International strategy: Ireland

Introduction

The retail sector has a profound effect on the economy of any nation. Sainsbury’s, Tesco, and ASDA are some of the renowned brands in the UK retail sector. Sainsbury’s is the second largest supermarket chain in the UK after Tesco with a 16.9% market share. The retail industry in the UK is very competitive, and therefore necessary for Sainsbury’s to explore other markets. This paper is an analysis of Ireland as a viable international market that Sainsbury’s can venture into. Ireland is a stable nation with a vibrant economy. Ireland had a per capita income of $62,562 in 2016, meaning that Irish people have enough disposable income to spend on retail products. The viability of Ireland as a new market for Sainsbury will be evaluated using different frameworks. A PESTEL analysis will explore the external environment factors that will affect the organization. Additionally, the internal factors within the organization and the external factors in the Irish retail industry will be evaluated using VRIO and Porters five forces. The paper will conclude with recommendations on an efficient mode of entry strategy to help Sainsbury’s to succeed in the international market.

Question #2: Discuss your rationale for the selection of your chosen market. 

The Republic of Ireland or simply referred to as Ireland is an island in the north western part of Europe. Ireland borders the UK, which makes it the best option for Sainsbury’s expansion. Ireland’s proximity to the UK is not just the only factor that makes it a suitable market for Sainsbury’s, but it has a stable political landscape and a vibrant economy that enables businesses to thrive.

PESTEL ANALYSIS

According to Matheson (2016), in 2014, Forbes ranked Ireland as the best countries to invest in for various reasons. Ireland has a stable government; Ireland is a democratic state with a parliamentary system of government. As a member of the EU, Irish law is derived from the common law; hence the legal and political system in Ireland is almost similar to that of the UK (Matheson, 2016).

Ireland has a stable economy that attracts foreign businesses. A nation’s economic status determines the costs, demand, prices, and profitability. Ireland’s currency is the Euro, and the country has managed to maintain the inflation rates very low. In the past decade, Ireland has experienced higher economic growth rates in comparison to other OECD nations. Irelands GDP rose steadily since the 2008 recession that adversely affected the Irish banking system. In 2014, Irelands GDP was $255.90 billion, and the number rose to $294.19 billion in 2016. With the steady economic growth, household income has increased while unemployment rates dropped to 8.3% in 2016. The economic growth was accompanied by an increase in foreign direct investments which rose to €129 billion in 2013 (Haught, 2016). Ireland introduced tax reforms in 2014 to encourage foreign investment. The corporate tax in Ireland stands at 12.5% (Kummer, 2014). Additionally, the Irish banking system is well developed to meet the needs of the major multinational companies.

According to the CIA statistics, Ireland had a population of 4,952,473 in 2016 (CIA, 2016). The biggest demographic in Ireland is the 24-54 age bracket with 43.52% of the total population. The second largest demographic is 0-14 years age bracket followed by the 65- and above age bracket. Irish people have a rich and distinct culture, but metropolitan areas like Dublin are global. The urban population stands at 63.9% with over 1.2 million people living in Dublin. The Irish culture is best known for songs, traditional dance, and literature. Ireland has one of the highest life expectancies at 80.8 years due to improved standard of living, access to health care and social amenities. A higher standard of living implies that the Irish have ample disposable income to spend. Ireland’s culture is almost similar to the UK culture; hence Sainsbury’s will not find it hard to meet the needs of the target market.

Ireland has invested heavily in technology, Matheson (2016) states that Ireland has some of the largest ICT companies. 9 out of 10 of the top most major technology companies have branches in Ireland, whereas 13 out of the top 15 medical technology companies are also found in Ireland. Ireland has invested heavily in its communication and internet infrastructure, and the ICT sector generates €35 billion annually. There are international and local software companies that provide support for businesses. The government supports research and development through tax credits and grants.

Ireland is trying to maintain low levels of pollution, particularly the high levels of water pollution due to agricultural runoff (CIA, 2016). Businesses operating in Ireland must take into consideration the local and international environmental policies. As a member of the EU, Ireland has a responsibility to implement EU environmental policies on waste management, water pollution, air and noise pollution policies. Ireland came up with green economy policies to guide business practices in the agricultural and food sector and tourism. The Sustainable Energy Authority of Ireland (SEAI) developed policies to reduce carbon emission by reducing electricity dependency and pollution from the transport sector.

Lastly, the legal system in Ireland is efficient. The legal system supports both businesses and employees, for example, employees benefit from the minimum wage and overtime policies created. On the other hand, companies benefit from the contract law, intellectual property, and taxation policies. The legal system is considered friendly for start ups and international businesses. International businesses can open branches quickly in Ireland, but they must be aware of the few pitfalls of the Irish legal system. For example, Ireland has weak intellectual property laws in comparison to the UK, U.S., and most developed nations.

Question #3: critically analyze the opportunities and threats in the firm’s industrial environment in your chosen market. 

Ireland’s retail industry is extremely competitive. There are large and medium supermarket chains that have established a presence. The largest supermarket chain is SuperValu with 223 stores followed by Tesco and Lidl. Medium scale supermarkets such as SPAR, Centra, and Londis have many branches, and they compete with the large supermarket chains for the same market. There are also small scale supermarkets and convenience stores that are located conveniently in Irish neighborhoods.

PORTER’S FIVE FORCES

The Irish supermarket and convenience store industry can be understood further using Michael Porters five forces. The five forces to consider are rivalry level, bargaining power of customers, bargaining power of suppliers, the threat of new entrants, and availability of substitute products. The five forces are interconnected, and they give a clear picture of the industry (Puiu, 2010). The supermarket industry is very competitive, big brands such as SuperValu has opened over 200 stores, and they are still expanding. SuperValu is the market leader with a 23% market share. SuperValu adopted an effective mix of marketing strategies and enhanced operational efficiency. Tesco, Dunnes, Lidl, Aldi, SPAR, and Centra have attained a share of the total market segment; hence it is difficult for new players to access the market. Nonetheless, Sainsbury’s has unlimited sources, and its brand will enable it to establish its niche in the market despite the high competition.

The concept of bargaining power of suppliers refers to the ability of suppliers to control product prices. The Irish supermarket and convenience store industry is highly saturated with SuperValu owning 25% of the market, followed by Tesco with 22.1%, and Dunnes with 21.6% (Murray, 2017). Some medium-scale supermarket chains also exist; therefore the suppliers have a low bargaining power. A vendor cannot change product prices drastically as the customers have unlimited options of suppliers.

Thirdly, consumers have a higher bargaining power. Porter (1980) argued that when products become standardized, customers will experience low costs of switching, hence more power. Products are almost similar across all the supermarkets. Businesses such as SuperValu and Tesco introduced the great loyalty cards, lower prices, and endless promotions to attract customers. Supermarket chains are finding it hard to retain customers as customers tend to shop in any supermarket that is convenient for them. Sainsbury’s expanded to banking and pharmacy as an effort to attract and retain more customers, and many supermarkets have adopted this trend.

The threat of substitutes is also high. According to Porter (1980), the availability of substitutes and alternatives can reduce the demand for the product. Supermarkets and grocery stores have many substitutes as customers can get products from manufacturers or small scale convenience stores. Sainsbury’s is not only competing with Tesco and Asda in the UK market, but it is competing with many small-scale operations that command a notable market share. Sainsbury’s, Tesco, and SuperValu have acquired existing small scale operations and Express stores in local towns.

Lastly, the bargaining power of competitors is a factor to consider. The supermarket industry has many players, but SuperValu, Tesco, Dunnes, Lidl, and Aldi are some of the most competitive and profitable supermarkets. The bargaining power is in the hands of the few large scale, and cost-effective supermarket chains, hence their pricing and promotional strategies affect each other. For example, when SuperValu reduces the price of certain commodities, the other supermarket chains in the neighborhood are likely to come up with their promotions to losing customers.

SuperValu is the most competitive supermarket chain with a record sale of €2.67 billion in 2016 (Murray, 2017). Tesco has seen a gradual increase in market share and profitability; in 2016 it reported €1.6 billions in sales in the first half of 2016. Dunnes experienced an 18% surge in its 2015 profits, and the company is gaining market faster than the other. Aldi and Lidl are formidable brands that Sainsbury’s has to take into consideration. Sainsbury’s total sales in 2016 were €25.8 billion, and the profit was £587m. Sainsbury’s is a powerful brand, and it has the capability to compete with the other supermarket brands in Ireland. Sainsbury’s has accrued a significant amount of customer information, it has expanded its business, and it has grown tremendously over the years. Sainsbury’s has experienced dramatic growth and profit decline over the years, but it has survived. Sainsbury’s is capable of responding to changes in consumer behavior by changing its marketing strategies and coming up with creative ways to retain clients.

Question #4: Critically analyze the strengths and weaknesses of the firm’s internal environment which may support or challenge the firm’s expansion into your chosen market. 

While Ireland is a lucrative market for Sainsbury’s, the organization’s internal environment will affect its performance in the new market. The internal environment refers to the factors within the company that affects its ability to achieve its goals. The internal factors are varied; they include the organization’s resources, capabilities, and skills. Mirrazavi & Beringer (2007) asserts that Sainsbury’s must take advantage of its available resources to achieve its objectives in the new market. Some of the internal strengths include Sainsbury’s reputable brand, financial resources, effective leadership, and the economies of scale. Typical internal weaknesses affecting Sainsbury’s are the poor internal structure and high turnover rates.

VRIO ANALYSIS

Various models are applied in analyzing a firm’s internal environment. SWOT analysis is used to explore the internal and external strengths of the organization, but a VRIO analysis is a better framework because it focuses on the internal factors that are unique to an organization. A VRIO analysis complements other tools such as the PESTEL analysis and Porter’s five forces. The VRIO analysis focuses on what gives the organization a competitive advantage (Das, 2016).

VRIO stands for valuable, rare, costly to imitate, and the firm’s organization. An organization or a product that meets the four requirements of the VRIO analysis has a competitive advantage and is likely to succeed in a new market. The first question of the VRIO analysis is “is the resource valuable?” Sainsbury’s is valuable to a certain extent because they are other supermarkets supplying similar products and services as Sainsbury’s. Nonetheless, Sainsbury’s is valuable to some extent because it conducts its business differently in comparison to the other supermarket chains. Sainsbury’s offers large scale service at their physical stores and through the internet. Sainsbury’s has also diversified its investments, and it has won the award for selling quality food produce; hence it has moderate value.

The second aspect of the VRIO model is ‘rare.’ Sainsbury’s does not deal with exceptional products; rather it deals with everyday products found in other supermarkets, convenience stores, and grocery stores. Supermarket products are not rare, and they are readily available through many channels. While the lack of rarity reduces the competitive advantage, an organization should not avoid dealing in valuable products just because they are not rare.

The third component of the VRIO model is ‘costly to imitate.’ Imitating a product takes two forms; another firm can produce similar goods and alternatives for the products. It is very expensive to imitate Sainsbury’s given the large organizational structure, history, and the many numbers of branches it has. Sainsbury’s was established in 1869, and it enjoyed market dominance in the UK until 1995 when Tesco took over. Sainsbury’s has massive resources, and it has expanded its services in the financial and property investments sector. Sainsbury’s has many stores, but it supplements its sales through Sainsbury’s online. The long history, massive financial resources, and other competencies within Sainsbury’s disposal make it hard to imitate.

The last component of the VRIO model focuses on how the business organizes itself to capture the value of its resources (Roethermel, 2015). The organization must create an efficient organizational structure, culture, management system, processes, and policies to take advantage of the resources. Sainsbury’s is well organized; the organization takes the time to train its leaders and employees to equip them with skills to help the organization achieve its goals. The hierarchical organizational structure, organizational culture, effective supply chain management, and ethical approach are some of the areas in which Sainsbury’s has organized well to enable it to optimize its resources.

Question #5: Evaluate the various modes of entry available to the firm and recommend 

According to Retail Ireland Monitor (2016), the performance figures for the supermarket and convenience sector continue to grow in Ireland. Sainsbury’s should take advantage of the positive trend to establish a presence in Ireland. Sainsbury’s can make use of the different modes of entry to enter Ireland.

MODES OF ENTRY

The main modes of entry are joint ventures, wholly owned subsidiaries, and a Greenfield venture. A joint venture is collaboration between two or more parties to establish a business in a new location. Alexander (2011) notes that joint ventures have been used by many British retailers to expand in the international market. A joint venture is based on trust and mutual interest, and in most cases, a foreign partner collaborates with a partner in the host nation. The joint venture has its advantages in that the partners will share the risks. Nonetheless, joint venture as a mode of entry can be very risky if the business does not find the ‘perfect partner.’ Sainsbury’s used joint venture in its previous international expansion quest in Egypt, but it failed because Sainsbury’s collaborated with the wrong partners (Sebora et al., 2014). Joint ventures come in handy when the business is expanding into an unfamiliar territory, for example, if Sainsbury’s was expanding in China, it is advisable to partner with a Chinese business that is familiar with the Chinese market, culture, and economy, legal and political factors. However, Ireland is a familiar territory, and Sainsbury’s does not have to collaborate with a local business to navigate the external environment challenges.

A joint venture takes different forms; some businesses approach joint ventures strategically by establishing strategic alliances. Strategic partnerships enable businesses to come together to develop a long term vision with regards to the new market. The partners can pool together their resources after creating binding agreements to guide the partnership. Additionally, an organization can use licensing, franchising or turnkey project to enter a new market (Lauidien & Daxboeck, 2017). Franchising and licensing are two different modes, but they attract almost similar benefits and shortcomings. The organization will incur small expenses if it uses licensing or franchising, but then it will have limited opportunities for growth since both parties involved. A turnkey project is a contract in which a host organization agrees to design, create, and equip the production facility and turns it over to the purchaser when the facility is operational.

On the other hand, mergers and acquisitions (M&A) is a consolidation of companies. In a merger, two businesses decide to partner, while in an acquisition, one business takes over the operations of the other business in the new market. Another mode of entry is a wholly owned subsidiary. A wholly owned subsidiary is a situation whereby an organization owns all common stock in another company in the country it plans to expand to, instead of partnering or establishing a branch. A wholly owned subsidiary can arise from acquisition where the parent company keeps purchasing stock in the subsidiary. Lastly, a Greenfield venture is a form of a market entry in which the parent company builds its operations from the ground up. A Greenfield venture is expensive, time-consuming, and the risks are too high.

The best mode of entry for Sainsbury’s is to establish to build branches in Ireland through turnkey projects. Sainsbury’s has tried a joint venture in the past, and it already has a wholly owned subsidiary in Ireland (Argos). The mode of entry is risky, but Sainsbury’s has the resources, skills, and structure in place to handle the risks. Most supermarket chains in Ireland such as Aldi, Lidl, and Tesco are all international brands that build branches in Ireland before gaining a bigger portion of the market share. From the VRIO analysis, Sainsbury’s has the resources, skills, supply chain infrastructure, and partnerships to succeed in Ireland. The PESTEL analysis paints Ireland as one of the best places to conduct business, it has a stable government and a growing economy, and this minimizes the risks that accompany the chosen mode of entry. Though the Irish retail industry is very competitive, there is room for new players who are willing to do more to meet the customer needs.

In conclusion, Sainsbury’s Ireland will provide an opportunity for immense growth. The successful expansion into Ireland will also act as a model for further international expansion. Sainsbury’s must take a careful approach by starting with a few branches in populated urban areas before expanding into other parts of the Ireland. Sainsbury’s must study the local retail industry, the culture, and seek the right partners to enhance its transition in the new market.

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