Entry Mode

knowledge and experience as a valuable, unique, and hard to imitate resource that can be used to distinguish Arla from its competitors. Due to Arla Foods previous and current arm‟s length agreement to serve the markets in SSA via low intensity in investment, Arla Foods exploits its tangible assets, its technology among others, to produce high quality processed dairy product in its home markets (and other locations where production is taking place). For this reason, Arla is expected to acquire much of its intangible knowledge of the market, industry, competitive setup and institutions insight via its export intermediary, but also through its visits to the markets, which are necessary to determine the actual potential and market conditions. Moreover, market research of the region, primarily carried out by Global Ingredients, adds to the more measurable factors to determine the market, industry potential and challenge. However, also highlighted by Arla Foods the lack of available market data and uncertainty about the markets, makes it more complicated to assess the markets.

In the SSA market, Arla has increased its involvement in both Nigeria (Global Ingredients) and South Africa (Consumer International) during recent years, as elaborated upon in Arla Foods‟

previous experiences in SSA (chapter 5). In both countries, it is therefore expected that Arla has built up year-long partnerships with agents and distributors, and in the customer-base built up a reputation for providing high quality products, which has allowed them to charge relatively premium prices for its products. However, the partnership asset and reputation asset are expected to be largest in scope in these two markets where Arla Foods has the strongest commitment in SSA and as a consequence is also carrying out the most supporting marketing activities. Further, Arla Foods‟

previous internationalisation path in emerging and developing countries has been seen with a step-wise entry within selected markets, and in general it has not taken on high risks in markets that are not part of the strategic markets.

Collectively, it can therefore be difficult to confirm the ownership advantages that Arla Foods may at present stage exploit in SSA and make (partly) reason for an equity investment with full or absolute control.

Moreover, in SSA Arla Foods has to compete with local and global established brands in acquiring ownership advantages. As a consequence, this competition exposes brand premiums and can create more vulnerable market positions, because these brands have considerably stronger presence and

This situation is emphasised in the emerging market literature, which underlines that the only long-term viable solution for companies without (strong) operational experience from LDCs is to acquire local brands. These local brands are then again positioned alongside companies‟ existing global brands. However, this would require a willingness on Arla‟ part to pursue higher investment and consequently higher risk.

The institutional setting in sub-Saharan Africa consists of a combination of elements that both promote and hinder the upgrading of Arla‟s existing resources and capabilities. According to the theory, both formal and informal institutions influence companies in their decision to pursue equity investments. Given that local industry is often favoured by governments, high tariffs are added to imported goods. However, as pointed out earlier in the analyses, protectionist policies are expected to diminish alongside the economic liberalisation process that takes place across sub-Saharan Africa.

However, poor infrastructure and heavy bureaucracy is something Arla Foods has to face in this region.

Given the complexities of operating in LDCs in general, and SSA in particular, a lower intensity in investment could be beneficial to reduce risks. However, it would also require lesser control over production and quality measurements. Developing partnerships with local actors may become necessary to work around the institutional voids that exist. As pointed out in the literature, the institutional voids make it particularly difficult for foreign companies to acquire adequate knowledge of the markets on their own. Further, in situations where formal institutions fail, the informal mechanisms come into play, making local partnerships valuable. An actual choice of entering into alliances, on the other hand, involves more control over assets. Market entry with local partners is therefore merely the chosen entry mode when government regulations require a certain degree of local ownership (which is seen in China). Further, entering into a partnership would require a larger degree of risk willingness from Arla Foods.

Given the external and internal factors Arla Foods might not be willing to take on a high risk at this state, which is also supported by its previous internationalisation modes and also its overall strategic focus on markets outside SSA. Although the market potential for Arla Foods in SSA has been clearly identified it is not unconditional. Due to Arla Foods‟ previously choice of arm‟s length agreement and entry, the markets in which Arla Foods is currently present might still be relatively unfamiliar and very unfamiliar in the new markets. Collectively with the institutional voids the

external and internal factors push for an entry strategy that focuses on a slow step-wise approach in order to minimise risks. This is also in line with the principles of the Uppsala model, which explains companies‟ internationalisation through a slow, step-wise, incremental market approach in step with the development of knowledge and capabilities about the markets. The point is exactly that this model is unique in seeking information about a market specifically which is based on experiential knowledge. In this way it is possible to ensure sufficient flexibility to further commit to the market or scale back investment as prospects alter.

Linking to a contractual entry mode via export with local distributors and agents with knowledge about the markets and institutions therefore seems like the most appropriate, low risky entry for Arla Foods to follow at present stage. To continue to pursue an export strategy can also be an economic way to test markets (especially the one Arla is not currently serving) without committing too many resources up front. However, significant investments in marketing are required, which are low in SSA. Further, manufacturing in home-based is consequently less risky than overseas-based and in general Arla has the opportunity to learn more about the markets before pursuing a higher risk.

Further, a distinction has also to be drawn between passive and aggressive export. A passive exporter awaits orders or comes across them by chance; an aggressive exporter develops marketing strategies which provide a broad and clear picture of what the firm intends to do in the foreign market. Arla Foods should aim at a more aggressive export strategy to develop its business in SSA.

The disadvantage by using export intermediary is mainly that Arla has lack of control when using an export intermediary, which has to be weighted against the advantages. It is therefore important not to underestimate both the challenges and opportunities of developing successful long-term partnerships with the right local partners. The main advantage of distribution agreements is that they require a limited amount of resources from Arla; the difficulty is however Arla Foods‟ lack of contact to the market and the conflict of interest that can emerge when sales reach a certain level.

Following the argumentation above, the literature grants failures in non-traditional markets to miscommunication with distributors rather than institutional voids. Arla Foods has so far granted distributor control over several activities, because of their knowledge and connections in the market.

With increased attention to the importance and development of collaboration with local distributors and agents, Arla is likely to be better equipped at understanding the local market as well as share

knowledge and ideas to ease communication and increase sales. Arla therefore ought to maintain high standards and requirements when selecting its distributors and agents.

A summary is presented below. It summarises the variables, which influence Arla Foods‟ choice of entry mode, which consist of external and internal factors. It gives a clear overview of the possibilities that Arla Foods have.

Entry Mode potentials and challenges in sub-Saharan Africa

Influencing factors Potentials (+) vs.

Challenges (-) Assessment

Ownership advantages to pursue

equity investment

-/+

which to some degree gives less contact and experience about the market. No sign of willingness of pursing a high risk investment at current stage/Has built up reputation assets and export intermediary relations

Competition to acquire ownership

advantages

-/+

Opportunity to acquire local brands Internationalisation through

incremental steps, start off with export

+/

Contractual agreement with local

and regional intermediaries

+/-

Aggressive export

+

group. Low costs in marketing