6. What Entry Strategy should Arla Foods pursue in sub-Saharan Africa?
6.1 Why should Arla Foods consider entering sub-Saharan Africa?
6.1.4 Previous Experience
The major supermarkets in the region have introduced private standards into their procurement strategies to ensure certain quality levels of their products (Luow 2008: 2-3). This is of importance to Arla, since quality is the pride of its business.
The table below provides an overview of the possibilities and challenges that lie in Arla Foods‟
business potential in SSA seen from the industry and competitive perspective, which consist of a mix of external and internal factors as highlighted in the analytical framework.
Industry & competition potentials and challenges in sub-Saharan Africa
Influencing factor Potentials (+) vs.
Challenges (-) Assessment
Demand levels
+
The demand level outgrows local supply, which makes the industry dependent on imported dairy productsImport levels
+
Rising demand for imported dairy products as a consequence of low local supply and growing purchasing powerFirst mover/follower potential
+/-
Potential to serve a new product market/Competition from global players and regional players who are already established in the marketDevelopment in supermarkets
+/-
Growing presence of supermarkets ease distribution of goods and create a demand of high quality products/ Informal markets are still dominating the distributor of food productsInternal Factors
The internal factors address the second, and last part of the analytical framework, which underlines that Arla‟s choice of entry, cannot be properly assessed by only looking at the external factors. This section therefore gives an explanation of Arla‟s internal factors consisting of previous experiences and their capabilities. A comprehensive summary of both factors and their variables will be given in the end of this section and thereby provide the answer to why Arla Foods should consider entering SSA.
revenue earned abroad. This is measured on earned revenue from increasing investments in non-traditional markets through sales offices, subsidiaries and production sites (Arla Foods 2007).
Through the organisational learning perspective and internationalisation process, companies can leverage their accumulated knowledge of one country towards entry into similar foreign markets.
This has also been the case in Arla Foods where a lot of focus has been given first to the home market, where Arla developed its business to become a dominant key player and thereafter able to develop its business in neighbouring countries (and thereby expanding its scope of home markets).
It is only within recent years that Arla Foods has opened up for investment into emerging markets such as North Africa, Russia and China and thereby becoming a stronger international player in new markets.
Today Arla Foods is targeting these growing and large markets more intensely with a relatively stronger equity type of establishment, which can be seen as a way to develop its business. The most evident examples are the investments made in China, Russia and Mexico, which can be seen as a strong market seeking investment, due to among other reasons, the large population size. A continuation of this market seeking, but also knowledge-seeking investment is likely to make Arla Foods more geared to work in a LDC context. The reason for this is that more knowledge is gained in markets where non-traditional market conditions rule (as also highlighted in the theory) and Arla thus positions itself “closer” to the market resulting in a higher risk, but with a stronger commitment, which makes them able to tap into the market faster and acquire specific market knowledge. Additionally, diversifying into new markets helps Arla to reduce its reliance on traditional home markets, which for most cases are saturated.
With the two overseas divisions, Consumer International and Global Ingredients; Arla focus‟ on different markets and different target groups, which jointly provides Arla with comprehensive knowledge on serving various needs at the various levels in the population. The divisions also have some developing country experience from North Africa, Vietnam and Bangladesh, among others, primarily through sporadic exports. Additionally, Arla Foods has experience with the sub-Saharan market (which Arla Foods‟ previous experience in SSA, chapter 5 explained) through more than 3 decades of exports with both Consumer International‟s and Global Ingredients‟ products. Here Arla has built up connections with distributors and agents to ease entry and business and at the same time minimize risk. Sales has been taken place in a number of countries across the SSA region primarily centred around the higher income groups, but also attention to the lower income groups by especially Global Ingredients has been shown in its product launch of an adapted product. Most of
its attention has been given to develop its presence in South Africa and Nigeria, because of the possibilities these markets present, which also shows Arla‟s commitment to large markets. The company will thus be able to draw on resources and competencies gained from operating in both developed, emerging and developing countries and exploit these experiences in the formulation of an entry strategy in SSA.
Moreover, the Middle East is an extraordinary case for Arla Foods, because it is one of Arla‟s key markets and has presented several challenges for the sales of Arla Foods‟ products lately due to the Muhammad crises. This made Arla Foods vulnerable because a boycott was made on Danish brands.
Consequently sales were reduced and adjustments needed to be made to build up trust and reputation to increase sales in the market again. The challenges in the Middle East have provided knowledge on how to respond to consumer responses fundamentally different from home markets.
Additionally, external exposures like the case of contaminated milk powder provided by Arla‟s joint venture partner in China, underlines that Arla needs to adjust for sudden risks and exposures in the entry and business activities when planning investments and partnerships into regions with different institutional and cultural scenarios. These experiences are however also likely to have served as a strong lesson on how to conduct business in a non-traditional market (compared to its home markets) and to respond quickly to problems so as to remain in business. It has also shown how defenceless Arla can be when being dependent on too few markets. On the other hand, external exposures like the above-mentioned examples might make Arla Foods more reluctant to further invest into emerging markets and developing countries. The risks might be perceived as too big of a burden on the company‟s reputation.
Below, you will find Arla Foods‟ potential successes and challenges outlined in terms of previous experiences. This shows the level of experience and type of experience Arla can rely on when deciding upon entering SSA.
Previous experience: Potentials and challenges in sub-Saharan Africa
Influencing factor Potentials (+) vs.
Challenges (-) Assessment
Business development experience
+
Comprehensive business developmentexperience in the development of becoming a international player
Establishment and export experience in
non-traditional markets
+
Increasing knowledge about emerging anddeveloping countries more commitment to emerging and developing countries Segmentation experience
+
With Consumer International and Global Ingredients Arla has experience of serving various customers‟ need at various incomelevels Sub-Saharan Africa experience
+/-
Decades of experience with export to SSA.Build up connections with agents and
distributors and stronger commitment to adjust to customers‟ need for adjusted products/SSA experience is to a larger degree based on the experience from South Africa and Nigeria Middle East experience