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A company encounters various motivations and challenges when entering emerging markets such as India. There are various issues that need to be taken into consideration for the successful outcome of such a venture.
To emphasis on the above notion, the restaurant industry has been selected. It is a growing industry in India, providing plenty of growth opportunities for international companies that wish to capture a share in the market. The global economic slowdown, adversely affected the UK food industry, though the Indian food industry remained unaffected.
An organization decides the entry mode that offers the highest risk-adjusted return on Investments. According to John Dunning's Eclectic Framework , a firm decides on its market entry modes based on the Firm Specific Advantages, Location Advantages and Internalization Advantages.
When a company expands its operations to a different country, it has to face various challenges which can be analyzed with the help of PESTEL analysis and the focus over here will be on the cultural issues faced by a restaurant, when it tries to expand further.
Thus there are various issues such as the industrial structure in India or the entry barriers that need to be covered if a firm decides to expand internationally and particularly in India.
This research proposal is being written with the intention of understanding the challenges faced by a global restaurant trying to expand its horizons further; an investigation on the case of India. The key points that will be covered in the thesis are as follows:-
A comparison between the restaurant sector of the two countries and the reason behind selecting India as the country for expansion would be stated.
The issues and challenges faced by the restaurant when entering a new emerging market like India.
The different barriers such as the political, economic, socio-cultural, technical, environmental and various legal challenges faced by the restaurant in the host country, with an in-depth analysis on the cultural barriers.
Strategies to overcome the barriers faced by a restaurant while entering a new country.
Practical Implications for the managers of the restaurants.
"International business is all commercial transactions - private and governmental- between two countries or more" (Daniels, Radebaugh and Sullivan, 2005, p 37). These transactions include sales, investments and transportation. Private companies carry out such transactions for profits whereas government may or may not carry out such transactions for profits.
Internationalisation can be defined as "the process of increasing involvement in international operations" (Buckley and Ghauri,1999,p 84 ).
THEORIES ON INTERNATIONAL BUSINESS
The Internationalisation Process of Firms
The development of organisations through acquisition, integration, the use of knowledge about global markets and operations, and increasing commitments to foreign markets constitute the internationalisation process (Johanson & Vahlne, 1977). This process can be explained with the help of the innovation-adoption inspired internationalisation models (Andersen 1993; Bikey and Tease,1997; Cavusgil, 1980) and the Uppsala process model (Johanson and Vahlne1998,1990; Johanson and Wiedersheim Paul,1975; Welch and Luostarinen, 1998). These two models are based on a behavioural approach where internationalisation is seen as a process. The U-model is a dynamic model based on the learning theory whereas the I-model explains the internationalisation process as a step-by-step development (Andersen, 1992).
The Uppsala Model has given emphasis to learning, for example the internationalisation process of a firm could be a smoother process for it, if it was familiar with the foreign countries national-culture. According to this model firms gradually increase their foreign involvement taking successive steps which can be classified as following:-
Stage 1: No regular export activities.
Stage 2: Export via independent agents.
Stage 3: Establishment of an overseas sales subsidiary.
Stage 4: Overseas production units (Johanson & Paul, 1975).
The U-Model has also spoken about psychic distance (Grady and Lane, 1996). A company will expand to distant countries only after establishing itself in more proximate countries (Hadjikhani, 1997).
A dynamic model was formulated by Johanson and Vahlne (1977) to further explain the steps of internationalisation. In this model the outcome of one cycle of events or states constituted the input of the next. The state aspects are the resource and market commitment towards the foreign country, whereas the change aspects are the decisions towards commitments of resources and performance of current business activities (Eriksson, et al, 1997). The model is based on an assumption that market knowledge and commitment influence commitment decisions and present decisions which in turn change market knowledge and market commitment. In short it meant that increased market knowledge will lead to increased market commitment and vice versa (Forsgren, 2000).
Innovation-Related Internationalisation Models
In these models internationalisation decision is seen as an innovation for the firm ( Fillis, 2001 ). In these models, various stages of internationalisation are mentioned which must be followed sequentially. The high level stages indicate more involvement and experience than the lower level stages and vice versa. The models have emphasised on the classification of the development into stages, rather than focusing on how firms move from one stage to another (Andersen, 1992).
Though the above models have helped us understand the internationalisation process, they are not free from criticism. The purpose of the models is vague, the comparison between the theoretical and operational level is unclear and the pragmatic design must be adapted to the theoretical model ( Andersen, 1992).
Dunning's Eclectic Framework
Agarwal and Ramaswami (1992, pp.3) state, "a firm is expected to choose the entry mode that offers the highest risk-adjusted return on investment." John Dunning's Eclectic Framework was formed to understand how international corporations decide on their specific international entry modes.
According to Dunning, the specific entry mode is selected on the basis of three criterias which are ownership or firm specific advantages, location advantages and internalisation advantages. (Brouthers, et al, 1999)
Ownership Advantages or firm specific advantages refer to advantages derived from inter firm transactions, control issues. Location Advantages refer to resource commitment issues, the availability and cost of resources. Internalization advantage is concerned with reducing transaction and coordination costs (Dunning 1993, 1995; Dunning and McQueen, 1982). "These three sets of variables influence a firm's entry mode decision by affecting management's perception of asset power (ownership advantage), market attractiveness (location specific advantage), and costs of integration (internalization advantage)", (Agarwal and Ramaswami, 1992). Thus if a firm derives advantages from OLI, then according to Dunning's theory the organisation will opt for an integrated mode of entry.
The limitations of the theory are that it is not a dynamic theory as it neglects the factors and business environment around the decision maker and competitors. The theory holds true only in the case of large firms and companies are internationalising irrespective of the benefits of the three variables (Dunning, 1987).
STRATEGIES TO ENTER INTERNATIONAL MARKETS
Entry Strategies for International Markets
Wind and Perlmutter (1977) have recognized entry modes as "frontier issue" in international marketing as they have a large influence on the performance of international companies.
All companies need to develop entry strategies which will give them a competitive edge and help them survive in the global market. These strategies should combine the objectives, goals, resources and policies of the organisation so that it is able to sustain itself in the global market in the long run (Root, 1984, p2).
The Hierarchical Model of Market Entry Modes
"A natural hierarchy exits among the various modes of entry" as suggested by Kumar and Subramaniam (1997). According to Chu and Anderson, 1992, the mode of entry shifts from exports to wholly owned subsidiaries with the increase in resource commitment, control, risk exposure, and profit potential.
Market entry modes can broadly be classified into equity and non-equity based. In the second level, equity modes can now be divided into wholly owned operations and equity joint ventures (EJVs), whereas non equity modes can be divided into contractual agreements and exports.
The Hierarchical Model is attractive due to two reasons. First, the managers of a company have partial analytic ability (Simon, 1955). They often decompose a complex decision into a hierarchical process and adopt a small set of critical variables to monitor at each level" (Steinbruner, 1974). Second, "the hierarchical process is suitable for entry choice decision because of the dramatic differences that exist among various entry modes and among the criteria of choice at each level" ( Gatignon and Anderson, 1988).
We define a franchise agreement as one lasting for a definite or indefinite period of time in which the owner of a protected trade-mark grants to another person or firm, for some consideration, the right to operate under this trademark for the purpose of producing or distributing a product or service (Caves et al, 1976).
Franchising has a significant contribution to international growth and expansion. The distinguishing features of international franchising in comparison to domestic franchising are distance management, cultural adaptability, host country policy evaluation and exchange rate management. (Lindquist, 1996)
PROBLEMS OF INTERNATIONALISATION
Environmental factors affect the performance of an organisation, thus it becomes important to analyse them, so that the extent of their impact on the firms activities can be known (Analoui, et al, 2003). PESTEL analysis refers to the changes that have occurred or are likely to occur in the political, economic, socio-cultural, technological, environmental and legal factors that affect the successful functioning of an enterprise in a country (Worthington et al, 2006). When a company expands further it must do a thorough PEST analysis, to make sure that the company's strategies are not negatively affected by the country's environmental issues.
The advantages of internationalisation do not come free of cost, when firms enter a new country they have to adjust to the national culture of the foreign country. (Barkema, Bell and Pennings, 1996).
Schein (1985) defines "culture as the shared values, practices, and beliefs of the people in the organisation" (Dermott and Dell, 2001). When a firm goes international it must be able to integrate its organisational culture with the national culture of the host country to be successful there (Mwaura et al, 1998).
Cross-cultural barriers can cause hindrance to a firm trying to internationalise. Overcoming these barriers help the organisation attain more "closeness" to the market (Swift, 1998).
Hofstede (1980, 1991) and the Schwartz (1994, 1997) are two frameworks which help understand cross-national cultures. Hofstede's Cultural typology highlights the differences between countries based on certain cultural dimensions. These dimensions can be categorised into Power Distance, Uncertainty Avoidance, Individualism/Collectivism and Masculinity/Femininity (Keegan, 2008). On the other hand Schwartz framework is characterized by societal issues and ways of overcoming them through certain cultural adaptations, leading to seven national-cultural domains. (Steenkamp, 2001)
In 1991,Robert J. House formulated the Globe Study, where national and organisational culture was highlighted and Hofstede's dimensions were extended to 18 (Hofstede, 2006). The Globe Project highlighted the inter-relationship between the firms culture, firms leadership and socio-culture (House et al, 2002).
The Service sector based United Kingdom where restaurants are a major source to its economic wealth is surfacing a declining trend. From the slowdown in the economy (tightening consumer credit, falling house prices and rising unemployment) to factors like recession are affecting the expenditure or purchasing power of the consumer, hence affecting the food market adversely. Only the fast food, takeaway and self-service sectors of the market are benefitting under these turbulences.
Whereas India's booming economy with a diversified range of cultures and cuisines is showing a higher appetite in the food sector. With the high growing population and appetite for various gastronomical delights of the big consumer base, the rising expenditure power and consequently the changing structure of the Indian lifestyle has taken the market to a big leap ahead. The Big Tourism Industry which accounts for an 18% of national wealth pushes the demand for varieties of regional and international food. Also India is youth oriented so there is great focus on social life which results in consumer food service.
Apart from the increasing growth rate of 4.5% and a great share in the world food market, India has a large rural sector which has yet not been exploited by the food market. In the developing India, these rural sectors are big future prospects for the food market and for future expansion. Hence, any investment from the UK into India will not only let the chain help establish itself in the country but provide an opportunity for it to grow bigger and bigger.
The specific questions that we focus in the thesis are
How does culture become a barrier to a company, which is trying to expand further to India?
What strategies can be applied to overcome these cultural barriers while entering a new market?
"Marketing Research is a key element within the total field of marketing information. It links the consumer, customer and public to the marketer through information which is used to identify and define marketing opportunities and problems; to generate, refine and evaluate marketing actions; and to improve understanding of marketing as a process and of the ways in which specific marketing activities can be made more effective" (ESOMAR).
Research can be carried out in three ways. They can either be explanatory, conclusive or descriptive. The research carried on in this project is descriptive. Descriptive Research is a type of conclusive research that has its major objective the description of something, usually market characteristics or functions (Malhotra & Birks, 2003, p 65).
The research methodology used for this study will be the Case Study Methodology which is a Qualitative Research Technique. Quantitative Research Techniques are not applicable for my dissertation as the data collected does not involve numbers or statistics. Sinkovics, et al. 2008 rightly suggests that, "Qualitative Methodologies can help to find meaning behind the numbers, provide flexibility without requiring large samples and offer a clear and holistic view of the context".
Yin (2009) suggests that the case study method is most useful when the questions explain some present circumstance and require "in-depth" description of phenomenon. In the present research a well known restaurant will be taken up, to understand the process of internationalisation.
The main conditions for the use of case methodology in research as suggested by Yin are as follows:
When questions in the research focus on why and how a phenomenon occurs
When the researcher only states the facts that have taken place over time through interviews and observations
The highlight of the research does not lie on historical events but contemporary events.
In my research these conditions are fulfilled and hence the case methodology is the most appropriate research methodology for the present study. It will help me focus on one restaurant and to do an in-depth analysis on it. Thus a generalizing conclusion about all restaurants with similar motives will be achieved.
The case study methodology can further be analysed with the help of primary and secondary data.
Primary data refers to the data which is collected by the researcher in order to solve specific research problems (Aaker, et al, 1998). In the case study method, primary data will be collected by conducting personal interviews of the managers of the selected restaurant.
A personal Interview is an unstructured direct interview in which a single respondent is probed by a highly skilled interviewer to uncover underlined motivation, beliefs, attitudes and feelings on a topic (Malhotra, 1996).
A brief review of the steps are:-
First a mail will be sent out to 30 successful restaurants which are either local to UK or have franchises all over the world but not in India.(refer Apendix 1)
Follow up calls will be made to the managing directors.
Based on their willingness to participate in the survey, a restaurant will be chosen for the research.
An interview of 30 to 40 minutes will be carried out with 4 to 5 managers of the restaurant and will be recorded for the purpose of analysis.
Some of the questions that I intend to ask in the interview are whether the restaurant is interested in opening a franchise in India? Why haven't they targeted the Indian market yet? What is their strategy to open restaurants in other countries?
Content analysis will be done to analyse all the data collected. Flick et al, 2004, state that, "the basic idea of a qualitative content analysis consists of maintaining the systematic nature of content analysis for the various stages of qualitative analysis without undertaking over hasty, quantifications". This technique is derived from communication sciences. Stone, et al, 1996, define content analysis as "any research technique for making inferences by systematically and objectively identifying specified characteristics within text".
Content analysis will thus help me analyse the interview of the manager in greater detail and also help me to interpret his attitude, behaviour and emotions towards opening of the restaurant in India.
NVivo, a software for qualitative data analysis, will also be used to analyse the data collected.
Secondary data refers to the data that is collected for some other purpose other than the research problem being dealt with. The secondary sources of data used for my dissertation will be journals, articles, educational books, magazines, websites, etc.
Code of conduct as mentioned by MRS in their guidelines for collection of qualitative data (October 2006), will be followed while collecting the data for my research.
The Gantt Chart (Appendix 2) gives a detailed outline of my schedule which I intend to follow in order to complete my dissertation successfully.
Through this dissertation, my aim is to formulate guidelines, which will help a company overcome problems and barriers while entering a new emerging market, highlighting the issues and problems specific to the Indian market. This thesis will help the restaurant managers formulate strategies required to open franchises internationally. A special emphasis will be given to the socio-cultural barriers. At the end of the research period I hope to gather useful information with the help of an in-depth analysis of one restaurant, reaching a generalising conclusion for all restaurants. The biggest challenge that I might face during my dissertation is to convince the mangers of the restaurant to give me a personal interview, if I am not able to get an interview from one of the leading restaurants then I shall try doing the same with the local restaurants in UK.
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http://restaurants.mapsofindia.com/growth-of-restaurants-in-india.html (Retrieved 2010, May 2).
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Address, First line
Address, Second line
Dear Sir / Madam,
My name is Pooja Shroff and I am a Masters Student at the University of Manchester, Business School. This letter is a request for you to participate in a research project on the "Entry Barriers in Emerging Markets: Investigating the Restaurant Industry in India". The goal of this project is to understand and decipher the motivations and obstacles that a company encounters when entering emerging markets such as India. We further aim to provide some practical guidelines on the issues that need to be taken into consideration for the successful outcome of such a venture. We focus strictly on the restaurant industry, because it is a growing industry in India, while providing plenty of growth opportunities for international companies that wish to capture a share in the market.
Because of your company's leading performance in the UK industry, and your non-exposure so far in the Indian market, your firm has been selected to participate in this research. I understand that you are extremely busy; therefore, I shall try to occupy as little of your time as possible. All that is required of you is that you dedicate approximately 30-40 minutes to answer a few questions in your office and at your convenience. ALL YOUR RESPONSES WILL REMAIN STRICTLY CONFIDENTIAL. NEITHER THE RESPONDENT NOR YOU WILL BE IDENTIFIED AT ANY STAGE OF THE STUDY.
The anticipated research benefits are very much dependent on your participation, which is extremely appreciated. As a participant you will receive the full case study of your company, including useful information about the industry in India, the entry barriers and other issues that need to be covered should you decide to expand internationally and particularly in India.
Should you have any questions, or need additional information please contact me at 07540265023 or firstname.lastname@example.org. Also, for any inquiry, feel free to contact my supervisor:
Dr. Vassiliki Bamiatzi at 01612757781. I am confident of your support and look forward to your response.
Thank you in advance for your valuable time and support, it is greatly appreciated.