B&Q Indian Market Entry Considerations - Essay Example

? B&Q Indian Market Entry Considerations B&Q Indian market entry considerations Executive summary Revolution of businesswithin different economies has created the need for firms and multinational companies to enter foreign markets and make significant impact. The need for new markets and ways of surviving the high competition found within almost all markets across the world has accelerated the spread of globalization. A number of factors, which are both internal and external to a business or a given economy, influences entry into new markets. Before a business can fully begin operations in a foreign, a number of options must be explored and entry models developed and adopted that fit the market in question and its dynamics. Emerging economies have been at the centre of the current wave of international investment due to the potential they hold in terms of investment opportunities and the available market. The emerging economies are blocked together form the BRIC block, which has countries such as Brazil, Russia, India and china. India is currently one of the fastest growing economies with significant business potential due to its high population and political stability (Milhaupt, 2008). Table of Contents Executive summary 2 Indian growth and macroeconomics trend 4 Emerging markets entry modes 6 Trade theory and competitive advantage 8 Socio-political, cultural and demographic considerations 9 Conclusion 13 Bibliography 14 Introduction Block and Quayle (B & Q) is a British based multinational with subsidiaries in china, Hong Kong and Taiwan where the company offers its home improvement and DIY services. However, as a means of surviving the current economic instability and seeking new markets, the company seeks to open a new subsidiary in India to tap on the enormous potential the country (Kleinman & Hall, 2007). The business must also develop a much informed entry approach into the economy to help resume normalcy faster once the operations begin officially. In this paper, the factors affecting entry into the international market and more specifically emerging economies will be evaluated. This evaluation will majorly focus on the strategies that B & Q should develop in their quest to enter the Indian market (Bihar, 2013). Indian growth and macroeconomics trend The surging growth of the Indian economy has made it quite easier for multinationals and other smaller firms from other countries to invest in the country and tap on the enormous potential the country presents as an emerging economy. Currently, there has been a significant craze in the development of trade ties between emerging economies and firms from developed countries and this has been attributed to the positive trend of such economic blocks. The broadening economic recovery of India has created significant confidence between investors and other international firms and this explains the current surge of multinationals in the country. India has repositioned itself as one of the major international hubs of investments due to its large human resource, available market for goods and services and positive trends towards development (Sathyamurthi, 2012). The country’s growth rate has been on a positive trend heading towards double digit growth index with the international monetary fund placing the country’s growth index at 8.2% in 2011 financial year. The Asian development bank estimate that Indian middle class has the potential of growing from 1.2 million in 2030 to more than 1.4 billion in 2050, a figure that will translate into an increased national gross domestic product (Sathyamurthi, 2012). According to a study conducted by the oxford economics, Indian growth trajectory promises a better future which the multinationals like B&Q can explore to increase their profitability. In 2010, the country’s economic output stood at Rs 67 trillion, a figure that is expected to expand to over Rs 144 trillion in 2020. This, coupled with the positive demographic trends posted by the country depicts a future with a population that has high purchasing power due to the increasing middle class population. The country’s labour will also increase from the current unskilled labour that is mostly involved in contract job engagement to highly skilled technologically advanced working population. The gross domestic product of the country also points to an economy which is on the recovery path moving towards progression and recovery, a great trend for an emerging economy which remains the focus of major multinationals across the world (Bialowolski & Bialowolska, 2013). In 2012, the country’s GDP was $1.842 billion, a figure that grows by over 3.2% indicating an increase in the purchasing power of the citizens. An increase in the purchasing power results into increased demand for goods and services, an event that creates room for multinationals like B&Q to enter the market and establish its rapport. The inflation rate of the economy, a macroeconomic indicator measured by the consumer price index has been on a decline trend, an indicator of an economy moving towards positive growth. However, the trend has not demonstrated a fixed decline in the value as some years are characterized by an increase in the inflation rate as compared to the previous year. By October 2013, the Indian inflation rate steadied to 11.06%, a decline from the 15.26% posted in the 2012 and 14.97% posted in 2008. The country’s currency, the rupee has also stabilized significantly against major world currencies, an indicator of growth trends in the country. Emerging markets entry modes To understand the nature of the market, the political and cultural aspects of the economy and any other factor, which may influence the success of the business in India, B&Q must adopt a passive initial entry model. This model will imply lack of full operations in India while the business gets the chance to familiarize with the market dynamics (Morrison, 2008). In this situation, export entry mode is the best initial option for the company because it will enable the company to establish its presence in this market while playing it safe as far as opening full operations are concerned. In export entry mode, a company establishes distribution agents and overseas subsidiaries whose roles are confined to receiving already manufactured goods, identifying the market and reaching out to the consumers (Floyd, Mcmanus & Ardley, 2011). With the export entry model, B&Q is well placed to avoid extra cost it will incur to establish a manufacturing plant in the country before it can identify the market behaviours and dynamics. It is therefore an opportunity for company to first establish its roots in India by identifying its potential market, the demographic and cultural factors to consider and the level of competition in this market. This initial entry approach has been used by other companies which have successfully established themselves in India including Sony television and Maruti Suzuki (Ramaswam, 2007). Apart from the export entry mode, other entry modes exists that B&Q can successfully adopt and make significant impacts in the Indian market. The use of contractual entry mode involves the development of agreements between the company and any company already operating in the DIY market in India. This approach can adopt two different methods, which include the licensing and franchise mode of entry in the international market. In licensing, the company will need to identify an already established business that has almost complete monopoly of the market to enter into contractual agreement with. As a company based in the developed country, the company is best placed to highlight its quality and advanced technological means of production. Through this therefore, the company can allow the company to produce its products, use its trademark and technological approaches to produce its products at a given fee (Davanzo Dogo & Grammich, 2011). This approach may however not favour a complete entry into this market as B&Q may not control the manufacturing and marketing process of products, which uses its trademark. As a result, the company will fail to experience the Indian market exposure and thus lack the ability to adequately establish in the market (Sasikumar & Karan, 2010). Apart from the use of franchises, licensing and adoption of export model of entry, B&Q has two other approaches known as the brownfield and the Greenfield entry approaches that it can comfortably pursue. As an emerging economy, India may lack a company with matching operations, infrastructural development and capital to match the massive capital of B&Q. This may restrain the ability of the company to use franchise and licensing options to enter the market. Export model of entry may also deny the company an opportunity to manufacture products, which meet the specification of the local market. In this case, the best alternative mode lf entry for the company is brownfield model of entry, an approach that allows the company to establish a new business entity that is specific to the market and the nature of competition (Meyer & Estrin, 2001). With this model, the company will have to identify a company to completely acquire and use its resources. As a company in the emerging market, the acquired business may not be a position to adequately support the production process of the company, making it essential for the B&Q to restructure the company and develop more infrastructural facilities. With this option, the company will make a quick entry into the market as it will inherit both the niche played by the acquired company in the market, its customers and other facilities available to its disposal. With a number of entry modes available to the company, a number of both internal and external factors in the market influences the choice adopted by the company. One of the major factors affecting the choice of mode of entry is the size of the company as this implies the lack or presence of enough resources to support any of the entry modes adopted. As a company with massive resources, networks and successful operations in other parts of the world, B&Q have enough resources to support any entry model it may opt for. The adoption of the acquisition, greenfield or even brownfield entry options require managerial resources which are well within the reach of B&Q. apart from the company size, the nature of the product that the company is planning to market to the emerging market will also significantly influence the mode of entry that the business will adopt. As a company that deals on high differentiated products, the cost of transportation and the taxes levied on the imports may be extra high thus restraining the ability of the company to adopt the export model of entry. With these kinds of products, the company may have to consider investing in the capital manufacturing equipment to manufacture the goods in India instead of importing them from its subsidiaries in china or the United Kingdom (Meyer, 2008). As a company with massive international experience having successfully ventured into new emerging markets in china, B&Q is best placed to use this experience to choose the best entry mode. With its high international experience, B&Q has exceptional abilities to adapt to any of the modes of entry that the company may opt for. Apart from the internal factors, other external factors may significantly influence the entry mode adopted by the company. These may range from the environmental factors which encompass the socio-political, cultural and economic factors in India that affects entry into the market. The industry feasibility and viability will also determine the entry mode that the company will adopt as these influences the confidence with which a company may enter the market (Meyer, 2008). Trade theory and competitive advantage Apart from the factors so far highlighted, the internal strengths of the company significantly influence the attitude of its management in working towards entry into an international market. International expansion is not influenced only by the resource advantage of an organization, but the competitive edge its controls over local firms in the industry which largely demonstrates its ability to make significant impacts in the international markets. The consciousness developed by a firm over the assets it possesses makes it most likely for such firm to exploit new markets and niche in the global arena (Meyer et al, 2007). This emanates from the confidence that its current competitive advantage beseeches it which makes its management and human resources grow in confidence to support the entire entry process. As a company that has significant resource and skills advantage over its competitors, B&Q is best placed to exploit new markets to for its expanding products. This will enable the company achieve massive profits which would otherwise be impossible in the current market and international distribution. Apart from resource, market and capital advantage, B&Q also has massive skills advantage due to the highly trained, motivated and supportive staff that the company has (Dunning, 2000). Socio-political, cultural and demographic considerations Before entry into India, B&Q must first understand a number of issues affecting the stability of the Indian market and how such factors may affect the success of the business and its future operations. The ability of the company to achieve its business objectives and reasons for expansion into the international market may be affected by a number of political factors found within the Indian market. Understanding the political stability of the region may be vital in enabling the company to implement policies that make consideration of the hostilities that may exist (Baek, 2003). Despite being considered as one of the longest democracies, India suffers from military hostilities and border disputes. This affects the security of major states in the country that may interfere with the smooth operations of the business. For example, the country has over the years experienced major hostilities with its neighbouring countries like Pakistan which has affected business in the country (Koch, 2001). This creates tension and scares aware the potential consumers, events that further destabilize the economy of the country and affect the establishment of the company’s operations. The military hostilities that have continued to grow since the 2003 gulf war have created significant tension created by the military hostilities (Manea, 2005). Apart from the political factors, a number of labour related issues present a number of challenges to B&Q and the company must consider all these before making significant investments. One of the most discussed issues in India is the persistent labour unrests in the country that has continued to dent the confidence of investors in the country. This is a problem that is common in major emerging economies like china, Brazil and Indonesia and is thus not reclusive to India only. Labour unrests affected the operations of Suzuki Maruti in august of 2013 and this caused the company massive losses as its operations were closed indefinitely for a long period of time (Buckley, 2000). These unrests have their basis in the poor contractual agreements that exist between the employees, the government and the foreign companies in the country. The country’s labour law has been blamed for the prevalent labour unrests in the country as it makes it easier for companies to employ people on contract as opposed to permanent basis (Sathyamurthi, 2012). To survive this hostility, the company must develop a more progressive approach which seeks to offer an advanced package to the employees to increase their confidence in the management and reduce possibility of unrest. The company must take into the account the impacts its operations will have in the local community and develop approaches that may eliminate any negative effects well in advance before actual entry (Sauvant, 2010). As a major retail outlet in house improvement and DIY products, B&Q success depends on the presence of proper infrastructural development in the country. However, according to a report released by the transparency international and international monetary fund, lack of proper infrastructural development leads as the main hindrance to international business entry into India. With brownfield entry mode most preferable, B&Q may need to invest in areas with significant infrastructural development to enable it reach a larger audience (Nilekani, 2013). This will only succeed if the company acquires land to construct its own manufacturing plant in an area with proper infrastructural development including proper road and rail networks, telephone and electricity services among other infrastructural facilities. Indian economic model have a number of infrastructural roadblocks that interferes with the smooth acquisition and development of land for business projects (Kotler & Armstrong, 2001). International investment must make consideration of the demographic trends of a country as demography affects the availability of labour and market for the company. India is one of the world’s populous countries with massive population growth as compared to any other country in the world. Within the demographic information of India, the company places more importance on the ratio of the working population and the target market population. A growth in the working age depict a potential availability of labour to work in the different businesses in the country, a factor that significantly influences the decision of B&Q. by 2025. It is estimated that the Indian working population will be tripled and this will increase the availability of cheap and trained labour to work in the different departments of B&Q. as a result. Therefore, the production cost of the company will significantly decrease as the market for its products increases due to the competitive advantage gained from lower prices charged (Liu, 2008). The current Indian population stands at 1.22 billion according to the estimates released on July of 2014 which translates to an exposure to a large market with significant demand for home improvement services and facilities. Within this population however, the company is interested in the 15-64 years age bracket, a distribution that provides both the working population and the potential consumers of its products (Axinn & Matthyssens, 2002). The Indian youth ration stands at 44.3%, a value that signifies an increase in future working population which will provide the much needed labour and market for B&Q products. With a population growth rate of 1.28%, the population of India remains on forward trend which presents both opportunities and challenges to the government of the day. Apart from the entry decisions and mode choices to be made by B&Q, the location of the firm’s headquarters in India is of great essence, as it will affect its success and market control (Floyd, 2011). The decision on the location of the business is influenced by the population distribution within different cities of India as this may affect the overall market reached by the company. According to the July 2013 estimates, new Delhi, the capital city of India has the highest population distribution standing at 21.72 million people. Mumbai and Kolkata follow at 19.695 and 15.294 million respectively, meaning that these three cities are the major industrial centres in the country. B&Q must choose its location from the three leading cities based on its potential target market and the land laws in the various cities (Meyer & Estrin, 2007). Conclusion Emerging markets have remained the key focus for major multinationals based in the developed economies due to the growth potential that they present to these firms. This explains the rise in the number of established multinationals establishing themselves in countries like India, Brazil, china, South Africa and Indonesia. Entry into these countries cannot occur overnight and require a multinational to develop a strategic approach before actually opening its operations in the countries (Meyer & Tran, 2006). 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