Porter S National Diamond Analysis
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South Africa with a population of around 49 million people is a growing retail market; it owns an advanced substructure backing up comparatively effective dispersion of commodities to rural areas, townships and urbanized centers all across Southern Africa and South Africa. The retail market of South Africa has been predominated by a couple of superstore for instance Woolworths, Spar, Pick n Pay and Shoprite all owned by large South African holding companies. South Africa has gone through a quick development and expansion in the food retail sector after the apartheid ended in the year 1994. (Anderson, 1993)
The sales in retail raised by nearly 5% in the year 2009 to attain $72 billion regardless of the strong influence of the recession worldwide. The sale of beverage and food amounted to a worth of $7 billion and that of convenience stores accounted to $ 1.4 billion and it has been a growth driver for the retail sector. The growth in the food retail sector seems to be promising and is expected that the food retail sector will continue to grow in the near future. (Kinsey, 1998)
The South African food retail market is turning out to be progressively advanced and is furnished by both imported and local commodities. It is anticipated that the food retail industry of South Africa generated a total of $73.9 billion worth of revenues in the year 2011, presenting a CAGR or compound annual growth rate of 11.5% in the year 2007 and 2011. (Bamford, 1997)
Approximately 90% of the stock of user ready products is domestically sourced. The most important development was the growth of super markets that traded a huge amount of all the commodities and especially food related commodities based on the concept of self-service. The super markets that are placed in uptown shopping malls/ centers, have laid a substantial pressure in terms of price on the domestic merchants by buying right away from producers and totally cutting out the middleman, generally with higher turnover and lower margins. (Benson, 1985)
It is forecasted that the performance of the industry would slow down, with an expected compound annual growth rate of 5.8% for the term ranging from the year 2011 - 2016 and by the year 2016 would leave the food retail sector with a worth of $98.1 billion. (Vink, 2002)
TOOLS OF ANALYSIS (Porter's National Diamond Analysis)
Michael Porter in the year 1990 developed the national diamond model and the intention behind this model was to explain that in the international competitive situations why a few nations achieve and develop and several others does not succeed. The ability of a nation to succeed and to accomplish continued global accomplishment inside a peculiar sector might be explicated by factors apart from the production factors based on which the hypothesis of and Heckscher-Ohlin and comparative advantage are established. (Anderson, 1993)
Michael Porter recognized four characteristics as the sustaining and driving dynamism for the aggressive willingness to compete, in other words both promoting and hampering the formation of originality. The factors are; factor endowments, firm strategy, demand conditions, structure and rivalry, related and supporting industries. This tool of analysis deals chance events and government as externally originated factors for the aggressive willingness to compete among countries. (Benson, 1985)
The above figure represents the Porter's National Diamond Analysis.
It adverts to quality and availability of natural resources, technology, factors of production, infrastructure and level of input prices such as diesel, machinery, and labor. These components are essential for the food retail sector to be profitable and competitive globally. (Bamford, 1997)
It has been found out that in South Africa the factor conditions restrain the competition in the food retail sector. The quality and cost of unskilled labor, input price, and administration costs related with managing and hiring labor, the cost of skilled labor, the cost of capital and the cost, availability of technology and the quality of infrastructure act as an important reason for this holding back of competition. (Kinsey, 1998)
South Africa faces a high- cost as compared to the other economies in the world. This creates difficulties for the food retail market to contend in the international market. Hence, to be competitory, the food retail industries have to cut down the production costs majorly by utilizing fewer inputs with more effectively. In addition reducing the cost on transport, capital costs and fuel. (Bamford, 1997)
The composition, growth and size of the inland marketplace have a significant function in creating a sector competitive across the world. Firm competition from the local market is essential and it is only is some cases a sector turns out to be globally competitive if it does have any local competition. (Anderson, 1993)
On condition that the rate of economic growth is poorer to the possible rate of growth, the volume of the market in South Africa and the slow rate of growth for food commodities would hamper food retail willingness to compete. Hence, the serious significance of rising demands from local market and it should not be confined to the advancement of some small and limited marketplace and should encourage and support the enterprises and activities of food retail.
Opportunities from market are frequently not formulated outstanding devoid of data and information. The availability, cost and quality of information of the market earnestly have an effect on the competition of various enterprisers in the food retail industries. Devoid of timely and reliable data or information, the development of local market is slow. (Bamford, 1997)
The occurrence of seller businesses, which are competitive across the world, for instance transport companies, research institutions, suppliers of packaging material, financial institutions, input industries, and utilities provider like water and electricity impacts the competition in the food retail sector. (Vink, 2002)
Enhanced concentration of market amongst distributors and input suppliers also the raised supremacy by transnational companies might in a negative way impact the competition in the food retail sector. The lack of completion and power of the food retail companies in the industry would lead to raised prices of inputs. The government monitors the competition in the food retail industry and whenever necessary takes look into the level of tariff or may impose the Competition Act. (Benson, 1985)
The task of producers is to increase their production efficiency through more efficient employment of inputs and production techniques. The producer's task is to raise the efficiency of the production by the employment of more efficient production techniques and inputs. More improved competition and efficient production is dependent upon the application and accessibility of the modern technology of production. (Vink, 2002)
The importance of financial institutions in very important as many small retailers are not provided help from big financial institutions because of lack of collateral and high perceived risk profile. If the food retailers could come up with a substitute to the collateral then they could avail the services of the financial institutions. Establishment of micro financial and locally based financial institutions will be encouraged. (Kinsey, 1998)
Firm strategy, structure and rivalry
This include the consideration which, regularize how food retail industry and firms are shaped, managed and organized, and the quality of inland competition has a substantial impact food retail sector competition. A good environment for competition is the one where by application of effective good business management and skills, competition policy shall be assured. The capabilities of food retailers and the power of the consumers are most essential for the success of the competition in the food retail market. The food retail industry turn out to be extremely powerful and large in determining and negotiating the prices of producer both globally and locally. It is essential to form long-standing relationship of trust and form partnership among the retailers in order to add value to the opportunities. (Cotterill, 1986)
Government attitude and policy
The influence of the government could be either negative or positive, which depends on the operational systems, programs and policies of the government. There is the feeling in the food retail sector that the policies and the programs by the government are not being implemented properly, which adds up to a constraint to the competition in the food retail sector. Perceptions may vary for the existing retailers and the fresh ones but they agree to the fragmentation and inadequacy of specific services, accountability, weak governance and poor decisions by the executives and their implementation. (Kinsey, 1998)
Thus, Government provides specific attention to improve services at every level. Raising competition is supported by the urgency to keep up the desegregation of the food retail industry in the economy worldwide and is speculated by the capability of the retailers to sell the commodities in the global marketplace. Thus leading to high growth of the economy by raising the access of the market. (Benson, 1985)
The actions by government to help in providing opportunities for trade are essential but needs large protection and support from global food retail market, trade and market diplomacy to the global level. (Cotterill, 1986)
Role of Chance
It is critical to have an effective strategy for risk management in order to promote the tools of risk management for example, food retail future market and asset protection. Some other element of the this strategy of risk management is system of early warning that contains enough accession to and use of relevant, accurate, free and timely data when needed.
Applying various tools of risk management on the price risk would become essential for all food retailers in South Africa. In collaboration with the private sector the government may launch extended awareness and training program among the retailers so that they could use tools of risk management more frequently. (Cotterill, 1986)
The price and market risk is lowered by timely and good information about the food retail market. This would render the industry with the intelligence about the market that is essential to come up with strong business decisions and lower the price and market risk. Currently South Africa has no devoted institution that could function permanently; the government with collaboration with private firms could establish such institutes. (Kinsey, 1998)
Double diamond model
Developed by D'Cruz and Rugman, the double diamond model proposes that for an industry to develop competitive in terms of growth, profitability and survival the managers of the food retail industry requires to construct on both foreign and domestic diamonds. (Vink, 2002)
In general, the exterior diamond of the double diamond model depicts a global diamond, the size of which is determined in a predictable period. Moreover, the diamond in the interior depicts the domestic demand size of which changes as the competition and size of the country. Between the inner and outer diamond is the diamond, which depicts the competitiveness of a nation decided by both international and domestic benchmarks. Difference amongst the domestic and international diamond depicts multinational or international activities, which comprise of either inbound and outbound FDI or foreign direct investment. (Cotterill, 1986)
The Nine-factor model
Contended by Cho in the year 1994 the nine-factor model indicated that diamond model of Porter has restricted pertinence for the countries that are less developed and hence came up with a new model. (Cotterill, 1986)
Contemporary Management Issues
The food retail industry of South Africa experiences a lot of serious governance, environmental and social challenges or ESG and issues. The significances of not actively readdressing the issues have much importance, particularly with regard to supply chain sustainability and brand longevity. The two management issues that should be taken into consideration before commencing operations in South Africa are:
Lifting the expectations of a stakeholder and enhancing regulative checks have led to a bigger focusing on corporate responsibility and accountability. Corporate responsibility limits have gone outside the organizations themselves and are wants to let in business' whole chains of value and to integrate wider issues of ESG. Developing consciousness of consumer about the issues of the environment has created a pressure on the food retailers to act more cautiously and responsibly and if they fail to do so, it leads to the damage on the reputation. And reputation is very essential to sustain in the market. (Bamford, 1997)
In South Africa, the corporate accountability is in menace where the trade barriers and bureaucracy might include increased costs and ethical standards. As the companies drives aggressively to expand in South Africa this issue becomes more important to manage by the companies. (Kinsey, 1998)
Companies have to consider the ESG report in this regulation as they relate to its operations and strategies. The King Report on Governance for South Africa 2009 and the King Code of Governance for South Africa 2009 states that risk, sustainability, performance and strategy are indivisible and hence be reported and managed in n incorporated manner. It also furnishes indivisible about the issues concerning corporate governance, like stakeholder engagement, board commitments and structures, and enterprise risk management. (Kinsey, 1998)
Climate change is expected to have an impact on retailers' bottom lines through its contributions to a variety of costs, the most notable being: carbon taxes, electricity costs, fuel costs and infrastructure costs. (Vink, 2002)
Carbon Tax: The government of South Africa is searching to create a mechanism based on the market such as putting a price on emission of carbon and escalating carbon tax. Government of South Africa feels that these techniques are a way to internalize the external cost of change in climate and as a motivator for the variegation of the nation's mix of energy and execution of measures for energy efficiency would raise investment in cleaner industries and technologies.
Implementing carbon tax will significantly affect the food retail industry of South Africa. The direct impact of the carbon tax will be on the operating costs. Hence reducing their profit margin and the food retail industry will have no other option rather than increasing the prices. (Anderson, 1993)
Electricity Costs: The Food retailing sector that uses energy intensively. The need for the energy could be raised due to the warmer conditions because of climate change. Although the warmer climate will lower the cost of heating but the raised cost for refrigeration and cooling would cancel the reduction, thus contributing to a high consumption of energy. (Cotterill, 1986)
The demand for the electricity will rise as a consequence of warmer weather and thus the price of electricity will rise and they already are rising. In the year 2009-10, there was an increase in the price of electricity by 31% and in the year 2010-11 it was raised by 24.8%. There is an incentive for the food retailers to lower the cost of energy and for most of the retailers the maneuver are identical from initiatives of cost management. The problem for the food retailers is that as the industry flourishes there will be addition of more companies and stores which would certainly lead to increase in energy usage. The required investment for the development of renewable sources of energy for the development of electricity could be huge. There can be a huge challenge to spread awareness among the employees regarding the climate change strategies. (Vink, 2002)
Fuel Costs: The emissions from the transport are the 2nd biggest source after electricity production of emissions by retailers. The cost of fuel plays a vital role in the food retail sector. The heavy and medium trucks for business purpose are relieved from the tax. The motor manufacturing industry and Government are looking for an understanding emission levels that will be taxable. (Kinsey, 1998)
Infrastructure Costs: This cost relates to the possible requirements of adaptation because of physical damage to the facilities and infrastructure induced by uttermost events of weather. Operational downtime, rising insurance premiums and repair of damages would lead to raised operating costs. (Vink, 2002)
Market Entry Strategy
Considering the above tools of analysis and the management issues the following market entry strategy could be enforced to have efficient and effective outcomes.
Coming out with a good with success is contingent on product support and strong promotion. In the competitive market of South Africa, it is essential to choose a right distributor or agent. Studies have revealed that the successful organizations in South Africa have investigated and researched the marketplace in detail prior to entering the market and searching distributors and agents. When proper contacts are founded then it is advisable to have a firsthand experience by visiting South Africa in person and get more knowledge and cognition of the market. Through strong marketing of products by advertising and sampling new opportunities could be developed in South Africa. (Anderson, 1993)
The term Distributor and Agent in South Africa has a particular meaning. The Distributors sell and buy right away from the clients whereas the agent operates based on commission after he/she gets order from the clients. Appointing a sole agent who is able to provide the coverage of the whole country either by network of branch office or one single office. The agent must be capable of handling the required rail and port charges, financial arrangements, warehousing, custom clearance and documentation. (Bamford, 1997)
Thus after appointing an agent or a distributor the firm shall look into the management issues discussed above before commencing the operation in full scale and keep in view the various taxes and costs that could be enforced at the time of commencement or during the production. Advertising on mass scale through whichever way possible like internet, newspapers, magazines and radio could help in getting recognition among the public. Also coming out with fresh products with low cost and of high quality will certainly attract more customers. (Cotterill, 1986)
A good market entry strategy is very essential for an organization both in short run and long run. If the organization is able to attract a huge customer base in short run even though it involves cost of marketing, it will lead to high revenues and more profits. Also considering the social and environmental responsibilities. (Anderson, 1993)
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