Magoosh GRE

Explore the opportunities for a company looking into international expansion to grow its foods and confectioneries business overseas

| December 11, 2012

INTRODUCTION

The purpose of this study is to explore the opportunities for a company looking into international expansion to grow its foods and confectioneries business overseas. Some relevant models will be used to assess the industrial analysis, country’s attractiveness, and risks. I will also look into some strategies it can use to survive after it enters into the country. Based on my analysis, I will identify and evaluate opportunities and at the conclusion recommend the necessary entry strategy to be used by the company to enter the new country.

BACKGROUND.

The sector that will be examined is the food and beverages sector. The sector to be considered is the food and beverages sector that has different industries in its sector and  the value chain of this sector has Farming that deals with raw agricultural commodities, then the processing industry that is into food beverages and confectioneries likewise  distribution which deals with groceries, quick service, and casual restaurant. Based on the value chains, the processing can be classified as food, beverages, and confectioneries. The top key players are Nestle, Kraft foods, Unilever and Cragill. In terms of groceries, top players are Asda, Tesco, Iceland and some other (Food and Beverages Global Report 2010 A-i).

Pfitzer, M et al (2007) reckoned that, ‘the food and beverage industry has a distinctive role in escalating economic prospect because it is universal to human life and health.’ In 2008, food and beverages was valued at $5.7T while food processing generated revenue of $3.2t. In 2008, food processing consumption constitutes 58% of the developing countries. It was anticipated that by 2013/2014 food and beverages projected value will be at $7t while estimated revenue will be at  food estimated revenue @$4t (SOURCE: F&B GLOBAL REPORT 2010, A-i).

Amongst all the firms under the food sector, I will be considering LIDL because it does not yet exist in Brazil. It will be very vital to consider what their culture is like in this country.  LIDL is one of the successful chains of grocery stores expanding strongly throughout Europe and beyond the borders. LIDL takes pride in providing top quality products at the lowest possible prices to all our customers across Europe and the UK. It has its headquarter in Germany. Their products are groceries, drinks, confectioneries and so on and LIDL will continue to play a major role in the exploration of new markets in Europe and beyond. As a multinational company, they are aware of their size and presence of operations. They also respect cultural variety and recognise differences in values and traditions. (LIDL official website).

If a company decides to enter another country in the process of raising awareness of the presence of their operations, it is imperative for the company to decide which country it wants to enter. Kedia L.B et al (2002) concluded that, ‘some organizations focus primarily on domestic operations and export products or services, while other firms establish subsidiaries or business units of varying autonomy in host countries that concentrate on the specific needs of those particular markets.’ This is what LIDL needs to consider before entering into Brazil by looking into the market, culture, economy. It should enter to concentrate on the specific needs of those particular markets, which needs to be tapped into. According to Radebaugh et al(2003 p.3), they concluded that, ‘ a company working in the international business field will engage in modes of business such as exporting and importing, that differs from those familiar with a domestic level.’ It is very clear that this company is one of these types of company as it has grown even with the economic recession in the past, it has thrived and succeeded, and it is still growing.

Looking into the Brazil, It is South America’s most influential country, one of world’s biggest democracies. Brazil’s culture reflects from Population, cuisine, religion to art. The major religion in Brazil is Christianity with population confirmed by united Nation as 195.4 million. (BBC NEWS)

The expectations of consumers cannot be overlooked when considering going abroad. Segal-horn, S. et al (1999 P. 61) claimed that, ‘the necessities and welfares of consumers are becoming progressively consistent all over the world.’ Therefore, customers’ expectations repeatedly changes temporarily . The table below will show customers’ expectations in relation to customers and the overall individuals in the world.

TABLE 1: CONSUMERS’ EXPECTATIONS

 COMMUNITARIANISM  SECURITY
TASTE  CHOICE
FRESHNESS  FUNCTIONAL
NATURALITY  CONVENIENCE
HEALTH  ARTIFICIAL
ENVIRONMENT 

SOURCE: FOOD INTELLIGENCE REPORT. (2007)

Consumers’ expectations are becoming very high, as they want good taste, fresh, and natural foods/groceries to buy. Consumers also wish their environment could be a friendly environment that they will be able to adapt themselves to the environment easily and enjoy convenience and security in the environment. Customers are now very conscious of their health, which create chances available for any company going abroad.

PUSH AND PULL FACTORS

The factors that influence Multinational companies are the pull factor, push factor and facilitating factors. The Pull factors are the proactive factors that drive people to a new place, Push factors are the reactive factors, which drive people to leave their home country. These factors will help to evaluate Brazil Market attractiveness as these factors have effect on all Multi-national food companies that are under the food sector. Therefore, all these factors are considered in table 2 below.

TABLE 2: FACTORS INFLUENCING INTERNATIONALISATION

PUSH FACTOR (REACTIVE) PULL FACTOR (PROACTIVE) FACILITATING FACTORS
Spreading of risk  Unexploited markets Lower Tariffs
Increased taxes  Thinking ahead of rivals Lower Labour standard.
Economic conditions  High Profit Margins Removal of barriers to entry
Domestic Market  Saturation  Reduced Labour and Overhead cost Relaxed regulations
Consolidation of Buying Power  Population Inducement to enter New markets
Public Buying Policy  Entrepreneurial Vision

SOURCE: ADAPTED FROM WRIGLEY AND LOWE (2002)

WHY DO LIDL NEED TO ENTER BRAZIL?

There has been increased growth in international business in this century we are now. Companies have moved from competing glocally to global competition. According to Deacon, J. H (2011) Glocally means business carried out among companies at the local level or in their home country.’ The company needs to enter Brazil as they have a different culture compared to other various countries that exist currently. It needs to consider the population of people, their culture, the lifestyle of the people, taste, and their cuisines and so on. However, a large population as mentioned above does not mean LIDL can be successful if it goes to Brazil because even in the international business environment, the market place is complex, interdependent, and dynamic. It needs to make a wise choice of entry strategy that will help them to gain a strong ground in another country. LIDL has subsidiaries in over 22 countries around the world and will even continue to gain more ground due to global competition. Based on these, the strategy to be used to enter these countries will be in accordance to their culture and some other factors.

LIDL need to go to Brazil to increase its sales, acquire more resources, and diversify their sources of sales. Due to too much competition in the countries where they exist already, they still need to look for other countries to invest and grow in order to spread their risks.  Radebaugh et al (2001 p.7) concluded that , ‘motives for industries pursuing international business then could also have been to increase sales, attain resources, diversify source of sales and supplies and minimise competitive risk.’ Realistically, some things must have happened in the recent decades we are now to have brought about increased growth in international business.

Companies do not just go global but some factors motivate them to go. There are some basic drivers and customers’ expectations needs to be well considered as customers are very vital in any organisation. Radebaugh et al concluded that, ’each nation possess certain demographic, human and behavioural characteristics that constitute its identity and that may affect a company’s method of conducting business effectively in that country. With respect to LIDL’s statement that, ‘they respect cultural variety and recognise differences in values and traditions.’ LIDL needs to consider these factors by aligning their mission with what they will be delivering to their customers. This is why it is also important to do a thorough R&D about a market before going there. Most people are conscious of their health these days and would want to buy foods that will benefit their health.

Considering the EXTERNAL BUSINESS ENVIRONMENT

The environment of this company will be analysed by using PESTLE analysis that means Political, Environmental, Social, and Technological.

Political factors

  • Changes in government laws and regulations
  • Changes in government  policies
  • Political instability  in developing countries
Economic factors

  • Consumer purchasing power
  • Foreign exchange rates
  • Tax regimes in different locations
Social factors

  • Increase in world population – Demographic change
  • Changing in consumer taste
  • Awareness on  consumer health – Obesity, Diabetics
  • Low per capital income – Developing  country
Technological factors

  • Dynamic technology – equipment and information system.

 

Considering the external environments, Radebaugh L. H (2001) argued that, ‘these affects how a company operates and the amount of adjustments of adjustments it must take to its operations in a particular country in relation to how it produces and market its products, staff its operations maintain other things. The amount of adjustments is influenced by how much the environments of home and host countries resemble each other.’

SWOT ANALYSIS

This will help to know how they position themselves in the market and how they are able to satisfy their customers in a competitive environment.

LIDL SWOT ANALYSIS

STRENGHT

  • Good  supporting infrastructures
  • Leading Global discounter
  • Environmental friendly operations
  • Leading global discounter
  • Rapid expansion in existing markets
  • Low cost operating model
  • Unique ownership model
  • Varied portfolio
  • Centralised buying operation
  • Discount range adaptation
OPPORTUNITIES

  • Increase in  Food demand  and varieties
  • Health-related products e.g. low calories food
  • Increase in low income customers
  • Further domestic discount expansion.
  • Further international expansion
  • Expanding product offering, especially fresh foods
WEAKNESSES

  • Weak cultural understanding – Norway
  •  Reliance on a discount format
  •  Relations with some branded manufacturers
  •  Sales performance per store
  •  Domestic customer loyalty
THREATS

  • Rivalry from competitors
  • Threats of new entrants
  • Sole focus on low price.
  • Retailer consolidation.
  •  Increased complexity of operating model.
  •  Price retaliation from other retailers.
  •  Local opposition to central buying.
  • Competition from discount operators.

Managers need to analyse the business environment for the company’s survival and success of business strategy for the coming future. The business is affected by the investors, customers, suppliers, and competitors impacts a company on a daily basis.

KEY SUCCESS FACTORS AND CORE COMPETNECIES

KEY SUCCESS FACTORS.•             Quality products

•             Good  supporting infrastructures

•             Low price

•             Understanding of Culture – Adaptation

CORE COMPETENCIES•             Nutritional food production

•             Cheap products

•             Production innovation

•             Operational excellence

•             Global supply chain

ENTRY STARTEGY

Having undertaken the analysis of the country’s attractiveness and decided positively to enter, it is important to work out an entry strategy that covers entry objectives, timing entry, and mode of entry to enter a new country. Mata, J and PORTUGAL, P. (2000) cites the work of Beamish and Makimo (1998) that, ‘One of the crucial decisions when deciding to expand into a new market is the decision on whether to set up a new venture or to acquire an existing firm.’ It is very vital for LIDL to make a wise decision about its entry into Brazil.

With reference to Table 1 and 2, they have to continue improving their market and gain entrance to important assets, and possibly continue to gain knowledge. Radebaugh et al (1999 p. 4) argued that four major objectives that influence companies to engage in international business are to expand sales, acquire resources, to diversify sources of sales and minimise competitive risks.’ All these are important but some other thing is missing. Does it mean knowledge and learning is not needed as part of their objectives influencing their entering a country? No. I disagree with this author’s conclusion because for a company to achieve all objectives that influence their entering a country there is need for knowledge and learning. Knowledge of the market they are entering into, knowledge to manage risks. In support of my argument, LASSERRE, PHILIPPE (2007 p.191) concluded that, ‘a company going into another country wants to develop the market, access critical resources, capture knowledge available in the country and to finally set up a global centre for coordinating various activities.’

It is very important for a multinational company to manage knowledge even at a global level. SEGAL-HORN,S and FAULKNER,D (1999 p.126) cites the work of NONAKA(1989) where she talks of the need to manage globalization as a self-renewing process in which information is the key to success. She also inferred that, ‘globalisation comes about through the interaction of articulated globalized knowledge and tacit localized knowledge, partly through the hybridization of personnel and consequent internationalization of learning.’  Learning is very essential for the success of a multinational company.  Johnson, G et al (2011 p. 94) agreed that, ‘as organisations become larger and more complex, the need to share what people know becomes more and more important but increasingly challenging. So, organisations that can share knowledge exceptionally may gain competitive advantage over those that do not.’

Lasserree, P(2010 p.193) reasoned that, ‘learning objectives are the basis of investments in countries where the industry is state of the art and in which a foreign investor gains knowledge and competencies by being present, even if the long-term market prospect is not favourable.’  There is a saying that, knowledge rules the world. In my own understanding, knowledge rules the world but what about other things that is needed to compliment these resources, which are the other objectives of a company entering into a country.

Lasserre, P (2007) also concluded that, ‘resources access based on the presence of a key resource such as human, agricultural and mineral which contributes to competitive advantage. He also said that a country offering size and growth is an opportunity with good co-ordination of their activities’ Brazil has key resources such as mining, agricultural that could be tapped. Based on the various objectives that influence entry of a company to another country, the timing factor is very important for companies to look into the current economy that might help them decide on which mode of entry to adopt. It cannot take a first mover advantage because competitive companies are there already.

Looking into the Brazil economy, some factors influence the entry mode such as country risks (political and operational risks), opportunities, companies’ internal capabilities, time pressure and governments’ requirements and corporate global strategy. Even though, the recession is still battling with all the economy. Jansen Robert(2010) said that, ‘the new economic dynamics will not only help revive investments in infrastructure, but above all it  means that instead of going abroad to obtain cheaper money and longer term loans, now local companies can just go around  in the country corner.’  Creating bigger companies in the information technology sector is considered one of the greatest strategic challenges for the Brazilian IT industry, which is very dynamic, but also very fragmented. Now is the time to take advantage of all the converging positive elements. It is an opportunity that cannot be afforded to lose.’

The government, investment entities, and companies are well aware of the window of opportunity in Brazil and are working towards building the proper framework that will help stimulate the necessary consolidation initiatives. This shows there is an opportunity for them to tap into as they are recovering back from the recession. It will be advisable for LIDL to use Acquisition strategies.

I think entering through acquisitions because it will give them access to markets when other opportunities are closed, there is also immediate availability of resources. Lasserre, P (2007) construed that, ‘This will also give them immediate availability of resources, assets and competencies; high control and penetration into the market and low technological leak.’  There is nothing beneficial that does not have a limitation. Using this entry mode, its limitations are that the acquiring company may not possess cross-cultural integration skills. This is why understanding of culture is very important and LIDL needs to find a way to turn it into strength. In considering the push and pull factors, the market is saturated with competitors in the country which means the company needs to use this factors to tap into their culture.

Ferraro, G.P (p.134) concluded that, ‘when negotiating within our own culture, there is every possibility of operating effectively at the intuitive level or unconscious level but when we leave our known cultural context to enter into international business, the scene changes dramatically. Different cultures have different values, attitudes, morals, behaviours and linguistic styles.’ It is very vital for them to negotiate across Brazil’s culture by communicating and interacting with people who have been there or are still living there. The aspect of culture should not be overlooked because Brazil is different from Germany, UK and other countries and this will enhance the result of their proposed entry.

It is also important they have a clue about the culture and after succeeding in entering, they should ensure they build a long-term relationship with their customers and all other stakeholders. Ferraro, G.P (2010) also consented that, ‘companies should avoid cultural cluelessness and concentrate on long term relationships because when negotiating with people from very different cultural backgrounds, the chances of misunderstanding increase enormously. For example, LIDL failed in Norway and people interview there think they did not understand their culture very well and their values.

According to a research carried out by a student, who looked into LIDL by taking a stakeholder approach. He said, some Norwegians believed that they ignored Labour unions.  Some will tell you that they never shopped there, because they didn’t want to support a foreign company that ignored the labour unions, build large and unattractive buildings in their towns, only had unfamiliar food in the shelves and who sent the profit out of the country.’ LIDL needs to be careful when they enter into Brazil and ensure they put goods consumed by Brazilians on the shelf.  Ferrarro, G.P (2010) concluded that, ‘successful international business negotiating is conducted in a cooperative climate in which the needs of both sides are met and in which both sides can emerge as winners. He said it is only under this circumstance that a business relationship will have a chance of lasting well into the future.’

Considering the Hofstede’s framework, Power distance, and uncertainty avoidance is very high and it is much of Masculine is very high. The only limitation of hofstede’s framework is that it was done through survey in different countries. Power distance affects culture and the way we communicate, so in Brazil, Power distance is very high which reflects that there is distance between the rich and the poor. This is why Attitude really matters when considering the culture of an organisation. It reflects underlying values.  WILD, J.J et al (2010) concluded that, ‘just like values, attitudes are learned from role models and differs from one country to another because they are formed within a cultural context. He also said that people in the Latin America and Mediterranean cultures are casual about their use of time, they maintain flexible schedules and would rather enjoy their time than sacrificing it to unbending efficiency.’

Organisations should be able to bring in place things that will reflect values and customs of people.  Laura Luo (2011) concluded in his lecture that, ‘Major  problems of cultural collision are likely to occur if a firm implements practices that do not reflect local customs and values and/or employees are unable to accept or adjust to foreign customs and that religion can be a powerful cultural force in societies of all levels of economic development.’  It is vital for organisations to consider the main religion in a country. Brazil’s main religion is Christianity.’ According to Pew Global Attitudes projects in 2002 researched that Number of respondents saying religion is very important in their lives are 80%. This shows there is opportunity for LIDL here unlike Malaysia that is constituted mostly with Muslims and they mostly rely on Halal products.

Some other limitation is that nationalities may view acquisition by foreigners unfavourably and costly which often associated with high acquisition premiums and high political risks. Food production will be there always because people eat and it will not die but innovation of new ideas is needed. If an organisation cannot lead change, then they should be managing to catch up. Is it risky? No, it is not risky since it can continue, just that it can change. There is existence of political risks and economic risks are very high. If risk is high, we need to avoid risk and risk avoidance is the key factor. Low risk means more attractiveness. Brazil market is a growing market, and then it is attractive

Despite all the attractiveness, there is tendency of some risks either economic/operational risk or political risks. This is why it is important for multi-national companies to look into the timing factor and see what is currently happening in the country they intend going. It is important for LIDL to consider their capabilities, scan the external environment to compliment whether they should go or not. It is important for companies to take risk because it means they are so confident that even though the future is uncertain. This is why the proactive issues were explained above.  Looking into Brazil, Lasserre, P (2007) concluded that, ‘operational risks directly affect some countries because government regulations and bureaucracies add costly taxation or constraints to foreign investors or because the infrastructure is not reliable.’

Considering the Brazil, John Paul Rathbone(2011) said in the report that, ‘Cheaper imports have made Brazilians feel richer, feeding a consumer boom but domestic manufacturers have appealed for help and the same kind of tariff protections that characterised the doomed economic model of bygone years. Finally, to deal with the global financial crisis, the government opened up the taps and has only just started to withdraw the stimulus. Ultra-low interest rate in the United States, Europe, and Japan has flooded the country with capital, pumping up the economy further. Bank credit is now growing at a 20 per cent annual clip.’ This implies some of the economic factors

In BBC news, the political factors determine the risks of doing business in a country. In January, there was a change in government on Brazil where Ms Rousseff Dilma was sworn in as the first woman president of Brazil.  Rousseff singled out his work over the last eight years to reduce poverty and promote economic prosperity. The most determined struggle will be to eradicate extreme poverty.’ We can be a more developed and fairer country.  Hill, C. W (2011) argued that, political forces cause a drastic change in a country’s business environment that adversely affect profit and other goals of a company. He later said political risk tends to be greater in countries experiencing social unrest and disorder. A change in political regime can result in the enactment of laws that are less favourable to international business. Since LIDL has strengths in providing low cost products and the newly elected president believes there is still poverty and some people are suffering, it is an opportunity for this company.

Considering the core competences of LIDL, which are Nutritional food productions, cheap products Production innovation, Corporate Social Responsibility, Operational excellence, Global supply chain. Paula A. I (2011) reported that Jacques Sarfatti, from recruiter Russell Reynolds said that, ‘Europeans have been coming to Brazil, but not Americans and are seeing opportunities there and that one of the key sectors for foreigners is energy, mostly because of the country’s expanding oil and gas exploration industries. There are also opportunities in infrastructure, mining, retail, and finance. Interest in Brazil is increasing as the country gears up to host the World Cup in 2014 and the Olympic Games two years later.’ This shows that there are opportunities for this company entering into the country as it is now recovering well.

Considering the above discussion, it is important for this company to use a model that will fit into the culture of Brazil. Then, how about marketing internationally? If LIDL is entering through acquisition into Brazil, it should consider how to market its product internationally. This will depend on the segments they are targeting in the country because marketing strategies depends upon a firm’s marketing orientation and targets markets because what sells in one company does not mean it will be bought in another company. The best ways to identify consumer market segments within and across countries include demographics (Gender, Religion, Income and age) and Psychographics (lifestyles, values, and attitude). However, there might be some challenges to global brands such as language factors, brand acquisitions, country of origin images, internet, and electronic commerce.

In conclusion, sometimes when a company is just entering into another country, products needs to be changed to suit the culture. There might be some alterations in the product policy due to some legal reasons, cultural reasons, and economic reasons. In addition, when using an entry strategy, they should choose a price strategy that will suit them and considering brands, currency value and inflation rates. I belief with the discussion made, going through an acquisition of a company already in existence in Brazil will give them the chance to understand the culture better and produce products that will meet the needs of the society rather than putting things they would not buy on shelf. This gives an opportunity to acquire an existing company there that will give them a grounded understanding of how things work in their company.

BIBLIOGRAPHY

  1. Marc pfitzer and Ramya Krishnaswamy. 2010.  http://www.fao.org/fileadmin/ user_ upload/ivc /docs/ UnileverandProjectNovella.pdf
  2. LIDL official Website. http://www.lidl.co.uk/cps/rde/xchg/lidl_uk/hs.xsl/4035.htm   (05 May 2011)
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