Risk Reduction Through Market Entry

Introduction

Common trend for businesses is to expand by either introducing new lines of product or venturing into new untapped markets. These two strategies are usually aimed at increasing the revenue as well as profitability of the business thus shielding the business from markets and enabling it to sustain its operations during tough economic times. Market diversification or the entry into new market has been lauded for its ability to reduce the overall risk of firm during economic recession that could greatly affect one region compared to others. For example, in th last economic recession the economies of Western countries were greatly affected compared to economies of African countries (Sakarya et al, 2007). This meant that Western companies, which had branch networks in Africa, were able to sustain their businesses owing to revenue that was being generated in the African market. This present report is based on the concept of market diversification and in particular, it focuses on Market entry to the Eastern European market via Czech Republic. This paper will seek to provide a detailed analysis of the Czech Republic with the aim of recommending a market strategy that Sainsbury could use to enter the Eastern Europe and Czech market in particular.

Terms of Reference

Based on the competition arising within the food-retailing sector of the United Kingdom, as well as the relative maturing attached to the market, the Board of Directors for Sainsbury Plc is keen on considering an expansion in the European market, particularly Eastern Europe as part of its new corporate strategy. The Board is keen on establishing a branch network in either Slovakia or the Czech Republic, both of whom are the newest members of the EU. The Board believes these two countries offer unsaturated market that can possible generate huge returns for the company more so considering they are exploiting scales economies, core competencies and industry knowledge. This report is written from the standpoint of Head of New Market Development at Sainsbury Plc, who has been tasked to assess the suitability of Czech Republic as a new market for the company under its corporate strategy.

Methodology

Methodology refers to the procedures and methods that are used in collecting analyzing and presenting data. This report used secondary sources as a means of data collection (Khan, 2011). Czech country report were obtained through conducting web search. In the analysis, this report applied PESTEL framework in analyzing the Czech market opportunities. SWOT analysis of the Sainsbury Company was also conducted to come up with conclusion to the effective strategy that it could apply in entering the Czech market. The Ansoff’s matrix was applied in order to derive the best strategy that can be applied by Sainsbury Plc whilst entering into the Easter European market through the Czech Republic.

Findings

PESTEL Analysis of Czech Republic

PESTEL analysis involves marketing principles/ concepts that organizations use to monitor the external environment where a business organisation operates. According to Friesner (2011), the PESTEL analytical tool is an important tool that helps a business organisation organization in the decision-making process pertaining to the suitability of a market. This tool gives the organization the overview of the existing external environment from different angles so that it informs the process of generating strategy for market entry (Indexmundi 2015). Czech Republic is located in Central Europe and is a land locked country. Czech Republic has great potential in automotive, retail and energy. It achieved the status of developed country in 2006 according to World Bank report. Its economy is mainly an export based and hence it underwent through tough economic hardships during the European economic crisis (Pauknerová, 2011). There is a highest level of human development in Central and Eastern Europe, which makes it to be ranked amongst the top 30 globally. The country enjoys peace, which is important for stability. It is ranked the 9th most peaceful country in the continent. It has achieved good performance in democratic governance (Kalimo & Jansson, 2016). It is governed by pluralistic parliamentary democracy. The country also has low infant mortality rate. It is a member of NATO, European Union, and Organisation for Security and Corporation in Europe (Hill, 2011).

Political Factor

The Czech Republic is a liberal and highly democratic country. Due to some elements of conservatism, the Republic has experienced political struggle between coalition government and opposition. There was tension that was caused by the emergence of Liberal Democrats (LIDEM) (Transparency 2014). Most political parties are taken to be corrupt and this means that there is overall high level of corruption. Corruption has a negative effect to the business environment. The republic has not yet ratified the use of Euro because even though it is a member of the European Union it is yet to join the monetary union. This was an important step taken by the Czech government because it insulated it to some extent from the 2008 financial crisis (Malhotra 2009).

Economic Factor

By the end of 2017, Gross Domestic Product (GDP) of Czech Republic is projected to reach US $279.8 billion. The economy grew at 5% during the period of 2002 to 2007. It also witnessed increased growth of about 6.8% during 2006. The growth has been majorly contributed by rise in net exports, gross capital formation, and increase in private consumption. Czech Republic has a minimum wage is GBP 267.5. The expenditure on food by the Czech public is about 15% of their annual income. The people of Czech republic are price-sensitive and hence they discounts and promotional offers greatly influence their purchase decision (Alza.cz, 2014). However, there has been slowdown in economic growth because of European economic crisis. For instance, in 2007, the economy decelerated to 6.1% while in 2008 it slipped further by 2.5% marginal difference. There is however, good economic prospect because of global economic recovery and revival of the economy by the Czech Republic (Caves 2007). The government undertook several fiscal measures, which in return saw the economy experience moderate growth of 2.3% in the year 2010. The economy was further projected to grow by an average of about 3% during the 5-year period between 2012 and 2016 (Rugman & Collinson 2008).

Social-Cultural Factor

Czech Republic has experienced a very modest and stable economic and political environment over the years and this has resulted in drawing foreign domestic investment (FDI). The Czech Republic is embedded with a rich and diverse culture that acts as an attraction for international investors; hence, it is capable of accommodating people from different culture (CzechInvest 2014).

Czech people have an eating habit that is peculiar in that they love taking heavier breakfast that comprise of bread, ham, and cheese. In the recent past there have been health concerns, which has seen many people change their eating habits. White bread has been declining as people have shifted to eating brown wholegrain bread. Supermarkets selling breads have seen rise in consumption in bread and other wheat products. Ergo, the current business model of Sainsbury is likely to fit positively with the needs and expectation of the people of Czech Republic (Daniels et al 2008).

Technological Factor

Czech Republic has advanced technology in nuclear generation. The nuclear technology has capacity of generating about 30% of the electricity needed by the Czech Republic. The total electricity produced in Czech exceeds the power needs by 10 Terra Watts-Hour. The electricity is produced by power plant combustion of coal, which produces about 65.4% of the total electricity. The remaining electricity of about 4.6% is produced from renewable sources such as wind and solar energy. Temelin Nuclear Power Station is the largest nuclear plant in Czech Republic. Dukovany power station is another nuclear plant with moderately large production capacity (Rugman & Collinson 2012). This is a reassurance of reliable power supply thus eliminating the extra cost on running using alternative energy because of frequent power disruptions. Many Universities cooperate in scientific research where there has been high number of research centers established within the Republic. These research efforts have paid well in the past and many scientists hope that the level of scientific innovation in the Republic is very promising. For instance, the modern contact lens is the invention of the Czech Republic. Scientists have also broken new grounds in the ability of separating various blood types. Another important invention made by the Czech Republic scientists is the production of plastic explosive known as Semtex (Verbeke 2005). Collectively, it means Sainsbury is posed to reap from technological advancement within the country and more importantly, it is expected ensure its business processes are technologically oriented.

Environmental Factor

The country has made huge strides in environmental sustainability. Public attitudes have been increasingly changing towards going green. The waste management efforts by the public and the government have been tremendous in ensuring environmentally friendly approaches. Recycling has been a major area where growth has been witnessed in the Czech Republic. It has come from 1% to 16% over the last 10 years (CzechInvest 2014). Consequently, Sainsbury will be expected to uphold environmental conservation practices.

Legal Factor

As a member of the European Union, Czech Republic has one great advantage for new and old companies that deal in retailing mostly of food products. There are no regulations on foods import and exports from countries within the European Union. This means that there is free movement allowed in food sector. However, there are some regulations governing food safety during transportation that ensure all food items are properly labelled and tagged (Durand & Wrigley 2009).

Competition in the Food industry in Czech Republic

Food industry in Czech Republic has four major competitors that comprise of Bona Vita, Nestle, EMCO, and other small and medium private firms. To begin with, Bona Vita Company deals in children products. Some of the outstanding products of this company include bio products such as cereals that are used by diabetic patients, whole grains, pasta, some cereal drinks. They are the main competitor that Sainsbury PLC will have to face in the Czech Republic because most of their products are readily available in the chain stores. Ergo, they have large market share of the food industry in the Czech Republic. They charge fair prices for a wide range of products (BonaVita 2014). Second company that will offer competition to Sainsbury is EMCO Company. This company operates only within the Czech Republic that has no international affiliations. It deals especially in oats products such as oatmeal and muesli snacks. EMCO alongside Nestle are the key competitors dealing with oatmeal. Moreover, EMCO production of children oatmeal is never sufficient for the Czech market, which is an opportunity that Sainsbury can tap (EMCO 2014). The third potential competitor of Sainsbury is Nestle. It is large multinational company with massive capital base coupled with a huge market share. It sells its products at a relatively high price considering it offers top-notch quality (Garzaro, 2016).

Summarily, the Czech Republic has a favorable external environment that can be conducive to the business of Sainsbury Plc. The next logical step is to analyse Sainsbury internal strengths and weaknesses vis a vis Czech’s business environment.

Sainsbury’s SWOT Analysis

SWOT analysis focuses on internal strengths and weaknesses as well as external opportunities that are available and threats facing a business organisation. SWOT analysis is important because it gives the idea of the organisation’s current standing in the market. This will inform the Board of Directors on areas they can capitalize on and weaknesses they can eliminate to reap maximum benefit from its subsidiary in Czech Republic (Whitelock & Jobber 2004).

Sainsbury Company Profile

J Sainsbury PLC is one of the leading retail supermarkets in the UK. It has largest market share after Tesco Company. Its other rivals include Asda and Morrison whom both have a considerable size of the market share. It deals with a wide range of products from groceries to financial services to sale of smartphones. Its retail stores are in the form of supermarkets, convenience stores, as well as superstores. Sainsbury group also includes Jackson stores, Bells stores, JB Beaumont and Sainsbury Bank (Sainsbury, 2015). The customer base of Sainsbury is about 6 million customers per week, which translates to about 17% of the market share in United Kingdom. In 2015, the company was able to generate arevenue £ 23.775 billion, resulting to an operating income of £81 million, and a net loss of £ 166 million. The record-breaking loss was attributed to stiff competition within UK’s grocery market. The most popular products offered by Sainsbury include groceries, fuel, consumer electronics, and clothing among others. It also has loyalty scheme known as Nectar card, which has enrolled over 10 million users (Sainsbury, 2016).

Porters Five Forces Framework

According to Roy (2009), the Porter’s analytical tool is used in the identification and analysis of market forces in relation to the way they affect the performance of a business organisation

Strategy Formulation

According to Hill et al (2010), the distinct traits of a business and even the target market largely influence the formulation of the strategy that will be applied. Through use of three analytical tools, this report has established that the Czech Republic is a suitable market for Sainsbury and that the company itself is in a good position to venture into this new market, which will be of greater benefit since it will enable the company to generate more income. The Ansoff’s matrix as illustrated in the image below shows four alternative entry strategies that can be adopted by Sainsbury in its launch into the Czech market.

Market Development: Sainsbury can develop its market by introducing its own stores into Czech republic. This will mean it will retain full control of its operations and that it will able to fully remain in charge of the management process. Ergo, it will be able to protect its brand image, level of service quality, and even customer care (Malhotra et al, 2009).

Product Diversification: Sainsbury can also develop new product for Czech market segment. This can be done through market research to ensure that the product introduced matches the market. It can introduce banking segment or cereal food stores as form of product diversification. However, this will be an expensive undertaking and it will delinking for the already developed strong brand reputation (Brennan, 2008).

Market Penetration: According to Pitts & Snipes (2015), this strategy willl entail Sainsbury penetrating further into the markets where it already operates. This will meanundertaking new promotional efforts such as intensive marketing, introduction of offers and discounts. This is likely to bear minimal results since the level of competition in the UK market is already intensified, therefore, to pentrate further into the market, Sainsbury will incur an additional operationing cost with no gurantee of massiv return.

Product Development: According to Hussain et al (2013) this strategy will require Sainsbury to develop new products for its existing markets. This strategy will also be faced with stiff competition from its arch rivals, which will make the process quite expensive with minimal guranteed return.

Conclusion

This report conducted strategic management analysis using SWOT, Pestle and Porter’s Five Forces analyses. The analyses revealed that Sainsbury will potentially face heavy competition from other player in the Czech Republic. These analyses also identified that Sainsbury has opportunity in venturing into international market and therefore the report suggest that Sainsbury should venture into Czech Republic through capitalizing on its strategic management practices as well as tapping onto the opportunities that exist in the Czech market (Rigby 2012). Strategic formulation for selecting appropriate entry strategies for Sainsbury’s was also carried out using Ansoff’s matrix of which the most suitable option was market development, which entail employing large scale investment into setting branch locations as a means of entering the Czech market (Sakarya, Eckman & Hyllegard 2007).

Recommendation

According to the analyses and the strategy formulation, this report recommends that Sainsbury should proceed to identify suitable real estates that it can purchase in order to avoid paying huge monthly rents and thereafter open up branch locations. More importantly, it should put into consideration the factors affecting the external environment while developing the business model and practices that it will apply in the Czech Republic.

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