The rationale for Selecting Poland as a Target for Investment
The country that will be selected for the expansion of the Sainsbury’s is Poland. From the PESTEL analyses provided in the Appendix, it is apparent that Poland is a better target for the retailer’s expansion than either Estonia or Hungary, even though some elements of the external environment are more attractive in those countries. It is possible to discuss the elements of PESTEL analysis and compare them in the three countries to see that.
Political
When it comes to the political environment, Estonia is probably the best choice of the three countries, for it is business-friendly and has pursued the free market economy for several years. Poland is slightly less attractive in this respect because it is stated to have burdensome taxes on businesses (CIA 2017c). Hungary is the worst choice, for it currently pursues a nationally-oriented economy with high taxes/tariffs especially for retailers, which will put Sainsbury’s at a disadvantage in comparison to domestic retailers (CIA 2017b).
Economic
Estonia is a rather attractive choice thanks to the high GDP per capita, but it is a very small country with a low absolute GDP; also, the growth rate is the slowest among the three countries: by the end of 2016, it grew to 106.01% of its economy in 2013 (1×1.027×1.015×1.017×100%=106.01%) (CIA 2017a). Hungary is more attractive because it has a greater absolute GDP and greater growth rate (in 2016, it grew to 108.84% of its 2013 economy) (CIA 2017b); however, its GDP per capita is lower. Finally, Poland seems the most attractive choice of the three, because it has the greatest GDP (the 6th greatest in the EU), and, importantly, grows faster than the two other countries (in 2016, it grew to 110.44% of its 2013 economy) (CIA 2017c), even though its income per capita is lower than in the other two countries.
Social
From the social environment, Estonia is the least attractive choice of the three simply because its population is too small (1,258,545); also, only 391,000 people live in Tallinn (CIA 2017a). In Hungary, the population is almost 10 million, but in Poland, it is nearly 38.5 million. Also, the capitals of Poland and Hungary have comparable populations, but in Poland, there are several very large cities or urban areas, such as Krakow (CIA 2017c). Thus, Poland is the most attractive choice of the three.
Technological
Both Estonia and Hungary are well-developed technologically, whereas Poland is not. While the infrastructure in Poland has some issues (CIA 2017c; Cienski 2014), it might still be a good idea to invest in Poland and bring innovative technology there that Sainsbury’s local rivals would not be able to have, for Sainsbury’s (n.d.) is stated to focus on innovations.
Legal
Estonia seems to be the most attractive choice of the three in terms of the legal environment thanks to the equal treatment of foreign and domestic businesses (CIA 2017a). Poland might be somewhat worse because there exist elements of Soviet legislation in Polish law; however, the legal environment is still friendly for foreign businesses. Finally, Hungary is the worst choice because of the additional taxes for foreign enterprises (CIA 2017b).
Environmental
Estonia has the best natural environment and keeps up with international standards (CIA 2017a). Hungary and Poland probably suffer from greater pollution, but that might also mean that Sainsbury’s might establish new standards in these countries (although doing so is double-sided because upholding standards takes additional funding in comparison to those who do not uphold standards). Also, Poland and Estonia have access to sea transportation, which is a benefit, whereas Hungary is landlocked (CIA 2017a; CIA 2017b; CIA 2017c).
Summary
On the whole, it can be seen that Poland appears to be the most attractive choice when considering economic, social, and probably also technological and environmental points of view. Estonia would also be rather attractive, but perhaps it is simply too small. Finally, Hungary seems to be the worst choice due to its nationalist economic policy, which levies additional taxes from international businesses.
Critical Analysis of the Opportunities and Threats of the Industrial Environment Using the 5 Forces Model
To understand the industrial environment in which the organization in question will find itself after it enters the market, it is paramount to conduct a thorough analysis of various elements involved in this environment. This can be done using Porter’s Five Forces model (Dobbs 2014). Such an analysis is provided below.
Power of Suppliers
On the whole, it is pointed out that in Poland, the sector of retailers that purchase goods from suppliers is rather weak (PMR 2015). The suppliers of goods are not numerous, and in general, the members of the sector of retailers are stated not to possess any strong mechanisms which could be utilized to exert pressure on those who supply them with merchandise (PMR 2015). Nevertheless, it is stressed that independent store chains are attractive partners for such suppliers, which might provide Sainsbury’s with an additional advantage over its smaller competitors (PMR 2015). In this case, it might also be possible to conclude that Sainsbury’s will have a certain amount of power over its suppliers (at least in the case of a full-scale entry such as having wholly-owned subsidiaries), even though it might be limited.
Power of Buyers
Concerning the power of buyers, it should be highlighted that Poland is a country with a large population, and its major urban areas also house large numbers of people, as is shown in the Appendix. By the U.S. Department of Agriculture (2017), however, the majority of consumers in Poland are still price-sensitive, but there exists a group of clients who are not reluctant to pay greater money for the products of higher quality, and that group is experiencing a stable growth in numbers. This means that, while a large percentage of customers are price-sensitive, there still should be a considerable number of clients, and that Sainsbury’s might be able to rely on clients who are desirous of purchasing high-quality goods even if the prices of these are higher than average.
Competitive Rivalry
When it comes to the degree of competitive rivalry in Poland, it is noteworthy that the main retail outlets in Poland are supermarkets and hypermarkets; these account for approximately 73% of the total value share of the respective market (U.S. Department of Agriculture 2017).
Therefore, it might be possible that Sainsbury’s will be faced with stiff competition when it enters the Polish market. Nevertheless, the supermarkets of Sainsbury’s vary in size, and some of them are small; in this respect, it should be stressed that the supermarket business is peculiar in that the number of clients depends heavily on the location of a particular store; if a location is successful and there are no other supermarkets nearby that are more attractive, or if there are such supermarkets, but they are not in very close proximity, customers may still elect to purchase goods from the given retailer, which presents an opportunity.
Consequently, the amount of competitive rivalry might depend not only on the general situation with supermarkets but also on the local conditions, unless the market is very heavily saturated with such stores. Sainsbury’s should also choose its strategy appropriately to decide in which locations whether large or small stores should be opened (which also depends on the mode of entry; see below).
Also, it should not be forgotten that in certain cases, it might be possible for Sainsbury’s to implement some technological innovations that would provide them with e.g. technological advantages over their rivals, which would be favorable for Sainsbury’s.
Threat of Substitution
Due to the fact that there exists a large number of food and other fast-moving consumer goods retailers in Poland (U.S. Department of Agriculture 2017), it is clear that consumers might be able to easily find substitutes for the goods offered by Sainsbury’s, which means that the threat of substitution for the products of Sainsbury’s is rather high. Nevertheless, as has been noted, the very close proximity of a store to places where people live might be a strong advantage for Sainsbury’s. On the other hand, if Sainsbury’s opens a large store, then people might visit it in situations when goods offered by such stores cannot be found in some other places located in close proximity.
The threat of New Entry
Finally, the threat of new entry remains rather high in the sphere of retailers. The rivals of Sainsbury’s, who are numerous in Poland (U.S. Department of Agriculture 2017), might open a shop not far from an existing location of the store in question, and it will take away a number of the clients of Sainsbury’s. (In this respect, it is better to open large stores with a greater assortment of goods). On the contrary, however, it might be difficult for completely new companies to enter the retail market in Poland, because it includes a large number of enterprises already (U.S. Department of Agriculture 2017).
Summary
On the whole, it can be concluded that both the suppliers and buyers might have a moderate amount of power on Sainsbury’s, but the latter should also have its methods of influence in Poland. A similar situation exists with respect to the competitive rivalry and threat of substitution. When it comes to the threat of new entry, however, the advantage might be on the side of Sainsbury’s. In any case, Sainsbury’s should be rather careful when entering the Polish market.
Analysis of Strengths and Weaknesses of the Internal Environment of Sainsbury’s Using the VRIO Model
To more fully understand the ability of a firm to compete in the market, it is needed to analyze its internal environment and consider whether its resources and capabilities are adequate for addressing the external situation in the market, and thus are the company’s strengths, or if they are not appropriate for dealing with the external conditions, and thus are its weaknesses. To do so, it is possible to employ the VRIO analytical model (Bach & Edwards 2013, pp. 22-23). Such an analysis of Sainsbury’s in Poland is provided below.
Value
The value of the internal resources, capabilities and corporate culture plays an important role in a firm’s competitiveness. When it comes to Sainsbury’s, it should be stressed that the company has considerable technological capabilities (Sainsbury’s n.d.), which may permit it to gain an advantage over the local retailers in Poland, therefore constituting a strength. Also, according to the company’s corporate culture, it makes stress on sustainability and quality, purchasing its products only from highly reliable suppliers (Sainsbury’s n.d.). In Poland, such a policy might be a disadvantage to a particular degree because many consumers there are price-sensitive (U.S. Department of Agriculture 2017).
Nevertheless, high quality should be able to attract clients who are willing to pay greater prices for it, and the numbers of these consumers are growing in Poland (U.S. Department of Agriculture 2017). Thus, in perspective, Sainsbury’s might have several important strengths when it enters the Polish market.
Rarity
The products and services that Sainsbury’s will propose in Poland will probably not be very different from what is already available in Poland with respect to assortment, for there are many supermarkets, hypermarkets and retail stores in that country (U.S. Department of Agriculture 2017); thus, there exists a weakness in what Sainsbury’s may offer. Nevertheless, very high-quality goods might not be widespread (U.S. Department of Agriculture 2017), so if Sainsbury’s focuses on quality, this might become one of their strengths.
Imitability
Unfortunately, when it comes to imitability, it might be possible to assume that Sainsbury’s products will be capable of being imitated by the company’s rivals. If Sainsbury’s is to sell retail products, such as fast-moving consumer goods, even of very high quality, they will have to purchase these from local suppliers, which means that other such firms will also have access to these resources. This constitutes a weakness of Sainsbury’s operations in Poland. However, if Sainsbury’s is able to utilize innovative technologies and other similar resources it has in other countries (Sainsbury’s n.d.), this might provide them with a unique advantage that local companies may not be able to imitate.
Organization
It is possible to state that the organization of Sainsbury’s, as one of the largest supermarket chains in the U.K., is highly effective (Sainsbury’s n.d.). Consequently, it provides this company with a strength in comparison to local Polish supermarkets because Sainsbury’s might be able to import and use the highly effective organizational and management experience and technologies they possess in Poland.
Summary
All in all, it may be summarised that Sainsbury’s has several important strengths in comparison to local Polish supermarkets; these strengths include technological capabilities, as well as organizational and management experience. On the other hand, it also has several weaknesses, such as the probably relatively low value of their quality policy among some of the consumers, or the imitability of the high quality of goods if these still become popular. Therefore, Sainsbury’s should be careful when entering the Polish retail market, focusing on its strengths and finding ways to lower the effect of its weaknesses.
Evaluating the Various Modes of Entry
According to Elsner (2014), there exist several modes of market entry for retailers; the most important of these, starting from those in which the company has the largest degree of control over its foreign operations and finishing with those where it has the smallest amount of control, include: “wholly-owned subsidiaries, mergers and acquisitions, joint ventures, franchising and licensing agreements and minority stakes” (p. 7). These entry modes will be analyzed below.
Wholly Owned Subsidiaries
When speaking about wholly-owned subsidiaries, greenfield investments and acquisitions should be discussed; mergers might also be considered. When it comes to greenfield investments, it is worth stressing that building new retail stores from scratch may be rather costly and highly risky; also, it takes a long time to establish such operations, so the investment will start to pay off only after a considerable amount of time passes (Wood & Demirbag 2012). During this time, the local rivals might be able to at least adopt the strategy of providing high-quality goods; technological advantages of Sainsbury’s may also be imitated, for it would take less time to export or imitate something when compared with building a company from scratch and then exporting via this company. Therefore, a greenfield investment might not be preferred.
On the other hand, a merger or an acquisition is apparently a better solution because they are much faster, and Sainsbury’s may be able to start utilizing its strengths more quickly, and faster establish itself in the market. However, there is also a problem with that, for, during a merger or an acquisition, there might emerge a clash in organizational cultures, management systems, etc. (Elsner 2014), and it is these elements which have been previously identified as comparative strengths of Sainsbury’s, so preserving them should be of great importance when establishing operations in Poland.
Joint Ventures
When considering the possibility of Sainsbury’s entering into a joint venture with another retailer, it should be stressed that this form of market entry on its own usually does not permit for establishing long-term operations, instead proposing a temporary relationship between several organizations (Wood & Demirbag 2012). Also, whereas Sainsbury’s might be able to share its comparative advantages with its potential partner, the partner might not be capable of adopting these advantages appropriately. Therefore, it is apparent that taking part in a joint venture should not be recommended for Sainsbury’s as a method of entry into the Polish market.
Franchising and Licensing Agreements
As for licensing agreements, it should be noted that forming one with a local company does not appear to be of high benefit for Sainsbury’s. In this case, Sainsbury’s will probably provide the licensed firm with some technological advantages and organizational secrets, in return gaining a part of the profits and having the licensee sell the products under Sainsbury’s brand name. However, this is often a temporary form of entry (Wood & Demirbag 2012), and later, the licensee might employ the received knowledge (and probably technology) to become a stronger competitor of Sainsbury’s if it chooses to also enter the Polish market using some other methods.
On the other hand, when it comes to franchising, it ought to be stressed that in this case, Sainsbury’s might be able to implement its management expertise and provide the franchisees with the technological privilege that it possesses (Elsner 2014). It also supplies a relatively simple way of expansion, which does not entail very high risks. On the contrary, the disadvantages include the probable inability to effectually implement the management schemes, and the possible heterogeneity of the franchisees.
Minority Stakes
While discussing minority stakes, it should be pointed out that having one in a Polish business might permit Sainsbury’s to cautiously test its ability to operate within the Polish market and make use of its relative strengths in it, as well as to gather some internal intelligence about that market. Besides, if the operation is successful, it might later become possible for Sainsbury’s to acquire the whole business in which it previously had a minority stake (Elsner 2014), thus making a full-scale entry into the Polish market. As for the disadvantages, it should be stressed that Sainsbury’s will not be able to control the whole organization, which may lead to the suboptimal realization of the potential of Sainsbury’s. Also, friction might emerge between Sainsbury’s and the business in which it has the minority stake, which may put a further relationship at risk.
Summary
On the whole, it seems that the methods of entry in which Sainsbury’s will (temporarily) have a relatively small amount of control are more appropriate than costly, full-scale investments such as greenfield investments. In particular, franchising or purchasing a minority stake appears to be the quickest option with the lowest risk, also permitting for probing the market. In addition, a minority stake might permit for easier acquisition of a full-scale business operation in Poland later.
Reference List
Bach, S & Edwards, M 2013, Managing human resources, John Wiley & Sons, Chichester, UK.
CIA 2017a, The world factbook: Estonia. Web.
CIA 2017b, The world factbook: Hungary. Web.
CIA 2017c, The world factbook: Poland. Web.
Cienski, J 2014, ‘Innovation and technology are foundations of Poland’s economic progress‘, Financial Times. Web.
Dobbs, ME 2014, ‘Guidelines for applying Porter’s five forces framework: a set of industry analysis templates’, Competitiveness Review, vol. 24, no. 1, pp. 32-45.
Elsner, S 2014, Retail internationalization: analysis of market entry modes, format transfer and coordination of retail activities, Springer Gabler, Wiesbaden, Germany.
Estonian Investment Agency n.d., Legal framework. Web.
PMR 2015, PMR Insight: wholesale market of groceries and cosmetics in Poland: Porter’s five forces analysis. Web.
Poland: legal environment. 2017. Web.
Sainsbury’s n.d., Sainsbury’s. Web.
Singh, HP 2016, PESTEL analysis of Hungary. Web.
U.S. Department of Agriculture 2017, Poland: retail sector. Web.
U.S. Department of State 2012, Doing business in Estonia: 2012. Country commercial guide for U.S. companies. Web.
Wood, G & Demirbag, M 2012, Handbook of institutional approaches to international business, Edward Elgar Publishing, Cheltenham, UK.
Appendix: PESTLE Analyses of the Countries
PESTLE Analysis of Estonia
Political
Estonia is ruled by democratically elected parliament. It is a member of the EU and part of the European Economic Area (EEA), which allows for free trade between its members. The country, having pursued a free market for many years, is liberal in its international trade policies; being a small country, it supports imports of products from other countries, such as the U.S. (CIA 2017a; U.S. Department of State 2012).
Economic
Estonia is a member of the euro zone; it boasts one of the highest levels of GDP per capita among the countries of Central Europe ($29,500 as per 2016 estimate, in 2016 USD); its GDP is $23.48 billion (as of 2016), with growth rate of 2.7%, 1.5%, and 1.7% in 2014, 2015, and 2016, respectively (CIA 2017a).
Social
The country has a small population of 1,258,545 (as of July 2016 estimate), which decreases by 0.54% yearly (as of 2016) (CIA 2017a). Its capital, Tallinn, housed 391,000 residents in 2015 (CIA 2017a). It has low unemployment rate (6.8% in 2016) and currently lacks the workforce, both professional and non-professional (CIA 2017a). However, 21.3% of population are considered to be below poverty line (CIA 2017a).
Technological
The country is well-developed technologically; machinery and electrical equipment account for 30% (as of 2016) of Estonia’s total exports (CIA 2017a). The country has strongly developed communications (e.g., online voting in elections is very popular) (CIA 2017a). It also has rather strong infrastructure, and good port communications (coastline length = 3,794 km), but has a low degree of completion of Trans-European Transport Network (CIA 2017a; U.S. Department of State 2012).
Legal
The country has a civil law system (CIA 2017a) and adequately protected and enforced property rights (U.S. Department of State 2012). Foreign investors have the same obligations and rights as domestic businesses; there exist agreements for preventing double taxation (Estonian Investment Agency n.d.).
Environmental
The Estonian constitution declares that the natural environment and resources are to be used sustainably, and that it is a duty of every person to preserve the environment (Estonian Investment Agency n.d.). On the whole, the country cares about upholding high environmental standards, and legal regulations for these are constantly upgraded according to international standards (Estonian Investment Agency n.d.).
PESTLE Analysis of Hungary
Political
Hungary is ruled by a democratically elected government, but there has been a rise in the popularity of the right-wing, nationalist parties such as Fidesz and Jobbik. It is a member of the EU and EEA (CIA 2017b; Singh 2016). In the past, reforms were implemented to pursue the free market, but in the recent times, a more nationally-oriented approach has been adopted, which favours domestic businesses, especially in sectors dominated by foreign companies, such as retail and banking (CIA 2017b).
Economic
Hungary is not a member of the euro zone, and it has not high levels of GDP per capita: nearly 2/3 of the mean level of the EU-28 (e.g., $27.200 as of 2016 estimate) (CIA 2017b). Its GDP is $267.6 billion, as of 2016 estimate, in 2016 USD; GDP growth rate was 3.7%, 2.9%, and 2.0% in 2014, 2015, and 2016, respectively (CIA 2017b).
Social
Hungary has a population of 9,874,784 people (as of July 2016 estimate), dropping by 0.24% yearly (as of 2016 estimate) (CIA 2017b). The capital, Budapest, has 1.714 million residents; urban comprises 71.2% of total population (as of 2015) and grows by 0.47% yearly (2010-2015 estimate) (CIA 2017b). 14.9% of population was below the poverty line in 2015, mainly in rural areas (CIA 2017b). It has an abundance of workforce and low unemployment rates (6.6% in 2016) (CIA 2017b).
Technological
The country is highly technologically developed; equipment and machinery account for 53.5% of its exports, and other manufactures comprised 31.2% of its exports in 2012 (CIA 2017b). The country is stated to boast a high level of education in the fields of technology and mathematics, to have produced 13 people who won the Nobel Prize, and to have been home and motherland for a number of world-famous scientists such as Janos Bolyai and John von Neumann (Singh 2016).
Legal
Hungary has a civil law system, which is based on the German system (CIA 2017b); law enforcement is carried out not only by the police, but also by the Border Guards (Singh 2016). Legal environment is not favourable for international businesses, subjecting them to additional taxes (CIA 2017b).
Environmental
The country has a diverse natural environment, but suffers from pollution, especially water pollution (Singh 2016). The current standards in energy efficiency, waste management, and the control of pollution fall below the international expectations, and require considerable investments in order to meet the minimal standards (CIA 2017b). The country is landlocked.
PESTLE Analysis of Poland
Political
Poland is ruled by a democratically elected government, and is a member of the EU and EEA (CIA 2017c). It has consistently implemented the policy of democratisation and economic liberalisation since 1990 (CIA 2017c). However, recently, the country has shifted towards the policies of social support, and there exists a system of taxation which creates a burden for businesses (CIA 2017c).
Economic
Poland is the 6th largest economy in the EU; it has experienced a consistent economic growth since the 1990s (CIA 2017c). It is not part of the euro zone, but is obliged to join it eventually. It had a GDP per capita of $25,900, $26,800, and $27,700 (in 2016 USD) as of 2014, 2015, and 2016, respectively (CIA 2017c), which is about 2/3 of the mean European level (Cienski 2014). The GDP is $467.4 billion (as of 2016 estimate), and its growth rate is rather high: 3.3%, 3.7%, and 3.1% in 2014, 2015, 2016, but is expected to slow due to the planned social policies implementation (CIA 2017c).
Social
Poland’s population is 38,523,261 (July 2016), decreasing by 0.11% yearly (2016 estimate) (CIA 2017c). The capital, Warsaw, houses 1.722 million people; another large city, Krakow, – 760,000 people (2015); urban population accounts for 60.5% of the total population, and urbanisation rate is -0.1% (2010-2015) (CIA 2017c). 17.6% of population are below the poverty line; unemployment rate is 9.6% (2016).
Technological
Poland is not highly developed when it comes to technology (Cienski 2014). The growth of Polish economy originates in cheap labour rather than in technological development, and further development of technology is paramount (Cienski 2014).
Legal
Poland has a civil law system (CIA 2017c). Its law is based on the Constitution of Poland of 1997; the legal system comprises a mix of the Continental civil law and some elements of the Soviet law, but the changes are implemented by new governments (Poland: legal environment 2017). Legal environment is friendly for foreign enterprises, and ensures impartial proceedings (CIA 2017c; Poland: legal environment 2017).
Environmental
Poland suffers from air pollution and acid rains due to gas emissions from coal-based power plants, and from water pollution and problems with hazardous waste disposal (CIA 2017c). Polish governments, however, have a considerable degree of environmental concern (CIA 2017c). Poland’s coastline length is 440 km (CIA 2017c).