Harvey Norman is a leading firm in Australia’s retail industry. Founded in 1961, the firm has since expanded its operations to foreign markets such as “Singapore, Ireland, New Zealand, Malaysia and Slovenia” (Harvey Norman, 2011). Currently, the firm has over 300 stores of which 195 are located in Australia (Harvey Norman, 2011). The firm’s core business activity involves retailing a variety of consumer products and property.
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The main products it sells include “computers, TVs, portable electronics, furniture and home appliances” (Harvey Norman, 2011). In the first half of its 2010 financial year (as at 31/12/2010), the firm realized a gross profit of $198.61 which was 16.5% less as compared to the $237.77 which was realized over a similar period in 2009 (Harvey Norman, 2011).
The core values of the firm include honesty, fairness and integrity. Its main competitors include, JB Hi Fi, Retravision and Myer. It is the first firm to contemplate expanding to India.
In order to expand its market and to improve its profitability and competitiveness, Harvey Norman is planning to join the Indian market. Thus the firm has to understand the business environment and competition associated with India in order to make the right entry decision.
Consequently, the Indian market and the firm’s ability to succeed in it will be analyzed through three concepts namely, SWOT analysis, Porter’s five forces analysis and the PESTEL analysis.
Macro-environment Analysis: PESTEL
India is one of the most politically stable countries in Asia (Chanda and Gopalan, 2009, pp. 66-78). The government of India has forged strong political relationships with most countries in Asia and other foreign countries (Chanda and Gopalan, 2009, pp. 66-78). The political stability encourages investments in the country since the investors are assured of the security of their investments.
Strong political relationships with foreign countries encourage the flow of foreign direct investment into India (Aisen, 2005, pp. 100-113). Thus Harvey Norman can take advantage of the political stability and investing the country.
India is the “tenth largest economy globally by nominal GDP” (Virmani, 2010, pp. 320-340). By purchasing power parity, India is ranked at fourth position globally. Its economy is currently recoding a high growth rate of 7.2% (Virmani, 2010, pp. 320-340). In 2010, the country’s GDP per capita was $ 3,339 which was one of the highest in Asia (Virmani, 2010, pp. 320-340).
The robust economic growth is likely to translate into high disposable income (Krugman, 2009, p. 78). This leads to high demand for goods especially in the retail industry. Due to the rapid economic growth, India’s retail industry is expected to grow by 14% between 2011 and 2015.
India has a population of 1.2 billion people thus making it one of the largest markets in the world (Bloom, 2010, pp. 84-100). Majority of the population has a high purchasing power following the expansion of the “upper and middle class consumer bases” (Bloom, 2010, pp. 84-100).
This has led to high demand for consumer products especially in the retail industry. The consumers in India are highly educated and are price sensitive. This explains the high price elasticity associated with most products in the country’s retail industry.
As an emerging economy, India is focusing on adopting modern and cheap technology in order to improve its productivity. Consequently, capital goods which are associated with technological advancements such as computers are exempted from import duty (Narayanan, Chandna and Das, 2008, pp. 321-351).
Besides, the country has improved its productivity by investing in modern transportation and communication infrastructure such as fiber optic and broadband technology (Narayanan, Chandna and Das, 2008, pp. 321-351). This further increases the demand for computers and portable electronics such as iPods in the country.
The government of India is keen on environment conservation. Companies operating in India are not only expected to engage in activities that are least harmful to the environment but are also expected to participate in its conservation (Senthilkumar and Shivakumar, 2011, pp. 341-410).
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Consequently, majority of the companies channel a high percentage of their social responsibility funds towards environmental conservation initiatives. The firms operating in the retail industry are expected to sell products with clear disposal instructions in order to prevent environmental pollution.
Legal factors refer to the rules or regulations that guide business activities such as importation, exportation and foreign direct investments. India has an open import policy which aims at lowering the cost of imports and simplifying the importation process (Sathish and Venkatramarajiu, 2010, pp. 251-278). There are no restrictions on quantities of goods that can be imported into India.
Even though most capital goods are exempted from import duty, the average importation duty is as high as 30% (Sathish and Venkatramarajiu, 2010, pp. 251-278). The retail industry is deregulated in order to encourage rapid growth.
Micro-environmental Analysis: Porter’s Five Forces Analysis
Threat of New Entrants
The firms operating in India’s retail industry are associated with high economies of scale since most of them are multi-national corporations. Due to the high competition in the industry, products are highly differentiated in order to improve the competitiveness of the retailers (Kottler, 2003, p. 67). Differentiation is mainly focused on pricing and product quality.
The cost of joining the industry is very high since it is capital intensive (Sodhi and Lee, 2007, pp. 1430-1439). A lot of capital is required to establish stores and to purchase the merchandise.
Besides, the switching costs associated with the industry are very high. These trends indicate that the threat of new entrants in the industry is low. Consequently, the competitiveness of incumbent firms is not likely to be affected negatively as new firms join the industry (Blanchard, 2008, p. 67).
Buyer’s Bargaining Power
The buyers have a low bargaining power in the industry and this can be explained as follows. First, there is low concentration of buyers as compared to the suppliers’ industry. This means that there are very many buyers as compared to suppliers and this leads to high competition for supplies (Sodhi and Lee, 2007, pp. 1430-1439).
Second, the suppliers or manufacturers of products such as computers, home appliances and furniture are focusing on product differentiation in order to compete effectively in their industries (Hollensen, 2010, p. 56).
Thus suppliers’ products are highly differentiated. Finally, the industry is associated with high switching costs. The low bargaining power of the buyers means that the retailers can be exploited through high prices of supplies.
Power of Suppliers
The suppliers have a high bargaining power due to the following reasons. First, there are a few suppliers as compared to the buyers (Sodhi and Lee, 2007, pp. 1430-1439). This means that the buyers highly depend on the suppliers. Second, there is low availability of substitutes for products such as computers and furniture.
However, sometimes customers substitute various brands of the same product due to differences in prices and functionality (Muthe, 2011, pp. 84-88). Finally, due to the large number of buyers, retailers are not highly valued by the suppliers.
Besides, some suppliers such as Dell Inc. have their own distribution channels. The high bargaining power of the suppliers means that they can dictate the price at which they supply their products thus leading to high prices (Blanchard, 2008, p. 71).
Threat of Substitute Products
The threat of substitute products is low particularly for computers, home appliances and furniture. Customers can only substitute one brand for another but can not easily seek substitutes in different industries (Muthe, 2011, pp. 84-88). For example, computers are highly preferred to typewriters despite their high prices (Muthe, 2011, pp. 84-88). The low threat of substitutes is attributed to low differentiation of substitutes.
Intensity of Competitive Rivalry
The intensity of competitive rivalry is high and this is attributed to the following reasons. There are very many firms competing in the industry, thus reducing the market share of each firm (Dhanabhakyan and Shanthi, 2010). Second, the industry is growing at a slow rate since it is at its maturity stage (Dhanabhakyan and Shanthi, 2010).
Third, the industry is labor intensive and this has led to high fixed costs (Blanchard, 2008, p. 91). Finally, the storage costs are very high due to the large number of goods stocked by retailers and the intense competition for storage space among firms.
Harvey Norman is associated with the following strengths. First, the company is financially stable. As at 31 December 2010, the firm realized a gross profit of $198.61(Harvey Norman, 2011). Even though the result was 16.5% less than the $237.77 million it realized in a similar period in 2009; the reduction is attributed to external factors.
For example, the unusual wet weather in Australia led to low demand for key products such as refrigerators and outdoor furniture (Harvey Norman, 2011). The Australian dollar also appreciated thus increasing the cost of importation.
Currently, the firm maintains a “low dept to equity ratio of 31.19% and net dept to equity ratio of 25.12%” (Harvey Norman, 2011). Due its financial stability, the firm can easily fund its expansion plan effectively.
Second, the company is associated with the best customer services. Based on its core values, honesty and integrity; the firm focuses on meeting customers’ needs (Harvey Norman, 2011). It not only sells high quality products, but also offers after sales services such as technical advice.
Customers’ experiences have also been enhanced through e-commerce initiatives. Through the firm’s website, the customers are able to access product information and to make instant purchases (Harvey Norman, 2011). The excellent customer services have helped the firm to retain its valuable customers thereby maintaining its markets share.
Third, the company offers a wide range of products (Harvey Norman, 2011). The firm stocks several brands for every category of its products. This has improved its competitiveness in two ways. First, the firm is considered a one stop retailer for electronics, home appliances and furniture (Harvey Norman, 2011). Second, the customers’ experiences have improved since they are able to find all the products they need under one roof.
Stocking a wide variety of products will enable the firm to meet the needs of consumers in India. Since India has a population of over 1 billion people, the preferences of the market are likely to be varied (Muthe, 2011, pp. 84-88). Thus the needs of the customers can only be met by stocking a wide variety of goods.
Finally, the company has been able to maintain competitive prices in the market for most of its products (Harvey Norman, 2011). The low prices will enable it to penetrate the Indian market that is associated with intense competition. Thus as the firm’s sales increases due to low prices, its market share will quickly increase.
The weaknesses of the firm include the following. The firm has always used the franchise business model to expand its operations (Harvey Norman, 2011). Consequently, the firm has not been able to have full control over its marketing activities since the franchisees are responsible for management of their businesses. Besides, the model is associated with low returns.
For example, in 2010 the company’s half year results reduced due to the reduction in franchise fees it collected (Harvey Norman, 2011). Second, most of the firm’s stores are located in Australia. Thus its performance is likely to be adversely affected if the Australian market becomes unfavorable.
First, the interest rates in the property industry have been increasing rapidly over the last one year. This has led to a decline in consumer confidence and reduction in demand (Harvey Norman, 2011). Second, demand for seasonal products such as refrigerators has been negatively affected by an unexpected weather patterns such as wet summer seasons.
Third, the strength of the Australian dollar has led to a significant price deflation. Significant reduction in consumer prices can lead to losses if the firm can not sustain them for along time (Krugman, 2009, p. 90). The threat of competitive rivalry in the market is very high. This means that Harvey Norman can easily lose its market share if it will not be able to improve its competitiveness.
Finally, the market is also characterized by high suppliers’ bargaining power and low buyers’ bargaining power. This limits the firm’s ability to access cheap supplies in order to maintain competitive prices (Krugman, 2009, p. 95).
The opportunities available to the firm include a large, wealthy and educated population (Bloom, 2010, pp. 84-100). This is likely to lead to high demand in the retail industry thereby giving the firm an opportunity to increase its productivity.
Deregulation of the retail industry and removal of import restrictions is an opportunity to the firm to increase its market share by joining the Indian market (Dhanabhakyan and Shanthi, 2010). The low threat of substitute products helps in preventing significant reduction in consumer prices. Thus the firm has the opportunity to set optimal prices that can enable it to make high profits.
Based on all the above analyses, the firm should enter the Indian market through foreign direct investment (FDI). This means that Harvey Norman will enter the market by either establishing new stores in India or acquiring existing retail chains in India. The rationale behind this decision can be explained as follows.
FDI will be suitable since the firm has ownership advantages. First, the firm has a well established brand through its trademark, Harvey Norman (Harvey Norman, 2011). This will help in distinguishing it in the market thus enabling it to compete effectively with domestic firms in India. Second, the firm has a highly qualified leadership with excellent entrepreneurial skills (Harvey Norman, 2011).
Consequently, they will be able to formulate effective policies that will enable the firm to improve its competitiveness in India. Finally, as a multi-national corporation, Harvey Norman enjoys economies of scale. It is able to reduce costs by synchronizing the supply chain activities of its branches with those of its suppliers.
Even though the citizens of India are well educated, the cost of labor is still cheap due to the large population (Sathish and Venkatramarajiu, 2010, pp. 251-278). Since the retail industry is labor intensive, Harvey Norman will be able to take advantage of the cheap labor to increase its productivity while reducing fixed costs (Blanchard, 2008, p. 45).
India is a member of ASEAN and has an open import policy (Sathish and Venkatramarajiu, 2010, pp. 251-278). This will enable the firm to access cheap supply of merchandise from the ASEAN member countries in order to maintain competitive prices. Besides, capital goods such as computers are exempted from taxation in India. Thus the firm will be able to import and sell them at low prices thereby increasing its market share.
Since the retail industry in India is characterized by intense competition, it will be advisable for the firm to have full control over its operations including marketing (Hollensen, 2010, p. 69). This will enable it to understand the needs of the market and respond to them within the desired timeframe.
Since the firm is a new entrant, it must directly engage its customers in conversations in order to understand their preferences (Hollensen, 2010, p. 79). This can only be achieved if the management has full control over its operations.
The firm has been able to achieve rapid growth due to the excellent entrepreneurial skills of its leaders. Thus it must preserve its proprietary knowledge in order to outperform its competitors in the new market.
Even though FDI is associated with the highest capital commitment, the firm can afford it. The SWOT analysis revealed that the firm is financially stable. Consequently it can fund its expansion strategies effectively.
Why other Entry Modes should not be used
Currently, the firm is using the franchise business model to expand its operations (Harvey Norman, 2011). Even though this model is cheap, it limits the ability of the firm’s leadership to have full control over marketing and other operation activities (Hollensen, 2010, p. 69).
Franchises are associated with inefficiencies in marketing and supply chain operations. This can lead to failure in a highly competitive market such as India. The high competition has led to low prices and low profits. Consequently, the firm will not be able to realize substantial returns if it adopts the franchise model since it has to share the profits with the franchisees.
The export entry mode will not be appropriate since Harvey Norman is a retailer. It will thus be expensive to export its merchandise from Australia to India through an export subsidiary. Besides, the firm might not be able to find an effective distribution channel to help it distribute its products in India due to the high import taxation (Sathish and Venkatramarajiu, 2010, pp. 251-278).
The licensing mode will not be appropriate since the firm has very little knowledge about the Indian market. A firm is likely to fail if it licenses another firm to sell its products in a market that it has little knowledge of.
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