1. STRATEGIES FOR
MARKET ENTRY:
Fast Moving
Consumer Goods
Companies in
Emerging Markets
Mark Sorgenfrey
Lasse Munch
M.Sc. Strategy, Organisation and
Leadership
Academic advisor:
Mai Skjøtt Linneberg
Aarhus School of
Business 2009

2. Abstract
Multinational enterprises (MNEs) are increasing their presence in the lives of more and
more consumers as companies seek to expand and promote their products to a still
wider range of markets globally. As markets change and develop, so does the strategy
used to enter them, and companies must be able to choose the correct way to enter
markets in order to remain competitive.
This thesis takes a look at how MNEs in the FMCG industry enters new markets, more
specifically emerging markets. In order to gain an understanding of this we look at three
specific markets, namely Russia, India and China. We attempt to answer if the way
MNEs enter emerging markets is in keeping with what would be expected from the OLI
framework (Dunning 2000) as well as the work done by Buckley and Casson (1998).
Additionally we try to gain an understanding of why any discrepancies exist and
whether they can be explained by the nature of emerging markets as well as the
characteristics of the FMCG industry.
An ability to adapt and tailor specific strategies to individual markets gains more
importance, especially with regard to emerging markets, as the difficulties and obstacles
presented when entering these markets often proves both new and unique. In many
cases there are difficulties in underdeveloped markets, specifically concerning consumer
spending power and brand awareness, as well as logistics and infrastructural
inadequacies compared to western markets which serves to make the correct approach
to entering emerging markets of high importance. The methods first employed when
entering emerging markets are often unsuccessful and needs to be modified as market
knowledge is gathered and opportunities present themselves. In the three markets
analysed in the thesis to illustrate emerging markets, Carlsberg is used as an example of
a company present on all three markets. Examples of entry strategies followed by
Carlsberg in the three markets are analysed and the reasons for their success or failure
as well as the lessons learned are discussed in relation to the individual markets. In
importance, this thesis contributes to the understanding of how MNEs enter emerging
markets as well as to which challenges they face.
I

3. Contents
1 Introduction ............................................................................................................... 1
2 Problem statement .................................................................................................... 2
3 Objectives and research method ................................................................................ 2
3.1 Selection of cases for analysis .............................................................................. 3
4 Market entry modes for FMCG firms .......................................................................... 6
5 Reasons for conducting foreign direct investment ..................................................... 7
6 Internalization level and form of market entry ........................................................... 8
6.1 Transaction cost theory ....................................................................................... 8
6.2 The Resource Based View and internalization .................................................... 10
6.2.1 The Resource Based View and mergers and acquisitions ............................. 12
6.3 The OLI framework ............................................................................................ 13
6.4 Model of foreign market entry........................................................................... 21
7 Fast moving consumer goods ................................................................................... 24
7.1 Choice of the supplier side of the FMCG industry .............................................. 26
8 Emerging markets .................................................................................................... 27
8.1 Circumventing infrastructure problems in emerging markets ............................ 29
9 Market analysis of the FMCG industry ...................................................................... 30
9.1 Threat of new entrants ...................................................................................... 30
9.2 Rivalry among existing competitors ................................................................... 31
9.3 Bargaining power of suppliers............................................................................ 32
9.4 Bargaining power of buyers ............................................................................... 32
9.5 Threat of substitute products ............................................................................ 33
10 Carlsberg Breweries A/S ......................................................................................... 33
11 Markets .................................................................................................................. 35
11.1 India ................................................................................................................ 35
11.1.1 Infrastructure ............................................................................................ 37
11.1.2 Indian retail and the Indian consumer ....................................................... 40
11.1.3 Five forces analysis of the Indian FMCG industry ....................................... 43
11.1.4 The Indian beer market ............................................................................. 46
11.1.5 Carlsberg India .......................................................................................... 47
11.1.6 OLI framework .......................................................................................... 49
11.1.7 Discussion ................................................................................................. 55
11.2 China ............................................................................................................... 56
11.2.1 Special economic zones and growth .......................................................... 56
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4. 11.2.2 Current state of the Chinese economy ...................................................... 57
11.2.3 Rural-urban wage gap ............................................................................... 59
11.2.4 Infrastructure ............................................................................................ 60
11.2.5 Chinese business culture and the importance of guanxi ............................ 62
11.2.6 Chinese retail ............................................................................................ 63
11.2.7 Chinese consumers ................................................................................... 64
11.2.8 Five forces analysis of the Chinese FMCG industry .................................... 66
11.2.9 OLI framework .......................................................................................... 68
11.2.10 Discussion for China ................................................................................ 71
11.3 Russia .............................................................................................................. 73
11.3.1 Market analysis for Russia ......................................................................... 76
11.3.2 The Russian beer market ........................................................................... 80
11.3.3 Carlsberg on the Russian market ............................................................... 82
11.3.4 OLI framework .......................................................................................... 83
12 Discussion and findings .......................................................................................... 87
13 Conclusion ............................................................................................................. 95
Appendix
Appendix 1 FMCG retail markets and supplier industries
III

5. Figures and tables
Table 3.1
GDP per capita and growth rate for emerging countries.
Table 4.1
Market entry modes
Table 11.1 Market segments in the Indian market
Table 11.2 Carlsberg India’s facilities
Table 11.3 Chinese urban and rural per capita income 2000-2008 (Chinese yuan)
IV

6. 1 Introduction
This text is the final chapter of our education at the Aarhus School of Business,
University of Aarhus. As M.Sc. students within strategy, organization and leadership,
we have spent a considerable amount of time for the past two years learning about and
working with the concept of strategy. The vast majority of this time has been focused on
strategy regarding the choice of which product markets to be in as well as how to
develop these markets – not concerning which geographical markets would be worth
while pursuing and how best to enter these markets. As we find the geographical aspect
just as interesting as the product market aspect however, we decided to spend our final
semester delving into the topic of market entry strategies.
That market entry strategies should be the main topic of our thesis was not our first
thought though as we discussed the first ideas for the thesis in the autumn of 2008. We
settled relatively quickly on the idea of involving the major Danish brewer, Carlsberg,
in the thesis however. Carlsberg had at that time only just completed the joint
acquisition of Scottish & Newcastle together with Dutch rival Heineken in the biggest
foreign acquisition by a Danish firm ever made. This deal reinforced Carlsberg‟s
position among the leading global brewers and increased their activities in high growth
foreign markets as well as their dependence on these. This made Carlsberg a highly
interesting case for analysis in our perspective. Based on our desire to delve into the
topic of market entry strategies as well as our interest in Carlsberg, the idea for the
thesis thus became to evaluate the options available to Carlsberg and similar
multinational enterprises when entering high growth foreign markets as well as the
actual entry strategies pursued by Carlsberg in such markets. The thesis draws
information and data from academic articles and books, corporate websites, and news
reports as well as governmental and other publicly available statistics. Additionally, we
attended Carlsberg‟s annual general meeting in Copenhagen in March of 2009.
In importance, this thesis contributes to the understanding of the challenges faced by
MNEs in emerging markets. Additionally, it adds to the knowledge on how MNEs enter
emerging markets and on the conceivable reasons behind choosing the respective modes
of entry in different emerging markets. This is relevant due to the increasing
globalization of markets as especially western MNEs look to emerging markets for
growth as they face stagnant growth in their core markets in the west.
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7. 2 Problem statement
A great deal has been written about strategies for market entry and we will present some
of the more important contributions in this thesis in order to offer the reader an
overview of relevant theories. When it comes to entry strategies in emerging markets
the amount of literature is limited however and is often confined to investigating single
economies. This study will therefore contain a comprehensive analysis of a small
number of emerging markets in order to offer a better indication of the challenges firms
face when entering emerging markets in general.
The objective of the thesis will be to make a contribution to the understanding of the
challenges and problems associated with entering emerging markets, and why these
strategies are implemented and carried out in the way they are. The main focus will be
on the differences between what are to be expected based on theoretical approaches and
what is actually observed. In order to shed light on this subject, the thesis will analyze
three cases covering Carlsberg‟s strategy on the Russian, Chinese and Indian markets
respectively. The main question which this thesis will seek to answer is the following:
Can the choice of market entry strategies for FMCG producers in emerging markets be
explained through the OLI framework (Dunning 2000)?
Secondary question:
If differences between actual and expected market entry strategies exist, how are these
explained by the special characteristics of emerging markets and/or the FMCG
industry?
3 Objectives and research method
The primary objective of this thesis is thus to determine whether firms within the
FMCG industry follow the theories on market entry in emerging markets. That is, can
the market entries of FMCG firms in emerging markets be explained through the
theories presented in this thesis; transaction cost theory (Coase 1937, Williamson 1975;
1985), the resource based view (Wernerfelt 1984, Peteraf 1993), the eclectic paradigm
(Dunning 2000) as well as the model on foreign market entry developed by Buckley &
Casson (1998). Providing this is not the case, the secondary objective of the thesis is to
determine whether FMCG firms follow a different pattern in market entries compared to
non-FMCG firms due to the characteristics of their particular industry or alternatively;
2

8. can the differences be explained based on the differences between established and
emerging markets. In order to answer these questions, we have chosen to analyse a total
of three cases of market entry by the Danish multinational FMCG firm, Carlsberg A/S.
3.1 Selection of cases for analysis
When the numbers of emergent markets are so large and diverse the question becomes
what markets are worth taking a closer look at in order to define the problems and
challenges facing FMCG manufacturers and to test their adherence to the theories on
market entry. In this thesis we have taken the approach of looking at the three largest
emerging economies, namely Russia, China and India, who amongst them represents a
significant percentage of the world population as well as the world market. We believe
that these countries will provide an interesting view of emerging markets. In our view
their size make them more interesting than smaller markets which has less influence on
the world, since these three countries could very well be the engines that drive the
economy of tomorrow. Additionally, the three markets shows themselves to be
interesting in the context that they, despite their large size, shows significant differences
in their market structure as well as the challenges entrants and domestic companies face.
This means, that these markets will give a fairly representative picture of the numerous
challenges faced by the companies operating in emerging markets.
In addition to the above mentioned reasons for our case selection, we have further
justification for our choices. Looking at the cases in a more scientific view, we consider
the Russian, Chinese and Indian markets to be diverse cases with regard to wealth
(Gerring 2007 p. 97), which is evident by the differences in GDP per capita in the three
countries. As can be seen from table 3.1 below, the Russian GDP per capita was
estimated at $15,800 in 2008, the Chinese $6,000 and the Indian $2,800 (CIA 2009).
Russia is thus among the wealthiest third on FTSE‟s list of emerging countries (FTSE
2009) and given the market‟s size and Carlsberg heavy involvement in the country, it is
as a result a logical case to include in our analysis. At the same time, Russia has shown
considerable growth in recent years and is part of the upper third of the emerging
countries in terms of growth.
China is on the other hand part of the lowest third of emerging countries when it comes
to GDP per capita. China is however likely to advance on the list in the coming years as
it has the highest GDP growth rate of all the emerging countries, and has sustained this
3

9. growth rate for a number for years. For this reason, we consider it fair to use China as
our median case, also because Turkey is the only market among the middle third where
Carlsberg is active and we do not consider Turkey particularly interesting compared to
China. This is primarily due to its more limited size, GDP growth and market potential
compared to China.
As stated, our final case is the Indian market. India is like Russia and China among the
upper third of the emerging countries in terms of growth, but it is however also the one
with the second lowest GDP per capita, only slightly superior to Pakistan. These facts
combined with a population in excess of 1.1 billion people and a very low consumption
of beer makes India an intriguing case for analysis.
Table 3.1 GDP per capita and growth rate for emerging countries.
Rank Country
GDP per capita Country
GDP growth rate
1
Taiwan
$31.900 China
9,8%
2
Czech Republic
$26.100 Peru
9,2%
3
South Korea
$26.000 Argentina
7,1%
4
Hungary
$19.800 Egypt
6,9%
5
Poland
$17.300 India
6,6%
6
$15.800 Indonesia
6,1%
Russia
7
Malaysia
$15.300 Russia
6,0%
8
Chile
$14.900 Morocco
5,9%
9
Mexico
$14.200 Pakistan
5,8%
10 Argentina
$14.200 Brazil
5,2%
11 Turkey
$12.000 Malaysia
5,1%
12 Brazil
$10.100 Poland
4,8%
13 South Africa
$10.000 Philippines
4,6%
14 Colombia
$8.900 Chile
4,0%
15 Thailand
$8.500 Czech Republic
3,9%
16 Peru
$8.400 Thailand
3,6%
17 China
$6.000 Colombia
3,5%
18 Egypt
$5.400 South Africa
2,8%
19 Morocco
$4.000 South Korea
2,5%
20 Indonesia
$3.900 Taiwan
1,9%
21 Philippines
$3.300 Turkey
1,5%
22 India
$2.800 Mexico
1,4%
23 Pakistan
$2.600 Hungary
-1,5%
Countries in italic type are Advanced Emerging Countries
Source: CIA 2009 and www.ftse.com
4

10. When using the diverse case selection method, the chosen cases should in combination
be somewhat representative of the population due to the selection of high, low and
median value cases. It is should therefore also be fair to say that diverse case selection is
often more representative than other forms of case selection as it encompasses a greater
range of variation (Gerring 2007 p. 101). This requires however, that GDP per capita
values are fairly evenly distributed between high and low values. When this is the case,
it should be representative of the population to pick one low, one median and one high.
If the majority of the population had a low GDP per capita however, that is if there were
more “low” than “high” cases, it would perhaps be more representative to add an
additional low score case (Gerring 2007 p. 101). Since the GDP per capita values seems
to be somewhat evenly distributed between the high and low values in the population of
emerging countries, it should be fair to select one high, one median, and one low case.
5

11. 4 Market entry modes for FMCG firms
Root (1994) and Buckley & Casson (1998) have identified 15 and 20 different modes of
market entry respectively. These can however be categorized in the five main classes in
table 4.1, which are ordered in accordance with increasing control of the entrant
(Johnson 2007) and in general also with increasing commitment and investment.
Table 4.1 Market entry modes
The perhaps simplest form of market entry is to export products from the
domestic market to a company or individual in the foreign market who
then sells the products on. In addition to being a simple form of market
entry it does not require any particular investment either and it is highly
flexible. On the other hand, the exporting firm has very limited (if any)
control over functions such as marketing and distribution in the target
market(s).
Licensing
and
franchising
Licensing and franchising agreements permit an incumbent to produce and
sell the foreign firm‟s product(s) in the markets agreed upon. The
agreement thus allows the incumbent to use the foreign firm‟s proprietary
technology and/or knowledge. The incumbent then pays the foreign
company compensation for the right to do so, which could for instance be
through a fixed annual fee or as payment per unit sold. In licensing and
franchising agreements, the vast majority of the necessary investment lies
with the incumbent.
Strategic
alliance
In a strategic alliance a foreign and an incumbent firm agree to collaborate
in the foreign market in order to reach specific goals while remaining
independent organizations – there are no equity investments. A strategic
alliance is often aimed at attaining synergies through combined effort and
can additionally involve knowledge and technology transfer as well as
shared expense and risk. As opposed to joint ventures, which are described
below, strategic alliances require limited upfront investment.
Joint
venture
In a joint venture, a foreign firm and an incumbent in a target market agree
to share activities in the target market. This collaboration can for instance
take place through a subsidiary owned equally by both parties. Such an
agreement would in most cases involve a substantial investment from the
foreign firm although not as much as an acquisition or green field venture.
At the same time, a joint venture can benefit from knowledge and
technology of both parties.
Wholly
owned
subsidiary
A wholly owned subsidiary can either be obtained in a foreign market by
acquiring an entire firm or part of a firm in the target market or it can be
started as a green field venture; that is building production and/or
distribution facilities from scratch in the target market. Since all costs
associated with this sort of entry mode lies upon the entrant, this is
naturally the one which requires the largest upfront investment. In case of
a green field investment, the entrant cannot rely on an incumbent‟s
knowledge on the foreign market. A major advantage to a wholly owned
subsidiary is that the entrant will retain full control of the venture.
Increasing control as well as commitment and investment
Export
6

12. 5 Reasons for conducting foreign direct investment
In general, doing business in a company‟s domestic market, or in markets
geographically and culturally close to this market, should be much simpler than
expanding globally. If a company do wish to sell to distant foreign markets, it should
likewise be simpler to export products rather than engage in FDI and setting up
subsidiaries with production facilities abroad – especially since this incurs costs of
communicating the company‟s technology (Buckley et al 1998). However, businesses
seem to increase their international focus year by year, which can be driven by a number
of different reasons according to Robock and Simmonds (1989 p. 310). The following
six points are focused on reasons for conducting foreign direct investment (FDI).
The search for new markets. Expanding internationally through FDI will often be
caused by companies seeking to increase turnover and, hopefully, profits by entering
new markets. Entering new and distant markets is often not feasible through export due
to factors such as logistical costs and import taxes as well as lack of knowledge on local
consumer demands.
The search for new resources. These resources1 could be unskilled labour, agricultural
products or natural resources such as minerals (Dunning, 2000 p. 164). FDI is in this
case not necessarily conducted in order to reach new customers but instead aimed at
servicing current customers (Hitt et al 2005 p. 468).
Production-efficiency seeking. Where economies of scale are present, it makes sense
to increase the customer base internationally and thus increase production volumes, as
this will lead to lower average costs for products which will increase the company‟s
competiveness (Ghoshal 1987 p. 434). This is especially the case when it is feasible to
concentrate production at a few international locations, preferably where production and
logistics costs are lowest, which can then supply nearby markets.
Technology seeking. Larger firms often buy smaller firms in order to acquire new
technologies, a common occurrence in the medical and biotech industries for instance.
In this way the acquiring firm can take advantage of the often more entrepreneurial and
innovative culture in smaller firms which often lead to development of superior
1
By a resource is meant anything which could be thought of as a strength or weakness of a given firm.
Examples of resources are: brand names, in-house knowledge of technology, employment of skilled
personnel, trade contacts, machinery, efficient procedures, capital, etc. (Wernerfelt, 1984 p. 172).
7

13. technologies. According to Ghoshal (1987), doing business in a global market may also
in itself aid development of diverse capabilities as companies are subjected to a
multitude of stimuli by operating in different environments. This should, ceteris paribus,
provide multinationals with greater opportunities for organizational learning.
The search for lower risk. Companies may seek to lower their risks by diversifying
into additional markets through FDI and thus lowering their dependence on the business
cycles of single markets (Hitt et al 2005 p. 468). For this reason, MNEs generally
diversify their FDI investments geographically so as “not to put all their eggs in one
basket” (Rugman 1979). Other risks which could be lowered by FDI are policy risks
from unfavourable national legislation, competitive risks from lack of knowledge on
competitor‟s actions and resource risks such as dependence on a single source of an
important raw material for production (Ghoshal 1987 p. 430).
Countering the competition. Companies can also engage in FDI as a reaction to
competitor moves, for instance as part of a tit for tat strategy (Frank 2003 pp. 461-462).
An example could be, that company X enters an important market of a competitor and
the competitor could then choose to retaliate by entering one of company X‟s important
markets making both parties worse off. This should then deter X from engaging in such
actions again.
6 Internalization level and form of market entry
As discussed in the previous section, a company wishing to sell their products abroad
can either engage in FDI or choose to license the right to sell the products to a third
party when they do not find it advantageous to export. The first question then becomes
whether the company should produce and sell the product itself on the foreign market or
if it should sell a license. Then, if the company estimates that FDI would be the best
solution, then which form of FDI should be used? Some of the theoretical attempts to
answer these questions will be covered in the following sections.
6.1 Transaction cost theory
One of the theories, which seek to answer why transactions are handled within a firm
instead of between independent parties in the market, is transaction cost theory. The
theory was introduced by Ronald H. Coase in his 1937 paper The Nature of the Firm
(Coase 1937). Though the theory is more than 70 years old, the concept of transaction
8

14. costs is still highly relevant today and is used within the field of industrial organization
where Coase‟s theories have been elaborated on.
To put it simply, transaction cost theory states that a company will grow if the internal
transaction costs are lower than the external transactions costs. For this to make sense, it
is necessary to define what is meant by transactions costs. Coase‟s 1937 paper mentions
three overall types of costs related to external transactions:
-
Costs associated with information gathering when searching for prices on external
offerings, e.g. components or services.
-
Costs related to negotiating contracts between the firm and external providers in
order to specify terms and conditions.
-
Some taxes and quotas, which have been established by governments for
transactions in the market, may not apply to transactions within firms.
As mentioned, Coase and others have elaborated on Coase‟s original paper and have
specified additional forms of transaction costs. First and foremost, even the most
comprehensive contract cannot cover every possible contingency (Williamson, 1975;
1985). This means that after a contract has been settled on after a highly meticulous, and
thus costly, negotiating process there will still be many issues that the parties can
disagree on later on. A contract may be excellent when times are good and both parties
are in a solid financial state but in times of economic difficulty, one or both parties may
attempt to attain a bigger slice of the pie by reinterpreting the contract. Even if it was
possible to make the perfect contract the amount of work involved with completing it
would most likely entail that it would not be cost effective to do so.
The fact that contracts must always be considered incomplete and thus unable to cover
every eventuality means, among other things, that both parties to the agreement must
monitor whether the other party is acting in accordance with it. Furthermore, if one or
both parties fail to comply with the terms and conditions of the agreement, and thus
behaves opportunistically, they may need litigation to settle the dispute. Both
monitoring a contract and settling disagreements in court can bring about considerable
costs. If the parties do not have a relationship built on trust, the uncertainty of future
costs may make it impossible to ever get to an agreement at all and it will thus be
necessary to internalize what would otherwise be done by the other party – or find
another, less suitable, supplier if at all possible. The fact that Williamson attributes
9

15. opportunistic behaviour solely to human nature has been criticised by Ghoshal and
Moran (1996). However, the fact that humans and organizations have a tendency to
behave opportunistically can hardly be disputed, especially in the current economic
climate. As an example, the majority of larger Danish firms are currently renegotiating
contracts with their suppliers in order to lower prices and achieve better terms (Bjerrum
2009).
To summarise, transaction cost theory states that if internal transaction costs are lower
than the above mentioned costs associated with transactions in the open market, then the
transaction should be handled internally. This is however only valid if other factors do
not change this recommendation – for instance it the company prefers the often higher
level of flexibility of using the market.
While transaction cost theory is highly relevant when deciding between using the
market and producing internally in a company, its focus is primarily on make or buy
decisions within markets. However, when the question is whether a company should
export to a foreign market or set up production there, a number of other factors need to
be considered and decided on. A later segment in this thesis will cover J. H. Dunning‟s
OLI framework (2000) which includes factors relevant to this decision. Before getting
to this, the next segment will turn to the resource based view and its views on
internalization.
6.2 The Resource Based View and internalization
While transaction cost theory mainly focuses on external circumstances and the
quantifiable, the resources based view is concerned with the firm‟s internal factors and
the more intangible subject of resources, also called firm-specific factors. In some of the
more classical writings on the resource based view, focus is mostly on the competitive
advantage of firms and thus not specifically with theory on market entry (Wernerfelt
1984; Peteraf 1993). However, the resource based view offers some interesting insights
with regard to the latter. For this reason, scholars have applied the resource based view
on subjects like the timing of market entry in recent years (see for instance Geng et al
2005; Frawley et al 2006). This thesis will use some of the resource based view‟s
insights on the choice between using the market and internalizing transactions; that is,
as an alternative view to transaction cost theory which we have covered above.
Moreover, transaction cost theory ignores the medium and long term strategic
10

16. considerations with regard to sustaining and expanding the firm‟s competitive
advantage. This is on the other hand central to the resource based view as it explains the
possession of competitive advantage from the control of superior resources.
Additionally, it highlights the importance of building competitive advantage and
suggests possible routes to this by acquiring new superior resources (Wernerfelt 1984).
Transaction cost theory is on the other hand focused on short term considerations and
profitability.
According to Wernerfelt (1984), a firm can use the possession of one or a number of
resources as a barrier, shielding its superior profits from entrants as well as from other
incumbents as long as these behave rationally. This shield comes from the fact that new
acquirers of a resource can be adversely affected, when it comes to costs and/or
revenues, by the fact that another company is already in possession of a resource. Given
this, the company already in possession of the resource thus has a competitive
advantage and a potential for superior profits. Wernerfelt has termed this a resource
position barrier as it is somewhat analogous to Porter‟s (1980) barriers to entry,
although Porter‟s entry barriers in product markets only protects against possible
entrants – not against other incumbents. Having satisfied and loyal customers could be
an example of a resource position barrier against entrants and incumbents, as it is a lot
easier to maintain such a position than it is to attract otherwise loyal customers from a
competitor.
A resource position barrier can of course be based on a number of different resources
besides having loyal customers. As mentioned above, the resource however needs to be
able to offer a competitive advantage, which means that the following four requirements
need to be met (Peteraf 1993):
1) There has to be heterogeneity in the resource bundles and capabilities underlying
production among firms. With heterogeneity, superior resources exists which results
in the potential of earning rents.
2) There has to be an imperfect market for the resource, as well as for substitutable
resources, so that such resources cannot readily be acquired by other firms. That is,
there has to be ex post limits to competition. Ex post limits to competition results in
rents being preserved as they cannot be competed away in the short term.
11

17. 3) Before the resource is acquired by the firm, there has to be limited competition for
that resource, that is, there has to be ex ante limits to competition. This prevents the
costs of acquiring the resource from offsetting the rents.
4) Finally, there has to be imperfect mobility in the market for the resource meaning
that the resource has to be more valuable in the firm where it is currently in use than
it would be elsewhere. Imperfect mobility is often caused by the fact that
transferring the resource to another firm will incur costs. This ensures that the rents
are sustained within the firm.
A wide range of things can be considered a resource. Many of these are also able to
comply with the above mentioned requirements for a resource to offer a potential
competitive advantage. Besides the example of customer loyalty stated above, such
examples include managerial skills, technological leads, and access to raw materials as
well as production capacity and experience (Wernerfelt 1984 pp. 173-174). We will
expand on some of these examples in later chapters of this thesis, including a few with
relation to our chosen cases.
All of this relates to market entry decisions because it is too short-sighted to only look
at the short term optimization of transaction cost theory. When entering a new market
and having to choose between the different modes of entry, it is important for the long
term success and profitability of the firm to consider the impact on the firms future
resource position. It may be that the alternative with the lowest cost is to license a firm
in the target market to produce and distribute the product. This short-term optimization
may however restrict the firm from developing new favourable resource positions thus
decreasing the firm‟s competitive advantage later on. For instance, licensing instead of
internalizing the activities in foreign markets could mean that the firm would not benefit
from the organizational learning and innovation which can be achieved by being present
in foreign markets as the organization is subjected to societal and managerial
differences (Ghoshal 1987). This duality between optimizing in the short and the long
term is also what Tallman is talking about in Hitt et al (2001 p. 475-480) when he
discusses capability leverage and capability building strategies and the multinational
firm.
6.2.1 The Resource Based View and mergers and acquisitions
While not referring directly to market entries, Wernerfelt (1984 p. 175) offer some
interesting thoughts on the subject of mergers and acquisitions, which are highly
12

18. relevant to market entry decisions. One of his points is for instance, that when a firm
acquires another firm, it can be likened to buying a bundle of resources. The market for
these bundles of resources is highly imperfect as there are few buyers and targets and a
low degree of transparency due to the heterogeneity of firms. It can be extremely
difficult to assess the value of a possible acquisition, especially since such an
assessment must often be done discretely so as not to alert competitors or the
organization of interest. At the same time, the value of an acquisition is dependent on
the acquiring firm and whether synergies can be achieved or not (Wernerfelt 1984).
Additionally, when a MNE plans to expand in current markets or enter new ones, the
resource-based acquisition strategies are either to get more of the resources the firm
already has or alternatively to get access to resources which complements the ones it
already has (Wernerfelt 1984 p. 175). These reasons for acquisitions corresponds well
with the resource seeking, technology seeking and production-efficiency seeking
reasons to conduct FDI stated by Robock and Simmonds (1989 p. 310).
6.3 The OLI framework
The OLI framework, or eclectic paradigm, has been developed by John H. Dunning and
dates back to 1958 but it has been revised continuously through the years (Dunning,
2000 p. 168). OLI is an abbreviation for ownership, location and internalization, which
are the three sub-paradigms in the framework. The OLI framework combines a number
of theories such as transactions cost theory and the resource based view of the firm and
in this way serves “as an envelope for complementary theories of MNE activity”
(Dunning 2000 p. 183). The framework describes the three above mentioned factors
which are relevant for companies engaged in international expansion. We will give
further details about these sub-paradigms below.
The ownership sub-paradigm is about the ownership of unique resources, skills or
capabilities which can lead to a sustainable competitive advantage (Tallman in Hitt et al
2001). If a company is to expand from its home market into foreign markets
successfully, it must of course have some advantage, something to offer, which is not
available in the foreign markets already – it must have a unique and sustainable
competitive advantage (Dunning 2000 p. 164). This corresponds with the resource
based view discussed in the previous segment. These advantages can of course take
many forms but can in general be grouped into three segments (Dunning 2000 p. 168):
13

19. -
Possessing and exploiting monopoly power.
-
Having scarce, unique and sustainable resources and capabilities, based on the
superior technical efficiency of a particular firm relative to its competitors.
-
Having competent managers who are able to identify valuable resources and
capabilities throughout the world and who are likewise able to exploit these
resources and capabilities to the long term benefit of the firm in which they are
employed.
Firstly, companies in a monopoly position on a market are often able to use their
position as a barrier to entry to potential competitors. This advantage could for instance
consist of economies of scale for the monopolist. I could also be the presence of cost
disadvantages for entrants independent of their size such as the possession of
proprietary technology by the monopolist (Porter 1980 p. 37). The advantage could
likewise be due to product differentiation by the monopolist, for instance when it comes
to superior brand power. According to Porter, brewers generally use a combination of
scale economics and superior brands to keep potential rivals out of their markets: “To
create high fences around their businesses, brewers couple brand identification with
economies of scale in production, distribution and marketing” (Porter 1980 p. 37).
Possessing and exploiting monopoly power can thus be considered a competitive
advantage since it gives the monopolist a cost advantage relative to its competitors and
raises barriers to entry.
Secondly, a company is generally able to earn superior profits if it possesses scarce,
unique and sustainable resources and capabilities internally in the firm and are able to
apply these in the marketplace (Tallman and Fladmoe-Lindquist 2002). This is central
to the resource based view and is acknowledged by Dunning in the OLI framework.
However, it should be beneficial for the firm to persistently develop new resources and
capabilities, not just exploiting existing ones, in order to be competitive in the long
term. That is, striking a balance between exploiting existing resources and developing
new ones is important in order to achieve optimal growth (Wernerfelt 1984 p. 178).
Tallman and Fladmoe-Lindquist (2002 p. 118) expresses this by stating that: “the
multinational firm will sustain its competitive advantage only if it can continue to
develop new capabilities in the face of changing environments and evolving
competition”. But how does the possession of scarce, unique and sustainable resources
14

20. and capabilities result in superior profits? As mentioned previously in the segment on
the resource based view, when a firm is in possession of a resource, this resource can in
some cases act as a so-called resource position barrier (Wernerfelt, 1984). This means
that new acquirers of the resource can be adversely affected, when it comes to costs
and/or revenues, by the fact that another company is already in possession of this
resource. Given this, the company already in possession of the resource thus has a
competitive advantage and as a consequence superior profits.
Finally, besides being in a monopoly position or having scarce, unique and sustainable
resources and capabilities, a company wishing to expand internationally can also rely on
competent managers to identify and exploit resources and capabilities internationally.
According to Hamel and Prahalad (1994 p. 78), “To get to the future first, top
management must either see opportunities not seen by other top teams or must be able
to exploit opportunities, by virtue of preemptive and consistent capability-building, that
other companies can't”. Research has also shown that top managers really do have
significant influence on the performance of firms (Priem et al in Hitt et al 2005 p. 497).
Managers are thus in itself a resource that companies can “own” and benefit from in
international expansion and they can of course be considered unique since no two
people are alike. However, skilled managers can hardly give a sustainable competitive
advantage since they can be employed by another company and even by a competitor.
Peteraf (1993 p. 187) exemplifies this by stating that “a brilliant, Nobel prize winning
scientist may be a unique resource, but unless he has firm-specific ties, his perfect
mobility makes him an unlikely source of sustainable advantage”.
It is however not enough for a company to have a unique and sustainable competitive
advantage for FDI to be attractive, it must also be preferable to invest directly in the
foreign market instead of simply just exporting or employing the advantage solely in the
home market. This is the subject of the next section.
The location attractiveness sub-paradigm states that the foreign market must in some
way favour local production to export from the company‟s home market or other
markets where the company is present with production facilities. Many factors influence
whether local production is preferable to exporting. Examples of these factors could be
lower labour costs, more favourable legislation, high transportation costs, governmental
trade barriers, superior production processes or consumers preferring products with a
15

21. local image (Hitt et al 2005 p. 472). The following will expand on the above mentioned
factors.
Low labour costs. In recent years, the transfer of jobs from high wage western
countries to low wage regions such as Asia and Eastern Europe have attracted
considerable attention – as well as some anger and hostility from western workers. This
has especially been the case when production is outsourced to low wage countries only
for the products to be imported back to the home market. As mentioned above there are
however other factors which influences the attractiveness of different locations. For
instance, many less developed countries are more lenient than western nations when it
comes to legislation on environmental protection as well as worker safety. This leniency
can in some businesses lead to significant cost savings through outsourcing although the
overall effect on profits is somewhat unsure given the potentially adverse effect on
company reputation.
Superior production processes. Low labour costs is however not the only reason why
companies move production abroad. In some cases other countries or regions have
capabilities which offer superior production processes compared to other locations. This
could for instance be due to a workforce which is particularly skilled within a certain
field – such as it has been the case for Germany within engineering. Other examples
could be superior skills within wind turbine development and manufacture in Denmark
or within manufacture of electronics in South East Asia.
Governmental trade barriers. Besides their influence on issues such as worker safety
and environmental protection through legislation, governments also play their part in
determining the attractiveness of different locations via governmental trade barriers.
Among other things, governmental trade barriers include import tariffs, licenses and
quotas as well as subsidies to local producers. In some countries it may not even be
possible to sell imported goods as they require at least part of the final product to be of
local origin, the so-called local content requirements (LCRs). LCRs are often used by
governments in less developed countries in order to protect local intermediate product
companies from foreign competition (Belderbos et al 2002).
Ceteris paribus, when a country impose trade barriers on importers in one way or the
other, it becomes more attractive to produce locally instead of exporting to this country
thus raising the location attractiveness of the market.
16

22. Preference for local products. Another factor which can make it more attractive to
produce in a given market is the fact that products with a local image are often favoured
by consumers. Firms, industry organizations and even governments sometimes attempt
to increase this form of loyalty by calling upon consumers to buy domestic products
through campaigns, often in order to support the local economy.
Besides the patriotic reason for preferring local products, when consumers have
consumed a certain product for a long time – perhaps their entire adult life – it is often
very difficult to convince them to switch to an alternative product. A good example of
this is in fact the beer industry where consumers have often preferred to buy from the
local brewery. In China for instance, there is generally a high level of patriotism when it
comes to beer drinking (Heracleous 2001 p. 43). Combined with other factors, the
preference for local beers have made it highly difficult for the majority of the global
players in the beer industry to gain a foothold in China based on non-local brands
(Heracleous 2001 p. 37). Another example could be the Danish market for fresh dairy
products where there is a strong preference for Danish products among consumers with
only limited competition from mostly German products which has been introduced in
recent years.
Due to the preference for products manufactured locally, it can often be beneficial for
MNEs to acquire or join forces with local producers. In this way, the companies can
combine their respective competences and in this way improve the competitiveness of
both. An example of this could in this case be the strong local brands of the incumbents
in conjunction with the superior manufacturing and marketing skills of the MNE.
Transportation costs. Last but not least, transportation costs are a major factor when
determining whether it is beneficial to produce locally as opposed to exporting to a
given market. In a short term perspective, one should choose to export if the combined
costs of producing the goods and transporting them to the foreign destination are lower
than the costs of producing them locally. Otherwise it would be beneficial to set up
production locally in some way.
There are a number of different costs related to shipping products across large distances
and these are not just related to the price of shipping a container from for instance Asia
to Europe. These other costs include all sorts of handling costs, spoilage during
17

23. transport as well as inventory carrying costs2 which also include carrying costs during
the eight weeks of shipping from Asia to Europe. Besides these costs, exporters are also
vulnerable to changing demands of consumers due to their long supply lines as demand
may change before the products reach their target customers. These changes in demand
can make it necessary to lower sales prices in order to sell products or can make it
impossible to sell them altogether. Customer service can also suffer from long supply
lines – especially since companies try to minimize inventories as much as possible due
to the above mentioned inventory carrying costs. With long supply lines, average
inventory needs to be larger than with short supply lines due to the higher need for
safety stock3, if the inventory service level4 is to be maintained. In case some part of the
long supply line minimizes safety stock excessively, perhaps to avoid perishable
products going beyond their sell by date, this is likely to lead to occasional stock outs
here as well as further down the supply line. Products will thus periodically become
unavailable to retailers and final consumers leading to lower perceived customer service
and loss of sales. With other things equal, shorter supply lines can minimize the
problem of stock outs considerably.
Finally, some products are more or less perishable and have a sell by or freshness date.
If the products have been transported from the other side of the planet, they have a
relatively limited time left on the shelves near the final consumer when they eventually
get there before they have to be discarded. An example of this could be beer as beer
often has a sell by date or in some cases a freshness date, which indicates the date of
production or the recommended final date of consumption. The amount of time between
time of production and freshness/sell by date is mostly between four months for a
standard lager and 12 months for stronger brews (The Beverage Testing Institute). This
amount of time, the so-called shelf life, is however dependent on correct storage of the
products. If the products are not stored correctly the actual shelf life will be lower as
product quality will decrease at a faster pace in poor storage conditions.
2
Inventory carrying costs include the cost of money tied up in inventory, storage space, loss and
obsolescence, handling, administration, insurance etc. (Waters 2003 p. 257).
3
Safety stock/inventory is a reserve inventory held in addition to the expected needs in order to add a
margin of safety. (Waters 2003 p. 267).
4
The inventory service level is the probability that a demand is met directly from inventory thus avoiding
backorders. Having safety stocks increases the service level (Waters 2003 p. 268).
18

24. Since shipping a container by container vessel from for instance Italy to China takes at
least three weeks (Maersk Line 2009), and in most cases considerably longer, exporting
beer across such distances limits the shelf life at retail stores considerably. This will not
only decrease the average quality of the products sold to end consumers but will also
increase the number of products which are not sold before the sell by date. Lower
quality will first of all lead to lower customer satisfaction but also to more products
which has to be discarded as they go beyond their sell by dates. All in all, shipping
perishable products over long periods of time incurs considerable costs besides the cost
of the transport fee itself.
Finally, companies can also seek to attain strategic resources they are currently lacking
by investing in foreign countries. In this case, investment in foreign countries is
conducted in an attempt to enhance their knowledge and global competitiveness, not to
use current advantages in new markets to earn higher returns (Chen & Chen 1998 p.
446). The presence of companies in possession of complementary competences in a
given country or region can thus attract FDI as foreign companies seek to attain these
competences (Dunning 2000 p. 178).
The internalization sub-paradigm concerns whether entry into foreign markets is
preferable through some sort of inter-firm non-equity agreement such as licensing, by
engaging in FDI through investing in green field production facilities, or by purchasing
a company in the target market (Dunning 2000 p. 164). As described in the section on
transaction cost theory, this decision can be based on a somewhat simple assessment of
whether an arm‟s length market transaction incurs the lowest cost or whether
conducting the activity internally is the less costly alternative. That is whether activities
in a foreign market should be handled internally or should be performed by a partner in
the market. The cost of conducting transactions in the market is in most cases positively
correlated with the imperfections of the market (Dunning 2000 p. 179) as this will often
allow companies to charge higher prices. Examples of these imperfections could be
information asymmetries between the parties to an exchange as well as common
property resources, public goods and externalities (Lipsey in Dunning 1999 pp. 83-84).
The former is in this case the most relevant, as information asymmetries has a highly
significant influence on the costs of conducting transactions in the open market as
described earlier on in this thesis in the section on transaction cost theory. Information
19

25. asymmetries between buyer and seller leads to costs associated with gathering
information, negotiating deals, monitoring compliance to these deals as well as costs
due to litigation in order to settle disputes between the parties to an agreement. Since
the transactions are to be performed between a domestic and a foreign market,
information asymmetries are likely to be more prevalent and significant than between
parties in the same market. This is of course due to the fact that firms will in general
have less knowledge of foreign markets than they have of their domestic market which
is exacerbated by language and cultural differences. In addition to information
asymmetries as a reason for internalization, it may also, as mentioned earlier, be cost
effective to internalize functions when certain governmental taxes or quotas can be
avoided by doing so.
While a transaction cost based analysis of where the boundaries of the firm should be
drawn is valid, it does however ignore other reasons why firms may choose to
internalize functions in foreign markets aside from pure cost optimization (Dunning
2000 p. 180). As covered previously in this thesis, Robock and Simmonds (1989 p. 310)
state six reasons for conducting FDI: the search for new markets, resources, technology,
production-efficiency or lower risk as well as countering the actions of competitors.
Consequently, a firm entering a foreign market can choose to set up its own production
in the market even though it at first glance would be more cost-effective to allow a local
producer to produce the company‟s product(s) on license. This could for instance be
relevant if the firm needs qualified engineers and these are in limited supply
domestically. The company could then attempt to gratify two needs at the same time by
reaching a new market through FDI while also gaining better access to competent
engineers. In order to do so, the firm could seek to establish itself in an attractive
foreign market, which at the same time maintains a high-quality education system, as
this could secure a steady flow of potential candidates. The firm may be able to market
their products in this market at a lower cost through a local partner via a licensing
agreement than through internalizing the function. But since this would not enable them
to access well educated labour in the same way, the overall benefit of internalizing
could be larger than the benefit of an arm‟s length market transaction.
The eclectic paradigm has managed to remain the dominant paradigm within MNE
activity and market entry as a result of regular revisions and updates. It is however, due
20

26. to its complexity, difficult to apply in the business world and it is at the same time not
particularly useful when it comes to advising on research designs and hypothesis testing
in academic research (Dunning 1980). By simplifying and expanding on Dunning‟s
framework, Buckley & Casson (1998) have constructed a model intended to guide
decisions on foreign market entry. This model will be the subject of the next section of
the thesis.
6.4 Model of foreign market entry
When firms plan to enter a new market, the decision of entry mode is an important one
since it can be of considerable significance to the firm‟s success in the market
(Woodcock 1994 p. 268; Yigang 1999 p. 98). Under all circumstances the entry mode
chosen will constrain the marketing and production strategy of the firm (Johnson 2007).
Thus if firms could make use of a simple model – or a complicated one for that matter –
in order to find the correct form of entry, this model would of course be of great value.
However, the world is seldom so simple and neither are decisions on market entry.
Buckley & Casson (1998) have nevertheless contributed with a model on foreign
market entry strategies which offer advice on which entry modes are preferable under
different circumstances. Unfortunately, the simplification process required to make a
model has involved the inclusion of a large number of assumptions. These assumptions
can however be relaxed although this increases the complexity of the analysis (Buckley
& Casson 1998 pp. 543-547).
Because of the large number of assumptions in Buckley & Casson‟s model, it is beyond
the scope of this thesis to describe them in detail but we will however shed light on
some of the more important assumptions. First of all, the firm is engaging in its first
foreign market entry and thus lacks knowledge on this subject as well as knowledge
related to the chosen market. It is thus relevant for the company to attain this knowledge
at as low a cost as possible which among other things depends on the mode of market
entry. Secondly, the model distinguishes between production and distribution of goods
in the target market as these functions can be owned independently. There are thus four
different possibilities of ownership or in the final case of non-ownership:
-
The firm can own both distribution and production facilities in the target market.
-
It can own the production facility solely, either in the target market or at home, and
then franchise the right to distribute the products to a local company
21

27. -
It can own the distribution facility solely and import products from its home market
to supply it or alternatively subcontract a local facility to handle production.
-
Alternatively, it can choose to own neither production nor distribution. In this case
the firm leaves both production and distribution to an incumbent in the market.
Finally it is assumed that the firm faces a single local rival in the target market. The
incumbent firm, who would of course have to be a monopolist, owns the only existing
facilities which can meet the needs of the market. In case the MNE chooses acquisition
as the mode of market entry, the incumbent firm‟s monopoly power can thus be
acquired by purchasing a majority equity stake in the firm.
Whether acquisition or green field investment is the most attractive option is also
dependant on the costs of technology adaption. If the MNE and the single incumbent
have very similar technology it is always more profitable to enter the market through
acquisition instead of green field investment. This is because green field investment in
this case will lead to low profits as the entrant will not be able to outperform the
incumbent directly. If the incumbent is acquired on the other hand, the entrant will yield
monopoly profits. If the MNE and the incumbent have sufficiently different
technologies however, the entrant should be able to outperform the incumbent through
green field investment, and the cost of technology adaptation can be avoided.
Nevertheless, if green field investment costs are too high, it may not be profitable to
enter the market in this way or through acquisition at all (Müller 2007 p. 98).
The assumptions stated in Buckley & Casson‟s model can as previously mentioned be
relaxed, but this will however add additional complexity. At the same time the
assumptions do not limit the applicability of the model per se but serves more as a
checklist for researchers and practitioners of things to consider when applying the
model (Buckley & Casson 1998 p. 543).
With the assumptions defined Buckley & Casson‟s model lines up the possible ways of
entering a foreign market, which amounts to 20 different possibilities. This follows
from the five dimension of foreign market entry that they set forth (Buckley & Casson
1998 p. 547); the question of 1) where production is located; 2) whether production is
owned by the entrant or the incumbent; 3) whether distribution is owned by the entrant
or the incumbent; 4) whether facilities are fully owned or shared through an IJV; and 5)
whether ownership is obtained through acquisition or green field investment. The cost
22

28. structure of the 20 different combinations can then be compared with a profit norm as
well as to each other. The profit norm is defined as market entry through green field
production and distribution facilities in a market without competition. The profit norm
will thus be; revenues at monopoly price, less the costs associated with a fully owned
green field venture, less the cost of internal transfer of goods (Buckley & Casson 1998
p. 550). This is considered the ideal form of foreign market entry meaning that every
other form of entry incurs additional costs. Since such an ideal entry in a market without
rivals is a rare occurrence, if at all possible, focus is primarily on finding the alternative
with the lowest costs among the 20 alternatives when entering already occupied
markets. This is initially done by eliminating alternatives which are strictly dominated
by other alternatives. What is meant by one alternative dominating another is, as an
example, that two alternatives, A and B, each lead to the same costs; W, X and Y.
However, alternative A additionally leads to cost Z and will thus always be more costly
than alternative B since changes in W, X and Y influences A and B in the same way.
When comparing the different market entry strategies, the assumptions are important to
keep in mind since the process of elimination will get increasingly difficult if the
situation under analysis fails to be as it is assumed in the model. When the assumptions
are not satisfied, the alternatives must be weighed more carefully against each other as
the effect of each deviation must be considered.
The process of elimination reduces the number of alternatives to a more manageable
amount, which can then be compared to each other by assessing the major tradeoffs.
Buckley & Casson (1998 p. 552) concludes that, given their set of assumptions, there
are three superior strategies to choose from:
-
Green field production combined with acquired distribution.
-
Green field production combined with franchised distribution.
-
Licensing.
The choice between these possibilities in any particular situation depends on six
different types of costs. If the cost of acquisition is low, green field production
combined with acquired distribution is attractive compared to the other options as these
do not involve acquisitions. In contrast, green field production combined with
franchised distribution involves market transactions of intermediate products between
the MNE and a local franchisee. If these costs are low, this will make this option
23

29. relatively more attractive. Since this option leaves the incumbent in a position to
compete, as the incumbent‟s production facility has not been acquired, the potential cost
of losing monopoly status must also be considered. If this cost is low, green field
production combined with franchised distribution becomes yet more attractive.
The attractiveness of the final option, of licensing the right to produce and distribute the
product to a single incumbent that is, is dependent on two types of costs. If the
transactions costs of licensing a technology and the costs of adapting local production
are low, this will make licensing a viable way of entering the market. The relevance of
adaptation costs is due to the fact that this is the only option among the three, which
requires already existing production facilities (Buckley & Casson 1998). In order to find
the most attractive solution for entering the market, these six types of costs must be
estimated and weighed against each other in order to find the option with the lowest
costs. This estimate can then be used in the final analysis where other factors are
considered including the long term strategic consequences of each possible solution.
In this thesis, we will make use of Buckley & Casson‟s model as a checklist for things
to consider in a market entry situation when analysing our chosen cases, especially the
Chinese market. The thesis will thus not use it as a step by step guide since the cases
under analysis do not comply with the assumptions set forth in their model. This use of
their model fits nicely with their own opinion on how researchers and practitioners can
make use of their work (Buckley & Casson 1998 p. 543). The OLI framework will be
used as the primary reference in our analysis as it, like Buckley & Casson‟s model,
encompasses many of the thoughts brought forward in transaction cost theory as well as
the resource based view.
From the theoretical part we now turn to description and analysis of the FMCG industry
as well as the emerging markets. Hereafter we turn to Carlsberg and our selected cases.
7 Fast moving consumer goods
The fast moving consumer goods (FMCG) sector is a large and important part of almost
every economy in the world, insofar as the products associated with the industry
represents a big part of every consumer budget. The goods produced by the industry are
basically necessities and the inelastic nature of the goods makes their impact on
economies worldwide significant. The FMCG are sometimes referred to as consumer
24

30. packaged goods and the various products are characterized by being sold quickly, in
large quantities, and at low costs and include almost all consumables regularly bought
by consumers. According to the International Standard Industry Classification, the retail
part of the industry are classified into 7 different categories and the supplier part into
some 22 categories (appendix 1), meaning there are many diverse products that are part
of the industry as a whole. The diversity of the industry is evident from the fact that a
typical European retail chain will have up to one or two thousand suppliers.
The FMCG industry consist of both a supplier side that manufactures the goods and a
retail side such as wholesalers or supermarkets, that sell the products produced by the
suppliers. The link between the manufacturers of FMCG and the retailer side are
logistics providers and intermediaries that constitute a smaller but significant part of the
industry. Few industries rely more on efficient logistics systems than the FMCG
industry (ATKearney 2009). In a modern economy, an efficient transportation system is
of great importance and it can perhaps be considered especially important for FMCG
firms. This is because most FMCG firms would ideally want their products to saturate
the market by being available at practically every outlet in order to increase sales 5. In
the soft drink industry for instance, consumers may have a preferred brand. If this brand
is not available however, they will in most cases simply purchase a rival or substitute
product – not go to another store to buy their preferred brand. You can thus have a high
value product and spend heavily on advertisement, but if the product is not widely
available in stores, revenues will be limited as consumers will mostly buy their second
choice product instead. Being able to distribute your products widely in the market,
making them accessible when and where a customer wishes to purchase it, is as a
consequence highly important to FMCG firms.
The higher sales connected with intense distribution of FMCG should of course increase
profits in itself, and since it also leads to higher production it should also lead to better
opportunities for economies of scale. This should then result in even higher profits. As
intense distribution is highly difficult, or at least expensive to attain in a market with
poor infrastructure, profits should, all other things being equal, therefore be lower in
such markets compared with comparable markets with better infrastructure. The
5
Firms selling high-end FMCG may only want their products to be available at selected outlets in order
to maintain an exclusive image. Since these products may not be “fast moving” with such low distribution
intensity they may not be considered as FMCG however.
25

31. negative effect of poor infrastructure on sales should especially be evident when it
comes to a poor transportation system and to a lesser degree on for instance poor
sanitation and communications infrastructure. This is simply because only the former
influences distribution directly. A consequence of this is that many FMCG companies
spend large amounts on maintaining and running distribution networks, either by
themselves or with partners, in order to assure they have the necessary options for
bringing their products to markets.
The products in the FMCG industry are by nature defined as bulk products, meaning
they are produced and consequently sold in large quantities to wholesalers and retailers.
Additionally there are many customers, both directly downstream from the production
company as well as the end user. This means that the consumers bargaining power goes
down as they are not concentrated and buys in relatively small amounts compared to
amounts produced. Mainly this is true for FMCG retailers and less for FMCG suppliers,
since the latter sells to the former to a large extend. As previously mentioned, a large
part of the income of most households are set aside for FMCG products since there are
so many of the products that consumers use on a daily basis and which needs to be
bought regularly. This results in a very high number of products being produced and
consequently sold by the FMCG industry at all times. The enormous sales in the FMCG
industry combined with relatively low entry barriers in many parts of the industry
results in stiff competition and often low margins.
The FMCG industry is largely dependent on macroeconomic factors such as oil prices,
and this makes long term forecasts difficult and often dangerous as the economic
climate changes rapidly in this regard (Russia today 2007). This means that the industry
can be very hard to predict at the moment, as the fluctuations in oil prices, inflation and
spending power as well as most other significant variables tend to be prominent as the
economic climate adjusts to the recent upheaval. This will make the situation on
individual markets different both from each other but also from what the markets
usually looks like.
7.1 Choice of the supplier side of the FMCG industry
While the FMCG usually gets mentioned as a whole there are in fact several different
aspects of it that display significant differences compared to one another. The retail side
is what most often gets mentioned when talking about the industry and while retailers
26

32. undoubtedly constitutes a large part of the industry, the supplier side which
manufactures the goods plays as significant a role. While retailers tend to be quite
similar with their marketing strategy and customer bases with differences mainly
attributed to size the supplier side will often contain a wide variety of companies both
large and small with a multitude of products being manufactured.
We find that the supplier and manufacturing side of the FMCG industry to be more
interesting than the retail sector, both as far as entry and development strategy goes, but
also with regards to scope and differences between companies in the individual segment
of the industry. While it seems that the other parts of the industry have received
comparatively greater attention with regards to being mentioned and analysed the
manufacturing companies often gets treated as outside the FMCG industry and as part
of other industries as for example the beverage or canned goods industry, where the
similarities between companies is far greater. For instance, Carlsberg and Heineken
display rather more similarities than for example Carlsberg and Sara Lee Corporation
does, even though they are all part of the FMCG industry. Based on these facts and
observations we will mainly be analysing and using the supplier companies for the
FMCGs as we progress with the thesis.
8 Emerging markets
The term emerging market is commonly used about markets or economies that fit into a
narrow description about size, growth rate and development. The term emerging in
relation to markets or economies stems from the 1980‟s, but came into common usage
around the 90‟s and is now a more or less accepted term when describing certain types
of markets (Authers 2006). The emerging markets differ from emerging economies
specifically in the fact that markets are not constrained by geographical boundaries or
national borders in the same way that emerging economies are, but generally there are
widespread differences in how exactly to define a market as emerging. One way to look
at emerging markets is to define them as markets that are not developed, in the sense
that first world countries such as most western European nations, the USA, Canada and
Japan are. This however would make most countries qualify in some way as an
emerging market, so it is necessary to keep in mind that several different criteria must
be met in order to distinguish between emerging and non-emerging markets. This
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33. includes factors such as growth rate, level of income and infrastructure as well as other
related measurements
As can be seen from lists commonly available, markets that are considered as being
emerging markets are not necessarily the same between different lists. MSCI classifies
22 countries as emerging (MSCIBarra 2009), FTSE Group have 23 countries as
emerging markets (FTSE group 2009) divided into two categories while some
companies and institutions such as ISI Emerging Markets lists more than 80 markets as
emerging (Emerging Market Information Service 2009). This fact goes to shows that
there are indeed different definitions and as such some confusion as to which group of
markets does qualify as emerging. Without trying to come up with a new list of
emerging markets this thesis will work from an assumption that emerging markets are
prevalent in most regions where there are countries experiencing economic
transformation and change on a broad scale. Meyer & Tran (2006) define emerging
economies as economies with high growth or growth potential, but lacking the
institutional (infrastructure, legislation, experience) framework prevalent in European
and other western markets. As such, this makes the term emerging economy dependent
on the immediate economic circumstances in a country or market, making the term
emerging economy applicable to any country or region at a given time if they fulfil the
criteria set. The term will be used in this thesis according to the definition and not based
upon a pre-existing list of markets. Despite the different definitions of emergent markets
there is generally an agreement that certain countries, such as the BRIC-countries
(Brazil, Russia, India and China) are to be included, as well as some other large and
populous countries. Together they constitute a large portion of the global consumers,
more than 50% of the world population according to globalEDGE (2008), and represent
a rapidly growing part of the world consumption and production output. This makes the
emerging markets both interesting as well as significant for the world economy as a
whole.
One of the factors that make emerging economies interesting at the moment stems from
their apparent ability to come through the economic downturn and credit crisis better
than most other economies. The counter-cyclical policies are seen more often in
emerging economies, and they are a more or less the norm in richer countries. What
counter-cyclical means in this setting is basically that a rich country will endeavour to
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34. diminish the fluctuations in their economy so that in bad times they try to stimulate their
economy and try to minimize the losses, while they in god times they try to slow the
economy down and prevent it from overheating. Emerging economies on the other hand
often tries to amplify their business cycles and one of the main reasons for this is that
they often struggle to fight the cycles, since the peaks and conversely also the lows are
more pronounced in smaller or less mature economies. One of the reasons for trying to
amplify the economic cycles are that since they are more pronounced in emerging
economies they are also harder to fight since they must do so on a smaller tax base and
often on revenues more susceptible to outside influences. Since this makes emerging
economies less robust than their richer counterparts, they often experience that investors
are reluctant to buy into bonds during downward trends and this in turn leads the
economies to be unable to borrow to smooth the economic cycles. Since they are unable
to borrow they naturally tend to save more in times where this is possible. This have
caused the somewhat curious case that many emerging economies are rather better
prepared for the current economic downturn than their western countries, since they
have greater fiscal strength due to this saving.
In part due to the above mentioned factors, the GDP in most emerging markets are still
expected to grow or at least remain stable, as opposed to most other markets around the
world (AT Kearney). In many cases this leads to the fact that with comparatively faster
growing buying power and faster growing markets, emerging economies represents
advantageous markets to invest and operate in. Emerging markets will generally be
influenced by changes in the growth in more mature markets to a degree but they will
also experience a lessening of the impact declining or negative growth has on them.
This is because this will often be accompanied by rising prices of the natural resources
that many emerging economies export, leading to an increase in the intake of foreign
investments and currencies, increasing reserves and lessening the impact of economic
influence from other markets (Rahlf 2007).
8.1 Circumventing infrastructure problems in emerging markets
As mentioned above, the infrastructure of emerging markets is generally in a poor state
compared to established markets. But a well functioning infrastructure, especially with
regard to the transportation network, is highly important if goods are to be distributed
efficiently beyond the major metropolitan areas by FMCG companies. It can therefore
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35. be attractive to enter limited geographical areas with a high density of potential
customers which will most often mean large urban areas for FMCG firms. Given the
usually larger per capita income of urban consumers compared with rural consumers,
city dwellers are also often more attractive customers to companies; especially to
foreign companies who often sell premium products targeted the middle and upper
classes.
The thought of entering concentrated markets within larger national markets, such as the
major Indian cities, instead of entering the entire market is consistent with Drejer
(2009). Drejer mentions entering so-called hotspots which could be cities like Berlin or
New York or regions such as Eastern China, as these hotspots may be more attractive to
enter instead of entering entire national markets.
9 Market analysis of the FMCG industry
In order to develop an understanding of the industry as a whole we will use the
framework developed by Michael Porter (1980; 2008) to develop a brief description of
the factors that influence and shape the market for FMCG. This five forces analysis will
provide an overview of the industry and a starting point for further analysis, which will
focus on the individual emerging markets chosen for study in the thesis.
9.1 Threat of new entrants
In the FMCG industry, as well as in several other industries, the nature of the products
and the technology necessary for the production process naturally gives rise to
economies of scale. Economies of scale in this instance relates to the fact that if
obtained, the unit costs goes down as output rises. Following from this it can be
concluded that these scale economy industries provide a substantial barrier for new
entrants, as there is a likelihood that not all companies will be able to obtain economies
of scale in a given market to a degree where they are effectively competing. There is
some difference between the various sectors of the industry with regard to the impact on
competitiveness of not obtaining sufficient economies of scale. But ultimately it will
influence both supplier companies as well as retailers and will result in consolidation of
the industry as markets become more mature. This will be less of an obstacle for
entrants on emerging markets in most industries, including the FMCG industry, as they
are defined as being markets in growth and thereby has more room for new companies.
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36. This includes the production or supplier companies in the FMCG industry, which will
likely not be as affected at the early stages in market development as they will later on.
In the FMCG industry there are few or no patents and little proprietary knowledge to
consider when entering the market. What exists in this category mainly relates to brand
names and production methods that are next to impossible to copy for any company
willing to attempt this. This negates to some degree the restriction of access suffered in
some industries.
9.2 Rivalry among existing competitors
Mainly there are many firms operating in the FMCG industry on all markets, due to the
rather diversified number of products being produced and sold. Largely the retail part of
the industry will be fairly consolidated and competition will be between few but large
retail chains that, as mentioned above, sell all of the different categories of FMCG.
While the firms in the retail segment are generally large and have few real competitors,
there does exists the smaller individual retail stores usually present in the form of
convenience stores in the cities, or small independent retail shops in rural areas, where
the larger chains are not present due to lower customer concentration. These
independent retailers are especially prevalent in undeveloped areas as well as in
countries with a historical and cultural bond with small retailers and street vendors. As
the markets develop, these will in most cases be outcompeted by organized retail
however.
As distribution and by extension infrastructure are so important in the FMCG industry
the ability to control the delivery and transport of goods are of vital importance to most
companies in the FMCG industry. This will lead to increasing competition and
concentration of logistics suppliers in the same way as in the retail part of the industry,
as the economies of scale as well as the ability to provide services across an entire
market will become of high importance to most companies. There are more supplier
companies in the FMCG industry than retailers, as they tend to specialize in certain
parts of the industry instead of being involved with all aspects. Individual companies
will concentrate on a certain type of product, or in some cases several different types,
and only in a few cases large conglomerates will produce most of the goods that are
attributed to the FMCG industry. Conglomerate type firms will make it possible to
operate on the same market, the FMCG market that is, without cannibalizing on their
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37. own products as the products in the industry are as different as it is the case. On the
other hand, they will be able to take advantage of considerable synergies in areas such
as logistics and marketing as well as adding market power as all their products are sold
to the same wholesalers and retailers.
The FMCG industry offers different competitive conditions for many of the categories
even though they display the same characteristics and developments to a large extent.
Mainly there will be a tendency towards few large companies to dominate the individual
categories as can be seen in the case of the market for beer, where only four companies
have any meaningful size worldwide. As is the case with the industry as a whole,
economies of scale in production plays a part but as mentioned the benefits of size are
also present when it comes to successful branding, which will serve to make the number
of companies competing in the industry larger and fewer. As a result of the
characteristics of the FMCG industry, it is often associated with significant risk to
attempt to compete in the industry as it does not offer newcomers much in terms of
revenue initially. Thus the competition in the industry as a whole is very high in general
an even though this is more pronounced in mature markets, the less developed markets
will become more and more competitive as they develop their economies.
9.3 Bargaining power of suppliers
Since so many and completely different goods and materials goes into producing most
FMCG products, it is generally hard for suppliers to obtain any significant bargaining
power over most companies in the industry. Often the scarce resources needed to
produce some FMCG are either directly controlled by the companies utilizing them,
such as quality malt and barley in the beer industry, or acquired and controlled by legal
contracts and long term association between companies, although this is not as prevalent
in emergent markets. While this can give suppliers some power over FMCG producing
companies, there are relatively few resources that are sufficiently rare for suppliers to
obtain much power over their customers. Examples of such resources can be extremely
diverse depending on location and the produced goods, but usually they can be obtained
from other sources if the local suppliers are not competitive.
9.4 Bargaining power of buyers
Given the nature of the goods produced by FMCG firms, the customer base represents
most households and persons giving relatively low bargaining power to the final
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38. consumer due to the sheer amount of customers. Additionally the large part of total
expenses used by households to buy FMCG as well as the necessity of these goods
lessens the customers‟ relative power with regards to companies in the industry. The
fact that customers overall have easy access to any given FMCG, due to the many retail
stores and other access points, gives the customers some degree of power since it is easy
for them to chose where to buy, and to switch to another product or retailer if they so
desire. Of course switching to another FMCG supplier or retailer would still mean the
customer is buying the products and as such it is not really feasible for customers to
stop buying the products offered by the industry. In the industry the retailers hold
considerable power, often directly related to their size, for example Wal-Mart that has
very great control over most of its suppliers. As the consolidation in the retail sector of
the industry continues, meaning fewer and larger retailers, they attain greater power
over both their suppliers and customers. Overall the customers hold significant power as
group, but little power as individuals, in the industry, since the degree of competition in
the industry are very high and as often as not the margins are low and retention of
customers are important for survival.
9.5 Threat of substitute products
Due to the nature of fast moving consumer goods there are inherently some threats of
substitution, not from outside goods but from the industry itself. To a large extend the
goods produced are interchangeable, which is one of the reasons branding and
differentiation plays such a large role in the industry. When many of the products are
virtually indistinguishable from competitors in a strictly physical aspect other methods
exists to differentiate a product. As can be seen on the retail part of the market and in
the market concentration in various segments of the industry, the trend is toward
concentration into fewer but larger firms, leading to a smaller variety of products and
minimizing the threat of substitutes from small local competitors and firms. Aside from
inter-industry competitors the threat of substitute product is therefore negligible.
10 Carlsberg Breweries A/S
The Danish brewer Carlsberg is the fourth largest brewer in the world, and an
internationally recognized brand name in all of its markets. Carlsberg is present on most
markets in the world, including Northern and Western Europe, Eastern Europe and
Asia. Additional markets include Africa and the Middle-east, while notable exceptions
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39. are North and South America. Originally Carlsberg mainly followed a strategy of
diversification on its domestic markets, while the main focus was on the two prominent
brands Carlsberg and Tuborg in foreign markets, to the exclusion of local brands. The
company has gradually shifted from this strategy and now prefers to depend on the
companies‟ core competencies in order to market and produce beer in local markets and
often with local brands. This has generated a significant shift in the production of the
company‟s brands and products, and a large part of the beer brewed by Carlsberg is
brewed in the same country or market where it is sold. Additionally the focus is now
mainly on beer as this is where Carlsberg believes it has its core competencies.
Carlsberg produced 109.3 million hectolitres of beer in 2008, a rise of almost 33%
compared to 2007. 47% of the total volume produced and sold annually is sold in the
mature markets in Northern- and Western Europe, 43% in Eastern Europe including
Russia, Carlsberg‟s biggest market, and 10% in Asia (Carlsberg group). The company‟s
net revenue reached DKK59.9 billion in 2008, also a significant rise compared to earlier
years, which makes Carlsberg one of Denmark‟s biggest companies as well as the
fourth largest brewery in the world, behind AB InBev, SABMiller and Heineken. The
main reason for Carlsberg‟s recent growth was the joint acquisition of Scottish &
Newcastle with Heineken which transferred complete control over Baltic Beverages
Holding to Carlsberg (Carlsberg annual report 2008). This and other acquisitions made
by Carlsberg follow the trend of consolidation and concentration in the global beer
industry in recent years into fewer, more international companies 6. This trend is perhaps
most obvious in the merger between the two largest beer-makers by sales, AnheuserBusch and InBev, that took place in late 2008, and created the biggest beer company as
well as one of the biggest FMCG firms in the world. Additionally, SABMiller has
combined their U.S. operations with Molson Coors‟s Brewing Co. in order to better
compete on the North American markets (SABMiller 2007) .
Carlsberg has accumulated substantial knowledge on entering markets, rarely as first
mover, but often as an early mover, in Eastern European countries such as the Baltic
nations and Poland. This is valuable in their goal to maintain their position as one of the
biggest and most significant global players. Even though Carlsberg follows a strategy of
6
In 2003 the beer market were far more fragmented, with the biggest 10 beer producers‟ only accounting
for around 45% of the total volume sales, as opposed to a volume share of around 65% in 2009
(Euromonitor 2005).
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40. expansion they rarely follow the same template when entering different markets.
Foothold strategies have been pursued in some Asian markets such as China, where
Carlsberg have a limited presence, or the two joint ventures that marked the company‟s
entry into Vietnam. As opposed to this, Carlsberg has sometimes followed a more
aggressive strategy aiming for market leadership with large scale acquisitions in for
example Russia and Poland.
Carlsberg has amassed considerable experience with marketing, producing and selling
beer and their excellence programs draw on these strengths to enable the company to
systematically improve and develop their abilities in different markets. The Excellence
programs help Carlsberg deal with their customers as well as minimize costs and
standardise processes (Carlsberg Group 2006) and is a strong tool for the company with
their strategy in entering new markets as well as developing more mature markets.
As it is the case with most FMCG companies, Carlsberg depends strongly on their
distribution network and logistics in order to be competitive in its markets. Carlsberg
spends around 15% of its total costs on logistics and logistics related activities, and it is
therefore a highly important function when it comes to the profitability of the firm.
11 Markets
In order to describe the situation on the chosen markets and come to an understanding
of the implications their individual characteristics have on entry strategies for foreign
firms, we will first look at the macroeconomic level. Afterwards there will be a micro
analysis building upon the Porter analysis above in order to describe the factors a
foreign company would face in the FMCG market, and further the understanding of the
specific factors and challenges in each market.
11.1 India
India is the world‟s second largest nation by population after China and is the world‟s
largest democracy. India has been among the world‟s fastest growing economies in
recent years with an average GDP growth of 9% for the last four years (CIA 2009) but
has however felt the current downturn in the world economy following the financial
crisis. Since a considerable part of the Indian GDP growth is driven by domestic
consumption (Das 2006), the effects of the economic crisis on India was initially
expected to be limited. However, the crisis caused a sharp decline in the Indian stock
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41. market followed by foreign institutional investors withdrawing funds. This drop in
available venture capital from foreign investors led to greater demand for capital from
the domestic market and eventually to soaring interest rates (Kannan 2009). This greater
cost of capital put negative pressure on the output of the Indian economy. India‟s GDP
growth rate was thus significantly lower in the final quarter of 2008 compared to
previous years at around 5.3% (World Bank). While this rate of growth is still relatively
strong in a global perspective, it is not enough to sustain the current rate of employment
in the country as the normal growth rate of India is likely to be higher than 5.3%7. This
has also been confirmed by surveys in the country indicating significant job losses
recently (World Bank).
The Indian government has sought to minimize the impact of the economic crisis on
India by means of two stimulus packages totalling US$8 billion, which is less than 1%
of the country‟s GDP. These have however widely been seen as insufficient to boost
economic growth. In comparison, the Chinese government intends to spend in excess of
US$ 586 billion in order to stimulate domestic demand (Candelaria et al 2009).
The amount of FDI in India is estimated at $142.9 billion in 2008, which is only slightly
more than FDI in Denmark. Compared to the other BRIC countries, India is also lacking
in foreign investment as Brazil receives almost twice as much, Russia more than three
times as much and China more than five times as much FDI (CIA 2009).
In our discussion on the Indian FMCG market, we will spend considerable time on the
country‟s infrastructure. This is because infrastructure is one of the areas which separate
India the most from other major emerging markets such as China and Russia, as these
countries in many cases offer infrastructure significantly superior to that of India. Poor
infrastructure is also a likely reason for the comparatively low amount of FDI in India.
We will therefore describe India‟s infrastructure in some detail in the subsequent
segment of this thesis. This also means that the thesis will focus less on Porter‟s five
forces in the analysis of the Indian market compared to our analysis of the Russian
market as we find it to be more useful in somewhat more established, less turbulent
markets.
7
Given a productivity growth rate around 8% and a population growth rate of 1.5% (CIA 2009) the
normal growth rate should theoretically be around 9.5% (Blanchard 2003 p. 183). Since the Indian
unemployment rate has declined in the last four years with an average GDP growth rate of 9%, the real
normal growth rate should however be less than 9%.
36