UNIVERSITY OF SALFORD
SALFORD BUSINESS SCHOOL
STUDENT NAME: ZAKIA ABDI
STUDENT REG NO:
STRATEGIC INTERNATIONAL BUSINESS MANAGEMENT
MID TERM ASSIGNMENT
LECTURER:Dr Adrian Manoghan
DATE OF SUBMISSION: 15/APRIL/2018
From the analysis in appendix 1 Norway is potentially the most attractive market that Lidl ought to focus on its future international expansion strategy.
From the comparative analysis in appendix 1 this section will break down on the selection of Norway over Mexico .A detailed discussion of the PESTEL analysis of Norway will be done and further the implication of the macro environmental factors are discussed.
1.0 Rationale for selection of Norway as the potentially attractive target market
1.1 PESTEL Analysis of Norway
This is an analysis that provides a holistic position of the state from historical current and future positions. A PESTEL analysis insightfully looks at the Political, Economic, Social, Technological, Environmental and legal factors of the country in this case Norway
Numerous factors determine and affect the environment of an organization, which should be identified, understood and analysed by the company so it can achieve optimum performance. PESTEL analysis categorizes these factors affecting the organization under six headings.
Lidl ought to know what is PESTEL analysis and how it can be used to gain an insight into the environment of their organization, Lidl needs to understand what these factors represent and how they are interdependent. Once these environmental factors are identified and analysed, Lidl will be in a better position to plan an effective strategy to meet their objectives and minimize any errors that might be causing a performance-expectation gap.
1.1.1 Political Factors:
These determine the extent to which the Norway government and government policy may impact on an organisation or a specific industry. This would include political policy and stability. Norway is politically stable due to the Monarchy system and is currently rated to have a much lower crime rate in comparison to Mexico. The general public in Norway have trust in their politicians and further there is a noticeable efficiency in government spending at 66%. Generally the political environment of Norway is conducive enough for Lidl to expand its business there as the is assured security from acts of terrorism and the threat of the uncertainty of an electioneering period.
1.1.2 Economic Factors:
These factors impact on the economy and its performance, which in turn will directly impacts on Lidl’s performance and its profitability. Economic factors include interest rates, employment or unemployment rates, raw material costs and foreign exchange rates amongst others. In comparison to Mexico Norway is ranked top on its global competitive index score in the year 2016-2017 with a score of 5.44 out of 7 .Norway has a GDP per capita US $ of 70391.6 ,This represents the total value of all the goods and services produced by Norway in year 2016-2017, divided by the population in Norway. Norway has a 50% rate of inflation and a 40.8% of imports on GDP. This is an indication that there is more foreign market size which is scored at 71 %.It takes approximately 4 days to start a business in Norway, this period is shorter and workable for any investor who wishes to start a business in Norway Lidl is therefore well placed to explore the Norway market as there are foreign business owners in Norway already.
1.1.3 Social Factors:
These factors focus on the social environment and identify emerging trends. This helps Lidl to further understand their customers’ needs and wants. Factors include changing family demographics, education levels, cultural trends, attitude changes and changes in lifestyles. Norway has a life expectancy of 82.1 yrs and has a nill business impact of malaria, With a 76% ranking of quality in education system Norway is ranked as one of those countries with high levels of educated population. Approximately the female to male participation in labour is valued at 0.95 compared to 0.59 in Mexico. Norway has a labour market efficiency of 73% this is an indication that it will be much easier for Lidl to find available skilled labour in Norway.
1.1.4 Technological Factors:
These factors consider the rate of technological innovation and development that could affect a market or industry. Factors could include changes in digital or mobile technology, automation, research and development new methods of distribution, manufacturing and also logistics. Norway is 87%technologically ready with a 94% availability of latest technology. The availability of 97.3% internet users in Norway will ensure efficiency in business activities of Lidl in Norway since that will make online transaction much easier. Norway has a score of 5.3 in capacity of innovation, this means that it is much easier to embrace the technological advancements while at the same time Lidl can introduce new innovations for adoption. Norway invests widely on research and development at 71% thus this enables them to have up to date technology in different industries.c
1.1.5 Environmental Factors:
These are factors that relate to the influence of the surrounding environment and the impact of ecological aspects. With the rise in importance of CSR (Corporate Sustainability Responsibility), this element is becoming more important. Factors include climate, recycling procedures, carbon footprint, waste disposal and sustainability. Norway is embracing more sustainable practices, Norway’s state-controlled businesses are developing cutting edge clean technology. Statkraft’s has been developing a unique new technology known as salt power. The method involves tapping both freshwater and seawater at the mouths of rivers and fjords. The water is redirected to tanks on both sides of a semi-permeable membrane. More recently, Norwegians have been moving away from hydroelectric power and toward other energy sources that have less of an environmental impact. Norway has enacted a series of policies designed to mitigate any environmental damage cause by its offshore drilling operations. Several laws were passed to protect the coastal marine environment from oil spills and hazardous industrial substances. Norway has overtime proved an environment conscious country and thus as an investor Lidl ought to pick it as the next destination for its expansion strategy.
1.1.6 Legal Factors:
Lidl must understand what is legal and allowed within the territories they operate in. They also must be aware of any change in legislation and the impact this may have on business operations. Legal factors include employment legislation, consumer law, health and safety, international as well as trade regulation and restrictions. Norway has an efficiency of 79% in its legal framework in settling disputes and a 75% strength in investor protection. This implies that as Lidl plans to invest in Norway they are well protected as investors and also when there is a dispute it is much faster to settle any disputes that may arise in the future. Norway boasts of 71%judicial independence, this implies that the judiciary is independent in its undertakings thus conflict resolution is done by the judiciary independently.
2.0 ANALYSIS OF COMPETITIVE INTENSITY OF THE SUPERMARKET CHAIN IN NORWAY
2.1 MICHAEL POTER 5 FORCE MODEL
This is a simple but powerful tool for understanding the competitiveness of any business environment, and for identifying the best strategy and its potential profitability. This tool was created by Harvard Business School professor Michael Porter, to analyse an industry’s attractiveness and likely profitability. This section will discuss the 5 forces namely ,rivalry amongst existing competitors, threat of new entrants, bargaining power of suppliers, bargaining power of buyers, threat of substitute products and services
2.1.1 RIVALRY AMONGST EXISTING COMPETITORS
Competitive rivalry between supermarkets to win customer share is a constant and a continuous battle that Lidl has to face. There are many significant firms in the supermarket industry in Norway with Norgespuppen, Coop, Rema and Bunnpris as the most dominant ones. This highly competitive market has fostered an accelerated level of development resulting in a situation in which the retailers have to be innovative in order to maintain their already built market share. Competitors in the industry have over time refocusing on price and value .Competitive rivalry is considered a high threat in the supermarket industry .
2.1.2 THREAT OF NEW ENTRANTS
Threat of potential new entrants in the supermarket industry is limited.The grocery market has overtime been transformed to supermarket dominated business Ritz (2005). Most large chains have built power from operating efficiency , one stop shopping and major marketing mix strategies.
2.1.3 BARGAINING POWER OF BUYERS
The power of buyers acts to force prices down. If prices of a certain commodity is high in one outlet buyers will always exercise their power and move to a much cheaper option. Loyalty cards and club cards in this case remains the most successful customer retention strategy that significantly increases the profitability of the outlets. In the quest of meeting the customer needs customizing the services, ensuring low prices, better choices, and constant flow of instore promotions over time enables other brands to control and retain their customer base.
2.1.4 BARGAINING POWER OF SUPPLIERS
The power of suppliers can be influenced by major supermarket chains that fear losing their business to the larger supermarkets. There is little threat as often large supermarkets dictate the price they pay to the supplier. If the supplier does not agree with the set price then the supplier will be left with no retailer.
2.1.5 THREAT OF SUBSTITUTE PRODUCTS AND SERVICES
Substitutes do not replace existing products entirely but may introduce new technology or reduce costs of producing the same product. Effectively substitutes in the market may limit the profits in an industry by keeping the prices down.
4.0 FOREIGN MARKET MODES OF ENTRY
A foreign market entry mode is an institutional arrangement that makes the entry of a company’s products, technology, human skills, management or other resources into a foreign country possible (Root, 1987, p. 5).
Entry mode used by firms may be determined by external environmental factors such as host country trade and investment restrictions, host country market size, host country geo- graphic and cultural distance, and exchange rate fluctuations (Aliber, 1970; Goodnow and Hansz, 1972; Stopford and Wells, 1972; Goodnow, 1980; Bauer- shmidt etal., 1985; Root, 1987; Gatignon & Anderson, 1987).
4.1 Foreign Markets Entry Strategies
This is an agreement to which the licensor sells the rights to intellectual property. Such rights may include patents and knowhow to the licensee and they are exchanged for a royalty fee. In such an agreement the foreign firms may either manufacture exclusively or none exclusively the proprietors’ product for a fixed term. Licensing is a non-equity mode of entry.
4.1.1 International Franchising.
This is a non-equity mode of entry into international markets. In franchising the franchisee pays the franchiser royalties in return for doing business under the franchisers trademark. Such an agreement is limited to trademarks and in many cases they may be longer.
This is a mode of entry into global markets where the clients pay for contracts to design and construct new facilities in foreign firms while at the same time train the personnel this way the foreign firm is able to export its technologies. Most industrial firms that have complex technologies use this mode of entry into international firms. Wholly Owned Subsidiaries (WOS)
This is a mode of entry into foreign markets which involves use of equity. WOS may be defined as subsidiaries located in foreign countries which are entirely owned by the multinational enterprise.
They may take the form of
2) Green field investments.
This is a foreign market entry mode which involves buying up a company, its suppliers, sometimes it may involve buying up a major competitor. When multinational firms venture into acquisition they enjoy the superior market power thus in the long run they will have a larger market share
A form of wholly owned subsidiary which are often complex in nature
4.1.3 Joint Venture.
A form of entry mode where two or more foreign firms consolidate their resources and invest in the same venture for the long term goal of making profits. The key issues in such a venture include ownership control, length of agreement, pricing issues, and technology transfer and government intentions.
4.1.4 Strategic Alliances
These are cooperative agreements between firms in industrialized nations which are often created for short term with a main focus of creating new products and technologies.
This is a mode of entry which involves sale of goods and services from one country to the other. It may take the form of direct exporting or indirect exporting.
This is a non-equity mode of entry into foreign markets which involves selling directly products made in home country in other foreign countries.
A non-equity mode of entry which involves trade of goods and services through domestic based export intermediaries. This may involve the use of export managing companies, export trading companies, conforming trading agents, non-conforming trading agents and export merchants.
4.1.6 Co-Marketing Agreements.
A market entry mode where a number of firms come together to jointly market their products and services.
4.2 Conclusion and Recommendations
The fact that the entry decisions are complex it is necessary that managers prioritize the modes by considering key variables which are manageable then contemplate other variables later depending on their resources. Firms may opt for either equity or non-equity modes.
How to enter a foreign market largely depends on the scale of entry, it might be either small scale or large scale. For an organization to make a decision they may follow a decision model that guides specific steps for foreign market entries. This decision model first focuses on the ownership issues. The second step makes the actual selection of the entry mode.
It is key for organizations to make sure that they are able to match the market entry modes and the geographical diversification with the strategic goals of the firm so as to ensure sustainable competitive advantage.
POLITICAL FACTORS Value(1-7) RANK Value(1-7) RANK
Public trust in politicians 1.9 2 5.7 1
Business costs of terrorism 4.8 2 5.9 1
Favouritism in decision of govt officials 2.0 2 4.9 1
Efficiency of government expenditure 2.2 2 4.6 1
Diversion of public funds 2.2 2 5.9 1
Burden of government regulation 2.6 2 4.1 1
Irregular payments and bribes 3.2 1 6.3 2
ECONOMIC FACTORS Global competitive index 4.4 2 5.4 1
GDP per capita US$ 8554.6 2 70,391 1
Government budget balance % GDP -2.9 2 2.9 1
Gross national savings% GDP 26.6 2 33.7 1
Inflation annual % 2.8 1 3.5 2
Govt debt% GDP 58.1 1 33.2 2
Country Credit Rating 71.0 2 94.8 1
Buyer sophistication 3.5 2 4.3 1
Imports% GDP 40.8 1 32.2 2
Prevalence of foreign ownership 5.3 1 4.4 2
Intensity of local competition 5.2 2 5.3 1
Foreign market size index 6.1 1 5 2
Effect of taxation on intensity to invest 3.4 2 3.5 1
Time to start Business (days) 8.4 days 2 4days 1
Prevalence of non – tariffs barriers 4.5 1 4.4 2
Trade tariff % Duty 5.2 2 2.7 1
SOCIAL FACTORS Quality of education system 3.0 2 5.3 1
Life expectancy 63.8 yrs 2 82.1 yrs 1
Business impact of Malaria 6.2 1 00 2
Hiv Prevalence % in adult population 0.3 2 0.2 1
Hiring and firing practices 3.4 1 3.3 2
Cooperation in labour employer relations 4.4 2 6.1 1
Female participation in the labour force(ratio to men) 0.59 2 0.95 1
Labour market efficiency 3.8 2 5.1 1
TECHNOLOGICAL FACTORS Technological readiness 4.2 2 6.1 1
Availability of latest technology 5.0 2 6.6 1
Foreign Direct investment ; technology transfer 5.0 2 5.1 1
Firm level technology absorption 4.6 2 5.8 1
Internet users % population 59.5 2 97.3 1
Capacity of innovation 4.1 2 5.3 1
Expenditure on research and development 3.2 2 4.9 1
Infrastructure 4.3 2 5.0 1
ENVIRONMENTAL FACTORS Quality of roads 4.4 1 4.3 2
Quality of port infrastructure 4.3 2 5.5 1
Quality of electricity supply 4.9 2 6.9 1
Quality of air transport 4.4 2 6.0 1
Quality of rail transport 2.8 2 4.0 1
LEGAL FACTORS Efficiency of legal framework in settling disputes 2.7 2 5.5 1
Strength in investor protection(1-10) 6.0 2 7.5 1
Burden of Government regulation 2.6 2 4.1 1
Ethical behaviour of firms 3.2 2 5.8 1
Organized crime 2.6 2 6.6 1
Judicial independence 4.1 2 6.6 1
Legal rights index(0-10) 10 1 5 2
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