Introduction
The company overview
Westfarmers Ltd is amongst the biggest retail chains in Australia. The company was established in 1945 with the objective of providing consumers with high quality and reliable products that met their aspirations of getting value for their money. Because of the firm’s concerted efforts, it achieved exceptional growth and is now amongst the largest listed retail firms and employers in the country.
Currently, the firm is highly diversified offering varying products and services to its consumers (Westfarmers, Limited, 2012). Presently, the company’s main objective is to increase its brand awareness within the Australian market and establish itself in the international market. In addition, the company aims to establish and increase its brand loyalty in major Asian emerging markets such as India and China.
The main reason why Westfarmers limited is planning to expand and establish into the Indian and Chinese markets is to increase its global market share. Currently many retail chains are expanding globally, particularly in the emerging economies because of the massive potential they provide in terms of constantly increasing demand for consumer goods (Westfarmers, Limited 2012).
The reason why India and China continue to remain the major targets for international expansion is the immense potential for rapid economic growth and rise in consumer spending.
Currently, the two countries hold the world’s largest and fastest growing middle-class with constantly increasing spending patterns on consumer products. Rapid economic growth and easy availability of natural and human resources at lower costs will enable the firm to operate at low-cost, thereby increasing its competitive advantage.
This paper will analyze the internationalization policy of Westfarmers Ltd with the basic objective of answering the crucial issue of what strategies it will have to adopt and what actions it will have to take in becoming a major player in the global market.
This question will be best answered by deciding and justifying the paths that the company will take while working towards achieving success in relation to its positioning, use of resources and effectively functioning within the institutional frameworks of its chosen businesses in the new markets.
The main objective of this report lies in making the right recommendations that will ensure successful implementation of short and long term strategies in order to increase its market share and thus to achieve financial success in a highly competitive globalized business environment.
Situation analysis
Company analysis
Westfarmers limited is a publicly listed Australian company specializing in retail chains including super markets and chain stores. In meeting up with its international expansion plans, the company intends to increase its brand awareness and to establish and increase its brand loyalty in major Asian markets such as India and China.
Given that the global retail industry is slated to grow exponentially in the next five years, it is beneficial for Westfarmers to expand into China and India, which are currently the fastest growing economies providing massive potential for firms to tap the growing markets in these countries.
In Australia, Westfarmers’ market share is robust with expected growth of 1.67% annually and this growth in its market share is driven by the popularity of its brands particularly among the middle-income earners. Westfaarmers has demonstrated exceptional financial results, which is evident from the financial numbers in its balance sheet and financial statements provided in the Appendix to this paper.
It is pertinent to note in this regard that the economies of China and India are also growing very fast because of the increasing size of the middle class that are now having greater disposable incomes to spend on consumer goods. Westfarmers limited is in a strong position to tap this huge potential and grab a larger share of these markets.
Westfarmers will use its brands in meeting the demands of the growing middle class in these countries, particularly for consumer goods and once it becomes popular it can hope to become a leader in the retail market.
However, the retail industry is highly competitive and volatile because of the presence of major global brands as well as well established local brands, which means that Westfarmers will have to operate in a highly competitive environment (Rawski, 2011).
Although retail markets in China and India are growing, they are being tapped by many other international retail chains (Aulakh & Kotabe, 2007). Nevertheless, if Westfarmers is able to make a strong presence in these markets, it will generate over ten billion dollars of revenues in the next five years.
Competitor and industry analysis
Porters Five Forces
The Porters Five Forces model is highly useful in understanding the competitive environment in which Westfarmers will operate in the new markets (Porter, 2000). Customers will have greater bargaining power because Westfarmers products can easily be substituted by products offered by other retailers, meaning that the company’s position is weakened because of these circumstances.
The bargaining power of suppliers is not very high because of the large numbers of companies that strive to supply consumer goods at the lowest possible prices. It is very easy for Westfarmers to switch and change its suppliers if their products or services are not in keeping with its expectations.
At the same time, it has to be provided that despite the presence of large numbers of suppliers it is not practical to change them frequently (Dunning, 2003).
The threat of new entrants is very high in the retail industry, which is why Westfarmers will have to go into additional cost to maintain its brand loyalty and promote new products. Competitive rivalry in the retail sector is very high in view of the large size of the operators and their ability to enter new markets (Wernerfelt, 2009).
SWOT analysis
The SWOT analysis allows for determining the company’s internal strengths and weaknesses, thus providing a basis to work towards removing the weaknesses and making the strengths stronger. In addition threats and opportunities are identified, which allows for the framing of appropriate proactive policies to achieve organizational goals (Davies & Ellis 2000, p.1190).
The biggest strength of Westfarmers is its market leadership, which allows it to have unparalleled competitive advantage and a strong basis to go ahead with its globalization strategy. It’s already diversified structure allows it to alter its product mix in meeting customer expectations, which results in enhanced sales. The company’s differentiation policy clearly demarcates its products from its competitors.
Staff members are highly skilled and enjoy shared values, which lead to common goals. In addition, Westfarmers enjoys an excellent reputation in Australia because it has consistently provided value to customers (Belin & Pham, 2007). A major weakness of the company is that its differentiated strategy is not effectively communicated to consumers.
The company distribution channels have not yet fully developed to allow speedy delivery of the products to the consumers. Sometimes, the company’s business model is not adaptable to the changes that might take place in the market particularly in hard economic times when smaller formats may be preferable to the consumers (Porter, 2000).
Westfarmers has several opportunities because of the fact that its target market is the largest segment demographically and the growth in the disposable income among the middle class appears to be high. In addition, Westfarmers’ expansionist strategy ensures its absorption and mergers with companies that offer direct competition (Porter, 2000).
Westfarmers has already established strong and long-term relationship with the suppliers thereby reducing most of the supply costs. Therefore, clients’ dependency hitherto established and developed is another opportunity for the Westfarmers management to thrive.
Threats for Westfarmers have surfaced by way of the ability of smaller competitors to enter the market with lesser investments, while being able to erode its customer base. In addition to the threats of new entrants, small and medium sized firms and larger corporations offer substitute products.
The declining revenue because of such developments may affect the company expansion strategy. China and India, where Westfarmers plans to expand do not have a stable regulatory In addition, the firm is planning to invest in countries with structure, which means there is risk in making such huge investments.
The expansionist strategies
Westfarmers is a highly diversified company and therefore requires strong corporate strategy to expand into the international market. The diversification is in both product and in operations. The company started with a single product line and operation.
However, by 2010, the company has diversified into various business operations offering numerous product and service lines. The Westfarmers expansion strategy will enable the firm diversify into more product line as well as the market as the international markets will offer more opportunities for growth and development.
The corporate strategy applied by the company
Westfarmers is using related corporate strategy where the company is using its operations to expand and remain competitive into the market. Since the company was already in the retail and related industry, the major issue in the corporate strategy is how to put together its operations to boost its combined performance, leverage its value chain fits and establish its investment priorities.
The company will use its long-term trends in its expansionist strategies including takeovers mergers and acquisitions. Besides its organized franchise strategy, the company is efficient in its value chain management.
The company products are distributed to the franchisees stores within the shortest time possible before its competitors. The way the company manages its distribution channels add value and make the corporation be more competitive.
The business level strategy applied by the company
Even though the company is selling similar merchandise, the products are highly differentiated making the Westfarmers’ products unique and attractive in the market. In essence, the Westfarmers’ products are differentiated from the competitions in terms of price and appearance. Westfarmers ensures that all the products needed by the customers are present in their stores and offer value to the customers.
With technological advantage in operations, the company offers products at low cost. In other words, the company products are affordable and are of high quality compared to the competing products.
In addition, the company first position in the industry has enabled its products to be sold globally particularly on new markets. The innovativeness in the product line has also increased the company competitiveness in both domestic and international markets.
The company functional and entrepreneurial strategy
Westfarmers is taking any opportunity to market its products or introduce its products into the market. The company is taking advantage of its efficient supply chain management and distribution to ensure that its products reach the market.
In fact, the company well developed supply chain and distribution increases its competitive advantage. The firm uses its supply chain and distribution functions to expand quickly into the new market.
The international expansion strategies
Westfarmers is dedicated to provide international clients with the best products that would give them the best usability experience. The peripherals and services have driven the company to open up its operations in the major emerging markets particularly in China.
Westfarmers expansion approach is to create a balance between its exceptional capability to devise and build up its own products that would provide its clients the best qualities that they are looking for and offering solutions to their needs.
Together with other expansion policies, Westfarmers keeps on developing and advancing the stage for retailing innovative products as well as offering the best quality and standardized consumer products all over the globe.
As a result, the company is planning to open up its operations in China due to the fast growth in GDP and the larger market (Alfaro et al., 2004). Currently China economic growth is surpassing that of US and Japan making the country attractive for consumer product investments.
The growing global consumer products market is an opportunity for the company particularly in countries like China, which is experiencing economic boom.
Moreover, the huge population and increasing application of Westfarmers’ products by the middle-class generation offer a potential market. Moreover, the innovative capabilities of the company are another opportunity to introduce new products into this large market (Blomstermo et al., 2006).
Besides economic growth and market opportunities, the international operations offer an opportunity for the company to produce commodities at low cost (Alfaro et al., 2004). The company’s Chinese subsidiary will operates at low wages compared to that in Australia.
In addition, the operations in China will reduce the distribution cost thus enabling the company to offer its products at competitive prices (Chen & Mujtaba, 2007). The Chinese subsidiary is strategically located to serve and meet the demands of the locals.
In essence, the company is taking advantage of the benefits the foreign country offers towards its operations while retaining its technological aspects (Anders, 2008).
The country operation advantages include the cost of factors of production such as labor cost, factor endowment such as availability of supplies as well as the reduced distribution costs. The technological aspects that the company has to retained include research and development along with the defining managerial procedures (Chen & Mujtaba, 2007).
Therefore, the company has to come up with an expansion strategy that will ensure the realization of the goals. Various expansion strategies are available to the firm to establish and position within the international market. Entering into the international market comes with increased costs and risks.
Therefore, firms must be critical while deciding on the international market entry modes. Firms, while expanding into the international markets can apply several strategies. However, for retail companies such as Westfarmers, franchising, joint ventures and utterly held auxiliaries will be the most appropriate.
Franchising
Westfarmers can utilize the business knowledge of other retail chains acting as a franchisee in host countries to expand the company’s business activities. In this strategy, Westfarmers is supposed to provide capital, technical skills, and business expertise. The firm can use this mode in countries where there is uncertainty in political and economic conditions as in the case of China (Arregle et al., 2006).
The uncertainty in the foreign markets makes this mode of entry more suitable for retail chains. The major advantage of this mode is that the company does not need to bear the costs and risks related to development and entry into the new market (Aulakh & Kotabe, 2007).
The cutback in overheads and threats allied to charters enlarges the corporation’s efficacy in searching for the fresh marketplace. However, the corporation will hardly have any power over the trade dealings mostly where the by-laws call for the businesses to observe the eminence ideals. Moreover, in the circumstances that the franchisee does not strictly obey the agreed rules and regulations, the firm can easily fail in this strategy.
Joint ventures
This is the most commonly used entry mode by firms including retail chains all over the world (Arregle et al., 2006). The entry mode requires that the Westfarmers form an alliance with similar firm in the foreign country in order to attain the greater position in the market. In most cases, the joint venture involves equal share of costs and benefits (Blomstermo et al., 2006).
Nevertheless, the businesses functions as well as operations are regularly detached from the company control. Moreover, the supervisory tasks are analogous and mutual by each corporation. In order to achieve stringent direction and have superior allocation entitlements, Westfarmers will have to devote additional finance to the mutual schemes.
The advantage with this entry mode is that risks and costs are shared (Arregle et al., 2006). In addition, Westfarmers would gain market knowledge from the joint venture firm as well as explore the foreign market with the help of the other firm with political and economic issues put into consideration.
With little regard to the conflicts that might arise from the joint venture, Westfarmers take advantage of the local firm’s capability of influencing the local government to allow the company to enter, establish, and dominate the markets.
Utterly held auxiliaries
This is the best entry mode for the Westfarmers. Utterly held subsidiary mean that the company will have total control of all its operations. In other words, Westfarmers will have to cuddle a hundred percent allotment of the far-off units. For the firm to own a subsidiary, Westfarmers must establish a new entity with full operations into this market or fully acquire an existing firm (Davies & Ellis 2000, p.1190).
The acquired firm must be well built within the industry. Westfarmers stand to gain a lot from this mode as the company can easily promote the products and services. However, there are increased costs associated with this mode of entry (Arregle et al., 2006).
Recommendations
Foreign investments in India and China are required to be made through the FDI (Foreign Direct Investments) route by making applications to the respective governments. Because the governments of these emerging economies are too eager to attract foreign investments, they have introduced speedy processes with negligible bureaucratic formalities.
Mostly all approvals are given from a single window whereby the investing company can get all licenses and approvals from a single office. Once Westfarmers makes the financial resources available, the approvals to invest in India will be given within two months, after which the company is free to enter and purchase land and buildings and other infrastructure to initiate its expansion plans.
It is important to note that entry routes into these countries for the purpose of doing business are very easy and convenient because both economies stand to gain because of the inflow of capital, which will lead to economic development and increase in employment opportunities. The entire process of getting the necessary approvals of establishing and setting up facilities in the two countries will not take more than three months.
Entering into the international market comes with increased costs and risks. Therefore, firms must be critical while deciding on the internationalization. Critical analysis of the international expansion strategies will enable the firm establish and benefit from the international markets. The key areas to focus on while setting up business in China and India are land, buildings, infrastructure and availability of resources.
Westfarmers will have to do a lot of sourcing of local merchandise, products and food items from within the given countries in complying with the tastes of local consumers. Setting up an effective framework for this will take four months because there will be a large number of products and items for which prior sourcing arrangements will have to be made by partnering with local producers and suppliers.
Performing cost benefit analysis will go a long way in determining the extent of profitability Westfarmers will be able to achieve with its investments in China and India. The objective is to gain in a new market for which costs will have to be provided for research, cost of production, cost of marketing, wages to workers, costs of investments and other miscellaneous expenses.
It is essential to conduct a thorough market research in order to get correct facts about the market and about consumer preferences so that appropriate marketing strategies can be framed for different consumer segments. Conducting market research and getting and applying its outcomes will take another three months, but this is essential for Westfarmers to get a correct picture of the environment in which it will operate.
In essence, the company’s corporate strategy will have to be aligned with the market needs of the two countries, which will obviously be different for each region. The next step will be to leverage the value chains that fit well with the investment priorities of the company. This process will take another six months.
For any retail company it is very important to frame a well organized franchise strategy because it plays a major role in making value chain management more effective. The next stage for Westfarmers will be to establish an efficient distribution system because international chain stores require implementation of specific techniques to remain competitive.
The ways in which the company manages its distribution system will have an important bearing on its market position. Efficiency in value chain management will entail a great deal of competitive advantages for Westfarmers. This process will take four months after which Westfarmers can confidently commence its business operations in the respective markets.
The next stage in the business cycle will be the design and implementation of appropriate marketing strategies in order to attract customers. An appropriate positioning strategy will have to be devised by including the most efficient elements of product, price, promotion and place (markets).
The objective will be to use the research outcomes in the best ways in order to survive in the competition, win a steady flow of customers in each segment and to retain loyal customers by constantly offering them value propositions for the purchases they make in Westfarmers stores across the country.
Designing and implementing the marketing strategy for different market segments can be quite tricky, particularly for retail companies because of the intense competition in the sector whereby customers can switch stores with the slightest provocation by way of being attracted by the propositions of other operators or by being put off with even minor deficiencies in service.
Overall, the implementation of marketing programs will take two months after which their outcomes will begin emerging in terms of customer visits to the stores. Therefore, in these 24 months, Westfarmers will be in a strong position to determine its future course of action in terms of future investments in the two countries.
References
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Appendix
Wesfarmers Ltd (WES) Balance Sheet
Wesfarmers Ltd (WES) Revenue Growth
Year over year, Wesfarmers Limited has been able to grow revenues from A$54.5B AUD to A$57.7B AUD. Most impressively, the company has been able to reduce the percentage of sales devoted to cost of goods sold from 67.75% to 67.26%. This was a driver that led to a bottom line growth from A$1.9B AUD to A$2.1BAUD.