QUESTION

Dick Smith is a retailer of home entertainment products, focusing on
consumer electronics. In recent years they have expanded by opening
new stores (stand alone and in shopping centres) across Australia. Dick
Smith is a wholly owned subsidiary of Woolworths Limited.

You have been appointed to the new position of International Strategy
Manager for Dick Smith. Your immediate project is to evaluate a
proposal to expand Dick Smith into Mexico. The Board requires from
you a comprehensive, but succinct, Report and Recommendations for
its next meeting at 10.30am on Week 8, 2011.

Your Report should include the following analyses:
(a) Country profile of Mexico and PESTEL Analysis.
(b) Institutional Analysis (both formal & informal).
(c) Analysis of relevant retail industry in Mexico, using Porter’s
Five Forces Model.
(d) Firm Analyses – Both SWOT & VRIO.
(e) Evaluation of alternative Modes of Entry. Top management has
requested you investigate export, joint venture and wholly
owned subsidiary arrangements.
Your Report should conclude with clear recommendations and include
a proposed Time Schedule as an Appendix. An Executive Summary
(maximum 1 page) should be included immediately after the title page.
A Turnitin Report must be attached to the back of the report.

SOLUTION

Executive summary

International markets are opening up with the advent of globalisation. Every nation is now opening up for external trade and is setting up a favourable business climate for entry of foreign players.

The current report analyses the entry strategy for a retail business firm ‘Dick Smith’ which mainly deals with consumer electronics in home entertainment segment. The firm has strong presence in Australia and wants to enter into a new geography ‘Mexico’.

A thorough analysis of Mexico has been done through PESTEL framework. In order to gauge the market conditions, Porter’s five force model is used to analyse the market factors in the Mexican retail industry. Dick Smith’s SWOT analysis and VRIO analysis of its resources is done to understand its strengths.

Based on the above analysis, it is suggested that the firm should enter into the market with a Joint Venture strategy. This is deemed to be the most effective strategy in all respects.

.

Country Profile- Mexico and PESTEL analysis

Mexico is a Spanish speaking country with the GDP rank as 12^th in the world. In order to understand the country profile in the current context, PESTEL framework is used as below.

PESTEL analysis

(Mexico-Department of Foreign Affairs and Trade, 2010)

In order to understand the factors that may be considered while venturing into Mexican market, a PESTEL study can be taken up as follows:

Political environment

There are good political tie-ups between Mexico and Australia. They are a part of various multi-lateral organisations like G20, WTO, and APEC etc. The bilateral tie-ups have been on stronghold with MOUs signed on Agriculture, Mining, Energy and Education. A Joint Experts Group had been launched between the two countries to improve trade and investment relationships. Both countries have double taxation agreement which further improves the business set-up in their territories and earn good profits. The internal environment is also good as government is stable and the policies do not come with many unforseen risks for businesses.

Economic environment

Mexico has healthy economic environment with its GDP rank 12th in the world (CIA World fact book). A lot of work had been done in the areas of improved governance and transparency in the economy. In order to boost trade, it has signed a number of Free Trade agreements with major countries. The major association is NAFTA. The country had taken various trade liberalisation steps in past. The other factors favourable for business set up include- availability of cheap labour, geographical advantage of being close to U.S. market and government’s initiatives to boost the industry to create jobs. The industry is now largely dominated by private players.

The banking system is maturing at faster rates to offer corporate loans at competitive rates. Various credit rating agencies are established that give the overall system a confidence to lend funds to the businesses. The central bank “El Banco de Mexico” functions independently to ensure that the financial risks are mitigated.

Social environment

Around 18% of the population is below poverty line (CIA World fact book). With the increasing household income, people are spending on goods and services which are not just basic necessities. There are segments that prefer luxury brands and are ready to pay for it. Mexico is open to new technologies coming from all over the world. However, there is a disproportionate economic and social development. Some of the cities are well developed and have adapted to the modern western culture, whereas there are some cities which are still following the age old customs.

Technological environment

The country has developed its telecommunication networks at a swift pace. It is one of the top 20 nations in terms of internet usage. Mobile penetration (~20 million users as per CIA) and the fixed line telephone systems are also growing at healthy pace. Such a communication system can facilitate the business promotion. In terms of infrastructure, the country has a well-developed network of roads and railways. With the increasing discretionary incomes, people now prefer air travel which is again facilitated by taxis and other transport services.

Environmental factors

The country had faced a lot of environmental adversities owing to rapid industrialisation. The pollution has been one of the worst in recent years. In order to address the environment issue, the government has taken up a number of incentive plans for industries to reduce carbon emissions. Mostly in energy sector, the government is incentivising renewable energy sources.

Legal environment

With the increased participation of Mexico in world trade affairs through forums like NAFTA, the legal system in the country has undergone modernisation and liberalisation. Foreign firms are given multiple options to set up businesses like- Joint Ventures, Share purchases and wholly owned subsidiaries. In order to guide the businesses, a Federal law known as ‘The General Law of Commercial Companies’ has been established. Labour rights are safeguarded through labour laws.

Analysis of Mexico retail industry

The retail industry in Mexico has undergone drastic changes over the years and has facilitated the entry of foreign players like Wal-Mart.

These foreign players have brought different concepts like price clubs, discount stores and hypermarket chains. Local small players are still posing competition but the young population is more attracted towards the modern trade concepts like hypermarkets for purchasing consumer durables. In order to analyse the retail sector dynamics, it is useful to understand it in terms of Porter’s five forces as described below.

Porter’s Five Forces Analysis

(THE ECONOMIST INTELLIGENCE UNIT)

The five forces that affect the market environment are:

Threat of entry of new competitors

In the retails sector, a lot of players are coming up especially from foreign countries. Wal-Mart was the major foreign player entry in the Mexican retail market. But overall threat of entry of a new competitor is moderate as setting up a retail business requires a huge capital investment. The existing big players have captured the distribution network and hence creating barriers for the entry of new players. Owing to difficult financing arrangements, the growth of retail sector is somewhat curbed.

Threat of substitutes

The threat for substitute retail stores is high as there is limited number of players in retail business of consumer durables. The big chain retail stores who have the shelf space to showcase maximum brands and products and the hypermarkets are coming up at a fast pace. At the same time, the local small players continue to attract most of the customers. A focussed local player can very well pose a threat to a big retail chain which caters to the mass market. These small players are also undergoing changes to bring modern retail concepts. For example, a local retailer Soriana has recently upgraded its stores. Owing to all these factors, chances of customers switching to new upcoming stores are very high.

Competitive rivalry

In all there are approximately 15 players in the organised retail sector in Mexico. There is an intense competition amongst them considering the size of the retail industry. They play on discounts and better customer service. Among them, which are most popular ones in the home entertainment segment, are the ones which have multiple brands under one roof and hence giving a variety of choices to the customers. The local players are mostly the family run businesses which have their own advantage owing to their presence in market for log time. There are also aggressive advertising, promotional offers etc. done by the players which add to the competitive rivalry.

Bargaining power of buyers

Customers have an upper hand since there is an intense rivalry among the players. The customers are ready to experiment with new products and brands. If the switching cost is less and there is lesser brand differentiation, the customer may go for a different brand and to a retail store where that brand is available at competitive rates. The promotional offers given by different retailers also affect the purchasing decision. Thus, every player has to closely watch the activities of other player.

Bargaining power of suppliers

The suppliers have very low bargaining power since they don’t have much scope for differentiation among different retailers. Customer’s purchasing habits are dynamic and they may choose a retail store based on complex parameters like proximity of store and promotional offers. Only brand conscious customers can give edge to particular supplier. Overall, the bargaining power of suppliers is very low.

Most of the foreign players enter in the Mexican market through joint venture route. It gives them the advantage of the local market expertise. The big players tend to capture the market mostly on the basis of price differentiation. They provide attractive credit schemes which could swipe away the market share of their local counterparts.

Firm analysis for Dick Smith

The analysis of capabilities of Dick Smith is done through two models SWOT and VRIO as below.

SWOT analysis

Strengths

The strength of the firm ‘Dick Smith’ lies in its experience in Australia. There are similarities in both Australian and Mexican markets. Both of them are in the developing stage. The customer behaviour in both the countries is more or less similar as both have technology enthusiasts. The advent of e-commerce and online marketing is still in nascent stage and hence the business strategies should correlate in both countries. It is clear that customers at Mexico’s retail stores are open to new experiences, which an MNC like Dick Smith can provide them. Hence, owing to all these factors, Dick Smith can start with a strong strategy in Mexican retail sector.

Weaknesses

Weakness or limitation for every company that wants to enter in the international market is the lack of market knowledge and customer behaviour in that market. Doing business in Mexico has become easy provided that a company complies by all the laws and other regulations. Although customer behaviour can be expected to be similar to what is there in Australia, but disproportionate demographics at Mexico may pose a challenge for Dick Smith to understand and forecast the customer behaviour. Moreover, the existing small and large players have their supply chain networks strongly in place and they may put entry barriers for the entry of new players. Hence, Dick Smith must plan to combat all these limitations so that it can start and operate its business profitably.

Opportunity

The only large foreign retail player in Mexico is Wal-Mart. If it can establish its presence comparable to Wal-Mart, it will go a long way in establishing a strong market hold in future. Going on an aggressive mode, it can expand its brand associations and thus get advantage of economies of scale. There has been a shift of customers from traditional unorganised retail to the modern trade and so this presents a lot of market potential for Dick Smith. Moreover, it will give Dick Smith a confidence and experience of moving into new geography and hence good for its future expansion plans. It will also uplift its brand presence across the borders.

Threats

Mexico was badly affected by the recent global financial crisis. As a result, the customer spending pattern has seen a change over the years which may likely to affect the confidence. If the company has to raise money through financial institutions, then also it may have to go through stringent procedures as they may not be comfortable in exposing their funds to a new player.

VRIO framework analysis

VRIO framework analyses the strength of resources of the firm. Resources of the firm can be assumed to be as follows:

1. Financial resources

The cash books of Dick Smith and the firm’s revenue figures over the years serve the financial requirements of the firm to enter into the new market. The credit rating of the firm may also be used to raise the money by borrowing. It is assumed that the firm has a good credit rating and sufficient cash in hand to venture into the new market.

2. Technological resources

The company’s existing technology which is utilised for improving operational efficiency in Australia can be applied at Mexico as well. The processes, the best industry practices and the trademarks serve as technological resources for Dick Smith.

3. Organizational resources

The existing strategic frameworks and the past experience may provide the necessary guidelines to approach a new market. Considering the firm has been into Australian market for many years, its learning and intellectual capital is of immense value.

4. Human resources

The experienced staffs at Australia know all the processes and procedures to be followed to maintain the standards in any location. They are the biggest assets of the organisation.

Applying VRIO framework considering the above resources in hand, the framework components are described as below:

Value 

The financial resources may enable Dick Smith to follow expansion plans aggressively to get a definite competitive edge. The company can utilise its technological resources in collaboration with its human resources to set up technologically advanced retail stores in Mexico. The technical know-how of the employees will definitely help them in hiring local people and train them. It will also help in standardising the whole operations.

Rarity

The company may have some of the technological resources which are exclusive to Dick Smith only. But this exclusivity cannot be assumed blindly as there are players like Wal-Mart in the market. So, the company should aim at utilizing the technological resources in best possible way and leave the rest to the marketing activities.

Imitability

To a certain extent, Dick Smith can establish such advanced processes in its retail stores which other competitors may not be able to imitate. It can at least assure itself of being technologically advanced than the existing small local players. The organizational resources such as experience of Australian market can definitely be considered as rare as it may be the first Australian firm to enter in the Mexican retail sector.

Organization

Dick Smith has been present in Australia for over years. The organisation can therefore be assumed to be at mature stage. The inter-dependency of its resources and their collaboration is strongly guided by established processes and procedures. The management roles can be assumed to be clearly defined and hence a better utilisation of the resources is very much possible.

Modes of entry

Three main modes of entry can be analysed for Dick Smith as follows:

Export

Dick Smith can market and sell its products directly in the Mexican market. The most important aspect in this option is the service delivery. A product can be ordered through any online or offline route and delivered in physical form to the customer but the after sales service is a big issue. In case there is any faulty product or there is a product which needs to be repaired, then it has to go through Australian route making it an inconvenient option as well as costly option.

Joint Venture

A lot of retail firms prefer Joint Ventures. The benefits which Dick Smith can expect in this mode are as follows:

The firm will not have to worry about the lack of local market knowledge. Dick Smith chooses a local firm with a high reputation in the Mexico market so that their expertise complements each other.

ü  Service delivery can be very easily handled. The Joint Venture should be negotiated in such a manner that the products should be sold under Dick Smith brand and the marketing should also be handled by it. The partner firm should take care of the after sales service and Dick Smith should provide necessary training to the customer service staff so as to maintain the brand name.

ü  It is a cost effective route as it is much focussed approach for Dick Smith where it can focus on establish the same quality standards as followed in Australia and rest of the activities can be taken up by local partner.

ü  The only risk in this case comes if the partner defaults on any of the obligations. So, a carefully done JV seems to be the best option.

Wholly owned subsidiary

Through this route, Dick Smith may establish direct ownership facilities in Mexico. So, in a way it has to start from scratch. The lack of knowledge about the local market as well as legal framework may pose big challenges. The company would be required to break through the existing retailer-distribution network. On the positive side, the firm is free to work as per its own standards and can apply specialized processes. In the long run, this route may seem to be more effective, but considering so much of difficulties in the beginning it may not be the most favourable option for Dick Smith. It is in fact the most expensive option.

Appendix

Based on the above analysis, a Joint Venture should be the ideal entry strategy. Following plan is recommended for Dick Smith:

References

Doing Business in Mexico; viewed 27 October 2011; <http://www.mexconnect.com/articles/13-doing-business-in-mexico-general-legal-business-entry-issues>

Mexico-Department of Foreign Affairs and Trade; viewed 27 October 2011; <http://www.dfat.gov.au/geo/mexico/mexico_brief.html>

Mexico-Economic analysis of government’s policies, investment climate and political risk; viewed 27 October 2011; <http://www.mkeever.com/mexico.html>

Mexico Economy 2011, CIA World Fact book; viewed 27 October 2011; <http://www.theodora.com/wfbcurrent/mexico/mexico_economy.html>

Mexico industry sectors, Economy watch; viewed 27 October 2011; <http://www.economywatch.com/world_economy/mexico/industry-sector-industries.html>

Mexico retail: Sub-sector update; THE ECONOMIST INTELLIGENCE UNIT; 2010; viewed 27 October 2011; <http://www.eiu.com/>

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