The Mirage of Global Markets, Essay Example

Executive Summary

The below paper is designed to provide recommendations for the management of Airborne, a New Zealand based natural honey producing company for international expansion. The task of the researcher is to determine whether the Finnish or the Indonesian market is more favorable for the company’s market expansion, and to establish a market entry framework that reduces risks and fully exploits the new market’s opportunties. The below research of the two countries’ internal and external market conditions revealed that the Indonesian market provides Airborne greater opportunities for long term growth and expansion, and its market conditions, location, political, and regulatory environment will help the company achieve its long term strategic goals better than the expansion to Finland. The comparison of the two countries’ market scale, economic growth potential, and competitive environment, as well as profitability revealed that while entering the Indonesian market is not without risk, due to the high level of international competition, the risks could be reduced through the careful selection of market entry mode: engaging with independent specialty food distributors.

Introduction

The below research is designed to assess the attractiveness of two target countries where Airborne is considering expanding to, and compare the market conditions in order to provide recommendations for the management. When comparing and contrasting countries, it is important to consider external and internal market conditions, and the opportunities for the company in each country to build valuable competitive advantages. The author of the current research will focus on reviewing the current competencies of the company, its ability to adopt to various market conditions in the given country.

Airborne Honey is the oldest honey manufacturing company in New Zealand, with strong research background, supported by universities and laboratories (New Zealand – China Trade Association, 2013). It has been producing honey for over a hundred years. Some of the main strengths of the company are: strong commitment to quality, research experience, and reliability.  Located in Leeston, the company has recently  decided to expand its markets to China, and increase production for international markets. The company currently has importers in the following countries: Australia, Canada, China, Hong Kong, India, Japan, Kuwait, Malaysia, Poland, Saudi Arabia, Taiwan, Singapore, Thailand, the United Kingdom, and the United States (Airborne, n.d.).

Airborne has several honey products designed for different uses. Floral honeys are produced in a controlled environment, containing only one type of pollen. The varieties include clover, manuka, rata, and thyme. Health honeys are likely to attract the more affluent customers worldwide, and they are proven to be high in antioxidants and  prebiotics, supporting a healthy digestive and immune system. Honey lozenges are designed as alternatives for cold tablets, and are made entirely  of honey, and the process of manufacturing is patented. Finally, comb honey, made of beeswax, and can be used as a spread.

According to the New Zealand Food & Beverage Directory (n.d.), the company has one location, and 20 employees. Given the high production level and the previous expansion to international markets, it is likely that the company realizes a high profit margin, due to the low cost of overhead and production. However, in order to realize further profits on international markets, it is necessary for Airborne to screen the target markets and determine a framework for developing a market entry strategy.  The below market entry analysis will compare and contrast the opportunities and risks associated with entering the Finnish or Indonesian market.

Prior to researching the market entry models and the target countries’ market characteristics, it is important to create a SWOT analysis for Airborne.  The completed graph is found below.

Market Entry Analysis

According to Timmer (2008, p. 15), “companies become committed to international markets only when they no longer believe that they can attain their strategic objectives by remaining at home”. One of the main reasons why Airborne is planning to expand to further markets is to increase its international presence, production, and revenues. Therefore, it is important to determine which market would be able to serve the above organizational goals the best. Therefore, it is important to review the characteristics of the two markets, and analyze their profitability.

Looking at the history of Airborne with expanding internationally, it is evident that the company is actively seeking official distributors to partner with. This indicates that the management of the honey manufacturer is looking at options where the cost of entry is low, and profit is shared between distributors and the manufacturer.

Before looking at the two countries  individual market characteristics, it is important to review the global trends in honey consumption. A recent paper by Batt & Aijun (2012) describes the most important factors that influence customer behavior. Taste and flavor was the most important factor of customer decisions, followed by the size of the packaging, brand reputation, and convenient packaging. This means that reputation of the company  had a significant impact on buyers’  decision on purchasing honey.

Screening

The below section of the paper will review the market size, competition, consumer characteristics, and external (political, economic, and regulatory) environment of the two countries. From the introductory part of the analysis, it has been determined that the right market entry model, due to its cost implications and low risk would be exporting, instead of licensing, franchising, or joint ventures. According to Twarowska & Kakol (2013), indirect exporting to countries through distributors would involve low risks, while it would not require Airborne to  become involved in the direct marketing and promotion of its products. While this strategy provides the company with limited control over sales and marketing, it is applicable for both markets being considered for export in the current report.

Finland

According to the CBI market survey (2009), in Finland, honey consumption has been rising in recent years. The per capita consumption of the country in 2003 was 0.52 kg-s, rising to 0.75 in 2009. However, given the population of Finland of 5.4 million people, the country represents a relatively small market. It is also important to note an EU trend of healthy eating. As  the CBI Market Survey (2009, p. 7) states: “consumers of organic and health foods mainly use honey as a natural nutritious alternative to sugar and for flavoring in cooking”. This means that Airborne’s traceable and honestly produced honey would attract this growing market segment in the EU. The same report (CBI Market Survey, 2009, p. 8) also states that “the increasing demand for organic honey offers good opportunities for developing country producers of honey”, however, there is a significant cost associated with becoming certified as an organic producer in the European Union. The recent EU Honey Directive (European Parliament, 2013) lists the potential costs associated with labeling and label changes recently introduced. The presence of GM pollen, nutritional analysis of the pollen, and the listing of the pollen present increases the cost of certification. It is recommended that the management – given the extensive research facilities available for Airborne – contact the EU’s relevant committee to seek clarification on the documents and tests accepted for certification.

A recent food industry market review (USDA, 2010) lists the opportunities and risks that lie in the Finnish and Swedish markets. While the report is created  to aid North American manufacturers, it is a useful resource for determining the market’s main driving forces and the strategy of potential market entry by Airborne. One of the advantages listed is market sophistication. Being a country with long democratic traditions and a free market, consumers in Finland have a good attitude towards new products and concepts. There is also a demand for value-added products on the food market, and the potential health benefits of consuming honey can increase consumers’ willingness to buy. The main challenges on the market are associated with the high cost of shipping and distribution, and the high level of competition from EU countries’ manufacturers, benefiting from tax and VAT reduction within the European Union. Regarding the regulation of the food market in Finland, the OECD (2013) report confirms that food competition regulations have been recently introduced by the government.

Looking at the trends in the food industry of Finland, the OECD  (2013) confirms that revenues rose across the industry between 2011 and 2012 by over 5 percent, due to higher prices, while the volume of sales decreased by only 0.1%. The prices of food items in Finland are relatively high, while the market is relatively small. It is recommended that the management of Airborne looks at the maximum increase of production it can realize, and considers the potential demand within Finland.

Reviewing the 4P model related to exporting products to Finland, it is clear that Finland’s affluent consumers are likely to favor the healthy and ethically sourced product. The place of distribution would be determined by the partner company, and Airborne would depend on the company’s abilities of engaging with retailers. Given the high price of food items in Finland, high profit margins could be realized by Airborne, which would need to be shared with the import firm. The promotion of the product would be in the hands of the importer, with little influence from Airborne.

Indonesia

According to the Foodexport website (n.d.), Indonesia is one of the four most populous countries in the world. This means that the country has a potentially large market. Given the fact that the GDP growth was over 5 percent in 2014, and is expected to remain  the same in 2015, it is a growing market that has a lot of potential for food exporters. On the sociodemographic angle, it is stated that the middle class of the country (just like other countries in Asia with a high growth of GDP, where Airborne is already present) is growing, and the access to international products is increasing every year.

The political environment of Indonesia is determined by the clear objectives of the government. According to the Foodexport website (n.d.), “The government has set a target for Indonesia to become an advanced country by 2025”. Further, the World Bank’s  recent report predicts that middle class will make up around 80 percent of the total population of Indonesia. The above economic and political conditions indicate that demand for food items and specialty goods is likely to rise significantly in the following decades, providing Airborne with an opportunity for long term expansion. Still, the same report states that market entry in the food industry is challenging for most Western companies, as the purchasing power of customers is low, and there is a great level of competition from Asian suppliers. Regulatory issues include the difficulties to get import  registration documents, labeling requirements in Indonesian, and smaller than usual package sizes expected by customers. Price competition is another entry barrier, as locally produced food items are usually available at a fraction of the price of imported products. Shipment and distribution costs can also make companies face high expenditures when entering this market. Urban areas, however, have some high-end customers who are looking for high quality, healthy, and organic food products, and they can be the target customers of Airborne should the management decide to enter the market.

According to Phipps (2014), Argentina is one of the main exporters of honey, and its presence in Indonesia, due to the price advantage the companies have can create a barrier of entry for New Zealand based Airborne. Indonesian sales make up 3.2 percent of Argentina’s honey export (Phipps, 2014, p. 3).

Yuningish (2015) created a full report on Indonesia’s natural honey market and industry. The author (Yuningish, 2015, p. 2) states that “local production of honey is not enough to meet the local demand. Also indication is that the consumption will be higher year by year due to the increasing awareness to consume honey as a supplement apart from as a medicine”. That statement confirms that demand for the product that Airborne is planning to market is likely to grow in the future. Domestic production of honey is also decreasing, therefore, demand for export is growing. The imported value of honey from New Zealand to Indonesia 92.000 dollars, and 196.000 in 2013. Argentina, Thailand, the USA and Australia are the greatest exporters. Overall,  the size of the import hone market in Indonesia was 8.851.165 in 2014, according to Yuningish (2015)

Overall, the main barriers of entry can be related to high price competition, high costs of distribution, and the presence of established retailers and manufacturers in the area, along with the lack of purchasing power in the country, and the high saturation of customers geographically. The main reasons why Indonesia might seem attractive for Airborne are related to the size of the market, the growing demand, and the lower regulatory requirements.

Reviewing the 4P model related to exporting products to Indonesia would provide the researcher with a more comprehensive image of the target country. The product would be in high demand in Indonesia, as the country is not able to produce enough honey to meet the needs of the local market. On the other hand, the price that Airborne could offer would need to be adjusted to  the industry’s trends and other retailers’ prices. Further, the company should be prepared for sharing its profits with the distributor. The place of sales would be determined by the distributing partner that the company decides to enter an agreement with. Promotion would be the importer company’s responsibility, and almost completely out of the control of Airborne.

Selection Based on Comparison of the Countries

Before selecting the country with the market conditions that are more favorable for Airborne’s market entry, it is necessary to review the company’s  expansion history. Through retailer collaborations, the  company is only present in two European countries: the United Kingdom and Poland. While the organic and healthy food market of the United Kingdom is relatively large, the Polish market is small. In Asia, however, the company is already present in India, Hong Kong, Japan, Malaysia, Thailand, Singapore, China, and Taiwan. This indicates that the cost of distribution to these countries in bulk would potentially still allow the company to make a profit. On the other hand, the Finnish market is relatively small, and has a limited growth  potential. It is also possible for Airborne to bulk shipments to Asian countries for a proportion of the journey, saving a substantial amount of money on  distribution and delivery.

Further, the company has limited experience with European retailers, while it has several Asian partners. The company’s relative familiarity with Asian markets would favor the decision to enter the Indonesian market instead of Finland.

Market Size

Based on the market size of the two countries, it is evident that the size of the Indonesian market is greater, and it has a large growth potential, compared with Finland’s, due to the rising GDP already discussed. Entering the Indonesian market would provide Airborne with a long term growth potential.

Retail prices and profitability

Regarding retail prices, it has been found that prices in Finland are amongst the highest in Europe, therefore, it is possible to realize high profits. At the same time, Indonesia’s  honey import has several strong players, such as Argentina and the United States, already established. It is likely that Asian countries can drive prices down due to their low production and delivery costs, creating a fierce competition in the industry. This is one of the main risks of entering the Indonesian market. Based on the above analysis of retail prices, neither of the countries are risk-free.

Decision making process

Based on the competitive intensity, entering the Finnish market is more favorable. However, the size of the Indonesian market is  greater, and there might be a gap for Airborne to fill.

Using Porter’s 5 competitive forces model (1980), the author would like to next examine the market conditions of the two countries in context. Regarding Finland, it is clear that there is a low rivalry among competitors, however, buyers have a high bargaining power. The bargaining power of suppliers is negotiable, while the threat of new entrants is high.

Competition

In the case of Indonesia, there is a high rivalry among competitors, due to the strong presence of Argentinian companies in the honey import market, and the high growth potential of customer demand. The bargaining power of customers, due to the large volumes is high, and the bargaining power of suppliers is negotiable. The threat of new entrants is high, due to the GDP growth prospects of the country.

Barriers of entry

Next, in order to determine which country is more suitable for fulfilling the company’s expansion goals, it is necessary to evaluate the two countries’  barriers of entry,  in order to successfully determine the risks associated with each decision. According to Porter (1980) , the seven major barriers of market entry are: the economies of scale, product differentiation, capital requirements, switching costs, lack of access to distribution channels, cost disadvantages, and government policies. Based on the comprehensive review of the two countries’ markets, it is evident that entering the Finnish  market would require Airborne to seek distribution channels and partners, as it currently does not have distribution centers in Northern Europe. Government policies and EU regulations related to labeling, registration, standards would also create a barrier of entry in the Finnish market. Provided that Airborne decided to enter the Indonesian market, it would face different barriers of entry. Economies of scale, just like Indonesia require large scale market entry, which might not be feasible for Airborne. As Porter (1980) confirms, newcomers on the market almost always have a cost disadvantage.

Recommendations

Based on the above analysis of internal and external market conditions, it is recommended that Airborne enters the Indonesian market by seeking a collaboration with a local importer of natural honey products. One potential partner in the area, based on internet research might be Alamboga Internusa. The company is family-owned, and has established marketing and distribution channels. It specializes on importing goods from Australia and New Zealand, and has offices in Jakarta and Bali as well. Focusing on the expat consumer market would potentially be beneficial for Airborne when entering Indonesia. Further, the company has an established healthy and organic range (Alamboga.com, n.d.), with coconut sugar, honey, and jams. It is advisable that the Airborne contacts the company seeking advice on the size of the market, the potentials of introducing the healthy range products, and sets up a collaboration with the management.

Given the fact that the Airborne would not need to move production to Indonesia, complete market research, or take care of marketing activities, the above described solution (using any company as a distributor and importer) would carry low risks. Risks can further be eliminated if the company finds a distributor that has an extensive knowledge of the local market.

Risks involved

The main reason why entering the Indonesian market was found to be more profitable, and the one that has the greater growth potential. Provided that Airborne is looking to expand its operation long term and grow production, as well as its profits, and the low cost of market entry, due to the partnership and indirect export approach, it seems like the company would be able to succeed in Indonesia.

Entering developing economies, however, calls for an advanced strategy. Even though the company has previous experience in similar economic conditions, such as India and Taiwan, before completing a detailed recommendation for the management, it is important to review the related frameworks and strategies, in order to adapt them to the current situation.

Difficulties with entering international markets

Arnold (2004) talks about the profitability issues of developing markets, and the potential methods of overcoming this difficulty. As the author (Arnold, 2004, p. 1) confirms: “profitability in international markets has lagged behind average firm profitability for much of the last two decades”. This – according to the author – is because many companies focus on revenue growth, instead of long term profit growth. Without detailed calculations available about the current profit margin of Airborne’s operations, and the cost of shipping, it is difficult to determine the exact profit the company could realize. However, increasing production – provided that enough honey can be produced – might decrease the cost of making each individual product. The author also talks about reducing the risk of low profitability by reducing the cost of market entry by entering agreements with independent distributors. The cost of marketing, shipping, and distribution would be reduced this way, therefore, profit margins could be retained.

Market entry strategy

One of the main disadvantages of the market entry strategy selected for the current situation – which needs to be addressed by the company – is the lack of control over marketing and promotion. This means that the company would not have a direct influence on creating and shaping the brand image in the new country, and will have to rely on the distributor’s abilities, marketing strategy, and local knowledge. However, the market entry method carries lower financial risks than opening a distribution center in the region.

That stated, in the future, it might be beneficial for Airborne to create its own Asian distribution center, given the combined size of the Asian market, provided that the volume of orders makes it financially worthwhile for the company to handle marketing, distribution, partners, and regulatory  requirements. As Arnold (2004, p. 1) states, “if national markets in which a company participates, the more likely it is to seek to manage them as an aggregated network rather than as independent units”.  At this moment, however, it is not recommended for Airborne to open a new office in Asia, as the company only has 20 employees, and its operations are localized.

Conclusion

The author of the current study recommends that Airborne enters the Indonesian market for the following reasons, based on the comparison of the two countries’ market conditions.

Scale

The scale of the Indonesian market is larger, therefore, demand is likely to be greater. Based on the above research, the honey consumption per person in Finland per year was 0.75 kg. Given that the country has a low population of 5.4 million people, and sales volumes of food items have been decreasing in recent years. This means that the high food prices make Finnish customers consume less, and the growth potential of the market is low. In contrast, Indonesia has a large market, with a population of almost 250 million. The honey market of the country in 2014 was 8.851.165  dollars. New Zealand importers accounted for more than 3 percent of the import, and this means that the country’s honey is somewhat known to local customers.

Demography

On the demographic scale, it is also important to note that the middle class of Indonesia is likely to grow significantly in the following years, while the same trend was not identified in Finland. While currently consumer purchasing power is low in Indonesia, after the government initiatives have been implemented, focusing on strengthening the middle class by 2030, it is likely that demand of food items, due to the higher disposable income will rise. It has also been stated that the most affluent customers of Indonesia, who would be able to buy specialty healthy and organic products are located in big cities’  uptown locations. This would make distribution simple and cost-effective.

Cost of market entry

Looking at the estimated cost of delivery, it is clear that Indonesia has some clear advantages. Located around 7500 kilometers from New Zealand, it is less than half way than Finland (16.893 kilometers). Given the fact that Airborne already has a strong presence in Asia, and has an experience with Asian distributors, entering the Indonesian market would be preferable. Looking at the possibility of further expansion, it would be easier for the company to establish regional distribution centers in Asia than in Europe, where it only has presence in the United Kingdom and Poland.

There are, however, several challenges associated with entering the Indonesian market, as well, which need to be addressed by the management of Airborne prior to planning the market penetration. First of all, there is a high level of competition from Argentinian and American firms, and several reputable brands already have a strong presence in the country. While the focus of the current study and the limitations of research have not allowed the researcher to conclude a comprehensive market analysis of Indonesia, it is recommended that the company researches the competition’s marketing and pricing strategies.  In order to create a competitive advantage on the market, the company needs to explore opportunities. It is likely that the product differentiation strategy would be the right approach, which would provide buyers with added value and benefits, in exchange for a higher price paid. It is not likely that Airborne would be able to compete with large international firms on the price dimension, as they already have established distribution channels and large scale production facilities. This way, the company could increase its international presence in a cost-effective way, and plan for long term growth.

References

Airborne Honey (n.d.) Website.

Alamboga Internusa (n.d.) Website. Retrieved from http://www.alamboga.com/

Arnold, D. (2004). The mirage of global markets: How globalizing companies can succeed as   markets localize. Upper Saddle River, NJ: Prentice Hall.

Batt, Peter J. and Liu, Aijun. (2012) Consumer behaviour towards honey products in Western Australia. British Food Journal. 114 (2): pp. 285-297.

Cbi (2009) cbi market survey the honey and other bee products market in the EU. Retrieved from http://www.fepat.org.ar/files/eventos/759630.pdf

Food Export  (n.d.) Indonesia Country Profile. Retrieved from       https://www.foodexport.org/Resources/CountryProfileDetail.cfm?ItemNumber=1028

New Zealand Food & Beverage Directory (n.d.) Airborne Honey Ltd. Retrieved from http://directory.foodandbeverage.govt.nz/entries/606069-airborne-honey-ltd

OECD (2013) Competition Issues in the Food Chain Industry. Retrieved  from http://www.oecd.org/daf/competition/CompetitionIssuesintheFoodChainIndustry.pdf

Phipps, R. (2014) International Honey Market. Retrieved from      https://c.ymcdn.com/sites/ahpanet.site-ym.com/resource/resmgr/ahpa_documents/honeymktmay2014.pdf

Porter, M. E. (1980). Competitive strategy: Techniques for analyzing industries and competition. New York, 300.

SADC Trade (2006) Trade  information brief. Honey. Retrieved from http://www.sadctrade.org/files/Honey%20Trade%20Information%20Brief.pdf

Timmer, H. R. (2009). Making better market entry decisions: improving market entry decision- making at Zwanenberg Food Group for Romania.

Twarowska, K., & Kakol, M. (2013). International Business Strategy-Reasons and Forms of Expansion into Foreign Markets. In Active Citizenship by Knowledge Management &   Innovation: Proceedings of the Management, Knowledge and Learning International Conference 2013 (pp. 1005-1011). ToKnowPress.

Yuningish, N. (2015) Natural Honey. Retrieved from        https://www.academia.edu/12136292/Indonesia_Natural_Honey_Market_Review