The world’s most capitalistic
multinationals in areas that
need social help
How local partners can help U.S. multinationals to reach
the base of the pyramid in India
Abstract: This thesis provides information what the needs of the rural BoP in India are and how
local Indian partners can help U.S. multinational firms in fast moving consumer goods to sell products to these people but on the other hand create development for the rural BoP. India is a huge country with a big variety of cultures, geographically dispersed and has many different climates. For U.S. multinationals it is hard to target a new kind of customers in one of the most difficult markets of the world. This research is based upon case analysis and interviews with professors, possible local partners and a U.S. multinational in fast moving consumer goods. This research shows how local partners can be integrated into the strategy of the U.S. multinational firms and can provide them information and services.
Key words: rural India, U.S. multinationals, emerging markets, social development, rural base of
the pyramid, local partners, emerging market strategy, fast moving consumer goods 16-1-2015
Author: Xander Willem Pierik S2415062
Fist supervisor: Dr. Pennink Second supervisor: Dr. Gubbi
Preface
During the course Emerging Markets given by Dr. Gubbi at the faculty of Economics and Business I got interested in the topic of emerging markets. This course gave me insights in the world of emerging markets, how people live there and how to do business in this environment. I have been on holiday to several emerging markets but never thought of the fact how firms are doing business in these kind of environments. China is already developing in the last 2 decades but India has fallen behind. This attracted my interests in India. There are roughly 1,2 billion people living in India, most of them still in the rural areas where too many live below or just above the international poverty line. Therefore I would like to thank Dr. Gubbi for providing interesting lectures and business cases about emerging markets. You have really have made me enthusiastic about emerging markets. A big thanks to Dr. Pennink for giving supervision for my research and the clear feedback I always received. We have spent many hours in your office debating about Emerging Markets and local development. Furthermore my thanks go to my parents for the ongoing support during the Master International Business.
I would like to thank the following people who all cooperated and contributed to my research by giving interviews or replying on messages.:
Table of content
Preface ... 2
1. Introduction ... 6
1.1 Research question and objective of this research ... 9
2. The bottom of the pyramid ... 10
2.1 Introduction ... 10
2.1 Bottom of the pyramid in general ... 10
2.2 Rural bottom of the Pyramid ... 12
2.3 Passport of the rural BoP in India ... 13
2.4 Advantages for multinationals at the rural BoP ... 13
2.4.1 Size ... 14
2.4.2 Rapid growth ... 14
2.4.3 No competitive environment ... 14
2.4.4 Opportunities for cost saving ... 14
2.4.5 Opportunities for innovation ... 14
2.5 Conclusion ... 14
3 Needs of the rural BoP ... 15
3.1 Introduction ... 15
3.2 Theory of Maslow ... 15
Survival ... 15
Safety and security ... 15
Social ... 16
Self esteem & self-actualization ... 16
3.3 Theory of Karnani (2007) ... 16
Microcredit ... 17
Create employment ... 17
Productivity ... 17
Government ... 17
Create efficient markets ... 18
3.4 Theory of Stimson et al, (2005) ... 18
Leadership ... 18
Institutions ... 18
Entrepreneurship ... 18
3.6 Conclusion ... 19
4 MNC strategy at the rural BoP ... 20
4.1 Introduction ... 20
4.2 Corporate Social Responsibility (CSR) ... 20
4.3 Product Innovation ... 21
4.4 Rural marketing ... 22
4.5 Distribution in rural India ... 23
4.6 Branding ... 23
4.7 Differences in doing business in India ... 23
4.8 Partners ... 25
4.9 Matrix of challenges to reach the rural BoP ... 25
4.10 Conclusion ... 26 5 Local partners ... 27 5.1 Introduction ... 27 5.2 Business groups ... 27 5.3 NGOs ... 28 5.4 Local governments ... 28
5.5 Local partners included in the Matrix ... 29
5.6 Conclusion ... 31
5.7 Research ... 31
6 Method ... 32
7 Case studies ... 34
7.1 Theory development ... 34
7.2 Embedded case analysis of Coca Cola in India ... 35
7.3 Multiple case analysis ... 36
7.3.1 Mc Donald’s (Dash, 2005) ... 36
7.3.2 Starbucks (Zerrillo et al. 2013)... 38
7.3.3 Oreo (Sarkar, 2013) ... 39
7.3.4 Gillette (Reddy & Dula, 2013) ... 40
7.4 Single case analysis of Hindustan Unilever Limited (HUL) (Rangan & Sinha, 2012) ... 41
7.5 Multiple case study of Indian firms ... 43
7.5.1 E-Choupal (Bowonder et al., 2003) ... 43
7.7 Matrix ... 47
8 Interviews ... 48
8.1 Introduction ... 48
8.2 Interview discussion ... 48
8.3 Challenges and needs of the rural BoP ... 52
8.4 Analysis of the matrix ... 56
9 Conclusion ... 57
10 Limitations & future research ... 60
1. Introduction
Emerging markets have enormous growth opportunities and their potential has already affected many multinational corporations (MNC) which are now investing in these kind of markets (Arnold & Quelch, 1998). According to Arnold & Quelch (1998) the definition of an emerging market is: 1) the market is liberalized so it is easier for a MNC to enter the market, 2) it is indicated by a high GDP growth rate, 3) there is a balance between agricultural and industrial/commercial activity in the country. Hoskisson et al., (2000) divide emerging markets into two groups: 1) developing countries in Latin America, Africa, Asia, and the Middle East, 2) transition economies in China and the former Soviet Union.
In today’s world 4 billion people at the bottom of the economic pyramid have to live of an annual per capita income of less than $1500, the minimum which is considered a necessity to provide in one’s basic needs (Prahalad & Hart, 2002:3). According to London & Hart (2004), most MNCs only focus on the wealthy top of the iceberg while there are 500 million possible customers left and this could be a huge profitable market. Strategies and business models that work in the developed world will only serve the happy few in emerging countries (Prahalad and Lieberthal, 1998; London and Hart, 2004; Wright et al., 2005). In order to be successful in emerging markets firms need to build new or modify business models that are suited to these markets (Prahalad and Lieberthal, 1998; Wright et al., 2005). According to Prahalad (2010) multinational enterprises can make profit and increase their market share by serving the 4 billion poorest people on earth. They can build a profitable businesses that is eliminating human misery and reducing poverty at the same time.
Countries and markets all over the world have not met the satisfaction levels on worldwide social, economic and environmental problems (Trivedi & Stokols, 2011). The result is a majority of the world population living just above or under the poverty line. According to Prahalad (2010) multinational enterprises can reinvest their profits to create development at the Bottom of the Pyramid (BoP). Multinational firms have to revolutionize their business models to enhance prosperity for the BoP. According to the report of Marketline (2014), India has a huge untapped rural market and this offers a great potential for the consumer goods sector. Low penetration rates compared with high growth rates (16,2% in 2012) and a population of approximately 800 million people creates a huge demand for Fast Moving Consumer Good players (FMCG) in rural India.
The United States is considered to be the most capitalistic country in the world. Even though the majority of the multinationals in FMCGs are U.S. enterprises. These multinationals in FMCG are capitalistic and India is identified as an emerging market where social responsibility in local Indian firms is important. Furthermore, there are many differences in doing business between India and the United States, which involves implications for U.S. multinationals in FMCG in the rural Indian market. To overcome the liability of foreignness of U.S. multinational firms in the rural areas U.S. multinational firms have to cooperate with local partners. These local partners can help the US multinational to cope with distribution problems, lack of information concerning the rural BoP, new innovative methods, marketing solutions, corporate social responsibility (CSR) policies, but also with creating brand awareness. These local partners have unique competitive advantages in the Indian market which are beneficial for U.S. multinational firms. Local partners can help U.S. multinationals in a complementary partnership with strategy options to serve the rural Indian market. The process model of this research can be found in figure 1.
Figure 1: Process model as a handgrip tool for this research
the type of local partner with the needs of the rural BoP and the challenges that a U.S. firm in FMCG faces in India. These challenges are internal strategy challenges but also external environmental challenges that it has to overcome. A ++ means that there is a very positive relationship, a + means there is a positive relationship and no sign means there is no relationship. This causal model is established after literature research.
Figure 2: Causal model
1.1 Research question and objective of this research
According to the introduction the research question of this thesis is: “How can local partners help U.S. firms in fast moving consumer goods to make profits at the rural base of the pyramid in India and simultaneously create development for these people?”
The process model gives a handgrip tool during the research of this thesis. It gives insight into the factors that influence the research question. The causal model in figure 2 shows an abstract view of the relationship between local partners and the strategy of the U.S. firm and the needs of the rural BoP. The causal model in figure 2 is established after conducting theoretical research. The objective is to create a reproduction of the causal model after the field research. This could give new notions and improvements of local partners and new relationships or missing factors that influence the research question. The causal model gives an abstract view of the relationship to make it tangible for U.S. multinational firms in FMCG a matrix will be established. This matrix will give insights which local partner can help the U.S. multinational with which strategy challenge or opportunity and simultaneously create development for the rural BoP.
2. The bottom of the pyramid
2.1 Introduction
This chapter embodies the aspects of the people who are living at India’s rural bottom of the pyramid. It is important to know who these people are, how they live and where they spend their money on. These factors should provide useful information to answer the research question: “How can local partners help U.S. firms in fast moving consumer goods make profits at the rural base of the pyramid in India and simultaneously create development for these people?”
2.1 Bottom of the pyramid in general
The bottom of the pyramid (BOP) are the people who are living on the bottom of the pyramid and do not have the opportunity to gain from globalization (Martin & Hill, 2012). The poorest 40% of the world count for 5% of the world’s total income (Martin & Hill, 2012). Emerging markets often show a great socio-economic difference between urban and rural areas. Developed markets are becoming increasingly saturated, MNC’s have turned to emerging markets like China, Brazil, India, and Mexico as key locations for future growth (London & Hart, 2004). By focusing on wealthy consumers and partner organizations who participate in the formal economy, these MNC’s only see the top of the iceberg (London & Hart, 2004). A visual is provided in figure 3.
Figure 3: The economic pyramid
Source: Danski Industry (2007)
Figure 4: BoP income segment Figure 5: Worldwide BoP population and income
Source: World resources institute (2007) Source: World resources institute (2007)
World resource institute did research onto the spending behavior of the worldwide BoP. They concluded that the 4 billion people who are living at the BoP worldwide spend about 70% of their income on food. Two other major expenses are energy and housing. Only a small amount is spend on water. A great opportunity arises for the firms operating in the FMCG due to the fact that the BoP spends the majority of its money on food. In figure 6 and 7 the spending behavior of the BoP and the market size of the BoP in several sectors is presented.
Figure 6: BoP spending behavior Figure 7: BoP sector market
Source: World resources institute (2007) Source: World resources institute (2007)
2.2 Rural bottom of the Pyramid
Anderson et al. (2010) distinguishes three types of markets namely, 1) urban slums, 2) deep rural areas and 3) conflict zones. These three types of markets all need different strategies to meet the needs of local people. Business models that are used to enter the BoP in the urban regions in Mumbai are not applicable in rural regions. To reach both groups firms need to compete with two business models at the same time. This task is certainly difficult to do, this is the logic of Michael Porter who proposed 30 years ago that a firm could pose itself as ‘stuck in the middle’. The solution to this problem is to keep two business models and physically separate the firm into two distinct organizations.
The products in the deep rural area operate at the basics and need to have an expected product classification. Producers should meet the needs of the rural people because they do not vale further additions to the product concept. It is hard to reach the deep rural BoP because a lot of the consumers are illiterate. These people do not use traditional media, this makes it hard to communicate (Iyer, 2010).
The rural market is different from the urban Indian market due to (Iyer, 2010):
- The rural customer is very traditional and the norms and values have not changed in the last decades.
- A lot of rural people are illiterate.
- A lack of infrastructure (roads, communication, warehouses) makes it difficult to distribute products and information
- People in rural speak different languages and dialects which makes communication and advertisement more difficult.
- The purchasing power is low
This report will focus on the BoP in the deep rural areas because of two reasons: 1) most poor people live in these areas and need development, 2) there is a high potential market to U.S. multinationals because 68% of all Indian citizens live in this area.
2.3 Passport of the rural BoP in India
68% of the Indian citizens live in the rural area (World Bank, 2014). India has about 640.000 villages and 84% of these villages have a population of less than 2000.
Figure 8: Poverty and consumption distribution of rural and urban India
Source: World Bank (2014)
According to figure 8, 33,8% of the rural people in India live in poverty compared to 20,9% of the urban people. This illustrates that the majority of India lives in the rural areas. These people are more poor than the urban BoP. The 800 million Indians who live in the rural areas have spent US$69 billion between 2009 and 2012 and it is estimated to increase to US$ 100 billion in 2025 (World Bank, 2014). These spending’s are exceeding its urban counterparts by 25%.
Firms can increase profits and extra growth by serving the 4 billion poorest people in the world (Prahalad, 2010). Only in India approximately 600.000 children die due to diarrhea each year (Jose, 2008).
2.4 Advantages for multinationals at the rural BoP
For U.S. multinationals in FMCG it is important to know why they should target the BoP. According to Danski Industry (2007) there are five advantages for targeting the BoP. These are:
1) The size 2) Rapid growth
2.4.1 Size
There are about 800 million people living in the rural areas of India. When taking the poverty line of the World Bank into account, 33,8% of the people are living under the poverty line and many just above the poverty line. This indicates that there are 270 million people living under the poverty line in rural India.
2.4.2 Rapid growth
Rapid growth is caused by an increase in purchasing power in the rural areas. This resulted in manufacturing jobs from the urban areas to the rural areas. Credit Suisse estimated that 75% of the factories that opened in India, were opened in the rural areas. These manufacturing plants account nowadays for 55% of the total Indian GDP (Kapur et al., 2014). In 2012 there was a market growth in rural India of 16,2% in the FMCG industry.
2.4.3 No competitive environment
Not many firms operate in rural India due to a lack of distribution facilities and purchasing power. This could enhance first mover advantages to firms who are willing to operate in rural India. Advantages like creating awareness, low marketing costs and first contacts with the local government.
2.4.4 Opportunities for cost saving
More and more firms are establishing production facilities in the Indian rural areas. The salaries of the rural citizens are significantly lower than in the urban areas. Furthermore, if a production facility is already established in the rural areas it faces less transportation costs.
2.4.5 Opportunities for innovation
A high level of innovation is important to reach the rural BoP of India. Innovation is necessary to produce products that are useful for the local rural market. A different innovation strategy is required to enhance opportunities for multinational firms to produce new products.
2.5 Conclusion
3 Needs of the rural BoP
3.1 Introduction
In previous chapter the passport of the rural BoP is examined, because the purchasing power of these people is low just like their standards of living. To create development at the rural BoP it is necessary to examine the needs of the individuals and the community. To reveal the needs of the rural BoP, multinationals need to get information how they can sell their products to the rural BoP. On an individual level the needs of the rural BoP will be established regarding Maslow’s hierarchy of needs model (1943). This model is old, but it’s still useful to describe personal needs of the rural BoP. Furthermore, the needs of the community will be disclosed by the theory of Karnani (2007) and Stimson et al. (2005).
3.2 Theory of Maslow
Maslow (1943) describes the fundamentals that are necessary for self-actualization in a pyramid of five layers. These five layers are: survival, safety and security, social, esteem, and self-actualization. In the following paragraphs the theory of Maslow will be applied to people who live in rural India.
Survival
The first segment of the hierarchy of needs is survival. This segment embodies the basic needs for the individuals who are living at the rural BoP. In practice these basic needs are food, energy resources, purified drinking water, and sanitation facilities. Water is defined as critical for survival, well-being, and development of the Indian people (Narender, 2013). There is a lower potential for water infrastructure in India because of storage of water in dams, reservoirs and water basins. The rivers have become sewers because all the waste water is dumped in the rivers. This declines the availability of water that can be used for irrigation in the rural regions as well as also drinking water. Safety and security
individuals, income, and standard of living is education (Agrawal, 2014). Education has impact on the level of welfare of future generations. Agrawal (2014) found that 32% of the rural children in the age group of 15 years and above are illiterate and only 8% have a degree in higher education. Even though the inequality of education in India has declined with 14%, the total remains above 50% which concludes that there is a clear regional difference in level of education. Some reasons of the difference in educational level in the rural sector in India has demotivated teachers, dilapidated infrastructure, irresponsible management and a paralyzing curriculum (PROBE team, 1999). The fundamental problems are a low priority in the classroom, poor quality of education and discrimination due to social disparities (De et al., 2011).
Social
The individual social needs in rural areas embodies the contact with other citizens and the involvement in the community or religious groups. The social needs are related to the need of friends and belongings. For the people in the rural areas it is important to satisfy the relationship between family as the individual needs (Ruth and Hsuing, 2007). Building social capital is of key importance in the life of people in the rural areas. Because of a lack in infrastructure, citizens in small villages are designated to other citizens. It is therefore important that they support the local stores and entrepreneurs to create an efficient market ,but on the other hand create social contact. Even though citizens in the small rural villages in India can buy their products cheaper in another village, they still buy their products at the local stores because social relationships are of great importance.
Self esteem & self-actualization
There will exist a need of being or becoming important. Therefore, the need for status, self-respect and reputation will arise. Other very important factors are women participating in the workforce and political freedom. According to Haggerty (1999) women participating in the workforce attempt women to have equal rights and opportunities in the labor market to compete with men. Self-actualization is the top of Maslow’s hierarchical pyramid of needs. Self-actualized people have needs like justice, truth and wisdom. Furthermore, higher education is important for self-actualization, because it will create creativity and knowledge generation. Primary education is a basic need, but higher education is self-actualization.
3.3 Theory of Karnani (2007)
have a great influence on the level of development of the rural BoP and presents suggestions to increase the life standards. This is a win-win situation for the firm and the rural BoP. Beyond the increase of income you have to take the social, cultural and political dimensions into account. Karnani (2007) takes the following dimensions into account: microcredit, employment, productivity, role of the government, and create efficient markets. To create additional welfare for the poor people from a producers perspective you can 1) raise the income of the BoP or 2) lower the prices. When prices become lower there are three ways to reduce prices: 1) reduce costs, 2) reduce profits, 3) reduce the quality of the product to reduces costs.
Microcredit
There also exists possibilities to increase the income of the BoP. Therefore micro financing is an attractive way for eliminating poverty due to the fact that people will become entrepreneur and can try to generate their own income. A credit of $100 will help them individually to flourish the local economy and to try to create a competitive advantage. Muhammad Yunus started providing people at the BoP in Bangladesh with micro credits via his Grameen Bank. It was so successful that an entirely new industry served a base of customers who were falling under the poverty line, most of them in the rural areas rather than urban areas (Mainsah et al., 2004).
Create employment
It is important to create reasonable working places for employees, because a job is the best way to eradicate poverty. There is a link between the level of productivity, the level of employment and competitive advantage. The efforts at poverty reduction in India has been hampered by the poor performance in job creation.
Productivity
The productivity of the Indian employees is between the Africans and the Chinese (Karnani, 2007). For example, poverty in China has declined, because a big share of the community is employed. Productivity will increase the wages of the employees which is beneficial to live above the poverty line.
Government
Create efficient markets
The BoP is often selling its products in inefficient markets that do not capture the value of the output that is given. Improved efficient markets will raise the income of the BoP. A great example is Amul, a large dairy cooperative in India where the farmers are the shareholders. Amul collects milk of 2 million farmers and it is producing and selling cheese, milk powder and ice cream (Karnani, 2007). To solve the poverty problem, there is a need to look beyond increasing the wages of the poor, but also look at the social, cultural and political dimensions.
3.4 Theory of Stimson et al, (2005)
Stimson, Stough & Salazar (2005) propose that leadership, institutions and entrepreneurship are crucial order to achieve sustainable regional development. Resource endowments and market conditions (REM) have effect on the institutions, leadership and entrepreneurship in a region. The more an endowed in terms of resources the better a certain area should performs (Stough et al., 2001). Poor leadership and a lack of institutions often means that the REM is not being used effectively as well as market opportunities. Places with favorable conditions, strong leadership and effective institutions are able to become places with a competitive advantage (Mc-Guirk et al., 1998:110).
Leadership
According to De Santis & Stough (1999), leadership is defined as: “the tendency of the community to collaborate across sectors to enhance the economic performance or economic environment of its region”. Leadership can be seen as a collective action that is not traditionally based on one person, but on the relationship between private, public and community sectors and will be based on mutual trust and cooperation.
Institutions
Institutions are crucial in providing the ‘rules of the game’ in a society. In regions with a poor institutional environment firms are less protected towards property rights and face higher transaction costs. The institutions of a region together with the economic constraints determine the opportunities for a society and firms. Therefore, institutional capacity building is nowadays fundamental for regional economic development.
Entrepreneurship
context of regional economic development is the willingness of sustaining a business and family. Stimson et al., (2009) found that entrepreneurship is created by good leadership.
3.5 Matrix of the needs of the individuals and community
According to the theories of Maslow, Karnani, Stimson and the research of Farag Nagi (2012), the matrix in figure 9 will describe the needs of the rural Indian BoP. If these needs are granted, it will lead to improvement of the life conditions of the rural Indian BoP. In this matrix the correlation between U.S. multinational firms and the needs of the rural BoP is not yet taken into account. Below in figure 9 the X-Axis of the matrix can be seen.
Figure 9: The needs of the rural Indian BoP according to Maslow (1943), Karnani (2007) and Simson et
al. (2005)
Number Needs of the rural BoP
A Drinking water
B Education
C Electricity
D Well-functioning telecommunication infrastructure
E Good roads
F Healthcare
G Women empowerment
H Status
I Leadership
J Technology to purify water
K Access to credit
L Increase in productivity
M Low priced products
N Well-functioning efficient market
O Increase in purchasing power
P High quality products
3.6 Conclusion
4 MNC strategy at the rural BoP
4.1 Introduction
Many multinational firms are moving beyond the traditional view of the transnational model (Bartlett & Ghoshal, 1989) and are striving to invent new strategies that address new opportunities and challenges in the emerging markets (London & Hart, 2004). The full potential of the rural BoP cannot be realized without creative managers who have an entrepreneurial orientation (Prahalad & Hart, 1999).
Multinationals need to build a local base of political support. This can be done by forming a partnership with NGOs, forming a coalition with community leaders and local authorities. Local research is necessary to get to know the unique local needs at the BoP in a specific country or region. Creating alliances are of great importance to create awareness and local knowledge. Due to the low purchasing power of the BoP, the productivity has to rise and the production costs have to decrease. This all has to be done in a sustainable way. These strategy challenges are based upon the external and internal environment.
4.2 Corporate Social Responsibility (CSR)
According to Friedman (1970) the only social responsibility of business firms is to maximize profits and the government has to fulfill the task of social service, educational institutions and NGOs?non profits. Matten & Crane (2005) conceptualized that there are more responsibilities for firms, following:
1) Generate profits.
2) Legal responsibility to comply by regulative environments of an area, state or country. 3) Ethical responsibility to meet social expectations that are not written in the law. This means
avoiding harm, respecting moral rights and do what is right.
4) Meet the additional behaviors of the community, like contributing to social and cultural funds.
Figure 10: Building CSR into the strategy
Source: Matten & Crane, 2005
4.3 Product Innovation
Innovations are necessary to meet the needs of the people at the BoP (Prahalad, 2009). Therefore, the theory of Prahalad (2009) and the theory of Sarkar & Chattopadhyay (2011) are worked out in this paragraph.
Figure 11: The innovation model for rural markets
Source: Sarkar & Chattopadhyay, 2011
4.4 Rural marketing
Kashyap (2012) explored changes in the rural landscape in India. Rural India changed from a slow growth area to an area with high growth rates as a results farmers became less independent on their farming income. The role of marketing is to deliver the right product to the right customer at the right place in the right time. Marketing to rural customers has become a necessity to firms if they want to stay competitive in the market (Kumari & Gupta, 2014). According to Jha (1988) the concept of rural marketing has three major components namely, rural to urban, rural to rural and urban to rural. This can be seen in figure 12.
Figure 12: Rural marketing table
Source: Jha (1988)
According to Prahalad (2009) innovations at the BoP must start with the 4As (the opposite ones of the 4Ps). The 4As are the following:
1. Create awareness of the service or product among the BoP 2. Enable access to the products at the BoP
3. Make sure the products are affordable to people of the BoP 4. Focus on availability to build trust and create loyalty at the BoP
A successful innovation in the BoP has its constraints. Prahalad (2006) calls this approach “work in an innovative sandbox”. This sandbox exists of new price performance levels, scalability, safety standards and aspirational intelligence. Innovation at the BoP is a continuous process of refinement and learning.
4.5 Distribution in rural India
The rural area is characterized by poor roads, financial capabilities of retailers, good channel intermediaries, dispersed populations, and a lack in warehouse facilities (Sarkar, 2014). According to Mart (2005) there are 9 challenges in rural distribution: 1) large number of small markets, 2) dispersed population and trade, 3) poor retailers, 4) poor storage systems, 5) poor road connectivity, 6) large number of intermediaries, 7) low density of shops, 8) no banking & 9)credit facilities. Sarkar (2014) researched 17 successful innovations by FMCG firms in rural distribution. Sarkar found that firms have to apply a four step approach to be successful in rural distribution innovation.
1. The distribution innovation should be beneficial to the rural citizens 2. The innovations should be replicable in other parts of the country 3. The innovation should incorporate high volumes of FMCG distribution 4. The firms need deep pockets
According to Danski Industry (2007) distribution is the key to success at the rural BoP.
4.6 Branding
It is important to have a strong corporate product and brand, because the experience shows that rural customers are very brand conscious. For the rural customers a brand is like a certificate that represents a certain degree of quality and guarantee. Customer loyalty can be created by trust and accountability towards the rural BoP. Trademarks will be distinguished by services and products due to branding (Danski Industry, 2007).
4.7 Differences in doing business in India
The business model of U.S. firms is maximizing the shareholder value. U.S. firms are characterized by three components:
1) Focus on the external opportunities in the market.
2) Focus on restructuring, when strategy changes, U.S. firms cut costs by firing employees and hire new employees in the business of the new market.
3) Employees’ motivation focuses mainly on top management due to financial incentives. According to Capelli et al., (2010) Indian companies are generally characterized by the following four components:
1) Serving a social mission
2) Invest in human capital and promote internal learning over hiring new employees
3) Indian companies have a special approach in solving problems by a trial and error approach that is deeply rooted into the culture (In Hindi this is called Jugaad).
4) Create a strategy that rest on the afore mentioned three components and innovation in the supply chain.
Figure 13: Business differences between the U.S. and India
(Source: World Bank(2009)
According to Raghaven (2007) several U.S. firms who operate in FMCG sector and entered India faced difficulties. Mc Donald’s had to change their beef burger into anything others than beef because the cow is sacred in India. Mc Donald’s first tried to alter their global strategy, only to experience later that the consumers in India differ significantly compared to other consumers in the world. Coca Cola found the Indian market really difficult to crack. Coca Cola reentered the Indian market in the 1990’s after an absence of 16 years. Coca Cola was able to make profit in India from 2006. Even Kellogg’s had difficulties with entering the Indian market. Kellogg’s tried to sell their cornflakes with cold milk to Indian women as a breakfast meal. However Indian women eat warm and fresh savory, so Kellogg’s changed their strategy by adapting local cultural habits and became successful. Pizza Hut entered the Indian market and adopted their products to local needs by offering special Indian toppings which was successful immediately. The Indian firms have observed the rural areas in terms of short term and commercial opportunities, however they have failed to understand the rural market (Vaswani et al. 2005). This results in a low market share, poor profit margins and a low market penetration of multinationals in the rural area.
4.8 Partners
India is one of the most difficult countries to conquer the market. This is due to a big dispersion in culture and geography. Local partners can help multinationals in rural India with their local knowledge. This knowledge is about geographical and cultural differences, customer behavior of the rural BoP, how to overcome the weak institutional environment and to reach economic targets (Danski Industry, 2007). The choice of partners will depend on the challenges that the multinational has to overcome.
4.9 Matrix of challenges to reach the rural BoP
In figure 14 the strategic challenges for the Y-Axis of U.S. multinational firms are described to successfully make profit at the rural BoP and simultaneously create development for these people. According to the aforementioned chapters these strategic challenges are established.
Figure 14: Strategic challenges for U.S. multinational firms in FMCG
Number Strategic challenges to reach the rural BoP
1 Well functioning logistical system
2 Reduce cost price of the product
3 Economies of scale
4 Offering low priced products
5 Production plant in the area
6 Cultural adaptations to the product
7 Use local entrepreneurs
9 Create brand awareness
10 Local CSR development activities
11 Special made promotions, advertisements and communication about the product
12 Innovate high valuable products
13 Rural inclusion in the innovation process
14 U.S. product safety standards
15 Develop a specific strategy towards the rural BoP
16 Innovate the distribution chain to reduce costs and reach the rural BoP
17 Difficult to pay taxes and have knowledge about the legislation
18 Gathering market data
19 Knowledge about the rural BoP
4.10 Conclusion
5 Local partners
5.1 Introduction
It is well established in the literature that success in BoP markets depends on partnerships with local partners that can provide them the missing resources and expertise. Anderson et al. (2010) found that firms need to go beyond the transactional partnerships to be successful in doing business in the environment of emerging markets.
According to London & Hart (2004) firms could only be successful in approaching the base of the pyramid by collaborating with non-traditional partners. These non-traditional partners are non-profit organization and local governments which operate on village level. London & Hart (2004) distinguish three impotencies in this field namely; 1) recognize the value of both non corporate and corporate partners 2) Proactively established relationships with non-profit and other non traditional partner organizations 3) Rely on non corporate partners who have expertise in the social infrastructure and local legitimacy. To be successful in emerging countries U.S. multinational firms in general do not have to cooperate with traditional partners like big national firms. According to Khanna & Palepu (1997) business groups gained competitive advantages in India after the market reforms in 1991. According to the theory of London & Hart (2004) and Khanna & Palepu (1997) the following three local partners are distinguished: 1) Business groups, 2) NGOs, 3) local government.
5.2 Business groups
The corporate sector of emerging markets is dominated by business groups, these are groups of legally independent firms who are operating in a wide variety of industries under a common ownership and control (Carney, 2008). Business groups in India have an extensive history which is dating back to the early 19th century when families invested in diversified industries by floating joint venture companies. Khanna & Palepu (1997) distinguish five lacking institutional mechanisms in emerging markets. These are product market, capital markets, labor markets, regulation and contract enforcement. After the adoption of the market reforms in 1991, business groups gained competitive advantage through these lacking institutional mechanisms. According to Khanna & Palepu, 1999 the capital flow between the group plays an important role in Indian business groups. Lensink et al. (2003) found out that group partners face fewer financial constraints in India due to the fact that they can borrow money from a pool inside the group instead of borrowing money from local banks. Khanna and Palepu (1997) recognized that focused strategies are not applicable in emerging markets due to the lacking institutional environment.
firm, bank, management institute or certification agency inside the group. Next to capital, product and labor market advantages, business groups also compete in emerging markets due to their reputation. Business groups have access to many various benefits from governmental policies which makes the government an important player for business groups in India.
5.3 NGOs
In the last decades a lot of NGOs have grown in India and play an important role for the society. There are 16430 recognized charities according to de Planning Commission of India (2005). Each NGO is unique and are mostly organized by religious entities government, corporate or independent of any body. NGOs basically work for community development in a social way and the interests are literacy education, health, child and woman welfare, environment advocacy, animal welfare etc. It is hard to measure success for NGOs while profits and revenues are not of main importance. The objective is more to do with social transformation through voluntary work via charity. There are two types of NGOs namely, vision driven and agenda driven. Agenda driven NGOs are supported and funded by the government and vision driven NGOs start with a vision and structure (Sridhar & Nagabhushanam, 2008)
According to Jamali & Keshishian (2009) there are several factors which contribute to the success of a partnership between an NGO with a private company. Regardless the differences between an NGO and a private company a good balance in participating is necessary to become successful. Another important factor is trust between the partnering organizations (Neergaard et al. 2009). Communication is a key success factor in making a partnership successful (Googins & Rochlin, 2000). A variety of non-corporate partners like NGOs and local governments can provide useful information about the target customers and the external environment. Because these non-corporate partners better understand the societal concerns and could provide knowledge about the local context and the needed local resources (London & Rondinelli, 2003).
5.4 Local governments
products. Top managers also develop relationships with the government to overcome the weak institutional environment and secure access to knowledge. Acquaah (2007) proposes that firms that have closer ties with governments in emerging countries will have higher performance.
5.5 Local partners included in the Matrix
In chapter 3 the local needs of the rural BoP are clarified and in chapter 4 the strategic challenges for U.S. multinational firms in FMCG established according to literature research. Local partners can play a key role in making profits and create development at the rural BoP. Therefore in this paragraph a 3 dimensional matrix will be established according to the literature. Because local partners can help U.S. multinationals in different ways there has to be made clear which strategic challenges fits to which local partner and to which need of the rural Indian BoP. Local partners can be seen as a mediator between the rural needs and the strategic challenges of an U.S. multinational in FMCG In figure 15 this matrix can be seen.
A business group could help the rural BoP with producing roads to create access to the villages. This also has a positive effect on the efficiency of the logistical system. An improvement of the roads will decrease the product prices because trucks spend less time on traveling to the villages. Furthermore, a production plant in the rural area requires well functioning infrastructure which is good for the rural village. The rural BoP requires high quality products and only need options that they use. The rural BoP does not want to pay for options they are not using. Therefore eliminating production parts that are not necessary increase the quality of the products. A business group can help a U.S. multinational in FMCG with this process.
Innovating high valuable products goes hand in hand with high quality products. Therefore there is a correlation between the needs and the challenges. Applying U.S. product safety standards increase the quality of the product. The rural BoP wants a product with a long life time. Healthcare and education are needs of the rural BoP and can be done by NGOs. These NGOs cooperate according to the CSR strategy of the U.S. multinational in FMCG. According to the literature, all the three foreamentioned local partners have information and knowledge about the local needs and can provide U.S. multinationals in FMCG to make sure these needs will be developed.
Strategy/Rural needs Dr in ki ng w ate r Ed uc ati on El ec tr ici ty W el l f un cti on in g te le co mmu ni ca tio n in fr as tr uc tu re Go od ro ad s He al th ca re W ome n emp ow er me nt sta tu s Le ad er sh ip Te ch no lo gy to p ur ify w ate r Ac ce ss to cr ed it In cr ea se in pr od uc tiv ity Lo w p ric ed p ro du cts W el l f un cti on in g ma rk et in cr ea se in pu rc ha sin g po w er Hi gh q ua lity p ro du cts Well functioning logistical system Business group Business Group Reduce cost price of
the product Business group Business Group Business group
Economies of scale Business
group
Business Group
Business group Offering low priced
products Business group Business Group Business group Production plant in the area Business group Business group Business Group Cultural adaptations to the product Business group & NGO Business group Use local entrepreneurs Business Group Business Group Business group & NGO Business group Business Group Eliminate production
parts that are not necessary Business group Business group Business Group Business group Create brand awareness Business group NGO Business group Business group Business group Local CSR development activities NGO Local governm ent & Business group Local governm ent, Business group & NGO Business group Business Group Special made promotions, advertisements and communication about the product Business group & NGO Innovate high valuable products Business group Business group Business Group Business Group Business group Business group Business group Business group Rural inclusion in the
innovation process Business group Business group American product safety standards Business group & Local governm ent Business group Business group Develop a specific
strategy towards the rural BoP
Innovate the distribution chain to
reduce costs and Business Business
Business Group Business group
Business group
NGO & Local
government NGO
5.6 Conclusion
According to the theory of London & Hart (2004) and Khanna & Palepu (1997) the three most important local partners in emerging rural India are examined. These three local partners are 1) business groups, 2) NGOs and 3) local governments. All three have different interests and specialties. A business group with an undiversified portfolio gained competitive advantages in the Indian market due to brand awareness. NGOs have knowledge about the local needs of the rural BoP and are specialized in social work and development of the rural BoP. Local governments are of great importance to get things done but also to speed up activities. Therefore these local partners are of great importance to become successful in the Indian market.
5.7 Research
According the literature research the matrix in figure 15 is established. This research will focus how local partners can help U.S. multinationals in FMCG as a mediator between the needs of the rural BoP and the strategic challenges of the U.S. multinationals in FMCG. To get to know the whole working field of a local partners, all the strategic challenges for U.S. multinational firms in FMCG have to be found. When there are more strategic challenges a local partner might can offer more services or products to a U.S. multinational in FMCG. Therefore there will be researched if there are more strategic challenges for Indian firms than there is described in the literature. This is in line with the improvement of the causal model that is explained in figure 2. New relations, different relations or new factors that could influence the performance of U.S. multinational firms in FMCG will be researched.
To create development for the rural BoP there will be done research to more needs of the rural BoP. To satisfy more needs of the rural BoP there will be researched if there are more needs of the rural BoP.
6 Method
The research question of this thesis is: “How can local partners help U.S. firms in fast moving consumer goods make profits at the rural base of the pyramid in India and simultaneously create development for these people?” This question will be answered based upon literature research and field research. The field research exist of 10 case analysis and 5 conversations with experts.
The case analysis is done according to the theory of Yin (2014). In total 10 business cases are analyzed. Three business cases about Coca Cola are embedded in 1 case analysis. These three cases are about CSR policies, entry mode of Coca Cola in India and the branding strategy of Coca Cola in India. These business cases have different sources and create a more in depth view how Coca Cola is operating in India. There are also 4 analyzed business cases about U.S. multinational firms in FMCG who just entered or operate in India. These U.S. multinationals are: Mc Donald’s, Starbucks, Oreo and Gillette. These cases are analyzed to create a broader view how U.S. multinationals operate in India. To gather information from a FMCG firm from another than the U.S. there is analyzed a single case study of Hindustan Unilever. To see possible differences between FMCG multinationals from different countries it is helpful to analyze this business case of Hindustan Unilever. Hindustan Unilever is a subsidiary of the Dutch Unilever. There could be differences between the rural BoP approach of U.S. firms and Indian firms. Therefore 2 Indian cases are researched. The first case is about E-Choupal, an online internet market platform for rural farmers. The other case is about the impact of brand awareness in the rural area. According to the literature brand awareness seems to be an important factor for U.S. multinationals that operate in rural India.
These case analysis are combined with in depth interviews. It was far from easy to reach people who have knowledge in this area of research. In total I have made around 30 phone calls and sent 55 e-mails to firms and individuals. I had selected to contact: U.S. multinational firms in FMCG who operate in India, professors who have written articles about rural India, Indian business groups, Indian NGOs and people in my network who had contacts with India. I aimed to speak managers from the marketing, innovation or CSR department who have information about doing business at the rural Indian BoP. The whole contact list is available in appendix II.
fall in the scope of this research. I was limited to send 25 mails to people who are not in my 1th, 2th or 3th ring of network. So I picked 25 managers regarding the scope of this research to send them a message. This resulted in 1 reply. This person requested me to send an e-mail to a HRM manager at Mahindra & Mahindra India. After a week I received a reply to interview Ronaan Roy, brand marketing manager of Mahindra & Mahindra Tractor division. Ronaan is involved in the process of selling tractors to farmers in the rural areas of India. This interview is recorded and the transcript is sent to Ronaan for corrections and misinterpretations. This interview is done through Skype and is available in appendix IV.
It is useful to interview experts in this field of research and therefore I have sent e-mails to professors who have written business cases about the rural BoP. I have interviewed Dr. Chaklader, professor at the university of New Delhi. She was co author of the business case: “Efficient Water Management through Public-private partnership model: An experiment in CSR by Coca Cola India”. This was an in depth interview about integrating CSR policies into the strategy of U.S. Multinational firms in FMCG in India. Notes have been made of this interview and are written down in appendix III. To increase the reliability and validity of this interview I have send the notes to Dr. Chaklader for corrections. Furthermore, I had a short e-mail conversation with professor Harish from the IBS industry who is co-author of Coca Cola in India: A responsible corporate citizen? This e-mail conversation is visible in appendix VI.
After sending e-mail I received a message from a person who wants to stay anonymous. This person is further called person 1. Person 1 is working in a top position of a U.S. multinational in FMCG who operates already for years in India. This U.S. multinational in FMCG will be called firm 1 from now. I kept in touch with person 1 via Whatsapp and person one provided me write ups how firm 1 is reaching the BoP and is exploiting CSR activities in India. To be sure person 1 really exists I checked his e-mail address, Linkedin and Facebook profile. Everything was correct.
Via my network I interviewed Patrick de Ridder. Patrick de Ridder is director of Dutch Business Partners in India. He is living for 17 years in India and creating partnerships between foreign firms and local Indian firms. To increase the reliability and validity this interview is recorded. The transcript is available in appendix V. To make sure there are no misunderstandings the transcript is sent to Mr. de Ridder for possible corrections. This interview was in Dutch and is translated into English.
7 Case studies
7.1 Theory development
According to Yin (2013) the business cases will be analyzed in a multiple case study. Case studies are necessary to examine the underlying mechanisms that could explain a statistical correlation.
For case studies theory development is highly desired (Yin, 2013). In this research the research question is following:
How can local partners help U.S. firms in fast moving consumer goods to make profits by selling products to the rural BoP and on the other hand create development for these people?
A theoretical framework is necessary to do good case study research, however theory development could be difficult and it takes time (Eisenhardt, 1989). Eisenhardt describes that a good case study exists out of 4 to 10 cases. Therefore in the previous chapters the theory development is done at first and after the case study.
Multiple case studies have certain advantages and disadvantages in comparison to single case studies. Multiple case studies are more robust and are often considered as more compelling (Herriott & Firestone, 1983).
To provide the best case study results for this research question the following case studies will be done:
- One embedded case analysis of three cases of Coca Cola in India
- Four case studies of U.S. FMCG multinational firms who are operational in India - One case study of a Dutch subsidiary in FMCG who operates at the rural BoP - Two case analysis of Indian firms who operate at the rural BoP
These cases are selected due to their familiarity with the rural BoP, innovation, contribution to the development of the rural BoP and cooperation with local partners. There are also three selected firms which are not from the U.S.. The reason for this decision is that U.S. firms might be able to learn from local Indian firms and a progressive Dutch firm in FMCG.
In total ten case studies will be analyzed according to the literature research that is done in previous chapters. After the literature research the following will be expected:
- Use of local partners to create development of the rural BoP and make profit The case study will be analyzed according to the following principles:
1) What do you see in the case study
2) What information from the case is helpful for this research 3) Confront the different cases
The confrontation phase will done after describing the case and examining what case information is useful for this research. The four different case studies (embedded, multiple, single and multiple case studies) will be analyzed by confronting them.
7.2 Embedded case analysis of Coca Cola in India
Three single case analysis are embedded to one case analysis because this analysis is about a single organization. This embedded case analysis consists out of three papers which are visible in figure 16.
Figure 16: Embedded case analysis
Name article Authors
Coca Cola India Unknown
Efficient water management through public-private partnership model: an experiment in CSR by Coca Cola India
Chaklader, B & Gautam, N. (2013)
Coca Cola’s branding strategies in India Mukerjee, K. (2008)
1) What can be seen in this embedded case analysis?
A bottle of Coca Cola had to be available for most of the citizens of India. Therefore Coca Cola dropped the price of a bottle and reduced the volume. A bottle of 200ml cost 5 Indian Rupee so it is even affordable for most of the poor Indian people. To reach the rural BoP, Coca Cola established two different strategies in India, one for the rural areas and one for the urban areas. This resulted in an urban growth rate of 24% and 37% growth rate in rural India in 2003. Coca Cola also faced distribution difficulties and demonstrations due to depletion of water resources. To get bottles of Coca Cola in the rural areas, Coca Cola used 10 ton trucks and three wheelers. Three wheelers are better able to drive over sand roads than heavy trucks.
depleting the rain water which harmed the local farmers. This resulted in demonstrations at the Coca Cola bottling plant. Coca Cola started communicating about the local needs with the community and this resulted in local CSR policies. Coca Cola is for 30% sponsoring irrigation systems for the farmers, the local government of Rajasthan subsidizes 60% which made it possible for the local farmers afford drip irrigation and increase production and quality. NGOs were helping with educational programs in the villages and local entrepreneurs were working for Coca Cola. Coca Cola was not pro-active in their CSR policies which faced resistance in the beginning but afterwards Coca Cola became popular due to regional and personal development.
Coca Cola had almost the same problem in Kerala (Southern India). Coca Cola established a bottling plant without taking into account local CSR policies. This resulted in local resistance and demonstrations towards Coca Cola. Coca Cola proposed to develop the local community but there was no information about the needs of the local people. So Coca Cola had to close the bottling plant in Kerala.
2) What information out of the embedded case analysis is helpful?
Be pro-active in local CSR policies and take into account the needs of the local people. These needs differ across India and this is the base of CSR policy. A special strategy for rural and urban India was successful, just like the invention of smaller Coca Cola bottles for lower prices in rural India. Working together with the local government and NGOs to provide subsidies, education and healthcare worked positively towards personal and regional development.
7.3 Multiple case analysis
In this paragraph multiple single cases will be analyzed and over this information one conclusion will be drawn. “Single case studies are vulnerable because you put ‘all your eggs in one basket” (Yin, 2014). Yin (2014) argues that using more than two case studies can have a stronger effect to the results and could be more powerful when they offer contrasting situations. The following cases differ according to the following reasons: 1) general strategy of Mc Donalds, 2) entry strategy of Starbucks, 3) Oreo about distribution channels and marketing, 4) about marketing in India.
7.3.1 Mc Donald’s (Dash, 2005)
1) What can be seen in this case analysis?
KFC directly entered the Indian market after liberalizations but did not have politically correct strategy which resulted in a demonstration against KFC in Bangalore. This was something Mc Donald’s did not want to happen and was very reluctant with their strategy to the local government.
Mc Donald’s is aligned to many NGOs which are all non profit. Mc Donald’s invest in the environment, want to make India polio free in 2005 and join the world’s children week. As stated before Mc Donald’s focuses on the middle and upper class of the Indian society. But still they decreased the prices of a ‘Veggie Burger’ and ice cream with about 50%. This resulted in more customers.
Mc Donald’s was forced to make use of local suppliers due to high import tariffs. Mc Donald’s only use local people for the distribution and helps farmers to increase their quality of lettuce. To enhance quality and to reduce water usage of the farmers they implemented drip irrigation. Due to the bad logistical environment in India Mc Donald’s had to establish a distribution center in the neighborhood of Delhi and Mumbai. It can only serve Mc Donald’s retailers in a circle of 500 kilometers of their distribution center. Mc Donald’s even worked together with a partner in petroleum to establish Mc drive facilities close to the highways. Mc Donald’s adapted the food and eating culture of the Indian people perfectly and came up with different burgers which are very popular. The target group of Mc Donald’s is like everywhere in the world family-centric and child-centric. Therefore most of the Mc Donald’s retailers have a play/fun zone for children and an area to hold birthday parties. Due to the fact that sweet ice cream is popular after dinner Mc Donald’s invented the ‘cold Kiosk’ where people can buy an ice cream on the streets for 7 rupee.
The downside is that Mc Donald’s is not making profit but it is reinvesting the revenues into the society . Nevertheless Mc Donald’s is not focusing on the people who live at the BoP which is an enormous market in India with about 800 million people.
2) What information out of the case analysis is helpful?
7.3.2 Starbucks (Zerrillo et al. 2013)
1) What can be seen in this case analysis?
In 2012 the U.S. coffee chain Starbucks entered the Indian market. Starbucks started studying the Indian market in 2005 and tried to enter the market first with Kishore Buyani an Indonesian franchise partner of Starbucks. The Indian government refused this alignment because of the ownership structure. Starbucks was convinced it had to enter the Indian market with a partner. In 2012 Starbucks found Tata Global Beverages as a joint venture partner to enter the Indian market. Starbucks entered India with the same business model as Pizza Hut, Costa Coffee and Domino’s pizza. The Challenge for Starbucks is that Indians do not drink high amounts of coffee. In India per capita people drink 82 grams per year compared to Germany 6,8 kg, 5,9 in Brazil and 4,5 kg in the United States. Chaiwala (chai tea) is more popular to drink in India.
Starbucks entered the Indian market under the brand: ‘Starbucks: A Tata Alliance’ which is the first time in the 41 year history of Starbucks to share the green and white logo. Starbucks had to train the employees, therefore they set up training centers in Mumbai and Delhi. The store managers were sent to Singapore, Malaysia and Thailand for shop floor training. Because the import tariffs on coffee beans in India are 100%, Starbucks decided to use local roasted beans from India and invented a new coffee specifically for the Indian coffee market. After studying the Indian market Starbucks recognized that food is important for Indian people so Starbucks changed and extended the assortment of food products. By using another local partner Starbucks was selling the ‘Murg Tikka’ Panini and a spiced chicken cooked in a tandoor (clay oven).
Starbucks wanted to enter the Indian market without compromising the premium experience. Therefore Starbucks sells coffee for half of the price they do in Beijing. To compete with Café Coffee day and Costa coffee the used a different pricing model. All the coffee of Starbucks in India has the same price, if you’re in a 5 star hotel or in a mall. The competitors of Starbucks have everywhere in India different prices. In India people like to drink coffee in the store and see this as a social meeting place therefore Starbucks has bigger outlet stores. Ethical responsibility is important for Starbucks. They help farmers with coffee growing and milling skills. Furthermore Starbucks is supporting the Swastha school project for children with special needs.
2) What information out of the case analysis is helpful?
Starbucks entered India in a Joint Venture with Tata and changed the name to ‘Starbucks: A Tata Alliance’ to create awareness. Starbucks adapted the local taste preferences for food into their products and priced their products as the lowest in the world and everywhere in India at the same level. Furthermore, Starbucks used the same entry mode as Pizza Hut, Costa Coffee and Domino’s Pizza which seems to be a generalizable entry model. Starbucks used local coffee beans and local farmers to produce these beans.
7.3.3 Oreo (Sarkar, 2013)
1) What can be seen in this case analysis?
Kraft Foods operates in more than 75 countries and in 2010 it acquired the English Cadbury plc. The goal of Kraft Foods is to get 40% of its revenues from emerging markets and especially the BRIC countries. The Indian biscuit market was dominated by Parle, Britannia and ITC in 2011. The largest player is Parle with a market share of 40%, Brittania follows with 25% and ITC with 8%. In 2011 Oreo got launched in India. Oreo biscuits are the world’s #1 biscuits with a sales of 7,5 billion a year. Oreo adjust the product to local preferences to make sure there is a balance in the flavors for the Indian people. In India Oreo was launched under the Cadbury brand name because Cadbury has a stronger brand equity in India.
Oreo took advantage of the 1.2 million store reach of Cadbury in urban and rural India. The network of Cadbury includes 2.100 distributors and 450.000 retailers. To bring down the price, Oreo came up with 3 different packages. 5 rupee for a pack of three biscuits, 10 rupee for a pack of seven and 20 rupee for a pack of 14 biscuits. Oreo could reduce costs to make use of an Indian third- party manufacturer. Oreo implemented a special marketing promotion strategy in India to reach children. Furthermore Oreo established different flavors like strawberry in their biscuits to meet the needs of the local people. The two main determinants of success are:
1) The barriers in the market were low due to Cadbury
2) Economies of scale could be used and there already was a distribution channel
2) What information out of the case analysis is helpful?
