Discuss about the Global and International Business Contexts.
This assignment is about analyzing the condition of Pakistani Soft drinks industry, as Kraft Foods Group is looking for new business opportunities overseas. In order to do that, it is required to find out the opportunities and challenges of the Pakistani market. For this reason, Porter’s diamond model is applied as the theoretical framework. There are various determinants of Porter’s diamond model that help to critically analyze the Pakistani soft drink industry. In the second part of the assignment, the advantages, appropriateness and limitations of foreign direct investment (FDI) as the entry strategy to the market of Pakistan has been provided.
Mirza and Javed (2013) mentioned that Porter’s Diamond Model is used whenever a certain company or industry wants expand its business. It has been found that Porter’s Diamond model has four broad determinants that can help a company to get competitive advantage. They are such as factor conditions, demand conditions, related and supporting industry and the firm strategy structure and rivalry. In addition, Saleem et al. (2013) stated that, there are two more dominants that can influence the four determinants of porter’s diamond model. They are such as intervention of government and the chance of events. There is a figure given below to describe the Porter’s Diamond model.
Figure 1: Porter’s Diamond model
(Source: created by research)
The factors condition includes physical resources, human resources and knowledge sources. Al these aspects have been discussed below:
Pakistan is a country enriched with different physical resources. It includes quality, cost and accessibility of nation’s land, minerals, water and other available physical traits (Malik & Zaman, 2013). In order to invest in the soft drink industry of Pakistan, Kraft Foods Group needs to analyze the accessibility and cost of land. It has been found that most of the F&B restaurants, soft drink factories and fast food restaurants are located near Lahore, Islamabad (Capital) and Karachi (Malik et al., 2013). Hence, buying or renting lands early in these locations can help the company to gain competitive advantage in the Pakistani market.
As of 2014, the population of Pakistan is approximately 187 million (Tufail & Batool, 2013). With a growing middle class, the country is ranked as the most populated country in the world. Mirza and Javed (2013) stated that, Pakistan is an attractive destination for beverage industry due to the low cost of labor and high demand of service. However, Shaheen et al. (2013) argued that there are certain challenges a company might has to face in this country. They are such as changing skill requirement, total quality management, changing skill requirement and employee involvement. Hence, in order to improve the condition, Pakistan has to upgrade and improve the HR department.
Yu et al. (2013) stated that, middle class industry of Pakistan provides significant emphasis on education. It is a significant determinant that cam improve national competitiveness of the country. For the soft drinks industry, a quarter of the total population of the country can be represented as potential market (Tufail & Batool, 2013). It will create more job opportunities and increase the requirement of trained industry professionals.
The demand of condition include various factors such as demand of soft drink industry in Pakistan, increase of middle class market in Pakistan and home demand condition.
Khilji (2013) stated that, there are certain factors like price is inversely related with the demand of soft drink. With the increase of price the demand of soft drinks increases. In addition, different lifestyle of people and their different taste about the products have also affected the demand of soft drink in Pakistan. Maqbool et al. (2013) stated that people of Pakistan are becoming busier that has increased desire of convenience food takeaways. This factor has surprisingly increased the demand of soft drinks in Pakistan (Malik & Zaman, 2013).
The country has a population of approximately 180 million, with an increasing middle class market. Maqbool et al. (2013) suggested that quarter of the population of the country represents the potential market for the fast food and beverage due to the increase of affordability. According to Shaheen et al. (2013), the increasing demand of international fast food chains like McDonalds and KFC has significant contribution in the improved demand of soft drinks purchased.
Khilji (2013) stated that characteristics of the home demand have played a significant role in the soft drink business of Pakistan. It can help to gain competitive advantage in the market. There are various notable assets that have contribution in the home demand of Pakistan. They are such as level of customer’s satisfaction and sophistication, services and features and quality of products (Yu et al., 2013). A normal cold drink buyer in Pakistan considers all these aspects when a buying a product from a certain company. Hence, considering all these points while expanding business in Pakistan, can help Kraft Foods Group to gain sustainable advantage in the market.
Bottling company
According to Malik et al. (2013), bottle manufacturing companies are the commercial enterprises that produce the output of bottling beverage for the purpose of soft drink distribution. Saleem et al. (2013) stated that the availability of bottling manufacturing organization as the supporting industry can help to increase competitiveness of the soft drink company in the market of Pakistan. Kanwal and Nadeem (2013) mentioned that, it can help to increase competitiveness of the company with the help of perceived committed value provided to all the stakeholders. Ahmad and Bashir (2013) stated that there are various bottling industries in Pakistan that are franchisees of companies like PepsiCo and Coca Cola. Naubahar Bottling Franchise is one of them. Hence, in order to gain competitive advantage in the market of Pakistan, Kraft Foods Group has developed partnership with a bottle manufacturing company. On the other hand, the company has mainly targeted youth population as demographic segmentation (Callen et al., 2013). It helped the company to increase its productivity and market share in Pakistani soft drinks industry.
Kanwal and Nadeem (2013) stated that, this dimension of the Porter’s diamond model indicates the condition that can govern how certain industries or business are created, managed and organized. It also provides the major principles of domestic rivalry. Haroon et al. (2013) stated that, in order to gain competitive advantage in Pakistan, a company has to implement favorable management practices and organizational models of Pakistan. The management of the organization also has to set objectives accordingly. It has been found that most of the middle level customers of Pakistan have started to emphasize on product quality, features and service, while purchasing a certain product. In addition, local soft drink companies of Pakistan have increased their competitiveness by means of expanding firm’s market and by means of overseas selling. For this reason, Kraft Foods Group has to continually innovate and upgrade its competitive edge to meet the higher standards related with product quality, features and services.
Saqib et al. (2013) stated that, soft drink industry of Pakistan is majorly dominated by two brands. They are like PesiCo and Coca-Cola. It has been found that the company PesiCo has entered the market of Pakistan by using franchising strategy (Ahmad and Mahmood, 2013). The company had targeted a broad segment of customers and developed a diversified product line. It helped the company to grab a majority of the market share of Pakistan (Haroon et al., 2013). The company has saved huge amount of taxes with the help of franchising entry mode. It helped the company to emphasize on advertising and promotion and increase sales profit (Callen et al., 2013).
Ahmad and Bashir (2013) stated that, depending on the chosen market scenario, the product strategy of the company has to has to follow the segmentation criteria while entering the market of Pakistan. In order to generate a significant amount of profit, certain characteristics have to be achieved (Saqib et al., 2013). They are such as substantiality, measurability and accessibility. For example, The Company Ice Cola used different process of segmentation to market its product in Pakistan. They are such as demographic segmentation, geographic segmentation and psychographic segmentation. Ahmad and Mahmood (2013) stated that, geographically, the company has targeted its products for most of the major cities of Pakistan like Karachi and Lahore.
Pakistan’s government has a very significant role in influencing four market determinants, which are factor conditions, demand conditions, firm strategy as well as related and supporting industries. The policies and legislations of the Pakistan’s government have the capability to promote or restrict the growth of the Pakistani soft drink industry. Kraft Foods Group also depends on the government’s intention to enhance the infrastructure so that they can attain competitive advantage in the global market (Mehtab, 2015).
It is expected by the economic scholars that the retail value sales of the soft drinks in Pakistan to be increased in the forecasted period. It is assumed that unlike other industries the Pakistani soft drink industry will face a tremendous amount of issues. It has been observed that the sales of the Pakistan’s beverage industry experienced a remarkable 37% growth to 172 billion rupees in the year of 2013 (Saqib, Masnoon & Rafique, 2013). However, the government imposed greater capacity tax on the soft drinks industry of Pakistan causing extra pressure on the domestic companies.
Just like every other nation, the growth and development of the Pakistani business greatly depends on the infrastructure of Pakistan. The chance of robust investment immensely depends on the efficiency, affordability and strength of the infrastructure. In addition, the Pakistani infrastructure has faced enormous pressure due to rising growth of the Pakistani soft drinks industry. Although, government has identified the importance of infrastructure improvement, the level of defective infrastructure poses an immense threat to the economic growth. In order to expand and improve the infrastructure condition of Pakistan, the government has initiated advanced development policy ‘Medium term development Framework (MDTF)’ (Haider et al., 2014). NRSP Engineers and local community members work together to identify, plan, execute and monitor physical infrastructure schemes. This process enhances the abilities of village residents to identify and plan projects and make the best uses of local resources. It also minimizes environmental impacts and ensures sustainability. Every scheme must benefit a wide range of recipients, be cost-effective and sustainable and have no adverse environmental impacts.
Chance plays a very influential role in addressing various business occurrences as well as events that lie beyond the control of organizations. It mostly depends on the respective condition on the basis of positive or negative influence of chance. The chance has a highly distinctive significance in the context of attaining competition edge in every industry including Pakistani soft drink industry. There are various notable external factors, which have greater influence in defining the competitive position of any soft drink company. For instance, Pakistan’s production cost can be considered as such influential factor (Mehtab, 2015). The abrupt hike in the production cost would definitely fluctuate the cost composite of the market position in Pakistan’s soft drink industry. At the same time, the lack of investment in R&D sector can be considered as another factor of production cost. Te competitiveness of the industry is greatly depended on the sturdy support of the research and development. On the other hand, the industry’s competitive advantage has been noted to change with the rise of disruptive technologies in the industry.
According to the latest report, it has been noticed that the chance of events for the soft drink industry in Pakistan has been quite favorable. It has been observed that the domestic demographic market has been inclined to consume soft drink in a increasing manner (Saqib, Masnoon & Rafique, 2013). In contrast, chance of events regarding the transportation infrastructure has been limited. The rising software industry as well as complimentary geographic location as also supported in the expansion of Pakistani soft drink industry.
Foreign Direct Investment (FDI) offers a great opportunity to expand the market of any given company by investing in foreign countries. The foreign direct investment can be conducted in the form of business operation establishment as well as business assets acquirement in other countries (Saqib, Masnoon & Rafique, 2013). There are various advantages as well as disadvantages of FDI in Pakistan, which is discussed below:
Pakistan’s market has huge potential considering its remarkable natural wealth and significant size of population. It offers a huge opportunity to increase the target market of Kraft Foods Group. Moreover, the purchasing power of the Pakistani citizens has increased in the recent years as the poverty level has decreased by 10%. The nation’s service and industry sectors have developed in a significant manner due to growth of its GDP in the past years. The allocation of the 50% of the countries budget has immensely encouraged the development of the Pakistan’s infrastructure and business condition (Mehtab, 2015). Pakistani government has initiated an impressive FDI attraction policy in the form of lucrative tax incentives, equal treatment of local and foreign investors as well as privatizations. It had been analyzed that Foreign Direct Investment in the country is increased by 2761.10 USD Million in 2016. Foreign Direct Investment in Pakistan averaged 2651.26 USD Million from 2010 until 2016, reaching an all-time high of 3184.30 USD Million in 2010 and a record low of 2099.10 USD Million in 2012. There is graph given below to analyze the amount of FDI in Pakistan from 2010 to 2016.
Figure 2: FDI in Pakistan from 2010 to 2016
(Source: Haider et al., 2014)
Despite of these positive points Pakistan’s FDI volume has been continuously threatened various crucial factors. The domestic terrorist organizations as well as Talban and al-Quaida pose a greater threat to the western and American companies. In addition, the taxation system, international contracts as well as government procurement has seriously suffered from high level of corruption (Haider et al., 2014). Furthermore, even though the government is looking for speedy infrastructure development, the gap is quite severe to continue an attractive business operation.
There are multiple numbers of market entry strategies ranging from new venture to merger to acquisition to joint ventures in the context of foreign direct investment. However, joint venture would be more suitable for Kraft Foods Group as the joint venture will offer a significant background knowledge of Pakistan’s soft drink market. The joint venture would help the company to share the risks and benefits of the local company. The understanding of the local market and demographic perception would also help the company to gain a proper foothold in competitive foreign market. In the current context, Kraft Foods Groups must choose a domestic company that has considerable positive brand image in the Pakistan’s soft drink industry. Shezan International Limited would be most suitable partner in the joint venture in Pakistan. The most popular product of the company is ‘Shezan Mango’ (Khan, Lee & Lockshin, 2015). One of the most successful FDI in Pakistan’s soft drink industry has been performed by Coca Cola. The company started its foreign investment with the help of joint venture process. In the contemporary days, coca cola has been popular for its successful business operation in the soft drink market in Pakistan. Coca-Cola Beverages Pakistan Limited (CCBPL) began its operations on 26 May 1996 in Pakistan. Coca-Cola Beverages Private LTD (CCBPL) is a joint venture between Coca-Cola International, Fraser and Neeves Singapore and Package Ltd. Initially it acquired National Beverages LTD Karachi. After that, the company was acquired International Beverages LTD Hyderabad .In the year of 1996 Fraser and Neeves, a Singapore based bottler of Coke, bought off the local bottlers in Karachi. Not long after it went on to acquire the bottling plants in Hyderabad as well. Since then the company has made an impressive impact on the local market by increasing its availability as well as its volume share.
Conclusion
In this assignment, the condition of the soft drink industry of Pakistan has been analyzed for Kraft Foods Group. A theoretical framework named Porter’s Diamond model has been implemented in order to analysis the factors, demands, related industry required to expand its business in Pakistan. The condition of Pakistan government and chance of expanding business in this country has been analyzed as well. Depending on this analysis, the advantages, appropriateness and limitations of implementing FDI as entry strategy of Pakistan has been discussed as well. Some examples of FDI in the soft drink industry of Pakistan have been provided in this section as well.
Reference list
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Ahmad, K., & Mahmood, H. (2013). Macroeconomic determinants of national savings revisited: A small open economy of Pakistan. World Applied Sciences Journal, 21(1), 49-57.
Callen, M. J., Gulzar, S., Hasanain, S. A., & Khan, M. Y. (2013). The political economy of public employee absence: Experimental evidence from Pakistan.
Haider, Z., Ahmad, N., Anwar, S., & Iqbal, N. (2014). Impact of foreign direct investment (FDI) on GDP: A Case study from Pakistan. International Letters of Social and Humanistic Sciences, (16), 73-80.
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