Entering a Foreign Market: Main Aspects

Introduction

Entering a foreign market is not an easy task. It is similar to starting a new company i.e., it involves all the managerial functions and operational functions. Before entering the foreign market it is important to make a profile of the potential market. We should conduct an overall study about the market in which we are going to enter into. New entrants to an industry bring in new capacity and capture market share from existing players. The main areas to consider are the political economy, social responsibility, social environment, and competitors. This paper deals with the entry of Kroger, a major retail chain in the United States into the expanding retail market in India. Retailing is delivering the products to the end users. A retail industry is a sector which combines individuals and companies to sell finished products to the end consumers in the general public. (Articles About “US retail businesses”, 2009). Now organized retailing is booming in India. As far as US retail chain is considered it will be good to enter into India because India is rich with middle class consumers and also Indian middle class is more tempted to get into the upper class. So they will surely and easily accept new retail chain. The standard of living of Indian consumers is improving a lot. Indian retailing industry is becoming more competitive as more and more companies are targeting the same customers. The major retail players in India are Pantaloon Retail, Shoppers Stop, Reliance Retail etc. It is one of the biggest sectors witnessing a great revolution in India.

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According to AT Kearney, The Windows of Opportunity shows that Retailing in India was at opening stage in 1995 and now it is in growth stage in 2008. India’s retail market is expected to grow tremendously in next few years. (View full version: retail industry in India: an overview, 2009).

The political economy

India is one of the largest working democracies in the world. India opened its market to international trade during the 1980s and 1990s and has increasingly becoming more liberal in its policies on international trade. More and more areas are being opened up for foreign direct investment in the country and it includes the retail sector also. As a result, both its imports and exports have significantly increased over the years resulting in a better balance of payment situation. The Indian Government has woken up to the fact that “Foreign trade has been the engine of growth even among developed nations during the early stages of their development.” (Nayak, 2007, p.29). Increasing urbanization: Nowadays, in India people are more job oriented and they are very aggressive to make money. Their life style changed a lot and most of the working couples are residing in the urban locations. They will give great opportunity for a new retailer to grow. India is a place where outsourcing of manufacturing software is high. This has resulted in a shift by many sections of the population shifting from rural to urban settings. Increasing urbanization can result in more knowledge about new products and technology and this factor can be made use of by companies entering into the Indian market.

Middle class: Most of the Indian consumers are middle class and most of them want to be in the upper class. Middle class people like to buy products at a reasonable price. By using the bargaining power the retailers can make competitive advantage from its competitors. The middle class in India is considered to be one of the largest in terms of number in the whole world.

Population: India’s large population is also an opportunity. Due to this factor, there is plenty of qualified labor at cheap rates. This is one of the advantages of economies like India and China. India has a large number of engineering and business colleges. As a result, there exist a large number of technically qualified people in the country. The comparative salary difference between a US engineer and an Indian engineer (especially in software sector) is high. Companies can exploit this wage difference by setting up operations in the country. The company can avail the advantage of cheap labor cost. If the outlet is situated in highly populated area more people will come and purchase from the retail outlet.

Indian Rupee Vs US dollar: There may be fluctuations in the value of US Dollar when compared to Indian Rupees “The US dollar continue to gain strength against the Indian Rupee over the next 3 to 4 years but without a doubt Indian Rupee will in the end become one of the truly dominant currencies over the next 15 to 20 years.” (Indian Rupee vs US Dollar currency exchange Rupee.us 89, 2009). Barriers to enter into a foreign market: The willingness and ability of firms to enter a particular industry takes into account the barriers to entry. The main 6 barriers are:

  1. Economies of scale
  2. Product differentiation
  3. Capital requirements
  4. Cost advantage independent of size
  5. Access to distribution channels
  6. Government policy

Strategies for companies operating in international market

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  • Set up manufacturing base in countries which offer low production costs, like GE has its back office operations in India
  • Import parts equipments form low cost manufacturers
  • Invest in improving design, quality, service and other such value addition that make the final product a premium offering.
  • Segmentation, targeting, positioning helps in allocation of scarce resources. The effectiveness of marketing improves when the marketing are segmented. There are several types of segmentation – geographic segmentation; demographic segmentation etc. As far as retailing is considered demographic segmentation will be more effective. According to G. P. Walters, “demographic segmentation has obvious potential as cross national segmentation criteria. It helps the companies understand the needs and behavior of various segments and to market their products.”

1. Political environment: main political factors that affect in India are government policies, tax policies, laws and regulations, trade restrictions and tariffs etc. In India political environment in some areas of the country will not welcome a foreign retailer. (Identify the political and social factors impacting the Indian retail sector, 2009).

There may be several reasons. May be because some may lose their jobs who are working under unorganized retailing and also people have the fear that they will lose the sales of the kirana (mom and pop stores) shops in which they are doing their business for a quite long time.

2. Economic environment: Economic factors are economic growth, interest rates, exchange rate, inflation rate etc. Being a developing country, India’s economic environment is good. Even in this recession stage India is able to maintain a strong economy. For a retailer who wishes to come to India, a huge middle class population is there. Major part of India’s population is youth so that a retailer can be successful here if they treat the employees as well as the customers well.

Social responsibility

India has yet to develop a strong social responsibility among its corporate houses. Even if they do show any such perception, it is mainly due to avail of certain benefits like tax concessions according to authors Guler Aras & David Crowther. In their book, Culture and Corporate Governance, they state that “Out of the very few companies who contribute to the social development, the basic intention was not ensure the good of the nation, rather than a business policy to stay away from the tax net.” (Aras & Crowther, (n.d), p.39). The authors add that corporate houses can do a lot in this regard. Hence Kroger can take the initiative in conducting genuine corporate responsibility programs through which it can earn a lot of goodwill. There is wide disparity of income among the lower, middle and upper classes. If Kruger concentrates its CSR programs with the lower middle income, and the poor, the company can earn a lot of gratification from them. In the long term, the lower middle income group will definitely become customers of the company. In the case of the lower and middle income group, this effort can help in converting them into immediate customers of the company.

Social environment

Cultural difference: India is a country where we can see many cultural differences; so the retailer should take into account all the factors that may create some problem mainly in case of food retailing because some of the people might be vegetarians but some might not. It is a challenging and profitable market to operate. For a multinational, dealing with cultural diversity is an ever-present issue and Kroger should take this matter seriously. “Cultural diversity is a way of life for transnational firms.” (Mann & Gotz, 2006, p.108). So the retailer should respect the values and beliefs of the people in that country. What foreign companies should do in such instances is to adapt to local tastes and beliefs. For example, beef is taboo for most Indians who belong to the Hindu faith. The Muslim faith does not take pork. So a food chain that sets up operations in the country will be benefited if its cuisine is adjusted according to beliefs and practices and not just tastes and flavors.

Languages: In India people speak different languages in different states; so it also can create some problems in the case of ads which is the main promotional tool. Even though English is the unofficial language of communication, it is not understood well by at least half of the population. Moreover, there are nearly twenty official languages (recognized by the constitution) and twenty thousand dialects spoken in India. This is a major challenge for any company entering Indian market.

Social environment: It includes changes in values, beliefs, attitudes, and life styles in society which create potential opportunities for an organization. Indian population is more adaptive and most of the middle class is now making shopping as a habit in weekends unlike in the previous years. So the company which is going to enter should consider the values and beliefs of the people.

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Technological environment: The main technological factors are R&D activity, automation, technological incentives and the rate of technological change. These can give support to the necessary functions in any type of organization. Effective formulation of strategy needs clear understanding of competition. The level of competition and level of profits are linked. Porters 5 forces model helps managers to understand business environment. It helps to analyze the factors outside an industry that affect the nature of the competition. Porters defined the forces which drive competition and the intensity of competition is determined by the relative strength of these forces

Competitors

5 forces which play in shaping company’s future are:

  1. Threat of new entrants
  2. The bargaining power of buyers
  3. The bargaining power of suppliers
  4. Rivalry among existing firms
  5. The threat of substitute product or service

Potential competitors in Indian retail industry

Big Bazaar, Reliance, Bharthi Wal-Mart, Subiksha, Panthaloon –Future group, Globus etc.

Conclusion

The entry of Kroger into the Indian retail industry has been discussed here. The biggest challenge is the diversity in culture, language, and income disparity among the population. The advantages are the growing middle class population, the migration into cities by a large section of the population, and the growing middle class in India. The government is also following favorable policies for the entry of foreign companies into the country. Even though a challenging market, India can be very profitable if the above considerations are taken into consideration and managed in an efficient manner.

References

  1. Aras, Guler., & Crowther, David. (n.d.). Culture and corporate governance. SRRNet. 49. Web.
  2. Articles about “US retail businesses”. (2009). About.Com: Retail Industry.
  3. Identify the political and social factors impacting the Indian retail sector. (2009). All Business: A D & B Company.
  4. View full version retail industry in India: An overview. (2009). ManagementParadise.com. Web.
  5. Nayak, Satyendra. S. (2007). Globalization and the Indian economy. Routledge. 39. Web.
  6. Mann, Clarence., & Gotz, Klaus. (2006). Borderless business. Greenwood Pulishing Group. Web.
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