be high whenthey buy large volumes, there is a concentration of buyers. The supplying industry comprises a large number of small operators. The supplying industry operates with high fixed costs, The product is undifferentiated and can be replaces by substitutes, Switching to an alternative product is relatively simple and is not related to high costs, Customers have low margins and are price-sensitive, Customers could produce the product themselves, The product is not of strategically importance for the customer, The customer knows about the production costs of the product There is the possibility for the customer integrating backwards. The competition in an industry will be the higher, the easier it is for other companies to enter this industry. In such a situation, new entrants could change major determinants of the market environment (e.g. market shares, prices, customer loyalty) at any time. There is always a latent pressure for reaction and adjustment for existing players in this industry.
The threat of new entries will depend on the extent to which there are barriers to entry. These are typically
- Economies of scale (minimum size requirements for profitable operations),
- High initial investments and fixed costs,
- Cost advantages of existing players due to experience curve effects of operation with fully depreciated assets,
- Brand loyalty of customers
- Protected intellectual property like patents, licenses etc,
- Scarcity of important resources, e.g. qualified expert staff
- Access to raw materials is controlled by existing players,
- Distribution channels are controlled by existing players,
- Existing players have close customer relations, e.g. from long-term service contracts,
- High switching costs for customers
- Legislation and government action
Threat of Substitutes
A threat from substitutes exists if there are alternative products with lower prices of better performance parameters for the same purpose. They could potentially attract a significant proportion of market volume and hence reduce the potential sales volume for existing players. This category also relates to complementary products.
Similarly to the threat of new entrants, the treat of substitutes is determined by factors like
- Brand loyalty of customers,
- Close customer relationships,
- Switching costs for customers,
- The relative price for performance of substitutes,
- Current trends.
Competitive Rivalry between Existing Players
This force describes the intensity of competition between existing players (companies) in an industry. High competitive pressure results in pressure on prices, margins, and hence, on profitability for every single company in the industry.
Competition between existing players is likely to be high when
- There are many players of about the same size,
- Players have similar strategies
- There is not much differentiation between players and their products, hence, there is much price competition
- Low market growth rates (growth of a particular company is possible only at the expense of a competitor),
- Barriers for exit are high (e.g. expensive and highly specialized equipment).
Use of the Information form Five Forces Analysis
Five Forces Analysis can provide valuable information for three aspects of corporate planning:
The Five Forces Analysis allows determining the attractiveness of an industry. It provides insights on profitability. Thus, it supports decisions about entry to or exit from and industry or a market segment. Moreover, the model can be used to compare the impact of competitive forces on the own organization with their impact on competitors. Competitors may have different options to react to changes in competitive forces from their different resources and competences. This may influence the structure of the whole industry.
In combination with a PEST-Analysis, which reveals drivers for change in an industry, Five Forces Analysis can reveal insights about the potential future attractiveness of the industry. Expected political, economical, socio-demographical and technological changes can influence the five competitive forces and thus have impact on industry structures.
Useful tools to determine potential changes of competitive forces are scenarios.
Analysis of Options:
With the knowledge about intensity and power of competitive forces, organizations can develop options to influence them in a way that improves their own competitive position. The result could be a new strategic direction, e.g. a new positioning, differentiation for competitive products of strategic partnerships.
Thus, Porters model of Five Competitive Forces allows a systematic and structured analysis of market structure and competitive situation. The model can be applied to particular companies, market segments, industries or regions. Therefore, it is necessary to determine the scope of the market to be analyzed in a first step. Following, all relevant forces for this market are identified and analyzed. Hence, it is not necessary to analyze all elements of all competitive forces with the same depth.
The Five Forces Model is based on microeconomics. It takes into account supply and demand, complementary products and substitutes, the relationship between volume of production and cost of production, and market structures like monopoly, oligopoly or perfect competition.After he analysis of current and potential future state of the five competitive forces, managers can search for options to influence these forces in their organization's interest. Although industry-specific business models will limit options, the own strategy can change the impact of competitive forces on the organization. The objective is to reduce the power of competitive forces.
The following figure provides some examples. They are of general nature. Hence, they have to be adjusted to each organization's specific situation. The options of an organization are determined not only by the external market environment, but also by its own internal resources, competences and objectives Porter's model of Five Competitive Forces has been subject of much critique. Its main weakness results from the historical context in which it was developed. In the early eighties, cyclical growth characterized the global economy. Thus, primary corporate objectives consisted of profitability and survival. A major prerequisite for achieving these objectives has been optimization of strategy in relation to the external environment. At that time, development in most industries has been fairly stable and predictable, compared with today's dynamics.
In general, the meaningfulness of this model is reduced by the following factors:
- In the economic sense, the model assumes a classic perfect market. The more an industry is regulated, the less meaningful insights the model can deliver.
- The model is best applicable for analysis of simple market structures. A comprehensive description and analysis of all five forces gets very difficult in complex industries with multiple interrelations, product groups, by-products and segments. A too narrow focus on particular segments of such industries, however, bears the risk of missing important elements.
- The model assumes relatively static market structures. This is hardly the case in today's dynamic markets. Technological breakthroughs and dynamic market entrants from start-ups or other industries may completely change business models, entry barriers and relationships along the supply chain within short times. The Five Forces model may have some use for later analysis of the new situation; but it will hardly provide much meaningful advice for preventive actions.
- The model is based on the idea of competition. It assumes that companies try to achieve competitive advantages over other players in the markets as well as over suppliers or customers. With this focus, it dos not really take into consideration strategies like strategic alliances, electronic linking of information systems of all companies along a value chain, virtual enterprise-networks or others.
Overall, Porters Five Forces Model has some major limitations in today's market environment. It is not able to take into account new business models and the dynamics of markets. The value of Porters model is more that it enables managers to think about the current situation of their industry in a structured, easy-to-understand way - as a starting point for further analysis.
Also there is the PEST analysis
What is PEST Analysis?
PEST analysis is very important that an organization considers its environment before beginning the marketing process. In fact, environmental analysis should be continuous and feed all aspects of planning. The organization's marketing environment is made up from:
- The internal environment e.g. staff (or internal customers), office technology, wages and finance, etc.
- The micro-environment. e.g. our external customers, agents and distributors, suppliers, our competitors, etc.
- The macro-environment e.g. Political (and legal) forces, Economic forces, Sociocultural forces, and Technological forces. These are known as PEST factors.
The political arena has a huge influence upon the regulation of businesses, and the spending power of consumers and other businesses. You must consider issues such as:
- How stable is the political environment?
- Will government policy influence laws that regulate or tax your business?
- What is the government's position on marketing ethics?
- What is the government's policy on the economy?
- Does the government have a view on culture and religion?
- Is the government involved in trading agreements such as EU, NAFTA, ASEAN, or others?
Marketers need to consider the state of a trading economy in the short and long-terms. This is especially true when planning for international marketing. You need to look at:
- Interest rates
- The level of inflation Employment level per capita
- Long-term prospects for the economy Gross Domestic Product (GDP) per capita, and so on
The social and cultural influences on business vary from country to country. It is very important that such factors are considered. Factors include:
- What is the dominant religion?
- What are attitudes to foreign products and services?
- Does language impact upon the diffusion of products onto markets?
- How much time do consumers have for leisure?
- What are the roles of men and women within society?
- How long are the population living? Are the older generations wealthy?
- Do the population have a strong/weak opinion on green issues?
Technology is vital for competitive advantage, and is a major driver of globalization. Consider the following points:
- Does technology allow for products and services to be made more cheaply and to a better standard of quality?
- Do the technologies offer consumers and businesses more innovative products and services such as Internet banking, new generation mobile telephones, etc?
- How is distribution changed by new technologies e.g. books via the Internet, flight tickets, auctions, etc?
- Does technology offer companies a new way to communicate with consumers e.g. banners, Customer Relationship Management (CRM), etc?
There are many different approaches to study market entry. However a thorough analysis would include a study from SWOT, PEST, five forces and a BCG matrix standpoint. All the case studies in this thesis are examined from all both SWOT and PEST angles along with the Porters 5 forces.
TATA AIG CASE STUDY
MARKET ENTRY ANALYSIS
In 2003, the Indian insurance market ranked 19th globally and was the fifth largest in Asia. (Sinha 2005) Although it accounts for only 2.5% of premiums in Asia, it has the potential to become one of the biggest insurance markets in the region. A combination of factors underpins further strong growth in the market, including sound economic fundamentals, rising household wealth and a further improvement in the regulatory framework. The insurance industry in India has come a long way since the time when businesses were tightly regulated and concentrated in the hands of a few public sector insurers. Following the passage of the Insurance Regulatory and Development Authority Act in 1999, India abandoned public sector exclusivity in the insurance industry in favour of market-driven competition. This shift has brought about major changes to the industry. The inauguration of a new era of insurance development has
seen the entry of international insurers, the proliferation of innovative products and distribution channels, and the raising of supervisory standards.
By mid-2004, the number of insurers in India had been augmented by the entry of new private sector players to a total of 28, up from five before liberalisation. A range of new products had been launched to cater to different segments of the market, while traditional agents were supplemented by other channels including the Internet and bank branches. These developments were instrumental in propelling business growth, in real terms, of 19% in life premiums and 11.1% in non-life premiums between 1999 and 2003.
There are good reasons to expect that the growth momentum can be sustained. In particular, there is huge untapped potential in various segments of the market. While the nation is heavily exposed to natural catastrophes, insurance to mitigate the negative financial consequences of these adverse events is underdeveloped. The same is true for both pension and health insurance, where insurers can play a critical role in bridging demand and supply gaps. Major changes in both national economic policies and insurance regulations will highlight the prospects of these segments going forward. The objectives of this report are to explore the current state of development in India's insurance
market and enumerate the opportunities and challenges offered by this exciting market.
There is a very strong potential for penetration of insurance into villages and towns and other rural areas which still is home for the most number of Indians but that has so far remained slow and could be a lot faster. If the Indian Insurance Industry does not take advantage of this huge customer base it is doing itself a great disservice.
Insurance in India used to be tightly regulated and monopolised by state-run insurers. Following the move towards economic reform in the early 1990s, various plans to revamp the sector finally resulted in the passage of the Insurance Regulatory and Development Authority (IRDA) Act of 1999.
Significantly, the insurance business was opened on two fronts. Firstly, domestic private-sector companies were permitted to enter both life and non-life insurance business. Secondly, foreign companies were allowed to participate, albeit with a cap on shareholding at 26%. With the introduction of the 1999 IRDA Act, the insurance sector joined a set of other economic sectors on the growth march. During the 2003 financial year1, life insurance premiums increased by an estimated 12.3% in real terms to INR 650 billion (USD 14 billion) while non-life insurance premiums rose 12.2% to INR 178 billion (USD 3.8 billion). The strong growth in 2003 did not come in isolation. Growth in insurance premiums has been averaging at 11.3% in real terms over the last decade. Notwithstanding the rapid growth of the sector over the last decade, insurance in India remains at an early stage of development. At the end of 2003, the Indian insurance market (in terms of premium volume) was the 19th largest in the world, only slightly bigger than that of Denmark and comparable to that of Ireland.2 This is despite India having the second largest population of all countries in the world as well as the 12th largest economy. Yet, there are strong arguments in favour of sustained rapid insurance business growth in the coming years, including India's robust economic growth prospects and the nation's high savings rates. The dynamic growth of insurance buying is partly affected by the (changing) income elasticity of insurance demand. It has been shown that insurance penetration and per capita income have a strong non-linear relationship. Based on this relation and other considerations, it can be postulated that by 2014 the penetration of life insurance in India will increase to 4.4% and that of non-life insurance to 0.9%. What will it take to realise this potential?
While the macro-economic backdrop remains favourable to growth, there are still major hurdles to overcome in order for India to realise this growth potential. Challenges and issues that have to be tackled by the Indian insurance market. On the regulatory side, there are outstanding issues concerning solvency regulations, further liberalising of investment rules, caps on foreign equity shareholdings5 as well as the enforcement of price tariffs in the non-life insurance sector. Health insurance is still underdeveloped in India but offers huge potential, as there will be increasing needs to purchase private health cover to supplement public programmes. Likewise, the deficiencies in current pension schemes should offer significant opportunities to private providers. With the majority of the population still residing in rural areas, the development of rural insurance will be critical in driving overall insurance market development over the longer term. While the current cap on foreign ownership in Indian insurance companies is set at 26%, the Indian Government is looking to raise the cap to 49%.
THE TATA GROUP
The Tata group of companies is one of the fastest growing business groups in the world and also is on of the premier business house in India The 2007-08 revenues were in excess of $60 Billion and almost two thirds of it came from outside the country. The net profit for the same period was nearly five and a half billion dollars, The Tata group employs over 300,000 people globally. The Tata brand and name itself is a well respected one in India and is nearly a hundred and fifty years and is well known for its strong ethics and value system. Tata group has about 28 companies which are listed in various stock exchanges with a overall market capitalization which exceeds 60 Billion dollars. And a shareholder base of nearly 3 million. The main companies in the group are TCS, Tata Motors, Tata Steel, Tata Power, Tata Communications, Tata Chemicals and Tata tea along with many others.( Source www.tata-aiglife.com)
American International Group, Inc. (AIG)
IG is one of top global companies in the field of insurance and other financial services. It has operations in over 130 countries globally. It also has the largest property casualty and life insurance network among all insurers globally. It is listed on New York, Ireland and Tokyo stock exchanges.
An analysis was done of this joint venture from the perspective of Tata using three of the tools previously explored ; Namely SWOT, PEST and Porter's five forces. In addition this researcher talked to various managers from TATA AIG to understand why Tata entered this venture. Those interviews have also been integrated into the analysis.
SWOT Analysis of The TATA AIG Venture.
One of the biggest strengths the Tata group has its size. The revenue (both net and gross gives it a huge advantage. Another advantage is that the Tata group already has a varied group of companies. So the challenge in entering another line of business would not be insurmountable. Business excellence is a integral part of all the companies in the Tata Group this enables the group to paying attention on quality in a very strong way. The Tata Business Excellence Model (TBEM) is adopted by the group from Malcolm Baldrige in early part of the last decade. To achieve chiselled degrees of business excellence. TBEM is a model determining the quality movement in the group. The Model works
under the protection of Tata Quality Management Services (TQMS), "an in-house organization mandated to help different Tata companies achieve their business objectives through specific processes." The TBEM methodology has been influenced to deliver strategic focus and aim business melioration. " TBEM holds elements that enable the group to capture the best of global business processes and practices. It translates into an ability to evolve and stay in step with ever changing business performance parameters," (Osterwalder, Pigneur and Tucci, 2005). Furthermore; the Tata's business model takes care the value proportion of what is proposed to the market; and makes sure that the target customer segments are also addressed by the value proposition. The group has developed the effective distribution channels to reach customers to offer the value proposition and to establish the relationship with the customers. The group uses the core capacities needed to make the business model possible, and effectively configure the activities to implement the business model. An excellent business model should be able to generate the effective competitive advantage and the value chain of a company, in order to fit with the company's strategies.
One of the very big weaknesses is that that while Tata has numerous lines of business, it has not entered into a business of this nature. The Insurance sector is not very well developed. It is not a part of national culture in India. Apart from LIC there is no other brand name in India in Insurance. While talking to the manager at Tata AIG, this was also brought up. The manager believed that it would be a while before the TATA AIG brand name could be in the same league as LIC.
The opportunity is pretty much what possibly could be the largest insurance market in the world within the next half century. India is one of the booming economies of the world and insurance in India has a lot of latent demand. Both Life insurance and non life insurance products would if targeted appropriately be in huge demand both in rural and urban sectors. Both the premium and per capita premium are one of the lowest in the world showing huge growth potential.
While the opportunity is great, it is not going to remain as attractive. The government of India was looking to open the market to allow foreign participants to enter. Already other local players were getting into joint ventures with foreign insurance companies such as Bajaj Allianz and ICICI Lombard. The opportunity needed to taken immediately. The manager at TATA AIG mentioned that marketing had to be aggressive to make sure that the first mover advantage that TATA AIG had continued to remain.
Porter's five forces
Threats of new entrants
The Government was opening up the market. Local rivals were already in the market. Big players would enter the market once the market was opened. If Tata did not aggressively push during the initial phase of entry. It might lose that advantage
Power of buyers
The risk is very low here since the market is very big. However there is a danger of complacency. If TATA does not build its brand strongly enough, it may alienate some segments of customers or simply not be able to connect to them. However TATA already has a reputation of being a people's company.
Power of suppliers
There is no threat of suppliers as AIG is a well capitalized company. TATA is also known to be a strong company financially and is well respected by the markets.
It is difficult to have a substitute in a developing economy like India. While people have survive dwithout insurance in India. The result has been lower quality of health care and retirement than as would be with Insurance being there.
- Bajaj Allianz
- ICICI Lombard
Political - Insurance FDI is a controversial topic from a political standpoint of view. Leftist leaders especially oppose opening up the Indian insurance market as they feel that would be damaging to Indian interests. However TATA is a respected company on all sides of the aisle in the Indian political aisles.
Economical and Ecological - The opening up the Insurance market will have great benefits to the Indian economy. The rate of the savings will go up. More people will enter the organized sector. More people would invest which would bode well for the business health generally in the country. There is unlikely to be an ecological ramifications of this Joint Venture
Social - There would be a dramatic impact on the social net which is taken for granted in most of the developed world. In India this is taken care of by a few companies (though growing rapidly) by PFs and pensions. There is a huge unorganized sector whose only safety in times of ill health or after retirement is a close family, and with a rapidly declining numbers of joint families that net is also shrinking. This deal will have a very positive impact on the Indian Social net.
Technology - The technology which AIG has at its disposal is world class in the insurance industry. The manager who was interviewed by this researcher was experienced in the Indian insurance industry and mentioned that there were many technological inductions that were totally new to the Indian insurance industry, admittedly there would be others who would be bringing it in as well, but rapidly from a technology perspective the Indian insurance industry was becoming on par with the rest of the developed world. TATA AIG itself was creating a competitive advantage for itself as it adapted this technology.
While Tata has a variety of businesses under its belt this is the first venture of Tata group of companies into the insurance sector. There are a number of benefits for the Tata group of companies by this joint venture. It gives it a strong position in the nascent Indian insurance market. AIG gets an entry into the Indian Insurance market, where it would not have had a presence otherwise.
MANGO CELLULAR CASE STUDY
The Indian Cell phone industry is one of most rapidly growing in the world with potentially the second biggest market in the world after China. According to statistics available from TRAI (Telecom Regulatory Authority of India) The cell phone base numbers exceeded quarter of a billion subscribers by the end of April 2008. Just in the previous two months (March and April) nearly 19 million subscribers were added. The Indian market shows a run rate of nearly 7 million subscribers added every month. Cell phone operators like Airtel and Reliance are aggressively rolling out service in rural areas and this trend is expected to continue because rural market is seen as a market with very high potential. While the last years growth has been impressive. Less than a quarter of India's billion plus population owns a telephone. This not only suggests that this trend will continue but most likely accelerate. The cell phone is already becoming much more than a communication device for the youth of India and is offering them new avenues for socializing and networking. Online networking is one of the trends which is gaining popularity in India.
The Joint venture
Visionaire Technologies was earlier involved with Bid4Prizes which is an innovative and fairly popular application used in reverse auctions. This was something new in the Indian market and was fairly successful. But in the development of that application Visionaire's role was that of a vendor. Bid4Prizes gave an opportunity for cell phone users to bid through their cell phone and win prizes.
Altrinsic on the other hand has been in this industry from the very beginning and often at the cutting edge. They have been able to combine the very latest in information technology in mobile entertainment and combine it with the power of internet media creating a competitive advantage which has been substantial. Altrinsic sees a massive opportunity in India with the rapidly growing cell phone market along with a rapidly growing internet market. In addition the youth population in India is one of the largest in the world and they would be one of the key target groups for the products of this joint venture
Strategic Analysis of the Mango Cellular Joint venture:
The mango cellular joint venture was put through an analysis consisting of SWOT, PEST and the Porters five forces. This analysis was supplemented by interviews by managers at Visionaire Technologies who shed some insight into why this joint venture was entered into by visionaire and where they see it going.
Visionaire technologies has a strong technology base, it is already well established in the IT industry. In addition Altrinsic is a market leader in various mobile products; Since the Indian IT industry already handles mobile software related outsourcing, the best practices globally are already present in India. According to the managers at Visionaire Technologies who were interviewed by this researcher the software content part of this deal itself was not a radical departure from prior work of Visionaire. Altrinsc itself had the best practices in place for media content for the mobile market.
The biggest weakness of this deal was that Visionaire simply had no experience in the Indian mobile market, while there was no doubt that the Indian mobile market was growing rapidly, there were peculiarities in the Indian Market which Altrinsic would not have a handle on like network and bandwidth issues and which Visionaire would not be able to provide guidance on due to its non experience in the Indian mobile markets. Also while the technology in Indian cellular software outsourcing industry was world class, the Indian networks still had not adapted third and fourth generation cellular technologies, a fact which would be critical for the success of this joint venture. In an interview with one of the managers at the Visionaire one of the concerns shared with the researcher was that the cellular spectrum policy of India had to quickly be put in place and clear guidance given by the Government as to when it would be in place.
The opportunity was potentially the fastest growing cellular phone market in the world, and what could eventually be the largest cellular phone market in the world. In addition unlike China, there was no strict control of the content and there was little danger of content being targeted for censorship, a key factor when dealing with the market for such products, In an interview with one of the managers of Visionaire, it was indicated that the primary target of these portfolio of products were teenagers and people in their twenties who would naturally have a little rebel streak in them. Also India also has the largest population of under 25 people in the world.
The biggest Threat to the joint venture was that this would not remain an exclusive space for very long. Already the bigger companies like Reliance and Airtel had entered it and slowly smaller players were looking to enter into this space. While Mango Cellular definitely was one of the first entrants in this field in India, its first mover advantage would be brief.
Porter's five forces are explored below for the Mango Cellular Joint venture
Threats of new entrants
The mobile products market is rapidly growing through out the world. With the Indian cellular market on the verge of being totally open to the global market it will not be too much time before big international players enter the market. The local players like Airtel and Reliance are already in the fray with additional advantages of having their own networks and retailers.
Power of buyers
This risk is very high, as the Indian cellular content market is still not clearly defined. The risk is what the buyers want and what content is viable. Poor network and bandwidth can frustrate the buyers causing in loss of customers.
Power of suppliers
There are no supplier issues here as the content is generated by Visionaire.
While there is not a substitute for mobile content. There are portable media which is increasingly becoming available in India and at a fairly affordable price.
Political - There is no political impediments to this deal as all political parties support rapid penetration of the cellular phone market and cellular phones reaching all parts of the country. However this particular product is targeted to the middle and upper middle class customers and they are not necessarily always a favored political class. In addition there are politicians on both the left and the right who are in favor of an increasing amount of censorship, which could effect the mobile phone content market.
Economical and Ecological - There are few ecological concerns in this particular transaction. However economic concerns are numerous. The high end cell phones are still not widely available in India and when they are available they are often imported. As one of the managers from Visionaire stated to this researcher, an Iphone which is available for $ 200 globally is available for over Rs. 30,000 in India which is three times the global price. Clearly most of these high end phones should be manufactured locally before their price could be low enough to reach potential customers of Mango Cellular's mobile content.
Social - There is very little social impact of this joint venture. This product is limited to urban youth who are usually in middle to upper middle class financially.
Technology - The impact this transaction would have on technology and technology on it would be tremendous. This would be new technology entering India and adapting to Indian conditions, there would be new ground broken on not only creating new technology but creating new technology inexpensively enough to cater to a larger number of Indian customers.
The content market in the Indian cellular industry is just getting explored. The potential of this market is tremendous, however there are numerous pitfalls. They range from government policy to thin margins to a fickle customer. While Altrinsic can provide top quality content and Visionaire can adapt it to Indian conditions, neither of them have any experience with the Indian retail customer and in the end that might prove to be decisive.
BHARTI WAL-MART CASE STUDY
Indian Retail sector:
The retail market in India is one of the most attractive globally. In fact it is considered second most attractive in all of emerging markets, where it is just behind Vietnam. It is also globally the fifth biggest destination (A.T. Kearney seventh annual GRDI 2008). The retail trade in India as a percentage of GDP was just under 10% in 2007 but is expected to reach 22% by 2010. In a report published by Mckinsey titled "The rise of the Indian Consumer Market" an analysis was done which seems to indicate a growth of 400% by 2025 of the Indian retail market. Richard Ellis values the Indian retail market at over $ 500 Billion.( Source : Mckinsey Report 2005)
FDI inflows in retail in India, which is currently possible only in single brand retail trading was over 25 Billion dollars by the start of 2009 ( Source: Department of Industrial Policy and Promotion (DIPP). FMCG (fast moving consumer goods) are one of the big drivers of profit and growth of India Inc. India's retail sector is expected to worth over $ 800 Billion by 2013 and well over a Trillion dollars by 2018. This translates into a Compound annual growth rate of well over 10 percent. India is a democratic, fairly transparent country with a high growth rates even in times of global recession. The consumer spending itself has seen exponential growth mainly because of the large youth population who have seen a substantial increase in their disposable income. This again bodes well for the country's retail sector. The under 15 population of the country constitutes over a third of the population. The consumer spending has shown an increase of over 75 percent over the last 4 years. The Organized retail sector accounts just 5 percent of the market so that again has a substantial growth potential and is expected to grow at an annual rate of 40% from about $20 Billion two years ago to over a $ 100 Billion by 2013.'
Two of the biggest attractions in the Indian retail sector are apparels and groceries. In Apparel India is the third most attractive destination ( Source AT Kearney). In India itself apparel is the second largest retail category almost accounting for 10% of the retail market and is expected to grow at nearly 15% annually. While India certainly has one largest number of retail outlets in the world, it is still expected to double by 2010 and quadruple to over 700 malls by 2015 and enter many tier -2 and tier-3 towns.
There are many developments going on in the Indian retail sector. Reliance India in association with Marks & Spencer is looking to open over 3o stores by 2013, in a statement by Mark Ashman who is the CEO of the Joint venture. This joint venture already has opened more than 10 stores in India. Marks and Spencer owns 51% in this Joint Venture whereas Reliance owns the rest. The Future group is testing the new rules of FDI by looking to get nearly $150 million in FDI. FDI is not allowed in multi-brand retail like what is owned by the future group. The group has created two layers of operation to take advantage of new rules issued by the Government. The largest retailer in Europe, Carrefour SA is looking to start wholesale operations in India as early as next year and is looking to setup a cash and carry outlet, its first in India, in the NCR region. Carrefour exports goods worth more than 170 million dollars to U.A.E, Europe, Malaysia, Singapore and Thailand. Gitanjali group which is a manufacturer and retailer of Jewelry has entered into a joint venture with MMTC and is setting up a chain of exclusive retail outlets called Shuddi-Sampurna Vishwas which is looking to open around 60 stores by the end of the year and plans to retail gold and diamond jewelry with the Hallmark brand. Mahindra retail which is a part of the Mahindra group, this group looks to invest nearly 20 million dollars into its Mom and Me stores.
The Government is also taking certain policy initiatives. The one mentioned in the context of Future group is one, but in addition 100% FDI is allowed in cash and carry segments. Franchisee arrangements are permitted in regular retail. Finally 51% FDI is now permitted in single brand retail.
The rural markets are expected to be the next growth drivers in the Indian Industry. The rural market currently accounts for nearly half of the domestic retail market and which is currently valued at nearly 300 Billion dollars. Rural India is going to grow economically over the next few years quite substantially. The per capita income has grown by 50% over the last 10 years and is looking to continue that trend. This has been mainly due to increasing commodity prices and improved productivity.
E&Y India, basic infrastructure generation, employment guarantee schemes, information and better access to money is also helping grow the rural wealth. The smaller size (single sachets etc.) may not be the only option for success in the rural markets. There may be a need to create new products to fit the rural markets. ( Ramesh Srinivas, KPMG India)
Investment commission of India has stated that the overall retail market is expected to grow from over US$ 250 billion to over US $ 1 trillion by 2016, with organised retail at just around 15 % at slightly over US$ 150 billion .India will be then among the top 5 retail markets globally in 10 years.
RNCOS produced a market report titled "Booming Retail sector in India" this projects Indian organized retail market to reach $ 50 Billion by 2011. The number of shopping malls is expected to grow by an annualized rate of nearly 19 percent till 2015. The rural market is expected to have half the share of the retail industry landscape by 2012. Organized retailing of mobile handsets is expected to reach nearly a billion dollars by 2010. The third party logistic market is expected to be at nearly 20 Billion dollars by 2011
Bharti Enterprises is one of top business groups in India with various lines of Business such as Agri-business, retail and insurance. Bharti is of course primarily known for its pioneering work in telecom sector and with Airtel has over 100 million cutomers. Bharti Airtel has also got global laurels and was named among the best performing companies in the world in the Business Week IT 100 list in 2007. Bharti Teletech is India's largest manufacturer and exporter of telephone terminals.
Wal-Mart Stores, Inc.
Wal-Mart stores, Inc. operates Sam's club locations, Neighborhood markets and supercenters in the U.S. Wal-Mart of course is known for its Wal-Mart discount stores with the branded "Everyday Low Price". The company has stores in Guatemala, Honduras, Japan, Mexico, Nicaragua, Puerto Rico Argentina, Brazil, Canada, China, Costa Rica, El Salvador, and the United Kingdom.
The Company operates in There is a general consensus of the analysts that the Bharti Wal Mart partnership is a good partnership with complementing strengths. Viswanathan Vasudevan, an analyst at from the Singapore-based Aquarius Investment Advisors in a statement said, Bharti knows the system and the rules of the game and will help Wal-Mart a lot.
In a conversation Gajendra Nagpal who is the director of Unicorn investments termed this joint venture as a winning combination. The logistics skill of Wal-Mart and the execution capability of Bharti will combine to create a company of great potency in the Indian retail market.
This franchise strategy with Bharti was a deviation from Wal-Mart's usual way of entering countries. This was because the policy restrictions on foreign direct investment (FDI) in the Indian retail sector. As part of the agreement, Bharti was expected to pay a royalty between 2 percent and 3 percent of sales to Wal-Mart for using the latter's brand name. The Bharti-Wal-Mart joint venture was expected to open its stores in India from August 2007.
Both Bharti and Wal-Mart did not disclose the nitty gritty details of the deal, but according to various sources the joint venture would make an initial investment of about a 100 Million dollars which would increase to a Billion and a half dollars eventually. Two veteran executives Lance Rettig and Andy Guttery have been brought in by Wal-Mart along with Raj Jain who is the President of emerging markets and his job will be to handle Wal-Mart's cash and carry business in India.
Bharti-Wal-mart is expected to have competition from domestic retailers such as Reliance Retail. Reliance has already planned to open more than 10,000 stores by 2010. It has also launched stores in the "Reliance Fresh" Format, which is expected to carry groceries and fresh fruits and vegetables. Many retailers feel that entry of foreign retail companies such as Carrefour and even Wal-Mart will benefit the Indian retail industry as the industry would learn some of best practices which are used internationally in retailing. Many analysts however feel that success of this particular joint venture would completely depend on the success of Bharti-Wal-Mart in building a good sourcing network and a cost efficient supply chain. The success of Wal-Mart has been it's "every day low price" strategy. The costs have to be saved and the savings passed onto the customer for the Wal-Mart success to be replicated in India. And with wafer thin margins in India that is quite a tall order.
Strategic Analysis of the Bharti Walmart Joint venture:
This deal was examined through the lens of SWOT, PEST and Porters 5 forces. In addition this researcher interviewed various managers at Bharti and incorporated those in this interview.
Bharti is a well known name to the Indian consumer. Organized retail is growing rapidly in India. Wal-mart already is best known for global best practices in retailing. So all the elements of success are essentially in place; Bharti also has strong experience with retailing to a large number of customers both in rural and urban areas. Due to it's Pan India presence Bharti can replicate the efficiencies of scale which Wal-Mart is known for. Wal-Mart while being a tremendous success in U.S has a mixed track record outside of the U.S. in direct entry. A joint venture like this helps this combined entity to focus on the strengths of each partner.
The Indian retail industry is still mostly unorganized and is widely fragmented. The supply chain in India is handicapped by creaking infrastructure. The Government has severe restrictions on retail which can impact this Joint Venture.
The opportunities here are tremendous as the Indian retail market has the potential to be the worlds largest organized retail market. This market is now largely in the organized sector. Walmart has the best practices of a globally successful retailer. These best practices have the potential of changing the face of Indian reatil.
There are numerous threats facing this joint venture. While many political parties see it as a backdoor entry for Wal-Mart, others see it as threat to traditional Indian retailing. The entry of other retailers at-least the Indian kind is a reality. The infrastructure will continue to put pressure on already low margins.
Porter's five forces
Threats of new entrantsThe new entrants who are looking to enter or who have already entered the Indian retail market such as Reliance or Big Bazaar are rapidly expanding While the market is sufficiently large the advantage of first mover success cannot be discounted.
Power of buyers
Retail traditionally has very low margins in India. For organized retail to succeed in India it must compete with the traditional kirana stores and other form of street vendors. While it certainly has an advantage with its ability to do volume purchases, the pressure on margins is always there. The Indian customer is usually loyal to the lowest price and not necessarily to a brand name and that makes it important that the JV always remain competitive on the price point.
Power of suppliers
It is not the suppliers as much at the supply chain network which is a cause for concern here. The infrastructure is very bad in certain parts of the country. Bad roads can delay transport.. Cold storage is not available in all areas which often results in produce being spoiled.
- Reliance Fresh
- Big Bazaar
- Tata Star Bazaar.
The threats of substitute
The threat of substitute is not very high. As people have to eventually shop at some place for their groceries and items which they would use in their daily life. There is a possibility of substituting brand name items with generic items if the price points do not match.
Political - The Political situation is a cauldron of controversies, where there is no clear national consensus on organized retail. While many feel that it would benefit retail overall others feel that it would drive out the small retailer. Many have even stronger feelings for entry of international retailers into India. And many feel that this is a backdoor entry of the worlds largest retail store chain into India which still has strict FDI limits in the retail sector.
Economical and Ecological: There are likely to be a lot of economic and ecological effects of this joint venture. The benefits of various vendors would certainly be positive. In addition there would be a positive impact on infrastructure as there would be a requirement of good roads, Warehouse facilities, ports , this would come up with either investment of the Joint Venture or other combination of Private or public partnership.
Social - There would be a strong impact on the social fabric of the nation as the farm sector which supports a large portion of the population would be affected. There would be an impact on the small retailer, and if the impact is even temporarily negative it may have severe social consequences. Many retail stores have seen strikes and protests in India due to the perceived view that it drives out small retailers.
Technology - The impact of technology will certainly be felt in the Joint venture. The best practices globally technologically will enter India through this joint venture. The impact can be unpredictable. The technology in most western countries is often used to reduce manpower. In India, that often is not necessarily the most desirable or viable approach. However in an Interview with Bharti managers many felt that some of the latest technological trends in retail like RFID etc will impact this JV positively.
The fate of this JV is not written in stone; though having two very strong partners and having the playground of the one of the world's fastest growing economy and the potential of becoming the world's largest organized retail sector. Political uncertainty and infrastructural issues can create an uncertainty which may need to be handled by this joint venture.
This thesis looks at three case studies which cover the sectors of communication, Insurance and retail. In all three case studies Joint venture with international participants was the main issue. In all three cases the international participant was at the top of their game as in AIG or Walmart or a strong player in their own domestic market. Very often this was the only way for the international participants to enter the market. Finally most importantly which is the central point of this thesis is that the Indian JV entered a line of work which was drastically different from their core competency. In each of these cases the JV was successful.
The main reasons attributed for this:
- Strong expertise from the foreign JV partner.
- Well established Indian partner with a strong financial and political backing.
- Indian partner with little expertise, but with an overall strong market presence in other areas.
- The market itself for the product in question is nascent with a lot of potential. (Insurance, Cell phones and retail).
It is never recommended to any company to go outside its core competency to gain market penetration, but this four conditions present a unique opportunity to certain kinds of businesses to rapidly enter a new line of business and reach a high market penetration fairly quickly. But in India we have companies which have multiple lines of businesses which are varied and flourishing independently. Tata has lines from steel to tea to hospitality, none of which are related to each other. Reliance has areas from telecommunication to power to retail. This is not a new concept. Even in South Korea we have chaebols who have different lines of business.
Going outside the competency itself is not a new thing globally either. Most companies seek to focus on their core businesses eliminating non-core operations. When does it seem appropriate to invest in non-core businesses: According to Luo in his book, entry and co-operative strategies in international business expansion, many firms first enter the U.S. market in the area of business where they are the strongest, and then diversify into non core areas. This researcher has found that there is a similar reasoning in the Indian Industry. Many industries still do not have many players. And to add to this many international companies face hurdles in entering the Indian market except through the FDI route. This creates opportunities for Companies who are already established in India to partner with foreign companies to enter into those areas to satisfy domestic demand. Focussing on non-core businesses during economic downturn also is not unheard of. Recently Volvo India decided to focus on rental business and used equipment sales to tide over the present economic downturn. The business does not have anything to do with the primary line of business or competence. Indian post office is looking at becoming a bank, since it already is a savings account holder for millions of Indians. U.S Post office is actually following it in its footsteps A green light from lawmakers could allow 30,000 post offices to offer banking and insurance products, renew drivers' licenses or sell pre-paid cellular telephone service, offsetting hits from the recession and a shift to electronic bill payment. Entering a new line of business is beneficial when there is an opportunity or the infrastructure is in place. When it is clear that there will be immediate market penetration and the market potential is such that there will not be a long route to profitability.
When entering a particular business, anybody needs to establish a few things:
They are in no particular order:
- Financial strength. Undercapitalization is one of the main reasons why businesses fail and businesses which do not have liquidity will invariably be under pressure.
- The understanding of the market place. This has been the bane for many international companies. Not knowing the patterns of the local population. Many companies who enter India are not aware of the razor thin margins which they have to deal with over here. This is just not true only in India. A lack of awareness of the market place can destroy any company ruthlessly.
- The business competency is another area where the business needs to be strong. If the business is fairly strong and has had a successful track record globally, then it can safely lay claim to having a strong business competency.
So a business with money, competency and understanding of the marketplace should invariably succeed. That exactly is the paradigm of these JVs. Most of the analysts just look at it from a stand point of view of the company entering a new line of business in which they have no competency but what needs to be understood is that the JV is entering a market where it has all the tools to succeed.
But there are still things which can go wrong and often do. The joint venture is a partnership between two companies and is like a marriage, and it is often not predictable whether the JV will be a success or not. There are a variety of things which go wrong in a JV.A joint venture represents the merger of two or more companies, much like an acquisition. Therefore, in evaluating JV partners, companies should perform the same compatibility and integration analysis they would do on an acquisition target, including a thorough evaluation of corporate culture, management style, personnel, employee benefits and IT systems. Opposites may attract, but unless they find a way to blend their differences, their joint ventures are likely to be unstable. Here you have the Indian culture which is fairly cosmopolitan but there is a subtle distrust of foreigners and the foreign companies are also not sure as to what to expect in India with the bureaucracy and the partner knowing the terrain. Many remember incidents like the Bajaj Piagio joint venture, where Bajaj got everything it needed and had Piagio kicked out of India. Though things have got a lot better since those days, companies remember those things and have an impression rightly or wrongly as to what they can expect in a joint venture.
Cultural reasons are only part of it. Who is in charge of the joint venture here? Is it the Indian company who knows the terrain or the foreign company who knows the product? That can cause a lot of problems if a joint command and control is not properly established. It is often a wise thing to set up a joint venture as a company of its own with individual controls, but that often has constraints which are financial or regulatory in nature.
Then the perspectives of both the partners are important here as well as to the duration of the joint venture. Is the Indian partner just looking to get the competency and then jettisoning the venture. Is the foreign partner looking for a toe hold in the market and then ending the venture. Both may have some element of truth in there. Both Hero Honda and Maruti Suzuki are examples of ventures where now the partners have both the joint venture and are competing individually as well.
In summary these joint ventures must be looked at like any other joint venture. All joint ventures have a probability that indicates that nearly three quarters of them will fail and that may be true for these as well. However the obvious perspective of a company entering into an area where it is not familiar with should not blind another analysis.
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