Market Entry Strategies And Macro Environmental Factors

PESTLE Analysis of the macro-environmental factors New Zealand

Discuss about the Market Entry Strategies and Macro Environmental Factors.

PESTLE is a useful strategic management tool to analyze the macro environmental factors which affect the operations of a business. Macro economic factors are those external factors which cannot be directly controlled by the company. Such factors, instead, steer the working of a company. By conducting a PESTLE analysis, the external factors are analyzed. These factors include Political, Economical, Social, Technological, Legal, and Environmental factors (PESTLE Analysis, 2016). In the following parts, various factors have been analyzed to evaluate the best market for the company Aldi to enter, as well as, the most appropriate mode of entry available to the company.
After evaluating the macro environmental factors, by conducting a PESTLE Analysis, New Zealand has been elected as the prospective market for Aldi, to expand its business. The rationale behind this decision is explained through a detailed PESTLE Analysis.
Aldi is a leader in the global discount based supermarket chain and works in the retail industry. The company is headquartered at Essen, Germany and as a result, the EU legislations influence the working of the company (Ruddick, 2013). The political environment of New Zealand is connected to the performance of the company, and the supermarket chains are also affected in the same way, as are other businesses, due to a change in climate of politics, in the country. As the country has a stable government, the business sector is able to grow steadily. Moreover, due to political stability, more and more investors are attracted to the nation, to carry on the business and trading activities. The supermarket industry in New Zealand is quite stable and as a result, there are negligible chances of a business loss.
The financial performance of any company is dependent upon the economical factors like employment and recession, as these results in lower sales and cause financial decline for the company. Since New Zealand has low unemployment rates, the financial performance of the company is expected to be favorable (Rutherford, 2016). The consumers check out the value of the product while purchasing groceries, and are moving towards the online options. This would again prove beneficial for Aldi as the company provides the online shopping services.
For any company to work, it has to identify the target market and the needs of such targeted market. Further, plans have to be developed to focus on the fulfillment of such needs. The location of any store of Aldi is a crucial decision, as the population is quite dispersed in the country. As the literacy rate of the country is nearly a 100%, the consumers are aware about the latest developments in the market (UNESCO, 2016). The banking system is very strong in the country and the foreign direct investments are welcomed in the nation. This is a huge advantage for Aldi.

5-Forces analysis

The education system of New Zealand is considered as the 7th best system across the globe (Dalgleish, 2014). This along with the high literacy rate has contributed to a progress in the fields of Science and Mathematics, amongst the students. This has ultimately resulted in significant developments in the field of technology, and in the various technical products. The high dependence on computers and mobiles has increased the online shopping and so, the chances of Aldi succeeding in New Zealand are high.

As the crime rate in the country is very low, as well as, the corruption has been curbed from the society, the basic facilities can be easily enjoyed by the natives of the country (Chadwick, 2015). Companies from the other countries are encouraged to start their businesses here. But due to the excessive lending charges payable to the government, the profit margin is decreased. Though, to cope up with this, freedom of business and trade is provided in the country which helps the foreign companies in expansion of business and ultimately flourishing in the society. The foreign businesses are provided a full legal cover, and can conduct the business without any fear of legal implications, on the activities of the company.

The 2015 New Zealand Tourism Strategy is focused on the protection of the environment, and as a result, the government of the country, is finding newer solutions to decrease the CO₂ emissions (Ministry of Business, Innovation and Employment, 2015). New Zealand has a unique ecological system. The population is well educated about the importance of environment, and is working towards removal of pollution in an effective manner. The latest technologies have been adopted to deal with the garbage, and to prevent the pollution of the atmosphere. Furthermore, new initiatives are constantly being taken up to make the country secure and free from pollution and dust.

To analyze the opportunities and threats in the firm’s industrial environment, in the chosen market, the Porter’s five forces analysis has been used.

A major threat for Aldi for establishing a business in New Zealand is in form of threat of new entrants. As this sector is highly profitable, more and more organizations are attracted towards this industry, and this creates a threat for the company. The more the number of competitors, the tougher it gets to earn the profits for the company. As a result of new entrants, the market share, as well as, profits can reduce. Though, this industry requires a huge capital investment to start up, and this does reduce the entrance of new firms in the industry. This capital is needed not only for the fixed facilities but also for operating the business (Oki, 2016). Further, the established firms in this regard already have access to the profitable distribution channels, as well as, have been established as trusted brands in the retail industry. This makes it difficult for a new entrant to enter this industry as such new entrant faces a risk of losing the invested money, due to high competition.

VRIO Analysis of Aldi’s Internal Environment

So, it can be concluded, that the threat of new entrants, in the retail industry of New Zealand, is low.

The threat of substitute creates another threat for Aldi. There are very strong competitors who offer similar services, and these include the giants like Woolsworths and Foodtown, as well as, the local supermarkets like Progressive Enterprises and New World. Having a huge number of rivals means having an availability of greater number of substitute products. Aldi has to face this threat, and as a result, is exposed to the potential reduction in the profitability, as well as, market share. The customers can easily switch between similar products, and this affects the sales, and income of any firm. The substitute products are easily available, so Aldi would have to come up with competitive, as well as, innovative strategies to attract more consumers, and to build a reputation of a trusted brand. The most important factor in the retail industry is a competitive price strategy.

It can be concluded, that the threat of substitutes, in the retail industry of New Zealand, is high.

The bargaining power of the buyers affects the prices of the products, and has the power to expand or decline an industry. The supermarket chain falls under retail industry, and in this industry, the consumers are very powerful. The strength of the buyers is quite high in the retail industry of New Zealand. Due to the high bargaining power of the customers, the companies have to decrease their prices, so as to attract more customers towards the company. There are a number of potential buyers and customers for the products. This creates an opportunity for Aldi. Even though the buyers have high bargaining power but the number of customers, creates a window of opportunity for the company. The higher the number of consumers, the higher is the chances of profit. And with the advancements in technology, the consumers have become more aware about the availability of substitutes, and the prices changed. This has again, helped in increasing the bargaining power of the buyers. So, the bargaining power of the consumer, in retail industry of New Zealand, creates fewer opportunities and more threats for Aldi.

So, it can be concluded, that the bargaining power of buyers, in the retail industry of New Zealand, is high.

Suppliers are the backbone of any retail industry. There is a presence of high number of suppliers in New Zealand. Due to this high number of suppliers in the country, the competition amongst them is quite high. This can help Aldi in attaining goods, at lesser prices. Further, the cost of shifting from one supplier to the other is quite low, as a result of the easy availability of suppliers. This ultimately helps a company, as the cost of supplies is decreased, resulting in higher profits. The weak bargaining power of the suppliers, in New Zealand, provides lower dependence on the suppliers.

So, it can be concluded, that the bargaining power of suppliers, in the retail industry of New Zealand, is low.

Aldi faces another threat in the form of industry rivalry, as there are number supermarket chains in New Zealand. These competitive rivals offer the same kind of services, and products in the market. The major competitors for Aldi are Big Fresh, Countdown, Four Square, Pak’nSave, Woolworths, and Price Chopper (Enz, 2013). And there are a number of other supermarkets too. Due to the presence of so many supermarket chains in New Zealand, the competition has become fierce to attain more customers, and a greater market share. So, Aldi would have to formulate such a strategy, so as to tap on the market share, to ensure profitability. Further, Aldi would have to attain, as well as, retain the customers to maintain proper amounts of profits.

So, it can be concluded, that the industry rivalry, in the retail industry of New Zealand, is high.

VRIO is one of the business analyzing frameworks, and forms a part of the company’s strategies. This is a form of internal analysis, which helps in evaluating the capabilities, and the resources of a company. In order to analyze the strength and weakness of Aldi’s internal environment, a VRIO analysis has been conducted.

	Valuable	Rare	Costly to Imitate	Organized Properly	Competitive Consequences	Implications of Performance
Tangible Resources
Borrowing Capacity (Steiner, 2014)	Yes	Yes	Yes	Yes	Sustainable Competitive Advantage	Above Average Returns
Smaller Stores	Yes	No	No	Yes	Competitive parity	Average Returns
Opening Hours	No	No	No	Yes	Competitive disadvantage	Below Average Returns
Lower Labor Cost	No	No	No	No	Sustainable Competitive Advantage	Above Average Returns
Proper display of Products to improve efficiency (Creevy, 2010)	Yes	Yes	No	Yes	Temporarily Competitive Advantage	Above Average Returns to Average Returns
Use of Manual System	No	No	No	No	Competitive disadvantage	Below Average Returns
Differentiation of Product	No	No	No	No	Competitive disadvantage	Below Average Returns
Financially Rich Parent Company	Yes	Yes	Yes	Yes	Sustainable Competitive Advantage	Above Average Returns
Intangible Resources
Amongst the largest food retailers across the globe	Yes	Yes	Yes	Yes	Sustainable Competitive Advantage	Above Average Returns
Provides shopping bags and charges $2 as deposit for shopping cart (Aldi, 2016)	No	Yes	No	Yes	Competitive disadvantage	Below Average Returns
Lower number of non-specialized employees	No	No	No	Yes	Competitive disadvantage	Below Average Returns
Reputed Customer Service	No	No	No	No	Competitive disadvantage	Below Average Returns
Properly trained area managers	Yes	Yes	Yes	Yes	Sustainable Competitive Advantage	Above Average Returns
Good relationship with suppliers (Kohler, 2015)	Yes	No	No	Yes	Competitive parity	Average Returns
Capabilities
Salary of employees above average industry rate (Cronan, 2014)	Yes	Yes	Yes	Yes	Sustainable Competitive Advantage	Above Average Returns
Buying Power (Felsted, 2014)	Yes	Yes	Yes	Yes	Sustainable Competitive Advantage	Above Average Returns
Distribution Capability	Yes	No	No	Yes	Competitive parity	Average Returns
Uniform prices across the countries	Yes	Yes	Yes	Yes	Sustainable Competitive Advantage	Above Average Returns
Good quality products at lower prices	Yes	No	No	No	Competitive parity	Average Returns

From the above analysis, the strengths and weaknesses of the firm have been evaluated. Some of these support the expansion plan of Aldi into New Zealand, whereas the others present a challenge for this expansion. The strengths of the company include the superior competency of the company, as well as, the sustainable competitive advantage, which helps the company in earning above average returns. The tangible, intangible resources, as well as, the capabilities which result in below average returns for Aldi, are the weaknesses of the company. In order to enter the market of New Zealand, Aldi would have to improve upon these below average returns factors. The factors that enable above average returns are the strengths of Aldi, and it has to ensure to formulate such strategies, which tap these strengths, in the market of New Zealand. The company has successful operations around the globe, and so the company does not have financial constraints to enter the market of this country.

The tangible resources of the company constitute mostly of above average returns, and this is a good sign for the company as this showcases the strength of the company. At the same time, the tangible resources in the form of differentiation of the product, and the use of manual system attain below average returns for Aldi, and contribute to the weakness of the company.

The intangible resources provide below average returns in the majority and hence, these can be considered as the weakness for the company, which would create difficulties for the expansion of the firm in New Zealand. Before entering the markets of New Zealand, Aldi would have to formulate strategies to improve upon the below average returns factors. So, the intangible resources of Aldi, have to be improved to ensure success in New Zealand.

The biggest strength of Aldi can be seen in the capabilities part of the internal environment of the Aldi. This segment provides the most above average returns. Furthermore, there are no factors which produce a below average return for the company. Hence, the capabilities of Aldi would be the biggest supporter for the company, while entering the markets of New Zealand.

To enter into the markets of New Zealand, three broad categories are available. These include export, direct or indirect; contractual in the form of turnkey projects, licensing or franchising; and investment mode in the form of joint venture or wholly foreign-owned enterprise (WFOE) (Osland, Taylor and Zou, 2001).

Export refers to such an act of by a company, through which such company sends its products to the other country. This is the safest mode of entering a new market, as the risks are comparatively small. Further, by exporting, the sales can be expanded, and benefits can be reaped, not only because of increased market share, but also because of achieving economies of scale. In Direct Export, the produces sell their products directly to the importers (Trade Start, 2016). In these cases, the requirement of knowledge about the foreign market is negligible. In Indirect Export, the products are sold in the foreign market through export agents.

The next mode of entry is the contractual mode. In turnkey projects, the foreign company exports its processes and technologies to another country, by establishing a plant, in the other country. A contractor is hired by the companies in the target market companies (Peng, 2016). This turnkey contractor is responsible for construction, design, installation, as well as, maintenance of the plant. On completion of the contract, this foreign company hands over the “key” of the project, and the project is considered as ready for operation. This method helps in gaining profits without political interferences. But the major disadvantage of this method is the risk of revealing secrets of the company to the rivals.

Licensing is a contractual mode of entry in which the licensor (the company) grants the licensee (the foreign company), the right to use all or a part of the intangible properties in form of trademarks, copyrights or patents. This method is a speedy way to enter a market, and helps in marketing of the brand of the company (Nagel, 2012). Though, it is hard to monitor the patterns of foreign markets, as well as, to enforce the licensing agreements.

In franchising, a firm (franchisor) transfers the concept of the business, which is already established, with related operational guidelines, to a foreign party in exchange for a fee. A high level of trust has to be established in this mode. The franchisors have the responsibility to improve the product mix, to promote the brand in the host nation, and ensuring the quality of the outlet (Nisha, 2016). The famous examples of franchising include KFC, McDonalds and Dunkin’ Donuts.

The investment mode has two options, the joint venture and WFOE. A joint venture is a type of strategic alliance, in which two or more parties, pool their resources together, to fulfill the desired task. In a joint venture, one of the entities is the operating entity, looking forward to the expansion of its business activities, by entering a new market. This mode is selected to enter into a competitive multi-domestic market or a competitive global market. By forming a joint venture, with such a firm which already has the necessary infrastructure to manufacture the products in the targeted market, the venture is usually successful. Though, these partnerships require greater commitments, in terms of resources and time, in order to develop an effective working relationship, as well as, trust with the local company (Shishido, Fukuda and Umetani, 2015). A high level of control can be maintained in this form of partnership, and the benefits of the goodwill of the partner of the home country, can also be reaped in this form. Though there are high chances of conflict of interest, whereby one partner may hold the business back for their own profits. The lack of equal commitment from both the parties is also a source of disadvantage.

The last and the best suitable mode of entry for Aldi is the wholly foreign-owned enterprise or WFOE. WFOE is a private and a limited liability type of company, which is completely and fully owned by a foreign company (New Zealand Trade & Enterprise, 2016). WFOE provide greater efficiency and market control, as well as, control of the customers. Though, this mode requires higher risks, as the costs of investments are high and the chances of returns are uncertain.

WFOE can be further classified into acquisition mode and the Greenfield investment mode. In an acquisition mode, two companies are combined, from different nations, in order to form a new legal organization (Buckley and Ghauri, 1999). The assets of the local company are acquired by the foreign company, and both the companies continue to exist. In Greenfield investment, a completely brand new subsidiary, in the targeted market country, is established to carry on the business activities. In this form, the new company is a clone of the parent company, with exactly same structure and strategies (Trakman and Ranieri, 2013).

The most suitable mode for Aldi is the Greenfield investment. Greenfield investment mode helps in avoiding the trade restrictions in new market countries. As analyzed above, New Zealand has free trade policy and so, when Aldi enters the markets of New Zealand, by using this mode, it would not have to face any trade restriction.

Another advantage of this mode is the lower costs of transportation, as well as, an avoidance of being affected by the fluctuations of the foreign exchange rates. Aldi has had successful operations in many nations, and so it is aware about the most suitable entry strategies to attain and retain customers, as well as, tap on the low bargaining policy of the suppliers. By utilizing the capabilities of Aldi (as analyzed in segment 3), the expansion strategy, by use of Greenfield investment, would prove the most beneficial for the company.

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