STRATEGIES FOR MARKET ENTRY: Fast Moving Consumer Goods Companies in Emerging Markets ppt

Based on our desire to delve into the topic of market entry strategies as well as our interest in Carlsberg, the idea for the thesis thus became to evaluate the options available to Carl

A a r h u s S c h o o l o f

B u s i n e s s 2 0 0 9

Mark Sorgenfrey Lasse Munch

M.Sc Strategy, Organisation and Leadership

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Abstract

Multinational enterprises (MNEs) are increasing their presence in the lives of more and more consumers as companies seek to expand and promote their products to a still wider range of markets globally As markets change and develop, so does the strategy used to enter them, and companies must be able to choose the correct way to enter markets in order to remain competitive

This thesis takes a look at how MNEs in the FMCG industry enters new markets, more specifically emerging markets In order to gain an understanding of this we look at three specific markets, namely Russia, India and China We attempt to answer if the way MNEs enter emerging markets is in keeping with what would be expected from the OLI framework (Dunning 2000) as well as the work done by Buckley and Casson (1998) Additionally we try to gain an understanding of why any discrepancies exist and whether they can be explained by the nature of emerging markets as well as the characteristics of the FMCG industry

An ability to adapt and tailor specific strategies to individual markets gains more importance, especially with regard to emerging markets, as the difficulties and obstacles presented when entering these markets often proves both new and unique In many cases there are difficulties in underdeveloped markets, specifically concerning consumer spending power and brand awareness, as well as logistics and infrastructural inadequacies compared to western markets which serves to make the correct approach

to entering emerging markets of high importance The methods first employed when entering emerging markets are often unsuccessful and needs to be modified as market knowledge is gathered and opportunities present themselves In the three markets analysed in the thesis to illustrate emerging markets, Carlsberg is used as an example of

a company present on all three markets Examples of entry strategies followed by Carlsberg in the three markets are analysed and the reasons for their success or failure

as well as the lessons learned are discussed in relation to the individual markets In importance, this thesis contributes to the understanding of how MNEs enter emerging markets as well as to which challenges they face

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Contents

1 Introduction 1

2 Problem statement 2

3 Objectives and research method 2

3.1 Selection of cases for analysis 3

4 Market entry modes for FMCG firms 6

5 Reasons for conducting foreign direct investment 7

6 Internalization level and form of market entry 8

6.1 Transaction cost theory 8

6.2 The Resource Based View and internalization 10

6.2.1 The Resource Based View and mergers and acquisitions 12

6.3 The OLI framework 13

6.4 Model of foreign market entry 21

7 Fast moving consumer goods 24

7.1 Choice of the supplier side of the FMCG industry 26

8 Emerging markets 27

8.1 Circumventing infrastructure problems in emerging markets 29

9 Market analysis of the FMCG industry 30

9.1 Threat of new entrants 30

9.2 Rivalry among existing competitors 31

9.3 Bargaining power of suppliers 32

9.4 Bargaining power of buyers 32

9.5 Threat of substitute products 33

10 Carlsberg Breweries A/S 33

11 Markets 35

11.1 India 35

11.1.1 Infrastructure 37

11.1.2 Indian retail and the Indian consumer 40

11.1.3 Five forces analysis of the Indian FMCG industry 43

11.1.4 The Indian beer market 46

11.1.5 Carlsberg India 47

11.1.6 OLI framework 49

11.1.7 Discussion 55

11.2 China 56

11.2.1 Special economic zones and growth 56

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11.2.2 Current state of the Chinese economy 57

11.2.3 Rural-urban wage gap 59

11.2.4 Infrastructure 60

11.2.5 Chinese business culture and the importance of guanxi 62

11.2.6 Chinese retail 63

11.2.7 Chinese consumers 64

11.2.8 Five forces analysis of the Chinese FMCG industry 66

11.2.9 OLI framework 68

11.2.10 Discussion for China 71

11.3 Russia 73

11.3.1 Market analysis for Russia 76

11.3.2 The Russian beer market 80

11.3.3 Carlsberg on the Russian market 82

11.3.4 OLI framework 83

12 Discussion and findings 87

13 Conclusion 95

Appendix

Appendix 1 FMCG retail markets and supplier industries

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Figures and tables

Table 3.1 GDP per capita and growth rate for emerging countries

Table 4.1 Market entry modes

Table 11.1 Market segments in the Indian market

Table 11.2 Carlsberg India’s facilities

Table 11.3 Chinese urban and rural per capita income 2000-2008 (Chinese yuan)

That market entry strategies should be the main topic of our thesis was not our first thought though as we discussed the first ideas for the thesis in the autumn of 2008 We settled relatively quickly on the idea of involving the major Danish brewer, Carlsberg,

in the thesis however Carlsberg had at that time only just completed the joint acquisition of Scottish & Newcastle together with Dutch rival Heineken in the biggest foreign acquisition by a Danish firm ever made This deal reinforced Carlsberg‟s position among the leading global brewers and increased their activities in high growth foreign markets as well as their dependence on these This made Carlsberg a highly interesting case for analysis in our perspective Based on our desire to delve into the topic of market entry strategies as well as our interest in Carlsberg, the idea for the thesis thus became to evaluate the options available to Carlsberg and similar multinational enterprises when entering high growth foreign markets as well as the actual entry strategies pursued by Carlsberg in such markets The thesis draws information and data from academic articles and books, corporate websites, and news reports as well as governmental and other publicly available statistics Additionally, we attended Carlsberg‟s annual general meeting in Copenhagen in March of 2009

In importance, this thesis contributes to the understanding of the challenges faced by MNEs in emerging markets Additionally, it adds to the knowledge on how MNEs enter emerging markets and on the conceivable reasons behind choosing the respective modes

of entry in different emerging markets This is relevant due to the increasing globalization of markets as especially western MNEs look to emerging markets for growth as they face stagnant growth in their core markets in the west

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2 Problem statement

A great deal has been written about strategies for market entry and we will present some

of the more important contributions in this thesis in order to offer the reader an overview of relevant theories When it comes to entry strategies in emerging markets the amount of literature is limited however and is often confined to investigating single economies This study will therefore contain a comprehensive analysis of a small number of emerging markets in order to offer a better indication of the challenges firms face when entering emerging markets in general

The objective of the thesis will be to make a contribution to the understanding of the challenges and problems associated with entering emerging markets, and why these strategies are implemented and carried out in the way they are The main focus will be

on the differences between what are to be expected based on theoretical approaches and what is actually observed In order to shed light on this subject, the thesis will analyze three cases covering Carlsberg‟s strategy on the Russian, Chinese and Indian markets respectively The main question which this thesis will seek to answer is the following:

Can the choice of market entry strategies for FMCG producers in emerging markets be

explained through the OLI framework (Dunning 2000)?

Secondary question:

If differences between actual and expected market entry strategies exist, how are these explained by the special characteristics of emerging markets and/or the FMCG industry?

3 Objectives and research method

The primary objective of this thesis is thus to determine whether firms within the FMCG industry follow the theories on market entry in emerging markets That is, can the market entries of FMCG firms in emerging markets be explained through the theories presented in this thesis; transaction cost theory (Coase 1937, Williamson 1975; 1985), the resource based view (Wernerfelt 1984, Peteraf 1993), the eclectic paradigm (Dunning 2000) as well as the model on foreign market entry developed by Buckley & Casson (1998) Providing this is not the case, the secondary objective of the thesis is to determine whether FMCG firms follow a different pattern in market entries compared to non-FMCG firms due to the characteristics of their particular industry or alternatively;

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can the differences be explained based on the differences between established and emerging markets In order to answer these questions, we have chosen to analyse a total

of three cases of market entry by the Danish multinational FMCG firm, Carlsberg A/S

3.1 Selection of cases for analysis

When the numbers of emergent markets are so large and diverse the question becomes what markets are worth taking a closer look at in order to define the problems and challenges facing FMCG manufacturers and to test their adherence to the theories on market entry In this thesis we have taken the approach of looking at the three largest emerging economies, namely Russia, China and India, who amongst them represents a significant percentage of the world population as well as the world market We believe that these countries will provide an interesting view of emerging markets In our view their size make them more interesting than smaller markets which has less influence on the world, since these three countries could very well be the engines that drive the economy of tomorrow Additionally, the three markets shows themselves to be interesting in the context that they, despite their large size, shows significant differences

in their market structure as well as the challenges entrants and domestic companies face This means, that these markets will give a fairly representative picture of the numerous challenges faced by the companies operating in emerging markets

In addition to the above mentioned reasons for our case selection, we have further justification for our choices Looking at the cases in a more scientific view, we consider the Russian, Chinese and Indian markets to be diverse cases with regard to wealth (Gerring 2007 p 97), which is evident by the differences in GDP per capita in the three countries As can be seen from table 3.1 below, the Russian GDP per capita was estimated at $15,800 in 2008, the Chinese $6,000 and the Indian $2,800 (CIA 2009) Russia is thus among the wealthiest third on FTSE‟s list of emerging countries (FTSE 2009) and given the market‟s size and Carlsberg heavy involvement in the country, it is

as a result a logical case to include in our analysis At the same time, Russia has shown considerable growth in recent years and is part of the upper third of the emerging countries in terms of growth

China is on the other hand part of the lowest third of emerging countries when it comes

to GDP per capita China is however likely to advance on the list in the coming years as

it has the highest GDP growth rate of all the emerging countries, and has sustained this

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growth rate for a number for years For this reason, we consider it fair to use China as our median case, also because Turkey is the only market among the middle third where Carlsberg is active and we do not consider Turkey particularly interesting compared to China This is primarily due to its more limited size, GDP growth and market potential compared to China

As stated, our final case is the Indian market India is like Russia and China among the upper third of the emerging countries in terms of growth, but it is however also the one with the second lowest GDP per capita, only slightly superior to Pakistan These facts combined with a population in excess of 1.1 billion people and a very low consumption

of beer makes India an intriguing case for analysis

Table 3.1 GDP per capita and growth rate for emerging countries.

Rank Country GDP per capita Country GDP growth rate

2 Czech Republic $26.100 Peru 9,2%

18 Egypt $5.400 South Africa 2,8%

19 Morocco $4.000 South Korea 2,5%

20 Indonesia $3.900 Taiwan 1,9%

21 Philippines $3.300 Turkey 1,5%

23 Pakistan $2.600 Hungary -1,5%

Countries in italic type are Advanced Emerging Countries

Source: CIA 2009 and www.ftse.com

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When using the diverse case selection method, the chosen cases should in combination

be somewhat representative of the population due to the selection of high, low and median value cases It is should therefore also be fair to say that diverse case selection is often more representative than other forms of case selection as it encompasses a greater range of variation (Gerring 2007 p 101) This requires however, that GDP per capita values are fairly evenly distributed between high and low values When this is the case,

it should be representative of the population to pick one low, one median and one high

If the majority of the population had a low GDP per capita however, that is if there were more “low” than “high” cases, it would perhaps be more representative to add an additional low score case (Gerring 2007 p 101) Since the GDP per capita values seems

to be somewhat evenly distributed between the high and low values in the population of emerging countries, it should be fair to select one high, one median, and one low case

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4 Market entry modes for FMCG firms

Root (1994) and Buckley & Casson (1998) have identified 15 and 20 different modes of market entry respectively These can however be categorized in the five main classes in table 4.1, which are ordered in accordance with increasing control of the entrant (Johnson 2007) and in general also with increasing commitment and investment

Table 4.1 Market entry modes

Export The perhaps simplest form of market entry is to export products from the

domestic market to a company or individual in the foreign market who then sells the products on In addition to being a simple form of market entry it does not require any particular investment either and it is highly flexible On the other hand, the exporting firm has very limited (if any) control over functions such as marketing and distribution in the target market(s)

Strategic

alliance

In a strategic alliance a foreign and an incumbent firm agree to collaborate

in the foreign market in order to reach specific goals while remaining independent organizations – there are no equity investments A strategic alliance is often aimed at attaining synergies through combined effort and can additionally involve knowledge and technology transfer as well as shared expense and risk As opposed to joint ventures, which are described below, strategic alliances require limited upfront investment

Joint

venture

In a joint venture, a foreign firm and an incumbent in a target market agree

to share activities in the target market This collaboration can for instance take place through a subsidiary owned equally by both parties Such an agreement would in most cases involve a substantial investment from the foreign firm although not as much as an acquisition or green field venture

At the same time, a joint venture can benefit from knowledge and technology of both parties

a green field investment, the entrant cannot rely on an incumbent‟s knowledge on the foreign market A major advantage to a wholly owned subsidiary is that the entrant will retain full control of the venture

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5 Reasons for conducting foreign direct investment

In general, doing business in a company‟s domestic market, or in markets geographically and culturally close to this market, should be much simpler than expanding globally If a company do wish to sell to distant foreign markets, it should likewise be simpler to export products rather than engage in FDI and setting up subsidiaries with production facilities abroad – especially since this incurs costs of communicating the company‟s technology (Buckley et al 1998) However, businesses seem to increase their international focus year by year, which can be driven by a number

of different reasons according to Robock and Simmonds (1989 p 310) The following six points are focused on reasons for conducting foreign direct investment (FDI)

The search for new markets Expanding internationally through FDI will often be

caused by companies seeking to increase turnover and, hopefully, profits by entering new markets Entering new and distant markets is often not feasible through export due

to factors such as logistical costs and import taxes as well as lack of knowledge on local

consumer demands

The search for new resources These resources1 could be unskilled labour, agricultural products or natural resources such as minerals (Dunning, 2000 p 164) FDI is in this case not necessarily conducted in order to reach new customers but instead aimed at servicing current customers (Hitt et al 2005 p 468)

Production-efficiency seeking Where economies of scale are present, it makes sense

to increase the customer base internationally and thus increase production volumes, as this will lead to lower average costs for products which will increase the company‟s competiveness (Ghoshal 1987 p 434) This is especially the case when it is feasible to concentrate production at a few international locations, preferably where production and

logistics costs are lowest, which can then supply nearby markets

Technology seeking Larger firms often buy smaller firms in order to acquire new

technologies, a common occurrence in the medical and biotech industries for instance

In this way the acquiring firm can take advantage of the often more entrepreneurial and innovative culture in smaller firms which often lead to development of superior

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By a resource is meant anything which could be thought of as a strength or weakness of a given firm Examples of resources are: brand names, in-house knowledge of technology, employment of skilled personnel, trade contacts, machinery, efficient procedures, capital, etc (Wernerfelt, 1984 p 172)

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technologies According to Ghoshal (1987), doing business in a global market may also

in itself aid development of diverse capabilities as companies are subjected to a multitude of stimuli by operating in different environments This should, ceteris paribus, provide multinationals with greater opportunities for organizational learning

The search for lower risk Companies may seek to lower their risks by diversifying

into additional markets through FDI and thus lowering their dependence on the business cycles of single markets (Hitt et al 2005 p 468) For this reason, MNEs generally diversify their FDI investments geographically so as “not to put all their eggs in one basket” (Rugman 1979) Other risks which could be lowered by FDI are policy risks from unfavourable national legislation, competitive risks from lack of knowledge on competitor‟s actions and resource risks such as dependence on a single source of an

important raw material for production (Ghoshal 1987 p 430)

Countering the competition Companies can also engage in FDI as a reaction to

competitor moves, for instance as part of a tit for tat strategy (Frank 2003 pp 461-462)

An example could be, that company X enters an important market of a competitor and the competitor could then choose to retaliate by entering one of company X‟s important markets making both parties worse off This should then deter X from engaging in such actions again

6 Internalization level and form of market entry

As discussed in the previous section, a company wishing to sell their products abroad can either engage in FDI or choose to license the right to sell the products to a third party when they do not find it advantageous to export The first question then becomes whether the company should produce and sell the product itself on the foreign market or

if it should sell a license Then, if the company estimates that FDI would be the best solution, then which form of FDI should be used? Some of the theoretical attempts to answer these questions will be covered in the following sections

6.1 Transaction cost theory

One of the theories, which seek to answer why transactions are handled within a firm instead of between independent parties in the market, is transaction cost theory The

theory was introduced by Ronald H Coase in his 1937 paper The Nature of the Firm

(Coase 1937) Though the theory is more than 70 years old, the concept of transaction

The fact that contracts must always be considered incomplete and thus unable to cover every eventuality means, among other things, that both parties to the agreement must monitor whether the other party is acting in accordance with it Furthermore, if one or both parties fail to comply with the terms and conditions of the agreement, and thus behaves opportunistically, they may need litigation to settle the dispute Both monitoring a contract and settling disagreements in court can bring about considerable costs If the parties do not have a relationship built on trust, the uncertainty of future costs may make it impossible to ever get to an agreement at all and it will thus be necessary to internalize what would otherwise be done by the other party – or find another, less suitable, supplier if at all possible The fact that Williamson attributes

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opportunistic behaviour solely to human nature has been criticised by Ghoshal and Moran (1996) However, the fact that humans and organizations have a tendency to behave opportunistically can hardly be disputed, especially in the current economic climate As an example, the majority of larger Danish firms are currently renegotiating contracts with their suppliers in order to lower prices and achieve better terms (Bjerrum 2009)

To summarise, transaction cost theory states that if internal transaction costs are lower than the above mentioned costs associated with transactions in the open market, then the transaction should be handled internally This is however only valid if other factors do not change this recommendation – for instance it the company prefers the often higher level of flexibility of using the market

While transaction cost theory is highly relevant when deciding between using the market and producing internally in a company, its focus is primarily on make or buy decisions within markets However, when the question is whether a company should export to a foreign market or set up production there, a number of other factors need to

be considered and decided on A later segment in this thesis will cover J H Dunning‟s OLI framework (2000) which includes factors relevant to this decision Before getting

to this, the next segment will turn to the resource based view and its views on internalization

6.2 The Resource Based View and internalization

While transaction cost theory mainly focuses on external circumstances and the quantifiable, the resources based view is concerned with the firm‟s internal factors and the more intangible subject of resources, also called firm-specific factors In some of the more classical writings on the resource based view, focus is mostly on the competitive advantage of firms and thus not specifically with theory on market entry (Wernerfelt 1984; Peteraf 1993) However, the resource based view offers some interesting insights with regard to the latter For this reason, scholars have applied the resource based view

on subjects like the timing of market entry in recent years (see for instance Geng et al 2005; Frawley et al 2006) This thesis will use some of the resource based view‟s insights on the choice between using the market and internalizing transactions; that is,

as an alternative view to transaction cost theory which we have covered above Moreover, transaction cost theory ignores the medium and long term strategic

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considerations with regard to sustaining and expanding the firm‟s competitive advantage This is on the other hand central to the resource based view as it explains the possession of competitive advantage from the control of superior resources Additionally, it highlights the importance of building competitive advantage and suggests possible routes to this by acquiring new superior resources (Wernerfelt 1984) Transaction cost theory is on the other hand focused on short term considerations and profitability

According to Wernerfelt (1984), a firm can use the possession of one or a number of resources as a barrier, shielding its superior profits from entrants as well as from other incumbents as long as these behave rationally This shield comes from the fact that new acquirers of a resource can be adversely affected, when it comes to costs and/or revenues, by the fact that another company is already in possession of a resource Given this, the company already in possession of the resource thus has a competitive

advantage and a potential for superior profits Wernerfelt has termed this a resource

position barrier as it is somewhat analogous to Porter‟s (1980) barriers to entry,

although Porter‟s entry barriers in product markets only protects against possible entrants – not against other incumbents Having satisfied and loyal customers could be

an example of a resource position barrier against entrants and incumbents, as it is a lot easier to maintain such a position than it is to attract otherwise loyal customers from a competitor

A resource position barrier can of course be based on a number of different resources besides having loyal customers As mentioned above, the resource however needs to be able to offer a competitive advantage, which means that the following four requirements need to be met (Peteraf 1993):

1) There has to be heterogeneity in the resource bundles and capabilities underlying

production among firms With heterogeneity, superior resources exists which results

in the potential of earning rents

2) There has to be an imperfect market for the resource, as well as for substitutable resources, so that such resources cannot readily be acquired by other firms That is,

there has to be ex post limits to competition Ex post limits to competition results in

rents being preserved as they cannot be competed away in the short term

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3) Before the resource is acquired by the firm, there has to be limited competition for

that resource, that is, there has to be ex ante limits to competition This prevents the

costs of acquiring the resource from offsetting the rents

4) Finally, there has to be imperfect mobility in the market for the resource meaning

that the resource has to be more valuable in the firm where it is currently in use than

it would be elsewhere Imperfect mobility is often caused by the fact that transferring the resource to another firm will incur costs This ensures that the rents are sustained within the firm

A wide range of things can be considered a resource Many of these are also able to comply with the above mentioned requirements for a resource to offer a potential competitive advantage Besides the example of customer loyalty stated above, such examples include managerial skills, technological leads, and access to raw materials as well as production capacity and experience (Wernerfelt 1984 pp 173-174) We will expand on some of these examples in later chapters of this thesis, including a few with relation to our chosen cases

All of this relates to market entry decisions because it is too short-sighted to only look

at the short term optimization of transaction cost theory When entering a new market and having to choose between the different modes of entry, it is important for the long term success and profitability of the firm to consider the impact on the firms future resource position It may be that the alternative with the lowest cost is to license a firm

in the target market to produce and distribute the product This short-term optimization may however restrict the firm from developing new favourable resource positions thus decreasing the firm‟s competitive advantage later on For instance, licensing instead of internalizing the activities in foreign markets could mean that the firm would not benefit from the organizational learning and innovation which can be achieved by being present

in foreign markets as the organization is subjected to societal and managerial differences (Ghoshal 1987) This duality between optimizing in the short and the long term is also what Tallman is talking about in Hitt et al (2001 p 475-480) when he discusses capability leverage and capability building strategies and the multinational firm

6.2.1 The Resource Based View and mergers and acquisitions

While not referring directly to market entries, Wernerfelt (1984 p 175) offer some interesting thoughts on the subject of mergers and acquisitions, which are highly

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relevant to market entry decisions One of his points is for instance, that when a firm acquires another firm, it can be likened to buying a bundle of resources The market for these bundles of resources is highly imperfect as there are few buyers and targets and a low degree of transparency due to the heterogeneity of firms It can be extremely difficult to assess the value of a possible acquisition, especially since such an assessment must often be done discretely so as not to alert competitors or the organization of interest At the same time, the value of an acquisition is dependent on the acquiring firm and whether synergies can be achieved or not (Wernerfelt 1984) Additionally, when a MNE plans to expand in current markets or enter new ones, the resource-based acquisition strategies are either to get more of the resources the firm already has or alternatively to get access to resources which complements the ones it already has (Wernerfelt 1984 p 175) These reasons for acquisitions corresponds well with the resource seeking, technology seeking and production-efficiency seeking reasons to conduct FDI stated by Robock and Simmonds (1989 p 310)

6.3 The OLI framework

The OLI framework, or eclectic paradigm, has been developed by John H Dunning and dates back to 1958 but it has been revised continuously through the years (Dunning,

2000 p 168) OLI is an abbreviation for ownership, location and internalization, which are the three sub-paradigms in the framework The OLI framework combines a number

of theories such as transactions cost theory and the resource based view of the firm and

in this way serves “as an envelope for complementary theories of MNE activity”

(Dunning 2000 p 183) The framework describes the three above mentioned factors which are relevant for companies engaged in international expansion We will give further details about these sub-paradigms below

The ownership sub-paradigm is about the ownership of unique resources, skills or

capabilities which can lead to a sustainable competitive advantage (Tallman in Hitt et al 2001) If a company is to expand from its home market into foreign markets successfully, it must of course have some advantage, something to offer, which is not available in the foreign markets already – it must have a unique and sustainable competitive advantage (Dunning 2000 p 164) This corresponds with the resource based view discussed in the previous segment These advantages can of course take many forms but can in general be grouped into three segments (Dunning 2000 p 168):

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- Possessing and exploiting monopoly power

- Having scarce, unique and sustainable resources and capabilities, based on the superior technical efficiency of a particular firm relative to its competitors

- Having competent managers who are able to identify valuable resources and capabilities throughout the world and who are likewise able to exploit these resources and capabilities to the long term benefit of the firm in which they are employed

Firstly, companies in a monopoly position on a market are often able to use their position as a barrier to entry to potential competitors This advantage could for instance consist of economies of scale for the monopolist I could also be the presence of cost disadvantages for entrants independent of their size such as the possession of proprietary technology by the monopolist (Porter 1980 p 37) The advantage could likewise be due to product differentiation by the monopolist, for instance when it comes

to superior brand power According to Porter, brewers generally use a combination of

scale economics and superior brands to keep potential rivals out of their markets: “To

create high fences around their businesses, brewers couple brand identification with economies of scale in production, distribution and marketing” (Porter 1980 p 37)

Possessing and exploiting monopoly power can thus be considered a competitive advantage since it gives the monopolist a cost advantage relative to its competitors and raises barriers to entry

Secondly, a company is generally able to earn superior profits if it possesses scarce, unique and sustainable resources and capabilities internally in the firm and are able to apply these in the marketplace (Tallman and Fladmoe-Lindquist 2002) This is central

to the resource based view and is acknowledged by Dunning in the OLI framework However, it should be beneficial for the firm to persistently develop new resources and capabilities, not just exploiting existing ones, in order to be competitive in the long term That is, striking a balance between exploiting existing resources and developing new ones is important in order to achieve optimal growth (Wernerfelt 1984 p 178)

Tallman and Fladmoe-Lindquist (2002 p 118) expresses this by stating that: “the

multinational firm will sustain its competitive advantage only if it can continue to develop new capabilities in the face of changing environments and evolving competition” But how does the possession of scarce, unique and sustainable resources

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and capabilities result in superior profits? As mentioned previously in the segment on the resource based view, when a firm is in possession of a resource, this resource can in

some cases act as a so-called resource position barrier (Wernerfelt, 1984) This means

that new acquirers of the resource can be adversely affected, when it comes to costs and/or revenues, by the fact that another company is already in possession of this resource Given this, the company already in possession of the resource thus has a competitive advantage and as a consequence superior profits

Finally, besides being in a monopoly position or having scarce, unique and sustainable resources and capabilities, a company wishing to expand internationally can also rely on competent managers to identify and exploit resources and capabilities internationally

According to Hamel and Prahalad (1994 p 78), “To get to the future first, top

management must either see opportunities not seen by other top teams or must be able

to exploit opportunities, by virtue of preemptive and consistent capability-building, that other companies can't” Research has also shown that top managers really do have

significant influence on the performance of firms (Priem et al in Hitt et al 2005 p 497) Managers are thus in itself a resource that companies can “own” and benefit from in international expansion and they can of course be considered unique since no two

people are alike However, skilled managers can hardly give a sustainable competitive

advantage since they can be employed by another company and even by a competitor

Peteraf (1993 p 187) exemplifies this by stating that “a brilliant, Nobel prize winning

scientist may be a unique resource, but unless he has firm-specific ties, his perfect mobility makes him an unlikely source of sustainable advantage”

It is however not enough for a company to have a unique and sustainable competitive advantage for FDI to be attractive, it must also be preferable to invest directly in the foreign market instead of simply just exporting or employing the advantage solely in the home market This is the subject of the next section

The location attractiveness sub-paradigm states that the foreign market must in some

way favour local production to export from the company‟s home market or other markets where the company is present with production facilities Many factors influence whether local production is preferable to exporting Examples of these factors could be lower labour costs, more favourable legislation, high transportation costs, governmental trade barriers, superior production processes or consumers preferring products with a

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local image (Hitt et al 2005 p 472) The following will expand on the above mentioned factors

Low labour costs In recent years, the transfer of jobs from high wage western

countries to low wage regions such as Asia and Eastern Europe have attracted considerable attention – as well as some anger and hostility from western workers This has especially been the case when production is outsourced to low wage countries only for the products to be imported back to the home market As mentioned above there are however other factors which influences the attractiveness of different locations For instance, many less developed countries are more lenient than western nations when it comes to legislation on environmental protection as well as worker safety This leniency can in some businesses lead to significant cost savings through outsourcing although the overall effect on profits is somewhat unsure given the potentially adverse effect on company reputation

Superior production processes Low labour costs is however not the only reason why

companies move production abroad In some cases other countries or regions have capabilities which offer superior production processes compared to other locations This could for instance be due to a workforce which is particularly skilled within a certain field – such as it has been the case for Germany within engineering Other examples could be superior skills within wind turbine development and manufacture in Denmark

or within manufacture of electronics in South East Asia

Governmental trade barriers Besides their influence on issues such as worker safety

and environmental protection through legislation, governments also play their part in determining the attractiveness of different locations via governmental trade barriers Among other things, governmental trade barriers include import tariffs, licenses and quotas as well as subsidies to local producers In some countries it may not even be possible to sell imported goods as they require at least part of the final product to be of local origin, the so-called local content requirements (LCRs) LCRs are often used by governments in less developed countries in order to protect local intermediate product companies from foreign competition (Belderbos et al 2002)

Ceteris paribus, when a country impose trade barriers on importers in one way or the other, it becomes more attractive to produce locally instead of exporting to this country thus raising the location attractiveness of the market

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Preference for local products Another factor which can make it more attractive to

produce in a given market is the fact that products with a local image are often favoured

by consumers Firms, industry organizations and even governments sometimes attempt

to increase this form of loyalty by calling upon consumers to buy domestic products through campaigns, often in order to support the local economy

Besides the patriotic reason for preferring local products, when consumers have consumed a certain product for a long time – perhaps their entire adult life – it is often very difficult to convince them to switch to an alternative product A good example of this is in fact the beer industry where consumers have often preferred to buy from the local brewery In China for instance, there is generally a high level of patriotism when it comes to beer drinking (Heracleous 2001 p 43) Combined with other factors, the preference for local beers have made it highly difficult for the majority of the global players in the beer industry to gain a foothold in China based on non-local brands (Heracleous 2001 p 37) Another example could be the Danish market for fresh dairy products where there is a strong preference for Danish products among consumers with only limited competition from mostly German products which has been introduced in recent years

Due to the preference for products manufactured locally, it can often be beneficial for MNEs to acquire or join forces with local producers In this way, the companies can combine their respective competences and in this way improve the competitiveness of both An example of this could in this case be the strong local brands of the incumbents

in conjunction with the superior manufacturing and marketing skills of the MNE

Transportation costs Last but not least, transportation costs are a major factor when

determining whether it is beneficial to produce locally as opposed to exporting to a given market In a short term perspective, one should choose to export if the combined costs of producing the goods and transporting them to the foreign destination are lower than the costs of producing them locally Otherwise it would be beneficial to set up production locally in some way

There are a number of different costs related to shipping products across large distances and these are not just related to the price of shipping a container from for instance Asia

to Europe These other costs include all sorts of handling costs, spoilage during

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transport as well as inventory carrying costs2 which also include carrying costs during the eight weeks of shipping from Asia to Europe Besides these costs, exporters are also vulnerable to changing demands of consumers due to their long supply lines as demand may change before the products reach their target customers These changes in demand can make it necessary to lower sales prices in order to sell products or can make it impossible to sell them altogether Customer service can also suffer from long supply lines – especially since companies try to minimize inventories as much as possible due

to the above mentioned inventory carrying costs With long supply lines, average inventory needs to be larger than with short supply lines due to the higher need for safety stock3, if the inventory service level4 is to be maintained In case some part of the long supply line minimizes safety stock excessively, perhaps to avoid perishable products going beyond their sell by date, this is likely to lead to occasional stock outs here as well as further down the supply line Products will thus periodically become unavailable to retailers and final consumers leading to lower perceived customer service and loss of sales With other things equal, shorter supply lines can minimize the problem of stock outs considerably

Finally, some products are more or less perishable and have a sell by or freshness date

If the products have been transported from the other side of the planet, they have a relatively limited time left on the shelves near the final consumer when they eventually get there before they have to be discarded An example of this could be beer as beer often has a sell by date or in some cases a freshness date, which indicates the date of production or the recommended final date of consumption The amount of time between time of production and freshness/sell by date is mostly between four months for a standard lager and 12 months for stronger brews (The Beverage Testing Institute) This amount of time, the so-called shelf life, is however dependent on correct storage of the products If the products are not stored correctly the actual shelf life will be lower as product quality will decrease at a faster pace in poor storage conditions

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Since shipping a container by container vessel from for instance Italy to China takes at least three weeks (Maersk Line 2009), and in most cases considerably longer, exporting beer across such distances limits the shelf life at retail stores considerably This will not only decrease the average quality of the products sold to end consumers but will also increase the number of products which are not sold before the sell by date Lower quality will first of all lead to lower customer satisfaction but also to more products which has to be discarded as they go beyond their sell by dates All in all, shipping perishable products over long periods of time incurs considerable costs besides the cost

of the transport fee itself

Finally, companies can also seek to attain strategic resources they are currently lacking

by investing in foreign countries In this case, investment in foreign countries is conducted in an attempt to enhance their knowledge and global competitiveness, not to use current advantages in new markets to earn higher returns (Chen & Chen 1998 p 446) The presence of companies in possession of complementary competences in a given country or region can thus attract FDI as foreign companies seek to attain these competences (Dunning 2000 p 178)

The internalization sub-paradigm concerns whether entry into foreign markets is

preferable through some sort of inter-firm non-equity agreement such as licensing, by engaging in FDI through investing in green field production facilities, or by purchasing

a company in the target market (Dunning 2000 p 164) As described in the section on transaction cost theory, this decision can be based on a somewhat simple assessment of whether an arm‟s length market transaction incurs the lowest cost or whether conducting the activity internally is the less costly alternative That is whether activities

in a foreign market should be handled internally or should be performed by a partner in the market The cost of conducting transactions in the market is in most cases positively correlated with the imperfections of the market (Dunning 2000 p 179) as this will often allow companies to charge higher prices Examples of these imperfections could be information asymmetries between the parties to an exchange as well as common property resources, public goods and externalities (Lipsey in Dunning 1999 pp 83-84) The former is in this case the most relevant, as information asymmetries has a highly significant influence on the costs of conducting transactions in the open market as described earlier on in this thesis in the section on transaction cost theory Information

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asymmetries between buyer and seller leads to costs associated with gathering information, negotiating deals, monitoring compliance to these deals as well as costs due to litigation in order to settle disputes between the parties to an agreement Since the transactions are to be performed between a domestic and a foreign market, information asymmetries are likely to be more prevalent and significant than between parties in the same market This is of course due to the fact that firms will in general have less knowledge of foreign markets than they have of their domestic market which

is exacerbated by language and cultural differences In addition to information asymmetries as a reason for internalization, it may also, as mentioned earlier, be cost effective to internalize functions when certain governmental taxes or quotas can be avoided by doing so

While a transaction cost based analysis of where the boundaries of the firm should be drawn is valid, it does however ignore other reasons why firms may choose to internalize functions in foreign markets aside from pure cost optimization (Dunning

2000 p 180) As covered previously in this thesis, Robock and Simmonds (1989 p 310) state six reasons for conducting FDI: the search for new markets, resources, technology, production-efficiency or lower risk as well as countering the actions of competitors Consequently, a firm entering a foreign market can choose to set up its own production

in the market even though it at first glance would be more cost-effective to allow a local producer to produce the company‟s product(s) on license This could for instance be relevant if the firm needs qualified engineers and these are in limited supply domestically The company could then attempt to gratify two needs at the same time by reaching a new market through FDI while also gaining better access to competent engineers In order to do so, the firm could seek to establish itself in an attractive foreign market, which at the same time maintains a high-quality education system, as this could secure a steady flow of potential candidates The firm may be able to market their products in this market at a lower cost through a local partner via a licensing agreement than through internalizing the function But since this would not enable them

to access well educated labour in the same way, the overall benefit of internalizing could be larger than the benefit of an arm‟s length market transaction

The eclectic paradigm has managed to remain the dominant paradigm within MNE activity and market entry as a result of regular revisions and updates It is however, due

6.4 Model of foreign market entry

When firms plan to enter a new market, the decision of entry mode is an important one since it can be of considerable significance to the firm‟s success in the market (Woodcock 1994 p 268; Yigang 1999 p 98) Under all circumstances the entry mode chosen will constrain the marketing and production strategy of the firm (Johnson 2007) Thus if firms could make use of a simple model – or a complicated one for that matter –

in order to find the correct form of entry, this model would of course be of great value However, the world is seldom so simple and neither are decisions on market entry Buckley & Casson (1998) have nevertheless contributed with a model on foreign market entry strategies which offer advice on which entry modes are preferable under different circumstances Unfortunately, the simplification process required to make a model has involved the inclusion of a large number of assumptions These assumptions can however be relaxed although this increases the complexity of the analysis (Buckley

& Casson 1998 pp 543-547)

Because of the large number of assumptions in Buckley & Casson‟s model, it is beyond the scope of this thesis to describe them in detail but we will however shed light on some of the more important assumptions First of all, the firm is engaging in its first foreign market entry and thus lacks knowledge on this subject as well as knowledge related to the chosen market It is thus relevant for the company to attain this knowledge

at as low a cost as possible which among other things depends on the mode of market entry Secondly, the model distinguishes between production and distribution of goods

in the target market as these functions can be owned independently There are thus four different possibilities of ownership or in the final case of non-ownership:

- The firm can own both distribution and production facilities in the target market

- It can own the production facility solely, either in the target market or at home, and then franchise the right to distribute the products to a local company

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- It can own the distribution facility solely and import products from its home market

to supply it or alternatively subcontract a local facility to handle production

- Alternatively, it can choose to own neither production nor distribution In this case the firm leaves both production and distribution to an incumbent in the market Finally it is assumed that the firm faces a single local rival in the target market The incumbent firm, who would of course have to be a monopolist, owns the only existing facilities which can meet the needs of the market In case the MNE chooses acquisition

as the mode of market entry, the incumbent firm‟s monopoly power can thus be acquired by purchasing a majority equity stake in the firm

Whether acquisition or green field investment is the most attractive option is also dependant on the costs of technology adaption If the MNE and the single incumbent have very similar technology it is always more profitable to enter the market through acquisition instead of green field investment This is because green field investment in this case will lead to low profits as the entrant will not be able to outperform the incumbent directly If the incumbent is acquired on the other hand, the entrant will yield monopoly profits If the MNE and the incumbent have sufficiently different technologies however, the entrant should be able to outperform the incumbent through green field investment, and the cost of technology adaptation can be avoided Nevertheless, if green field investment costs are too high, it may not be profitable to enter the market in this way or through acquisition at all (Müller 2007 p 98)

The assumptions stated in Buckley & Casson‟s model can as previously mentioned be relaxed, but this will however add additional complexity At the same time the assumptions do not limit the applicability of the model per se but serves more as a checklist for researchers and practitioners of things to consider when applying the model (Buckley & Casson 1998 p 543)

With the assumptions defined Buckley & Casson‟s model lines up the possible ways of entering a foreign market, which amounts to 20 different possibilities This follows from the five dimension of foreign market entry that they set forth (Buckley & Casson

1998 p 547); the question of 1) where production is located; 2) whether production is owned by the entrant or the incumbent; 3) whether distribution is owned by the entrant

or the incumbent; 4) whether facilities are fully owned or shared through an IJV; and 5) whether ownership is obtained through acquisition or green field investment The cost

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structure of the 20 different combinations can then be compared with a profit norm as well as to each other The profit norm is defined as market entry through green field production and distribution facilities in a market without competition The profit norm will thus be; revenues at monopoly price, less the costs associated with a fully owned green field venture, less the cost of internal transfer of goods (Buckley & Casson 1998

p 550) This is considered the ideal form of foreign market entry meaning that every other form of entry incurs additional costs Since such an ideal entry in a market without rivals is a rare occurrence, if at all possible, focus is primarily on finding the alternative with the lowest costs among the 20 alternatives when entering already occupied markets This is initially done by eliminating alternatives which are strictly dominated

by other alternatives What is meant by one alternative dominating another is, as an example, that two alternatives, A and B, each lead to the same costs; W, X and Y However, alternative A additionally leads to cost Z and will thus always be more costly than alternative B since changes in W, X and Y influences A and B in the same way When comparing the different market entry strategies, the assumptions are important to keep in mind since the process of elimination will get increasingly difficult if the situation under analysis fails to be as it is assumed in the model When the assumptions are not satisfied, the alternatives must be weighed more carefully against each other as the effect of each deviation must be considered

The process of elimination reduces the number of alternatives to a more manageable amount, which can then be compared to each other by assessing the major tradeoffs Buckley & Casson (1998 p 552) concludes that, given their set of assumptions, there are three superior strategies to choose from:

- Green field production combined with acquired distribution

- Green field production combined with franchised distribution

- Licensing

The choice between these possibilities in any particular situation depends on six different types of costs If the cost of acquisition is low, green field production combined with acquired distribution is attractive compared to the other options as these

do not involve acquisitions In contrast, green field production combined with franchised distribution involves market transactions of intermediate products between the MNE and a local franchisee If these costs are low, this will make this option

In this thesis, we will make use of Buckley & Casson‟s model as a checklist for things

to consider in a market entry situation when analysing our chosen cases, especially the Chinese market The thesis will thus not use it as a step by step guide since the cases under analysis do not comply with the assumptions set forth in their model This use of their model fits nicely with their own opinion on how researchers and practitioners can make use of their work (Buckley & Casson 1998 p 543) The OLI framework will be used as the primary reference in our analysis as it, like Buckley & Casson‟s model, encompasses many of the thoughts brought forward in transaction cost theory as well as the resource based view

From the theoretical part we now turn to description and analysis of the FMCG industry

as well as the emerging markets Hereafter we turn to Carlsberg and our selected cases

7 Fast moving consumer goods

The fast moving consumer goods (FMCG) sector is a large and important part of almost every economy in the world, insofar as the products associated with the industry represents a big part of every consumer budget The goods produced by the industry are basically necessities and the inelastic nature of the goods makes their impact on economies worldwide significant The FMCG are sometimes referred to as consumer

of the industry as a whole The diversity of the industry is evident from the fact that a typical European retail chain will have up to one or two thousand suppliers

The FMCG industry consist of both a supplier side that manufactures the goods and a retail side such as wholesalers or supermarkets, that sell the products produced by the suppliers The link between the manufacturers of FMCG and the retailer side are logistics providers and intermediaries that constitute a smaller but significant part of the industry Few industries rely more on efficient logistics systems than the FMCG industry (ATKearney 2009) In a modern economy, an efficient transportation system is

of great importance and it can perhaps be considered especially important for FMCG firms This is because most FMCG firms would ideally want their products to saturate the market by being available at practically every outlet in order to increase sales5 In the soft drink industry for instance, consumers may have a preferred brand If this brand

is not available however, they will in most cases simply purchase a rival or substitute product – not go to another store to buy their preferred brand You can thus have a high value product and spend heavily on advertisement, but if the product is not widely available in stores, revenues will be limited as consumers will mostly buy their second choice product instead Being able to distribute your products widely in the market, making them accessible when and where a customer wishes to purchase it, is as a consequence highly important to FMCG firms

The higher sales connected with intense distribution of FMCG should of course increase profits in itself, and since it also leads to higher production it should also lead to better opportunities for economies of scale This should then result in even higher profits As intense distribution is highly difficult, or at least expensive to attain in a market with poor infrastructure, profits should, all other things being equal, therefore be lower in such markets compared with comparable markets with better infrastructure The

5

Firms selling high-end FMCG may only want their products to be available at selected outlets in order

to maintain an exclusive image Since these products may not be “fast moving” with such low distribution intensity they may not be considered as FMCG however

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negative effect of poor infrastructure on sales should especially be evident when it comes to a poor transportation system and to a lesser degree on for instance poor sanitation and communications infrastructure This is simply because only the former influences distribution directly A consequence of this is that many FMCG companies spend large amounts on maintaining and running distribution networks, either by themselves or with partners, in order to assure they have the necessary options for bringing their products to markets

The products in the FMCG industry are by nature defined as bulk products, meaning they are produced and consequently sold in large quantities to wholesalers and retailers Additionally there are many customers, both directly downstream from the production company as well as the end user This means that the consumers bargaining power goes down as they are not concentrated and buys in relatively small amounts compared to amounts produced Mainly this is true for FMCG retailers and less for FMCG suppliers, since the latter sells to the former to a large extend As previously mentioned, a large part of the income of most households are set aside for FMCG products since there are

so many of the products that consumers use on a daily basis and which needs to be bought regularly This results in a very high number of products being produced and consequently sold by the FMCG industry at all times The enormous sales in the FMCG industry combined with relatively low entry barriers in many parts of the industry results in stiff competition and often low margins

The FMCG industry is largely dependent on macroeconomic factors such as oil prices, and this makes long term forecasts difficult and often dangerous as the economic climate changes rapidly in this regard (Russia today 2007) This means that the industry can be very hard to predict at the moment, as the fluctuations in oil prices, inflation and spending power as well as most other significant variables tend to be prominent as the economic climate adjusts to the recent upheaval This will make the situation on individual markets different both from each other but also from what the markets usually looks like

7.1 Choice of the supplier side of the FMCG industry

While the FMCG usually gets mentioned as a whole there are in fact several different aspects of it that display significant differences compared to one another The retail side

is what most often gets mentioned when talking about the industry and while retailers

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undoubtedly constitutes a large part of the industry, the supplier side which manufactures the goods plays as significant a role While retailers tend to be quite similar with their marketing strategy and customer bases with differences mainly attributed to size the supplier side will often contain a wide variety of companies both large and small with a multitude of products being manufactured

We find that the supplier and manufacturing side of the FMCG industry to be more interesting than the retail sector, both as far as entry and development strategy goes, but also with regards to scope and differences between companies in the individual segment

of the industry While it seems that the other parts of the industry have received comparatively greater attention with regards to being mentioned and analysed the manufacturing companies often gets treated as outside the FMCG industry and as part

of other industries as for example the beverage or canned goods industry, where the similarities between companies is far greater For instance, Carlsberg and Heineken display rather more similarities than for example Carlsberg and Sara Lee Corporation does, even though they are all part of the FMCG industry Based on these facts and observations we will mainly be analysing and using the supplier companies for the FMCGs as we progress with the thesis

8 Emerging markets

The term emerging market is commonly used about markets or economies that fit into a narrow description about size, growth rate and development The term emerging in relation to markets or economies stems from the 1980‟s, but came into common usage around the 90‟s and is now a more or less accepted term when describing certain types

of markets (Authers 2006) The emerging markets differ from emerging economies specifically in the fact that markets are not constrained by geographical boundaries or national borders in the same way that emerging economies are, but generally there are widespread differences in how exactly to define a market as emerging One way to look

at emerging markets is to define them as markets that are not developed, in the sense that first world countries such as most western European nations, the USA, Canada and Japan are This however would make most countries qualify in some way as an emerging market, so it is necessary to keep in mind that several different criteria must

be met in order to distinguish between emerging and non-emerging markets This

economies as economies with high growth or growth potential, but lacking the

institutional (infrastructure, legislation, experience) framework prevalent in European and other western markets As such, this makes the term emerging economy dependent

on the immediate economic circumstances in a country or market, making the term emerging economy applicable to any country or region at a given time if they fulfil the criteria set The term will be used in this thesis according to the definition and not based upon a pre-existing list of markets Despite the different definitions of emergent markets there is generally an agreement that certain countries, such as the BRIC-countries (Brazil, Russia, India and China) are to be included, as well as some other large and populous countries Together they constitute a large portion of the global consumers, more than 50% of the world population according to globalEDGE (2008), and represent

a rapidly growing part of the world consumption and production output This makes the emerging markets both interesting as well as significant for the world economy as a whole

One of the factors that make emerging economies interesting at the moment stems from their apparent ability to come through the economic downturn and credit crisis better than most other economies The counter-cyclical policies are seen more often in emerging economies, and they are a more or less the norm in richer countries What counter-cyclical means in this setting is basically that a rich country will endeavour to

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diminish the fluctuations in their economy so that in bad times they try to stimulate their economy and try to minimize the losses, while they in god times they try to slow the economy down and prevent it from overheating Emerging economies on the other hand often tries to amplify their business cycles and one of the main reasons for this is that they often struggle to fight the cycles, since the peaks and conversely also the lows are more pronounced in smaller or less mature economies One of the reasons for trying to amplify the economic cycles are that since they are more pronounced in emerging economies they are also harder to fight since they must do so on a smaller tax base and often on revenues more susceptible to outside influences Since this makes emerging economies less robust than their richer counterparts, they often experience that investors are reluctant to buy into bonds during downward trends and this in turn leads the economies to be unable to borrow to smooth the economic cycles Since they are unable

to borrow they naturally tend to save more in times where this is possible This have caused the somewhat curious case that many emerging economies are rather better prepared for the current economic downturn than their western countries, since they have greater fiscal strength due to this saving

In part due to the above mentioned factors, the GDP in most emerging markets are still expected to grow or at least remain stable, as opposed to most other markets around the world (AT Kearney) In many cases this leads to the fact that with comparatively faster growing buying power and faster growing markets, emerging economies represents advantageous markets to invest and operate in Emerging markets will generally be influenced by changes in the growth in more mature markets to a degree but they will also experience a lessening of the impact declining or negative growth has on them This is because this will often be accompanied by rising prices of the natural resources that many emerging economies export, leading to an increase in the intake of foreign investments and currencies, increasing reserves and lessening the impact of economic influence from other markets (Rahlf 2007)

8.1 Circumventing infrastructure problems in emerging markets

As mentioned above, the infrastructure of emerging markets is generally in a poor state compared to established markets But a well functioning infrastructure, especially with regard to the transportation network, is highly important if goods are to be distributed efficiently beyond the major metropolitan areas by FMCG companies It can therefore

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be attractive to enter limited geographical areas with a high density of potential customers which will most often mean large urban areas for FMCG firms Given the usually larger per capita income of urban consumers compared with rural consumers, city dwellers are also often more attractive customers to companies; especially to foreign companies who often sell premium products targeted the middle and upper classes

The thought of entering concentrated markets within larger national markets, such as the major Indian cities, instead of entering the entire market is consistent with Drejer (2009) Drejer mentions entering so-called hotspots which could be cities like Berlin or New York or regions such as Eastern China, as these hotspots may be more attractive to enter instead of entering entire national markets

9 Market analysis of the FMCG industry

In order to develop an understanding of the industry as a whole we will use the framework developed by Michael Porter (1980; 2008) to develop a brief description of the factors that influence and shape the market for FMCG This five forces analysis will provide an overview of the industry and a starting point for further analysis, which will focus on the individual emerging markets chosen for study in the thesis

9.1 Threat of new entrants

In the FMCG industry, as well as in several other industries, the nature of the products and the technology necessary for the production process naturally gives rise to economies of scale Economies of scale in this instance relates to the fact that if obtained, the unit costs goes down as output rises Following from this it can be concluded that these scale economy industries provide a substantial barrier for new entrants, as there is a likelihood that not all companies will be able to obtain economies

of scale in a given market to a degree where they are effectively competing There is some difference between the various sectors of the industry with regard to the impact on competitiveness of not obtaining sufficient economies of scale But ultimately it will influence both supplier companies as well as retailers and will result in consolidation of the industry as markets become more mature This will be less of an obstacle for entrants on emerging markets in most industries, including the FMCG industry, as they are defined as being markets in growth and thereby has more room for new companies

9.2 Rivalry among existing competitors

Mainly there are many firms operating in the FMCG industry on all markets, due to the rather diversified number of products being produced and sold Largely the retail part of the industry will be fairly consolidated and competition will be between few but large retail chains that, as mentioned above, sell all of the different categories of FMCG While the firms in the retail segment are generally large and have few real competitors, there does exists the smaller individual retail stores usually present in the form of convenience stores in the cities, or small independent retail shops in rural areas, where the larger chains are not present due to lower customer concentration These independent retailers are especially prevalent in undeveloped areas as well as in countries with a historical and cultural bond with small retailers and street vendors As the markets develop, these will in most cases be outcompeted by organized retail however

As distribution and by extension infrastructure are so important in the FMCG industry the ability to control the delivery and transport of goods are of vital importance to most companies in the FMCG industry This will lead to increasing competition and concentration of logistics suppliers in the same way as in the retail part of the industry,

as the economies of scale as well as the ability to provide services across an entire market will become of high importance to most companies There are more supplier companies in the FMCG industry than retailers, as they tend to specialize in certain parts of the industry instead of being involved with all aspects Individual companies will concentrate on a certain type of product, or in some cases several different types, and only in a few cases large conglomerates will produce most of the goods that are attributed to the FMCG industry Conglomerate type firms will make it possible to operate on the same market, the FMCG market that is, without cannibalizing on their

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own products as the products in the industry are as different as it is the case On the other hand, they will be able to take advantage of considerable synergies in areas such

as logistics and marketing as well as adding market power as all their products are sold

to the same wholesalers and retailers

The FMCG industry offers different competitive conditions for many of the categories even though they display the same characteristics and developments to a large extent Mainly there will be a tendency towards few large companies to dominate the individual categories as can be seen in the case of the market for beer, where only four companies have any meaningful size worldwide As is the case with the industry as a whole, economies of scale in production plays a part but as mentioned the benefits of size are also present when it comes to successful branding, which will serve to make the number

of companies competing in the industry larger and fewer As a result of the characteristics of the FMCG industry, it is often associated with significant risk to attempt to compete in the industry as it does not offer newcomers much in terms of revenue initially Thus the competition in the industry as a whole is very high in general

an even though this is more pronounced in mature markets, the less developed markets will become more and more competitive as they develop their economies

9.3 Bargaining power of suppliers

Since so many and completely different goods and materials goes into producing most FMCG products, it is generally hard for suppliers to obtain any significant bargaining power over most companies in the industry Often the scarce resources needed to produce some FMCG are either directly controlled by the companies utilizing them, such as quality malt and barley in the beer industry, or acquired and controlled by legal contracts and long term association between companies, although this is not as prevalent

in emergent markets While this can give suppliers some power over FMCG producing companies, there are relatively few resources that are sufficiently rare for suppliers to obtain much power over their customers Examples of such resources can be extremely diverse depending on location and the produced goods, but usually they can be obtained from other sources if the local suppliers are not competitive

9.4 Bargaining power of buyers

Given the nature of the goods produced by FMCG firms, the customer base represents most households and persons giving relatively low bargaining power to the final

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consumer due to the sheer amount of customers Additionally the large part of total expenses used by households to buy FMCG as well as the necessity of these goods lessens the customers‟ relative power with regards to companies in the industry The fact that customers overall have easy access to any given FMCG, due to the many retail stores and other access points, gives the customers some degree of power since it is easy for them to chose where to buy, and to switch to another product or retailer if they so desire Of course switching to another FMCG supplier or retailer would still mean the customer is buying the products and as such it is not really feasible for customers to stop buying the products offered by the industry In the industry the retailers hold considerable power, often directly related to their size, for example Wal-Mart that has very great control over most of its suppliers As the consolidation in the retail sector of the industry continues, meaning fewer and larger retailers, they attain greater power over both their suppliers and customers Overall the customers hold significant power as group, but little power as individuals, in the industry, since the degree of competition in the industry are very high and as often as not the margins are low and retention of customers are important for survival

9.5 Threat of substitute products

Due to the nature of fast moving consumer goods there are inherently some threats of substitution, not from outside goods but from the industry itself To a large extend the goods produced are interchangeable, which is one of the reasons branding and differentiation plays such a large role in the industry When many of the products are virtually indistinguishable from competitors in a strictly physical aspect other methods exists to differentiate a product As can be seen on the retail part of the market and in the market concentration in various segments of the industry, the trend is toward concentration into fewer but larger firms, leading to a smaller variety of products and minimizing the threat of substitutes from small local competitors and firms Aside from inter-industry competitors the threat of substitute product is therefore negligible

10 Carlsberg Breweries A/S

The Danish brewer Carlsberg is the fourth largest brewer in the world, and an internationally recognized brand name in all of its markets Carlsberg is present on most markets in the world, including Northern and Western Europe, Eastern Europe and Asia Additional markets include Africa and the Middle-east, while notable exceptions

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are North and South America Originally Carlsberg mainly followed a strategy of diversification on its domestic markets, while the main focus was on the two prominent brands Carlsberg and Tuborg in foreign markets, to the exclusion of local brands The company has gradually shifted from this strategy and now prefers to depend on the companies‟ core competencies in order to market and produce beer in local markets and often with local brands This has generated a significant shift in the production of the company‟s brands and products, and a large part of the beer brewed by Carlsberg is brewed in the same country or market where it is sold Additionally the focus is now mainly on beer as this is where Carlsberg believes it has its core competencies

Carlsberg produced 109.3 million hectolitres of beer in 2008, a rise of almost 33% compared to 2007 47% of the total volume produced and sold annually is sold in the mature markets in Northern- and Western Europe, 43% in Eastern Europe including Russia, Carlsberg‟s biggest market, and 10% in Asia (Carlsberg group) The company‟s net revenue reached DKK59.9 billion in 2008, also a significant rise compared to earlier years, which makes Carlsberg one of Denmark‟s biggest companies as well as the fourth largest brewery in the world, behind AB InBev, SABMiller and Heineken The main reason for Carlsberg‟s recent growth was the joint acquisition of Scottish & Newcastle with Heineken which transferred complete control over Baltic Beverages Holding to Carlsberg (Carlsberg annual report 2008) This and other acquisitions made

by Carlsberg follow the trend of consolidation and concentration in the global beer industry in recent years into fewer, more international companies6 This trend is perhaps most obvious in the merger between the two largest beer-makers by sales, Anheuser-Busch and InBev, that took place in late 2008, and created the biggest beer company as well as one of the biggest FMCG firms in the world Additionally, SABMiller has combined their U.S operations with Molson Coors‟s Brewing Co in order to better compete on the North American markets (SABMiller 2007)

Carlsberg has accumulated substantial knowledge on entering markets, rarely as first mover, but often as an early mover, in Eastern European countries such as the Baltic nations and Poland This is valuable in their goal to maintain their position as one of the biggest and most significant global players Even though Carlsberg follows a strategy of

6

In 2003 the beer market were far more fragmented, with the biggest 10 beer producers‟ only accounting for around 45% of the total volume sales, as opposed to a volume share of around 65% in 2009 (Euromonitor 2005)

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expansion they rarely follow the same template when entering different markets Foothold strategies have been pursued in some Asian markets such as China, where Carlsberg have a limited presence, or the two joint ventures that marked the company‟s entry into Vietnam As opposed to this, Carlsberg has sometimes followed a more aggressive strategy aiming for market leadership with large scale acquisitions in for example Russia and Poland

Carlsberg has amassed considerable experience with marketing, producing and selling beer and their excellence programs draw on these strengths to enable the company to systematically improve and develop their abilities in different markets The Excellence programs help Carlsberg deal with their customers as well as minimize costs and standardise processes (Carlsberg Group 2006) and is a strong tool for the company with their strategy in entering new markets as well as developing more mature markets

As it is the case with most FMCG companies, Carlsberg depends strongly on their distribution network and logistics in order to be competitive in its markets Carlsberg spends around 15% of its total costs on logistics and logistics related activities, and it is therefore a highly important function when it comes to the profitability of the firm

11 Markets

In order to describe the situation on the chosen markets and come to an understanding

of the implications their individual characteristics have on entry strategies for foreign firms, we will first look at the macroeconomic level Afterwards there will be a micro analysis building upon the Porter analysis above in order to describe the factors a foreign company would face in the FMCG market, and further the understanding of the specific factors and challenges in each market

11.1 India

India is the world‟s second largest nation by population after China and is the world‟s largest democracy India has been among the world‟s fastest growing economies in recent years with an average GDP growth of 9% for the last four years (CIA 2009) but has however felt the current downturn in the world economy following the financial crisis Since a considerable part of the Indian GDP growth is driven by domestic consumption (Das 2006), the effects of the economic crisis on India was initially expected to be limited However, the crisis caused a sharp decline in the Indian stock