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Entry Strategies of foreign firms: The Case of Carrefour in Saudi Arabia
There are a number of entry modes available to companies such as exporting through direct or indirect channels, licensing and franchising, foreign direct investment (acquisitions and mergers, joint ventures, strategic alliances etc.). However, the firm when going abroad must also see whether the foreign market where it intend to go have potential to grow or not. This work aims at conducting an analysis of entry strategies used by Carrefour to enter retail market of Saudi Arabia.
The research is based on interpretivism philosophy and was designed exploratively. The researcher has used an inductive approach to reach the conclusion. The work is qualitative in nature and judgmental sampling was practiced by the researcher to select a sample of 50 employees from the strategy department of Carrefour.
The study concludes that government and regulatory authorities of host country influence the entry mode selection of Carrefour. Carrefour enters into only those markets in which the government policies are favourable to the company. It generally avoids countries which create unnecessary issues while granting the license. Moreover, strategic objective and availability and accessibility of resources are main firm specific factors that influence Carrefour's decision in entering into the new market. The company expands its operations in those markets that have profit potential and generate continuous retail demand. From the primary data it can be concluded that promotion of export efforts of government is important home country specific factor considered by Carrefour in selecting the mode of entry. Finally, before selecting an entry mode for entering into the foreign market, Carrefour consider whether the company has experience of operating in the host nation or not.
CHAPTER ONE: INTRODUCTION
When a firm goes international, there are three basic questions that are required to be addressed: What the company is? Where it wants to go? How will it go there? The first question gives the idea of the firm’s values and its core competencies. The second question shows the ambitions and direction of the company, particularly for the foreign market where it intends to enter and expand business. The third question highlights the ways and strategies adopted by the company to enter foreign markets. Jansson (2007) defines entry strategy as how companies get access to new customers in new markets by marketing their products and services. According to author, Internationalization strategy is how market of business is rapidly globalized by expansion of the company to the growing number of nations (Jansson, 2007). This section of the dissertation provides a deep insight into entry strategies that firms implement in order to expand their business in foreign countries. This chapter provides the brief introduction of the subject under consideration and main themes that are adopted for the purpose of research. The chapter begins with a short background of research area, then providing the problem statement that will guide the entire research process. Subsequent to this, research aims and objectives are given, that will further help in carrying out research in a systematic manner. Research questions that are intended to be solved through present research are also stated in this chapter. Finally, the section ends by presenting the succinct outline of other chapters that are be included in this dissertation.
Background of study
The business environment in today’s world is experiencing significant changes such as increase in competition, advancement of technology and increasing globalization. This has provided many market opportunities to business firms and therefore, influenced them to go international. In the past two decades, companies have shifted their orientation from domestic to global and are using global marketing techniques to reach international markets (Davis and et. al. 2000).
Different researchers discuss on a number of reasons on why firms intend to go abroad. Thomson and et. al., (2005) mentioned four main reasons that motivates company to expand their business into foreign markets: (a), gain access to a large number of new customers that further help company to generate more revenues; (b) lowers cost and improving the competitive position of company in the market; (c) capitalizing on its organizational capabilities as well as core competencies; (d) dispersing business across the wider market so that economic slowdown cannot put the company at risk (Thomson and et. al., 2005). According to Couturier and Sola (2010), firms’ desire to acquire resources that are more efficient than those in the domestic market, also motivates them to go international. Album and Duerr (2008) add some more motivational factors that drive companies to pursue international marketing: firstly, cost of R&D, which, for many products cannot be recovered unless they are sold globally; secondly, the nation’s desire to improve its economic position.
The major business environment changes that drive rapid growth of global business are: advancement in technology and great reduction in costs of communication, improvement of logistics and supply chain management, development of diverse and sophisticated software applications that support the wide range of organizational functions, entrepreneurial innovation, expansion of capital markets, increasing trend of strategic alliances and joint ventures, etc. (Ellis, 2000).
Entry in foreign market most likely means being exposed to completely new business environment. The usual business conditions might differ from domestic market and may even constitute higher level of socio-cultural differences and trade barrier, that may prove to be complex to handle. If the firm lacks important resources and organizational capabilities in unfamiliar foreign market, then it may become difficult to sustain in the market for long periods. However, being aware of the potential of a target market is prerequisite for making a decision regarding entry into foreign markets. Albaum and Duerr (2008) stated that, most firms have started buying, selling, competing and/or working with business organization in other countries. The authors further assert that, from the customers’ perspective, international sales and marketing provides a wide range of goods and services with better quality and lower prices. A similar view is presented by Courturier and Sola (2010), who assert that, companies must develop international in order to survive and sustain in the market. Nevertheless, it is crucial for these companies choosing a suitable target market in order to expand their business network. There are a number of entry modes available to companies such as exporting through direct or indirect channels, licensing and franchising, foreign direct investment (acquisitions and mergers, joint ventures, strategic alliances, etc.). However, the firm, when going abroad, must also see whether the foreign market where it intend to go have potential to grow or not.
Carrefour, in order to expand its business boundaries, entered into the market of SA. Initially, the company faced stiff competition from the local players already existing in the retail market of Saudi Arabia (SA). Major among those were the Lifco Group of Companies, Lulu Hypermarket of EMKE Group, and Fathima Group of Companies. Among all, Lulu is the most popular retail store among the local society. At present, the economy of the country is doing well as a result of which Lulu has come up with more than 80 stores at various locations (Barbra Dozier's Blog, 2011). Market leaders like the EMKE group, are in a process to further expand the retail sector to next heights. Apart from groceries, food, drinks and domestic products, these retail stores also sell various brands such as IKON. The Fathima group came into existence in 1970 and offers wide range of products and services. The company operates through retail outlets, hypermarket, supermarket, wholesale and distribution centres, cold stores and restaurants (Barbra Dozier's Blog, 2011).
To conclude, it can be rightly said that today’s world is highly dynamic and globalized, where consumer anticipate a large variety of goods and services to select from, and competition in the market is rapidly increasing due to continuous change in social and technological advancements. These trends are keeping the international marketing and internationalism, a hot subject among the companies’ strategic meetings. As a result, business organizations are now looking for new and untapped potential customers for their product and services that further aid them in generating higher revenue and growth prospects for their company.
1.2 Statement of the Problem
When a firm goes international, there are three basic questions that are required to be addressed: What the company is? Where it wants to go? How will it go there?. The first question gives the idea of the firm’s values and its core competencies. The second question shows the ambitions and direction of the company, particularly the foreign market where it intends to enter and expand business. The third question highlights the ways and strategies adopted by the company to enter foreign markets (Thomson, 2005).
Jasimuddin (1995) stated that, studying the culture of the host country is of paramount importance for companies wanting to expand their network because cultural differences have direct influence on all business operations (Jasimuddin, 1995). External business environment is not the only critical component to be examined when establishing business in foreign markets, the potential of the target market in terms of growth and revenue prospects is a major parameter for deciding whether to enter into that market or not. Additionally, identifying the forces that drives competition in the target market is also one of the vital factors, as it helps in determining the attractiveness of the market (Pietrzak and Klug, 2007).
In sum, the globalization and various technological developments have provided organizations an opportunity to expand their operations and to benefit from emerging markets. However, it involves a greater degree of risk as the business markets are volatile both in terms of economic and political instability of the countries. Thus, it is crucial for the companies to evaluate what strategy they must adopt to enter into a new market. Several research studies have been conducted with a view to identify the entry strategies that prove to be effective for firms, different paths are available to the firms to enter into emerging markets (Limbersky, 2008). Some companies take into consideration the gradual path, in which, as per the time and knowledge they enter into new market one by one, while some companies avoid this strategy. The proposed work will handle Carrefour, a retail company, which is involved in international markets and study its market entry strategy in Saudi Arabia. This area was chosen so as to gain knowledge that how companies formulate their strategies for entering into a new market. It will also help in understanding the parameters to be considered while devising the entry strategies.
1.3 Objectives of study
The main aim of this study is to conduct an analysis of entry strategies used by Carrefour to enter retail market of Saudi Arabia. More specifically, this study includes gathering relevant data on factors that influences the choice of entry strategies of foreign firms in Saudi Arabia, modes of entry and strategies used by Carrefour to enter the retail sector of that country. Thus, the study also seeks to examine the challenges that the company faced while entering the foreign market, and steps taken to address that challenge.
1.4 Research Questions
With a view to achieve the above mentioned aims and objectives, as well as to conduct the study in a systematic manner, it is important to answer the research questions. Following are the main questions that will be addressed by this study:
What factors influenced the choice of entry strategies of foreign firms in Saudi Arabia?
What entry strategies Carrefour adopted to enter into retail market of Saudi Arabia?
What challenges did the company face when entering Saudi Arabia?
What are the steps taken by the company to address the entry challenges?
1.5 Brief Research Methodology
Research Philosophy: The proposed work is Interpretivism in nature since entry strategies differ from country to country and company to company (Merriam, 2009).
Research Design: The present study is explorative in nature as the topic under study is relatively new and nothing much has been done on entry strategy of Carrefour in Saudi Arab (Suri and Clarke, 2009).
Research Approach: The proposed work is based on an inductive approach as first the study focuses on evaluating the market entry strategy of Carrefour in Saudi Arabia and then it generalizes the findings (Mulder and et. al., 2000).
Research Type: The present work is qualitative in nature since all the data collected for this purpose are qualitative (Babbie, 2010).
Sampling: Judgmental sampling technique is applied for selecting 50 employees of Carrefour from its strategy department.
Data Collection: Both primary and secondary sources are referred for collecting primary and secondary data. Secondary data are collected through books, journals, internet, etc. while Primary data are collected by conducting interviews of 50 employees of Carrefour from its strategy department (Gibaldi, 2010).
Data Analysis: Qualitative tools are used for analysing the collected data (Gill and Johnson, 2002).
1.6 Dissertation Outline
The short summary of key chapters of research has been given as below:
Chapter 1: Introduction: This chapter provides an overview about the retail market of Saudi Arab and market entry strategies practiced by the retailers. In addition to this, aim, objectives and research questions are also discussed in this section. Finally, the chapter highlights the significance of the proposed work.
Chapter 2: Literature Review: In this chapter the researcher studies various literatures regarding market entry strategies and model practiced by the companies. It provides deep insight about the area under consideration. Further, this chapter helps the researcher in collecting secondary data.
Chapter 3: Research Methodology: This chapter is the core of the research process. This chapter assists the researcher in designing entire research process for the study so that the work can be completed effectively and efficiently.
Chapter 4: Data Analysis and Findings: In this section, the researcher discusses all the finding devised from the analysis of the primary and secondary data.
Chapter 5: Conclusion and Recommendations: Final conclusion and recommendations are made in this chapter by the researcher.
1.7 Significance of the work
Before entering into any foreign market, a company needs to formulate entry mode strategy to successfully penetrate into the market. This work is an attempt to analyse the entry strategy adopted by Carrefour, while entering into the retail market of the Kingdom. Thus, the present work has a lot of significance. Firstly, it is of high importance to Carrefour to understand whether they have adopted a correct strategy or not to enter into SA. In addition to this, this will also help them in formulating better strategies for entering into other countries. Through this study, not only the other retail companies operating the outside the SA, but also various other companies other than retail sector will also be benefited. They can use this study to draft their entry mode strategy into SA. The present work is useful for the theoretical purpose also. Students, scholars and professors can consult this work for their academic purpose. Students can gain significant knowledge regarding entry mode strategies through this study. Apart from this, scholars who want to pursue further studies in this field can refer this work as it will provide them a strong platform for future research.
CHAPTER TWO: LITERATURE REVIEW
In this part of the dissertation, the researcher presents various concepts and theories regarding entry strategies, entry modes and internationalization. The main aim of this chapter is to gain deep insight regarding the subject under consideration. For the purpose researcher has referred various secondary sources to collect appropriate information so that researcher can draw valid and appropriate conclusion.
2.1 Market Entry Strategies
Different researchers have defined foreign market entry strategy, marketing strategy and internationalization differently. Jansson (2007) defines entry strategy as how companies get access to new customers in new markets by marketing their products and services. According to author, Internationalization strategy is how the market of business is rapidly globalized by expansion of the company to the growing number of nations (Jansson, 2007). It can be inferred from these two definitions that entry strategy is the initial stage in the process of entering new markets, whereas internationalization is a long-term process that observes expansion of the company in a global business context (Lee, Lim and Tan, 2000).
According to Jansson (2007), entry strategy constitutes four main factors, namely entry mode (that determine whether the firm shall establish a company of its own, operate through a JV or export), entry node (determine how shall a firm joins the local market), entry role (what commercial role the firm shall play in local network i.e. manufacturer, buyer and/or seller) and entry process (determines how the firm shall develop a relationship in local market). Albaum and Duerr (2008) presented a similar view, they stated that market entry strategy consists of marketing plan and entry mode that defines the degree of control the company enjoy and its commitment in the target market. Pan and Chi (1999) identified another aspect, i.e. time of entry, which is essential to consider when entering an emerging market (Greco, Meyer and Streinriede, 2000).
Agarwal & Ramaswani (1992) have identified some other aspects of market entry strategies that are related to entry mode - ownership and control. Over the last 10 years, significant emphasis has been laid on maintaining business relationship through networking and strategic alliances and examining the business performance within varied entry modes (Beilock, Wilkinson and Zlateva, 1998). A recent study conducted by Filatotchev (2007) indicates that entry strategies are related to information, irregularities and substantial risks, particularly when companies invest in emerging markets having less developed business infrastructures.
Luostarinen & Hellman (1993), conducted a research on small family firms in Finland and had a holistic view towards the internationalization process. Unlike outward processes as per the traditional approach, they fortified the notion of inward internationalization. According to them, for gaining internationalisation, companies must buy raw materials, technology, components or goods through inward internationalization. Further, they proposed four stages for internationalisation. These are: domestic stage, inward stage, outward stage and co-operation stage (Esperanca and et al., 2006). Dunning (1988,1993) views on internationalization were based on the opportunities available in the international market. He suggests, the focus of a company should be on OLI framework, that is, ownership, location and advantages by internationalization. According to Dunning, a company will enter into that market where it can utilize competitive advantages (Beilock, Wilkinson and Zlateva, 1998). Hill, Hwang & Kimís (1990) feel that companies entering into a foreign market must have some control over the activities. They further proposed that, licensing requires minimum controlling while wholly owned subsidiaries require maximum controlling.
Several theories have evolved explaining the reasons for the choice of entry strategies. One of the most important is transaction cost theory.Beside this, resource advantage, international product life cycle, strategic behaviour and network theories are also some well known concepts regarding entry strategies (Harzing, 2002). Some of these focus on internal resources, management practices and risk tolerance of firms, whereas some focus on external business environment factors as the deciding factor for internationalization. In the present dissertation, no specific model has been used, instead the researcher has tried to focus on different aspects of all these theories that are most relevant to present case (Pehrsson, 2009).
2.2 Foreign Entry Modes
Hill (2007) stated that there are three ways a business organization must consider if it intends to explore overseas markets. These include decisions regarding what the foreign market to enter, timing of entry, and scale of entry or strategic commitments. The author asserted that, if the company wants to expand its dealing to out of the country markets; it must appraise the long-term yield prospective of the country. The long-run profits of operating company in a unfamiliar marketplace mainly depends on market size as well as current and potential purchasing power of the consumers in that market. However, in case of large markets, economic growth rate of the market and living standard of the customers is also required to be considered.
Once the organization has selected an area to enter, the next step, the company needs to consider is time of entry. If the company is first to enter into the market, then it has certain advantages such as brand of early entrant will be well known and accepted by the market, as well, the first mover is able to capture a large share of market demand. The company also has cost advantage which can be used to cut the price to eliminate competitors for market. However, there are various disadvantages also, firstly, the pioneering costs are needed if the company is first to enter that market. This means, the company has to pay much time, effort and expense to understand that foreign market (Pehrsson, 2004).
Besides the above two basic decisions, the firm also needs to consider the scale of entry. A company can penetrate a overseas market on a large scale; this needs a tactical assurance. For large scale entry, the firm has to face first mover risks as well as inflexibility. On the contrary, when a company enters the market on a small scale, the company needs more time to acquire market information and then to eliminate risks.
To a great extent performance of the company in foreign country depends on its market entry mode. The choice of mode of entry that company selects in order to expand its business network in another nation is one of the most critical decisions.
Root (1987) termed entry mode as an “institutional arrangement that aid entrance of company’s product, competencies, technology and other organizational capital in a distant nation. Gatingnon and Anderson (1988) defined entry mode as “governance structure that enable the company to implement control over its business actions in foreign country (Bretherton and Carswell, 2001).
As mentioned above, the transaction cost is one the most important theories that describe the choice of mode of entry. This theory focuses on minimizing the costs by investing in varied markets, protecting assets, etc. The theory is significant when deciding between internally producing in a firm or buying from a market. It emphasises on make or buy decisions (Tielmann, 2010). Nevertheless, when a question is whether the firm should set up production in foreign market or export there, myriads of factors are required to be considered. Erramilli and et. al. (2002) further added that a company should select the mode of entry that can well reassign its capabilities or resources from domestic nation operations to host nation operations without destroying their value (Wang and Montaguti, 2002).
Some scholars stated that the growth rate of local industry is also one of the important factors on which choice of entry mode depends. Bhaumik and Gelb (2005) argued that if an industry is growing at a fast pace and is therefore changing rapidly, in that case, it may be important for firms to not to lose first-mover advantage to other competitors.
There are various international market entry modes that company can implement when entering into a new market. Modes of entry vary in terms of degree of control the company has over resources, the transaction costs associated with these resources, ease of knowledge transfer and enforceability of legal rights. Dunning (1993) identified three factors that determine market entry modes; first is ownership advantages of company, the second is a location advantage of the market and the third factor is internationalization advantage of integrating transaction within a company (Taylor, Zou and Osland, 2000).
Below mentioned are some of international market entry strategies that are relevant for companies engaged in retailing and are intending to enter foreign markets:
Exporting: When a company wants to involve in international retailing at lowest level, then exporting is main choice. It is one of the easiest ways to reach the foreign market and has minimal impact on operations of the firm. Exporting is classified into two categories: direct (every function is owned and controlled by the firm itself) and indirect (some business functions involve intermediaries). From the company’s perspective, exporting requires low investment, increase production capacity, allow the company to achieve competitive edge over rivals, and most importantly improves the financial position of the company. It also allows the firm to uphold control over production function and reaching maximum consumers. On the contrary, exporting has certain disadvantages; the company may lose market control and in some instances exporting may affect financial performance of the company which can be caused by high tariff costs, transportation costs and quotas. This type of entry mode is appropriate when a domestic country has cost advantage and there are low entry barriers.
Licensing: Licensing is in use when a firm allows another firm to produce their product under that firm’s name; it can be process technology transfer from home country to the host country. Licensing involves low initial investment, easy access to the local market, avoidance of trade barriers and ease of understanding local market needs. While on the other hand, licensing has some major drawbacks also; the company may lack control over its operations and may also face difficulty in transferring knowledge. The company can exercise this entry mode when it has a location advantage in the host country.
Jointventure: When a firm glues with other firm for similar interest and form a new business unit, then Joint venture is in action. The main attribute of this strategy is that rights and control are collective. By forming a joint venture with local partner, the company can enjoy varied advantages, such as, difference in language and culture in the host country will not be a barrier for company to enter another market. Secondly, risks and costs can be shared among partners. Moreover, a joint venture with local partner will allow the firm to have land lease rights and exemption on certain taxes and duties. However, there are various disadvantages also; the company may not enjoy tight control on its subsidiary. Additionally, shared ownership may also cause disputes and conflicts among partners, which can affect business to a great extent.
Franchising: In this type of entry mode, the company gives franchiser the right to use its name to sell the product. In context to the present case, the retailer can also provide the franchiser with technological knowledge and training required to operate the business effectively. Doherty (2001) asserts that franchising is one of the simplest ways to expand business networks. As far as disadvantages are concerned, under this agreement, the company may not have much control over operations, and moreover, the potential revenue will have to be divided among the partners (Doherty, 2001). It has been observed that most of business organizations that are engaged in retail adopt franchise entry mode to enter in foreign market as it involve lower costs and risks.
Wholly-owned subsidiary: Under this type of entry mode, the company wholly owns a business in foreign markets, i.e. from production to ultimate selling, every business function takes place in a foreign nation. Basically, there are two ways to establish subsidiary in foreign market. First is by acquiring an established local company in foreign nations and then to manufacture its own products in that company. The other is by setting up a whole new operation in foreign nation, this is called Greenfield venture. Under this entry mode, the company has tight control on every business operation and will thus not lose its technologies to others. However, this type of entry mode requires huge investment and is relatively more risky than other entry modes.
2.3 Factors influencing decisions of Entry Modes
Although a business unit may guarantee high growth, expansion or entry into a foreign market cannot be productively achieved without having an economical place within the trade and commerce (Agarwal and Ramaswami, 1992). For this reason, selection of mode of entry is essential, therefore, considered as crucial tactical resolution. Choice of entering mode is influenced by various internal and external factors which are as discussed below:
Company size and resources: Small-sized corporations have limited market service options as they have restricted resources which may not permit any doorway. Establishing a wholly-owned subsidiary requires substantial investment and involves high risks which a small company cannot afford (Koch, 2001). Size of company and its organizational resources influences choice in the selection of entry strategy to a relatively great extent. According to Root (1994), the more profuse a firm’s resources in technology, capital, management, production and marketing skills, the more entry mode options are there.
Risk Attitude of management: The point to which a firm will admit company risks occurred from extension depends on the firm’s fiscal position, competitiveness in the market, its strategic options, etc. The perception of risks associated with a particular mode of entry may influence firm’s decision significantly (Koch, 2001). Wholly owned subsidiary involves the highest level of risk due to heavy resources associated with such entry, whereas exporting is less risky (Hollenson, 2001).
Home country factors: As per Root (1994), variables such as production, market and environmental factors associated with home country also influences the firm’s alternative of entry mode. When the domestic market for the firm is small, the company is forced to go international and motivate it to invest heavily to enter new markets.
Characteristics of the foreign nation's business environment: general business regulations, intensity of competition, taste and preferences of consumers, buying patterns of consumers, business infrastructure and ancillary activities, legislation and technological development are key variables that persuade the option of entry mode. In views of Hollenson (2001), highly competitive business environment may influence firm to enter with mode of entry that require less resources in order to shun redundant risks.
Market growth rate: It is considered to be of great implication. If a marketplace is budding at rapid pace, the firm will be advised to capitalize this opportunity and use exporting. And if the demand for foreign goods is very large, then the company can also establish its own marketing subsidiary.
Entry Barriers: There are several types of market barriers that make it tricky for overseas company to enter home market. These barriers include tariff barriers, distribution access, governmental regulations, exit barriers, etc. These factors tend to manipulate the alternative of entry mode of the business.
2.4 Retailer Internationalization
With the passage of time pace of globalization has quickened and so does the race of companies exploring the new market. More and more companies, with the aim of generating higher and higher businesses are entering into some of the emerging markets of the world such as India, Saudi Arabia, Brazil, China, etc. The main driving factor behind this is that these emerging markets are too attractive to ignore and are highly promising markets. In addition to this, these markets are still unexploited and thus offer lots of potential for all kinds of businesses. However, swiftest actions by the companies do not guarantee success; rather it is the right moves at the right time that ensure success for the companies (Guisinger, 2001). For retail companies, location is one of the important parameters to be considered while formulating its market entry strategy, but the most important is the timing of the entry. For example, if a company enters a market where other companies have already entrenched business, in that case it is considered as late entrant and hence may not enjoy any first-mover advantage. But if the company is early entrant, in that case brand will be known and accepted by people much earlier, which in turn will enable the company to capture market demand. In addition to this, the company also requires to have in-depth understanding of the market in which it intends to enter. Studies have shown that International retailer has to pay much attention to the nature of the market in which it intends to enter. A company needs to conduct extensive market research regarding local culture, local customers’ buying pattern and behaviour, the local consumption situation, etc., as they may differ from those of the home country. Subsequent paragraphs discuss the expansions of big business corporations which will help in understanding about global retailing.
The globalization of contemporary retail continues to hasten up. In the last decade and a half, more than 50 retailers have crossed their local business boundaries and have explored around 90 new markets. The year 2005 is considered to be a milestone in this regards as in this year alone around 30 wave 2 companies entered into new markets. Wave 2 companies are those companies which are regarded as supermarket and includes do-it-yourself and apparel retailers. However, a sudden wave of globalization does not result in the success of most of these retailers as in 2005 itself retailers left 17 of the world markets and in the succeeding year, another 19 markets were evacuated by the retailers (A T Kearney, 2012). The main reason behind this was that retailers were struggling to generate profits.
In this regards, A. T. Kearney is helping retail companies in devising their global development and market entry strategies through Global Retail Development Index (GRDI). The index considers 30 top moist emerging markets of the world and ranks them on more than 25 macroeconomic parameters and retail specific variables. A. T. Kearney has done lots of research in this area and has found that emerging markets remain attractive and offer a window of opportunity for an average of 5 to 10 years (Davis, Desai and Francis, 2000). Moreover, depending on the region and time of entry of the company, certain retail formats works better than the others. And finally, modern retail expansion adds to economic development and growth of the country.
After finding that European nations have become mature markets for the retailers, Asia has reclaimed as the lead position. However, the Middle East has recorded highest retail sales growth rate globally followed by the United Arab Emirates and Saudi Arabia ((Root, 1994)). The map below shows relative market attractiveness around the world:
Figure 1: Relative Market Attractiveness
Between 2001 and 2005, the retail sector of the Middle East countries grew by 30 per cent. This growth is second in the world after Central and Eastern Europe, whose retail market grew by 41 per cent. This figure is well above the growth rate in Asian retail market, which was recorded around 16 per cent (Limbersky, C. 2008). The retail market of Latin America, Western Europe and the United State grew by 20 per cent, 16 per cent and 22 per cent respectively. In addition to better market growth of retail sector, the Middle East countries have recorded the uppermost escalation rates in shopper expenditure and a stumpy echelon of retail concentration. Take an example of Saudi Arabia. In Saudi Arabia the top five retailers hold less than 11 per cent of retail sales (A T Kearney, 2012). Because of this reason, more and more retailers of European nations are entering in the Middle East region countries more particularly in Saudi Arabia, Kuwait and United Arab Emirates. Most of the entrants in this region are non food retailers. Such retailers use low risk models by taking franchise of different brands and tries to gain a foothold. Some of the retailers entered into this region in the past few years are Burberry, Paul Smith, Jimmy Choo, Asprey and Emporio Armani. Louis Vuitton also is in the process to expand its presence in this region and Harvey Nichols is also expected to enter soon in this attractive market. Us retailer GAP is also planning to enter in the five regions of the Middle East by lunching both Gap and Banana Republic stores (Harzing, 2002).
The annual Gross Domestic Product (GDP) growth rate of United Arab Emirates is 7 per cent whereas, the annual retail growth rate of is 11 per cent. The top retailer in this region is Carrefour followed by Consumer Co-op UAE and Casino. The retail space in the country is going by 110 per cent. With the entry of Saudi Arab into the World Trade Organization has resulted in better and easy investment rules. Now foreign countries can control up to 51 per cent shares of the local companies. Because of this the company has got a place in the list of top twenty global retail development countries (A T Kearney, 2012). The country’s economic growth is quite healthy and steady and in addition to this, there is a stumpy concentration of contemporary retailers (the top five hold just 11 percent). Both the parameters reflect the tremendous potential in the retail market of Saudi Arabia. Since several malls have come up in the city like Riyadh and other major cities, the growth of shopping centres and non food retailing is around 100 per cent in the country. Carrefour has sensed the opportunity existing in this country and is planning to come up with 18 new stores through partnership with the local players. In addition to this, the retailer has adopted several new strategies such as developing the new floor layout, launching game centres, etc. (Tielmann, 2010). Management feels it will tremendously help the company in attracting more and more customers by providing a whole new shopping experience. Another retail giant Casino is also planning to enter in the country’s retail sector through its Giant store format. Since this market possesses lots of potential for the retail players, Carrefour has also entered into the market and has further expanded its area of operations.
2.5 Overview of Saudi Arabia retail Market
The retail market of Saudi Arabia is, however small but per capita income is very substantial. At present, Saudi Arabia and United Arab Emirates are considered as the largest and most attractive markets in terms of total expenditure. The region continues to exhibit strong market presence, increasing population and GDP, more stable political environment and enhance government spending.
Saudi Arabia is the ninth largest country by area in the world. The strategic geographic position of the country enables it to import products from Asia, Europe and other nations. The kingdom has been ranked as the top market for foreign retailers intending to expand their maker in the region. Over the past five years, the region has experienced significant increase in retail floor space. Today, malls of Saudi Arabia are populated with a large number of foreign stores ranging from Debenhams (UK departmental store) to Starbucks (US coffee house).
Many market studies have shown that consumers of Saudi Arabia are among the most eager consumers in the world (Saudi Gazette, 2013). According to the IMF, over 81 percent population of Saudi Arabia is economically strong and it further estimates it to increase to 83 percent by 2015. The population of the region is having high exposure to global brands and are used to foreign product; this in turn facilitates global companies to establish their products in Saudi Arabia. As well, the demands for global brands are getting impetus in domestic market. Many brands from France, Canada and Germany are also experiencing high demand by Saudis. The shifting tastes of consumers have motivated international retailers to expand their market in the region.
2.6 Company Background
Carrefour, French multinational retail is one of the largest hypermarket chains and fourth largest retail chain across the world. The company's headquarters are located in Paris, France. Since its inception in 1959 the company has expanded its business boundaries around the world. Carrefour has its chain all across the globe, including Europe, China, Brazil, Argentina, U.A.E., Saudi Arabia, UK, etc. Carrefour has adopted multi-channel approach in which physical as well as online stores interact with customers in order to meet their different needs and demands.
Products are core business element for Carrefour. The company believes in providing customers with a wide variety of products with better quality and at the lowest prices. To cater different needs of customers throughout the world, the company refines its product range with a variety of fresh produce directly from suppliers, essential non-food items, major brand products, day-to-day retail services as well as regional products. In all the stores, Carrefour provides a broad selection of high-quality fresh produce in specially designed areas that make shopping convenient. The company is engaged in partnership with more than 20,000 producers and farmers from the heart of the regions in which company operates. Carrefour contributes significantly in enhancing the local economy and protecting the local expertise, while offering customers with best quality products at reasonable prices (Working for you, 2013).
The company has always given priority to locally produced goods. More than 75 percent of goods come from local suppliers. It is also fostering enduring relationship with local firms and thereby developing a range of regional products.
With more than 10,100 stores in 35 nations, the company is a major player in international retailing. Currently operating in France and other foreign countries, Carrefour relies on network of integrated and franchised stores, along with stories that the company runs with local partners. The group focuses on developing a product range specific to the region in which each store operates, customized to cater the taste and preferences of customers (Overview, 2013). In such business environment the below discussed SWOT analysis will help in determining the competitiveness of Carrefour to compete with local retail giants (Barbra Dozier's Blog, 2011).
SWOT of Carrefour:
One of the company’s strength is its ability to provide its consumers a variety of store formats, from convenience stores for daily shopping to hypermarket for major shopping. In different countries, the company endeavours to create competitive advantage through carefully designed and measured investment.
The expansion of Carrefour also stems from a broad network of franchised stores. The company is engaged in long-term partnership with its franchisee which in turn aid in contributing to market share gains. Integrated and franchised stores share same business practices and values of commercial effectiveness (Working for you, 2013).
The group has also marked its presence in regions with high growth potential such as the Middle East, North Africa etc, through long term partnership with local operators. The company developed its exclusive franchise partnership with Majid Al Futtiam groups that further held strengthening its business operations in the Middle East and Central Asia networks. Additionally, the group has signed a memorandum of understanding with the CFAO group in order to develop a Joint Venture that will aid in marking the presence of Carrefour in African countries (Overview, 2013).
2.8 Challenges faced by Carrefour when entering foreign markets
Emerging markets such as Saudi Arabia, are seen as a good business region mainly because of its increasing per capita income, growing taste of consumers towards Western goods, technological advancements etc. However, there are certainchallenges which sometimes make it difficult for companies to operate smoothly in foreign nations. In the context of retailing, when a company attempts to expand its network internationally, there are various problems that can occur. According to Peng (2001), most companies fail to operate in foreign market due to lack of market knowledge and inadequate adoption in management and marketing practices, while many companies confront unfamiliar issues or condition in foreign nations. For example, lack of basic marketing infrastructure in emerging markets, poorly developed channel of distribution, lack of proper communication channel, etc. Furthermore, in many regions consumers are more loyal towards the local brands which in turn empower local companies to dominate the market (A T Kearney, 2012).
One of the major problems faced by Carrefour, while entering into the Saudi Arabia market was difficulty in finding local players who can share the burden of navigating complex local statues and pre operational regulations. Moreover, the company needs to meet the health and local culture standards for getting product licensing. Another challenge faced by the company was the cost associated with the establishment and infrastructure. It requires a huge cost to set up an establishment that too at a foreign location. Apart from this, growing competition from other retail players was another issue to deal with in the food segment. To overcome this, the company has to set its prices very competitive and thus has to compromise with the profit levels. Although, Saudi Arabia and other Middle East nations were not strategic location for Costco and Wal-Mart, many of the other European hypermarkets strategically planned to enter into this sector. In addition to this, chronic inflation was another major challenge sensed by Carrefour. In 2008, due to several reasons such as high liquidity, high demand, low supply, rapid growth and currency peg to the declining US dollar, national inflation was 13 per cent in the Kingdom and as per the economist the consumer price index was 20 per cent. Because of this company's staffing and inventory cost raised significantly, thus eroding its revenue. Finally, political risk from Iraq, Iran, and from terrorism also acted as hurdles in the entry of Carrefour in Saudi Arabia.
Nevertheless, global companies are making every possible effort to address the challenges and to mark their presence in a foreign nation. For example, many multi-national companies are creating their own innovative distribution channels and packaging process in order to eliminate the barriers. Companies are conducting extensive market research with a view to understand taste and preferences of local consumers. Additionally, international firms are forming partnerships with local players and are thus reaching to consumers (Koch, 2001).
CHAPTER THREE: RESEARCH METHODOLOGY
To get a deep insight of the topic and to accumulates appropriate data regarding the various aspects of the research work, researcher need to apply various approaches, tools and techniques. The research methodology section is designed so as to specify all such approaches, tools and techniques applied by the researcher to reach to certain conclusion.
3.1 An overview of Research Methodology
The simplest definition of a research process is systematic investigation performed by a scholar in order to gain sufficient amount of knowledge on certain topic or to find the solution of some real life problem. In order to come up with accurate facts and figures, it is essential to accumulate appropriate data as it will enhance the quality of the work (Bryman and Bell, 2007). To obtain valid, reliable and accurate conclusion of the work, it is essential for the researcher to select the best approach from all the available approaches. Thus, it is required that before starting the research process, scholar must gain enough knowledge regarding different methodologies (Kumar, 2005).
This section of the report deals with the theoretical presentation of the methodologies and approaches applied by the researcher during the research process with appropriate logic behind it. Thus, the purpose of writing this chapter is to gain an idea regarding the nature of data and information to be collected and to identify the sources which are best suitable for collecting information and data. Moreover, this chapter also helps researcher to find the solutions to his or her research questions.
3.2 Research Purpose
In general, there are four kinds of research type, these are exploratory, descriptive, explanatory and causal. The main aim of causal type research is to determine the factors that are responsible for a particular kind of behaviour. Thus, in this, cause and effect relationship is determined by the researcher. In case of descriptive research, the researcher does not have any idea regarding the root cause of the problem, the researcher works on the factual information only. In exploratory research, there is no much background information available to the researcher as nothing much research has been done on the topic. Since there is very less secondary data available, the researcher needs to collect data from interviews, surveys, experiments, etc. Lastly, in explanatory research type, the researcher tries to explain certain phenomenon.
The present study will be explorative in nature since the topic under study is relatively new and nothing much has been done on entry strategy of Carrefour in Saudi Arab (Suri and Clarke, 2009). This approach will aid in obtaining an in-depth understanding of the particular situation.
3.3 Research design
Before proceeding with the research work, it is important for the researcher to design the entire process as a well developed structure makes the entire work easy for the researcher. The research design deal with four aspects of the research process, these are; finding solutions to research questions, determining the types of data required, determining the sources of data best suitable for the work and tools and techniques for analyzing the collected data. The importance of this methodology lies in the fact that on designing tells about the kind of data that will be required for the completion of the research process. For this purpose a researcher can choose from various options such as case study research, action research, cross-sectional, comparative and experimental. A researcher can adopt more than one research design as per the demand of the topic.
In the present work, the researcher has adopted case study research design technique so as to gain ample of knowledge regarding the subject. On the basis of this approach, the researcher will be able to collect factual data and information regarding Carrefour and thus will help the scholar in reaching to a concrete conclusion. Further, with the help of case study research design, researcher will be able to assess the foreign market entering strategies adopted by the companies.
3.4 Research philosophy
For determining the background and nature of a research, it is necessary for a researcher to propose a research philosophy. It gives clear cut idea regarding the technique that will be best suitable for attaining the aim and objectives of the matter. Research philosophy deals with ideas, values, perceptions and beliefs of different people towards a common situation. Thus, on the basis of these ideas and values, the researcher can draw accurate inferences. As per Williams (2011), a researcher can select research philosophy on the basis of questions the researcher needs to answer from the study. Thus, there are two common philosophies practiced in the real world, there are philosophy of positivism and the philosophy of interpretivism, the interprevitism philosophy shows that there can be n number of solutions to a given problem depending on the situation in which the problem exists. This philosophy is not scientific in nature and thus does not formulate theories and laws. On the other hand, the philosophy of positivism is also know as scientific philosophy as it is based on facts and figures and states that for a given problem, there can be only and only a single solution. The solution does not depend on the surrounding situation. The interpretivism philosophy is applied on qualitative research with small sample size whereas, positivism philosophy is applied on quantitative research with large sample size.it is the positivism philosophy which is responsible for deriving laws and theories as it is purely based on facts and figures and does not make any assumption.
The proposed work will be Interpretivism in nature since entry strategies differ from country to country and company to company. Additionally, as the present study is qualitative in nature as well as sample size is also small; therefore Interpretivism philosophy is deemed to be appropriate.
3.5 Research Type
The most common form of research type are Quantitative and Qualitative. When a researcher needs to determine the 'how' and 'why' nature of research, qualitative research is applied. Through this kind of research, the researcher can gain deep knowledge and understanding on the subject. Through this research type, the researcher can examine the opinion and values and beliefs of human beings regarding the subject matter and on the basis of that draws some conclusion. While in case of quantitative type of research, statistical tools and mathematical formulas are applied on the quantitative data. It tells about the “what” and “where” of the subject under study.
In the proposed work, both quantitative and qualitative research types are applied. Qualitative methods helped in analyzing the qualitative information. In addition to this, it will also aid in examining the views and opinions of the employees of Carrefour regarding the entry strategies of the company to expand its business in foreign market.
3.6 Research Approach
Two of the most popular research approaches are Inductive and Deductive. The inductive approach is a bottom up approach in which the researcher does not have to look into existing theories or facts (Scandura and Williams, 2000). On the contrary, deductive approach is top bottom approach in which in order to draw appropriate conclusion regarding the subject matter, a researcher first needs to refer the existing facts and theories. The proposed work will be based on an inductive approach since first the study will focus on evaluating the market entry strategy of Carrefour in foreign nations and then will generalize the findings.
3.7 Data Collection Methods
Basically a researcher can collect data from either primary or secondary sources. For the purpose of the present study, both primary as well as secondary sources have been used.
Primary data is that data which is fresh and has been collected for the first time by the researcher for the current study. It is obtained as original information that is collected from data sources and is void of any kind of interpretation. This type of data can be collected through various methods such as interviews, focus groups, observation, surveys, etc. in the context of the present study, primary data have been collected by conducting interviews with 50 employees of Carrefour from the strategy department.
It is defined as data that has been collected, examined and assembled already by someone else and is therefore also considered as second-hand information. This type of data can be collected from varied sources such as online, published articles, journals, books, periodicals, government reports etc. It is easily available and accessible. For the purpose of the present research, a number of secondary sources has been used such as company’s annual reports, online articles related to company and marketing strategies, books and journals concerning international entry strategies and modes, etc. The internet is one of the main sources that aided in accumulating a large amount of secondary data concerning the subject.
3.8 Sampling technique
For the collection of primary information, the sample of 50 employees of Carrefour has been selected. Sampling is basically of two types: probability and non-probability. Under probability sampling, each element has equal chances of getting selected in the sample while under non-probability sampling technique; chances of elements of getting selected in the sample are not equal. Probability sampling is further segmented into simple random, cluster, stratified and multistage sampling, while Judgmental, snowball, convenience and quota sampling are types of non-probability sampling. In the present dissertation, 50 employees of Carrefour have been selected with the help of judgmental non-probabilistic sampling method.
3.9 Method of Data Analysis
Without analyzing the data properly, no researcher can reach to any conclusion. Thus, a researcher needs to thoroughly analyse the data so that he or she can deduce something out from it. Based on the nature of data collected, data analysis can be either qualitative or quantitative. (Saunders and et. al., 2009). In quantitative analysis, quantitative data are collected and this it can be analysed through mathematical formulas or statistical techniques. On the other hand, in case of qualitative analysis, thematic technique is applied.
3.10 Research Quality
To make this work reliable and accurate, the researcher has conducted an interview with the managers of the companies regarding market entry strategies used by companies to enter in foreign market. Apart from this, the researcher has referred only trusted and reliable secondary sources for collected secondary data.
Reliability and validity, both are important measures to define the research quality. To maintain the validity of the work, the researcher has tried to find out the solutions to some of the real life problems which were stated under the research question section of the work.
3.11 Ethical Consideration
To maintain the ethical consideration, the researcher has took prior written permission from all the respondents. After getting their consent, the researcher has conducted a debriefing session in order to convey the aim, objectives and purpose of the work to the respondents. Further, the researcher has nor forced any participants to be the part of the process and moreover, scholar does not reveal the identity of any of the respondents participated in the research process. The participants were free to leave the process at any point of time they wish.
The top most limitation of the work is collection of data. Since all the participants were holding major positions in the companies, they cannot afford time for interviews. Thus, the researcher has to complete the interview process as per the convenience of the participants and there are chances that the researcher may not have been able to collect as much information as required. Another limitation of the work is its small sample size. Due to limited time, researcher performed the research only on the 50 respondents.
CHAPTER 4 - DATA ANALYSIS AND FINDINGS
Data analysis and findings are the penultimate chapter in the research process and draws final outcomes of the work. Thus, for a researcher this chapter holds lots of importance. As the name suggests, research means search of information and data. Thus, a researcher needs to accumulate lots of data and information for successfully conducting the research. The collected information or data can be either qualitative, quantitative or both and the scholar needs to refine the information to analyse the content. Thus, through this section the researcher converts the raw data into some meaningful information so that it can be presented to the readers. Moreover, a well presented report is easily understandable by even a common man. For analysing the accumulated data, there are several tools and techniques available to the researcher that assists him or her is extracting meaningful information from the raw data.
The main objective of data analysis is to reach to certain conclusion of the study. If a researcher deal with raw data, in that case it is not possible for him or her to reach to any authentic and reliable conclusion. Thus, to overcome from this problem and to conclude the research effectively it is essential to include a data analysis chapter as it represents internal facts and findings of the topic under research.
In the present work, the researcher has used both qualitative and quantitative techniques of data analysis as the collected data is both in the form qualitative data and quantitative data. For the analysis of qualitative data the researcher has applied qualitative technique of data analysis. More specifically, thematic analysis has been practiced by the researcher on the collected data. In this the researcher has plot certain themes and graphs and on the basis of that the researcher has made some conclusion. On the other hand, for analysing the quantitative data, the researcher has used the MS Excel software. With the help of this statistical software, the researcher has plotted some bar graphs and pie charts that have helped him or her in drawing valid conclusions.
4.2 Thematic Analysis
Theme 1: Carrefour operates in several countries
Started its operations from Paris, France, over the past 40 years the company has become one of the leading distribution group of the world. It is the largest retail of Europe and is positioned in second place in the world in the retail sector. Basically the company operates through four major formats; hypermarkets, supermarkets, hard discount and convenience stores. Presently, there are around 15500 stores of the company located in various parts of the world. The company entered into Brazil in 1975 and China in 1995 and is currently operating in three major markets; Europe, Asia and Latin America. The company has its presence in more than 35 countries and 56 per cent of the group's revenue is generated from outside France. As per the respondents, the organization sees great potential in the future in countries such as Turkey, Poland, Indonesia, Brazil and China.
Theme 2: Most of the company's stores are located in Europe, US and Asia
In response to the question related to company's store locations, participants reported that the company has strong presence in Europe, Latin America and Asia. This shows that the European retailer has a global presence as 56 per cent of the company's revenue is generated outside France. In Asia, China is the biggest hub for the country. Initially, in China the organization faced stiff competition from the local players. Moreover, the government policies were also not favouring the European Giant. However, gradually the company picked up and in the recent years the company has done well in the Asian giant. On the other hand, Carrefour was not able to flourish its business in India, an emerging economy and other Asian giant. Recently it has been heard that the company has brought down the shutters to five of the company's stores in India. Still, the company is considered to have a fair amount of global presence.
Theme 3: Market potential, and government and regulatory authorities are main country specific factors influencing Carrefour's decision in entering into new markets
Among all the listed factors, the majority of the participants said that market potential and government and regulatory authorities play a huge role in deciding whether to enter into some country or not. The main aim of a company is to make profit, thus before entering into any foreign market, managers analyse the growth factor of the market. If the market shows lots of potential in the years to come, company formulates strategies to enter into that market so that it can penetrate in a better manner. On the other hand, if the market looks attractive only for short term and does not offer much for the company in the years to come, in that case companies generally put up their money as in the coming years it will be a dead investment for them, affecting their profitability. In addition to this, if a company wants to operate smoothly in any nation, it is essential to have a support from the government and higher officials. The government policies are not supportive for the company, it is impossible for it to flourish in the market. Thus, government and market potential are the main country specific factors that influence the Carrefour's decision in entering into new markets.
The above chart clearly shows that, 40 participants said that market must show a lot of potential for a company to make a decision regarding entering into that particular market. Apart from this, 38 participants agreed that government policies and rules and regulations are also considered by the company before deciding its entry into a new market. Some of the participants also said market competitiveness is also an import factor in foreign market selection.
Theme 4: Profit potential and retail demand are main industry specific factors influencing Carrefour's decision in entering into new markets
Every organization needs to study the industry specific factors in which the company is operating. In this regards, participants involved in the survey agreed that profit potential and retail demand are important to be considered before entering into foreign markets. Demand is the biggest factor considered by the companies. If there will be huge demand for a particular product or service, any company offering that product or service will benefit from it. On the other hand, if there is limited or no demand of the product or service in the market, it is not advisable for the firm to enter into any market, either domestic or international. Similarly, for the growth of any organization, it is essential that it makes the sizable amount of profit each year. If the company fails to make profits, it won't be able to attain sustainability. Thus, according to respondents, retail demand and profit potential are two main industry specific factors to be considered by Carrefour before entering into new markets.
The challenge of China market entry has become an increasingly important one of Western companies of all shapes and sizes. Despite a difficult economic climate in Europe and the United States, China’s economy has continued to grow by double-digit rates over the last couple of years. With the country poised to overtake the US as the second largest global economy by 2020 and destined to remain an engine of global growth for the next decade, understanding how to enter large and complex market has become critical to most companies in the B2B sphere.
Within China, rapidly changing demographics, rising incomes, increased consumer spending and an increasingly open business environment have all helped to make the Chinese market increasingly attractive to Western businesses across a variety of industries. Similarly, declining sales in their home markets has forced many US and European companies to relocate China firmly to the centre of their long-term global growth strategies.
Breaking into the China market successfully can seem like an almost impossible task to foreign companies with limited or no experience of doing business there. The aim of this white paper is to highlight some of the key challenges that foreign companies face when entering the China market for the first time, and to offer some practical recommendations that can be integrated into a company’s China market entry and expansion plans.
Identifying The Market
With a population that exceeds 1.3 billion people and a land mass larger than the United States, China’s sheer size and scale presents challenges uniquely distinct from any other market (including other Asian markets such as Japan and South Korea). While it is true that China represents a huge potential market for foreign manufactured goods and services, it is also the case that understanding where these opportunities lie and how to access them can be extremely challenging. Whether it be the large Western multinationals with an established China presence or the first-time market entrant with no previous China experience, foreign companies of all shapes and sizes often find their China success stymied through insufficient lack of local understanding.
The first realisation that foreign companies often need to make is that China is in no way a uniform and homogenous market. Although China is unified in the geo-political sense, socially and economically the picture is much more disparate and fragmented. Uneven rates of economic growth in different parts of China over recent years have served to exacerbate many of the economic and social differences that already existed between different provinces. For example, there are huge variations between different provinces in terms of population levels, per capita GDP, average income levels, consumer spending habits, education levels, literacy rates, lifestyles and so on. As such, it is certainly no exaggeration to state that rather than representing a single, unified market, China is actually a collection of individual sub-markets defined by vastly differing demographic, economic and cultural characteristics.
The nature and make-up of markets in different parts of China also varies considerably, which means that foreign companies should think carefully about which geographical location offers the best vantage point to target the broader China market. In the past, foreign businesses have often been drawn to coastal provinces such as Zhejiang, Guangdong, Jiangsu and Shanghai, due to higher populations and incomes in those areas. In particular, foreign companies involved in consumer markets have tended to focus their attentions on these higher income coastal regions.
Although foreign companies in the b2c sector still remain focused on coastal cities, business-to-business markets are often far more geographically scattered. As in many countries, China has actively encouraged the setting up of industrial clusters in specific cities or regions, and in many cases entire industry supply chains can be concentrated in a small handful of cities. In many b2b markets, such clusters can help foreign companies to know where its target customers are, which cities to focus on and even where to base its operations (particularly where local manufacturing will take place). The first step of any effective China market entry strategy is therefore to identify the geographical location of the target market(s) and the best specific location to target first.
Figure 2 – Selected Cities According to Industrial Orientation
|Shanghai||Petrochemicals, chemicals, pharmaceutical, automobile, electronic apparatus, financial|
|Beijing||IT, communications, electronics|
|Guangzhou||Automobiles, electronic appliances, textiles, apparel, toys, petrochemicals, chemicals|
|Jiangsu||Chemicals, textiles, communications, petrochemicals, steel, foods, auto parts, biomedicine|
|Shenzhen||IT, semiconductors, biomedicine, communications, electronics information|
|Zhejiang||Light industry, plastics, textiles, apparel, toys, metallurgy, household electrical, furniture, kitchenware|
|Shandong||Agricultural, oil & foodstuffs, pharmaceutical|
Choosing A Location
In recent years, the prevailing wisdom among foreign enterprises has been to focus predominantly on China’s Tier 1 cities (i.e. Shanghai, Beijing and Guangzhou) – highly populated areas with a large, middle-class representation and income levels well above the national average. Tier 1 cities are China’s most mature markets in terms of consumer behaviour, and are typically the most suitable testing ground for foreign companies with limited experience in China. Although being based in a Tier 1 city may offer the lowest risk point of market entry, it will also mean that the company faces higher operational costs and more competition.
Economic growth and rising incomes in China’s Tier 2 cities have made entering these markets much more attractive to foreign suppliers than it was in the past. Not only do Tier 2 cities have the advantage of lower set-up and operating costs, but the increase in consumer spending power in these areas is creating a rapid growth in demand for foreign manufactured goods and products. In particular, cities such as Shenzhen, Tianjin, Wuhan, Chongqing, Chengdu, Nanjing, Qingdao, Dalian, Suzhou and Hangzhou all offer strong commercial opportunities for foreign companies across a range of sectors. Over the long term, including Tier 2 and even Tier 3 cities in their strategy can enable foreign companies to gain first-mover advantage in these cities and lead to greater long-term market success.
Whether to set up in more tried and tested locations or to take the risk of setting up in a less developed market is likely to depend on a variety of different factors, and ultimately this decision will be based on having thoroughly research the market landscape. For example, it is critical to spend time mapping out the location of customers and suppliers, understanding how distribution channels vary between different locations, and fully researching any local regulatory barriers that could block market entry in specific regions. Companies planning to set up a local manufacturing facility will be required to research a broader range of factors, such as local manufacturing and transport infrastructure, access to key raw materials, local investment policies, the availability and cost of human resources, and a myriad of other factors.
Government Policies And Regulations
Understanding government policy and regulations is critical to success in Chinese b2b markets. Although China’s entry to the WTO in 2001 helped to liberalise China’s trade environment to some extent, many industries remain heavily regulated. There are still a lot of industries that remain off-limits to foreign companies, and many industries where severe limitations remain in place. For example, China severely restricts foreign companies’ involvement in the field of petrochemicals, energy and telecommunications sectors. Any foreign company looking to set up local production in China should first consult the China foreign investment catalogue, which divides foreign investment projects into ‘encouraged’, ‘restricted’ and ‘prohibited’ categories.
As China’s economy develops, it is also accumulating a growing number of industry-specific regulations and standards, which both domestic and foreign companies should conform to. China now has a host of different ministries and regulatory organisations with responsibility for industry regulations and laws. For example, in the healthcare sector both the Ministry of Health and the State Food and Drug Administration (SFDA) play a role in drawing up and enforcing regulations, while there are also provincial level MOH and SFDA organs that implement regulations at a local level. In industries with greater levels of regulation (such as the healthcare and food sectors), foreign companies will need to attempt to unravel the web of complex laws and regulations, and try to understand which authorities have primary responsibility for implementing them.
Regulation is becoming more stringent, as are to efforts ensure that companies actually conform to them. In the wake of the melamine poisoned milk scandal in 2008, the Chinese authorities have taken a tougher line against companies that openly flaunt the food safety law, whilst the SFDA is also tightening regulations on pharmaceuticals and medical devices to avoid similar events from occurring in the future. Likewise, environmental problems caused by poor environmental regulatory enforcement and widespread pollution in years gone by have led to the introduction of much tighter environmental legislation. Foreign companies are now required to go through lengthy environmental assessments before gaining permission to produce locally.
Government regulations can very often impact significantly on the timeline and costs of market entry, and companies are advised to examine the implications of such regulations prior to committing to the market. For example, in the medical and pharmaceutical sectors, long product or clinical trials may be required, which result in a longer sales cycle than may be the case in other countries. It is also worthwhile noting that just because a product has previously been approved by regulatory authorities in Europe or the US does not automatically guarantee that the same product will receive approval in China.
It is critical to spend time researching and understanding the regulatory environment prior to making any decision to enter the market. Having entered the market, it is equally important to constantly monitor for any changes to legislation or regulations and how these could affect your business. Chinese regulatory bodies often operate in a quite opaque manner, making it difficult to anticipate regulatory changes before they happen. A further problem is that China’s regulations are often vaguely worded and open to interpretation, which can be unsettling for foreign companies used to a more transparent regulatory environment. Market research specialists and legal consultants can help foreign businesses to better understand how China’s laws and regulations should be interpreted.
Market Entry Mode
Choosing the right vehicle for entry is one of the most crucial decisions a business can make when entering China for the first time. Although a growing number of foreign companies are ‘going it alone’ in China, the joint venture (JV) business model still brings with it many advantages and can often be seen as a lower-risk strategy than the wholly foreign owned enterprise (WFOE). Equally, while some b2b markets require setting up a local Chinese entity, in other markets using local intermediaries or a small representative office may suffice.
Entry mode often depends on a number of factors, including industry landscape, the geographical size and scope of the market, whether the company plans to manufacture locally or import its products, and the level of on-the-ground sales and technical support required by customers. Ultimately, when choosing which form is most appropriate, a company should consider each of these factors, along with the overall costs of setting up a local entity and hiring local employees.
Figure 3 – Foreign Investment Vehicle: Advantages & Disadvantages
|Joint Venture (JV)|
Ultimately, the best vehicle for a foreign enterprise entering the market for the first time will vary according to the size and scope of an enterprise, along with the specific characteristics of the market it is entering. For example, while WFOEs are often the main modus operandifor high-tech firms with large IP inventories, companies specialising in more commoditised products often find that risk is mitigated by partnering up with a well-established local company.
Conducting Market Research
Whichever market entry mode is chosen, thorough market research should precede any final decision on how and when to enter the market. A growing number of market research companies now have operations in China, and the market is becoming easier to research than ever before. In addition to the numerous off-the-shelf reports available about the Chinese market, there are now a growing number of companies offering tailored market research services (whether it be global consultancies and management consultants, government-affiliated agencies or private individuals providing research and consultancy).
The profusion of English-language publications on China available through the internet makes it relatively easy for Western companies to carry out some initial research on the Chinese market. Typically, this initial in-house ‘desk research’ can help firms to determine whether further, more detailed research is required and can assist with setting goals for more detailed research later on. An experienced market research company will then build upon this initial foundation of knowledge with more detailed information collected via Chinese-language desk research and in-depth interviews with leading industry experts and decision makers. Along with these qualitative techniques, quantitative research can then help with determining more accurately market size, future growth trends, levels of competition, routes to market, key customer requirements and so on.
Effective market research is essential to determining the size and nature of the market opportunity and acts as a benchmark against which firms are able to measure future performance. Good market research can help to identify any potential road-blocks to market (competitive, legal or regulatory) and identify any weaknesses in a company’s product or service offering. A thorough and well executed market research study can help prevent poor decision-making and establish a clear strategy map for the future.
Arguably, the single biggest determinant of a company’s ultimate success in China is the quality of staff it employs. Very often, the enterprise type will determine the human resources available, and foreign companies tend to have greater freedom with WFOEs and rep offices than JVs in this respect. The quality of human resources available will also be closely related to where the company is located, and it is generally the case that the quality of people available is much higher in Tier One cities such as Shanghai and Beijing than Tier Two and Tier Three cities.
Another key decision to be made is whether to employ expatriates in senior management positions or whether to localise these roles. Employing expatriates tends to be seen to offer greater operational control, although is also more costly in terms of salary packages, relocation costs, insurance and other expenses. Moreover, most expatriate managers have a very limited local knowledge of Chinese cultural and business practices, and very seldom have the Chinese language skills necessary for dealing with Chinese companies on a day-to-day basis.
A key benefit of hiring a Chinese manager is the local market knowledge and deeper understanding of Chinese business they bring to the role. Not only are salary and insurance costs lower for local employees, but Chinese employees very often have existing contacts (‘guanxi’) with suppliers, customers and local government authorities that can be fully utilised.
Unfortunately, in many industries the supply of highly skilled local managers with industry experience is extremely limited, and employers may still be forced to pay a premium to attract the right calibre of employees. Equally, staff turnover rates are extremely high in China and retaining quality managers over the long term is challenging. Losing local managers will also risk losing access to their guanxi networks and local market knowledge.
Whether hiring staff, investing in a joint venture or appointing a local distributor, carrying out due diligence is also an indispensable activity when setting up in China for the first time. The key objective of due diligence is ultimately to verify the trustworthiness of partners and employees, and to flag up any skeletons in the cupboard before proceeding with any sizeable investment. Although some basic due diligence can be carried out in-house, nowadays there are also numerous legal and risk assessment consultants with offices in China that provide business intelligence, individual background checks, and risk analysis consultancy.
Developing An International Property Rights (IPR) Strategy
IPR infringement is commonplace in China, and any company entering the market for the first time should work under the assumption that its technology will be compromised at some point. With this in mind, it is generally recommended that foreign companies, and particularly those with large IP inventories, consult with lawyers and IPR specialists to formulate an IPR strategy for the China market.
There is no one-size-fits-all IP protection strategy for China, and typically an effective IPR strategy mix will employ a number of different tools. One might include a mixture of various legal, practical and technical measures designed to prevent infringement and ensure legal rights are enforced in the event of an infringement.
China has a “first-to-file” patent system, which means that it is possible for local Chinese companies to register another company’s patents even though it is not the original inventor of a technology. Also, there are time limitations on registering patents in China, and so companies that registered their patents outside China more than 12 months previously are usually unable to register their patents locally in China. Another important consideration is whether registering a patent could actually serve to disclose key technical information that could otherwise be protected through employee non-disclosure agreements (NDAs) and other practical measures.
China also has a “first-to-file” trademark system, which means that a foreign company’s legitimate brand and logo cannot be used if these trademarks have already been registered by a local Chinese company. Any company seriously considering entering the Chinese market in the future should register its trademarks with the China Trademark Office as soon as possible. Registering a trademark across a number of different categories may also be necessary for companies keen to deter potential infringers. Likewise, new market entrants should ensure that all trademarks are registered both in English and Chinese, and that any internet domain names are properly registered.
Beyond these legal measures, there are a number of practical measures that foreign companies can adopt to protect their IPR. For example, carrying out thorough due diligence on prospective partners and company employees, signing NDAs with partners and employees, and constantly monitoring the market for infringements are key practical steps a company, having already entered the market, can take to prevent its IPR from being compromised. Equally, actively pursuing legal proceedings against any IP infringers should act as a deterrent to other potential infringers and will alert the authorities to future IPR infringements.
Making that first step into the China market is an intimidating step for most companies in the b2b arena, with an almost endless series of potential pitfalls to be negotiated. Although there are often many obstacles in the way of achieving success in China, the rewards of successfully navigating this difficult course are also immense.
Thankfully, as China’s economy continues to grow and become more open to foreign companies, the rewards increasingly outweigh the challenges of doing business in China. While the old adage “In China everything is possible, but nothing is easy” still rings true for many foreign companies when doing business in China, the extent of this difficulty seems to decline further with every passing year.
China is a country that is constantly changing and its markets are evolving more rapidly than almost anywhere on earth. As such, there is no one-size-fits-all approach by which foreign companies should approach the China market. Each company’s China strategy is likely to be informed by any number of different factors – from industry sector, product type, company size and culture, through to long-term business aims and global corporate vision.
This white paper has attempted to illustrate some of the fundamental considerations that any company must take when approaching the China market for the first time. Although these steps may lead to very different conclusions for different companies, they can help companies to properly determine an appropriate strategy for China. We finish with a brief summary of the ‘Dos and Don’ts’ that any foreign company approaching the China market for the first time should take into consideration.