Abu Dhabi University
College of Business Administration
International Business (MGT 521)
Al Ain Dairy in the United Kingdom
Submitted To:
Submitted By:
Date: 5 January 2015
Fall B 2014/2015
Table of Content
Introduction 3
About Dubai Ports International 3
The Choice of the Country 5
PESTEL Analysis of Australia 6
SWOT Analysis of the Company 9
Modes of Entry 11
Resources Need 13
Conclusion 16
References 17
Introduction
Apart from the domestic expansion and value creation, the existence of international expansion is
extremely essential for an organization (Casillas, Acedo & Moreno, 2007). Organizations across
the globe are now focusing on expanding their core networks in different parts of the world for
their future stability and effectiveness. Almost every organization of the world is now
strategizing very hard to sustain in this competitive world through expansion, but only a few can
make a difference.
There are certain pre-requisites that should be considered by an organization to expand their
network in different parts of the world; however strategic management and modeling are also
important to be used for this particular activity (Czinkota & Ronkainen, 1998). In this work
paper we are also trying to deliver the same thing in the UK. Al-Ain Dairy is the company
which is trying to initiate an international expansion strategy in the UK that will provide both
economic and non-economic benefits to the company. To do the same it requires applying
different expansion models and techniques that will be considered effective as far as expanding
the networks are concerned. Apart from applying the models of PESTEL and SWOT Analysis of
the country and company, mentioning of entry models is also essential.
About Dubai Ports International
Al Ain Dairy was founded in 1996. The Company's line of business includes manufacturing dry,
condensed, and evaporated dairy products. Al Ain Dairy, the largest dairy producer in the UAE,
has been consistently delivering quality dairy, juice, yoghurt and dessert products for over 30
years. From their impressive farm and factory located in Al Ain, the company is producing an
ever growing portfolio of fresh dairy products. The flagship brand encompasses the staple fresh
cow milk and juice products, while the camel milk products are marketed under the premium
Camelait brand and includes a full range of fresh camel milk, flavored camel milk, laban, ice
cream and milk powder. The company has witnessed significant growth in the hypermarket
sector during the last 10 years with a current local market share of 38 per cent. Al Ain Dairy is
capitalizing on the opportunities at home. The company which has an annual turnover of Dh500
million. The firm which started with 200 livestock in 1981 has over 5,000 cows and 2,500
camels today
The Scenario
Both Domestic and International expansion are essential for an organization, because both will
increase the level of output of the company in a positive manner (Casillas, Acedo & Moreno,
2007). However, most of the recognition will be given to the International Expansion, as it has a
long term effect over the financial stability and capability of a company. The given scenario
relates with the international expansion of Al-Ain in one of the developed countries of the world,
UK.
The Choice of the Country
United Kingdom is the country which has been taken into account for this analysis. United
Kingdom, heart of Europe, consists of Great Britain and Northern Ireland, is one of the biggest
countries, territories of the world. The history of this great kingdom is very old beginning by
about 30,000 years ago. It was ruled by many emperors and thus periodically converted into
civilized nations. The emperors of United Kingdom also rules over many other countries thus
making many colonies of Great Britain in several regions of the world, for example, North
America and Sub-continent were also the colony of Great Britain. It is difficult to remember the
deep history of United Kingdom because it is very old and complex. But overall, United
Kingdom has enjoyed very good time in the history. The United Kingdom is a parliamentary
democracy with a constitutional monarch. A king or queen is the head of state, and a prime
minister is the head of government. The people vote in elections for Members of Parliament
(MPs) to represent them. The British economy also has a rich and diverse sectoral mix. The bulk
of the economy is service-based: from the large and world-beating financial & insurance industry
(8% of Gross Value Added (GVA)), through professional, technical and support services (a
further 12%) to the smaller but internationally renowned cultural sector[8] (taking a 2% share).
And, contrary to popular belief, the UK still makes, shapes and builds things too: its
manufacturing sector is the 9th largest in the world; construction is the other large non-services
sector, with a 6% share; while the oil & gas sector remains crucial in strategic terms, although its
share of GVA has declined to 2%.
PESTEL Analysis of UK
The field of Strategic Management is extremely broad, and it usually completed through the
utilization of different models and techniques. PESTEL Analysis is one of the most important
aspects that associated specifically with the Strategic Management (Casillas, Acedo & Moreno,
2007). PESTLE describes about the Political, Social, Economic, Technological, Environmental
and Legal aspects of a country (Inazumi, 2005). PESTEL Analysis works as an Environmental
Scanning tool that will analyze the Ethics and Demographics of a country. The rationale behind
choosing PESTEL analysis in this particular part is that it will analyze the core behavior of the
country while expanding the operations of Dubai ports International. All of the six elements of
PESTEL analysis will work explicitly for getting an idea about the effectiveness of the expansion
both from financial and strategic angles.
Political Factors of UK
The UK has had a stable democratic government for several decades, the situation expected to
remain the same in the foreseeable future. The country has mixed economy which means that
both the public and the private sectors work together in providing goods and services. The UK
maintains an interventionist approach in managing the economy and therefore develops and
implements regulations and policies that govern how the economy works. Most of the policies,
laws and regulations are developed at the national, regional, and local levels. Businesses
operating in the UK are also affected by international laws and treaties that the UK is party to.
Although the political environment is stable at the moment, there is great uncertainty about the
future of the nation politically in the event that citizens vote in favour of an exit from the
European Union in June, 2016 (Allen & Overy 2016).
Some of the main policies that affect businesses in the UK include the country’s fiscal and
monetary policies. The government imposes direct and indirect taxes on businesses in the form
of corporation tax, value-added tax, council tax, excise duties, and national insurance
contributions. Currently, the corporate tax rate as instituted by the national government stands at
18%, down from the previous rate of 20% (UK Government 2016; Gandhi 2015). Like other
businesses operating in London, Al-Ain Dairy will pay taxes which effectively reduce its
profitability. The government maintains a monetary policy which targets maintaining the level of
inflation at a maximum of 2%. This means that the government is committed to maintaining
medium-term price stability (Carney 2015).
As previously notes, one of the political issues that the U.K. is currently faced with is the
country’s possible withdrawal from the European Union (EU). The nation is bound to hold a
referendum on 23rd June, 2016 to decide whether or not it will continue to be part of the Union
(Allen & Overy 2016). Al-Ain Dairy will definitely be affected in different ways if the nation
goes the Brexit way. While the full effects of a possible Brexit remain unclear to a great extent, it
remains a fact that there is a strong link between the nation’s legal sector and the wider economy
of the United Kingdom as well as market forces.
Economical Factors of UK
The economy of the UK was greatly affected by the 2007-2008 financial crises. Ever since mid
2009, the country has been recovering from the crisis (Price Waterhouse Coopers 2016). Its
recovery, although slower by historical standards, has been faster than that recorded by most of
the other G7 economies over the same duration. While the country’s GDP growth dipped slightly
in 2015, consumer spending remained relatively strong, the situation further boosted by lower oil
prices. Analysts estimate that the country will achieve a GDP growth of 2% in 2016 as noted by
Price Waterhouse Coopers (2016). It is also expected that consumer spending will remain strong
during the year much as food and energy prices will remain low. Economists estimate that the
inflation rate will gradually rise to the 2% mark from the current zero% later in 2017 which
could prompt the Monetary Policy Commission (MPC) to raise the interest rates (Price
Waterhouse Coopers 2016). For almost seven years, the interest rate has been maintained at
almost zero percent.
According to Spence (2016), the UK has a public debt in excess of £1.5 trillion. While this is the
case, the government is steadily on track in repaying this debt.
Analysts note that in 2015, the UK emerged as one of the fastest growing major developed
economies. The rate of unemployment steadily fell during the year steadying at 5.4% while the
housing market thrived (Elliott 2015). Consumer spending during the year also grew, a trend that
will most likely continue in 2016 going by experts predictions. The country has also benefited
from the strengthening of the pound against major currencies including the Euro and the US
dollar in 2015 according to Elliott (2015). Although the first half of 2016 seems promising for
the nation in economic terms, the second half is quite uncertain as noted by Elliott (2015). The
uncertainty in this respect revolves around the impending referendum on Brexit.
Social Factors of UK
The UK has a population of more than 63,742,980 individuals according to Index Mundi (2015).
The population growth rate stands at close to 0.54%, the population comprising different ethnic
groups, majority of which is White (87.2%). Close to 80% of the population of the UK lives in
urban areas with London hosting over nine million residents (Index Mundi 2015). The nation has
a literacy level of 99%. The aging population in the country is steadily growing which also
means that spending on the aging population by government and individuals is steadily rising
(Kingsfund 2016).
In general, people in the UK have divided opinions regarding whether the country should
withdraw from the European Union. They are also divided on the net effects of a UK withdrawal
from the EU in the immediate, medium and long terms. A recent opinion poll indicated that 46%
of UK nationals want the UK to remain in the EU against 43% opposed to this view (Financial
Times 2016). The population enjoys a lot of freedom in choosing what individuals do and where
they work. Most individuals however work in urban areas where job opportunities abound.
Technological Factors of UK
One of the technologies that affect how business is conducted anywhere in the world is
Information Communication Technology. Statistics indicate that over 90% of adults in the UK
use computing devices on a daily basis (Office of National Statistics 2015). Statistics further
indicate that close to 38 million adults, accounting for 77% of the country’s adult population,
have access to the Internet on a daily basis (Office of National Statistics 2015). Between 2010
and 2014, usage of mobile phones to access the Internet grew from 25% to 58% (Office of
National Statistics 2015). Well over 91% of UK households currently have access to broadband
Internet.
Environmental Factors of UK
Being a major city, London has a huge population of people. The city has a good transport
network comprising road, rail and air transport systems (London County Government 2016). In
spite of the huge population of people in the city, the city’s environment is generally clean and
well planned. More than 50% of the area in the city is covered in plants making the air quality
much better that it is in most cities around the world (London County Government 2016). With
parks and green spaces covering a huge part of the city, people in the city have several options to
choose from when it comes to resting and leisure. The city has a reliable supply of clean water
and well maintained sewer and drainage systems. In general, the city has a good infrastructural
network that is vital for the success of businesses
Legal Factors of Australia
The United Kingdom has a stable and reliable legal system. The country also has a reliable court
system. Legislations and policies are instituted by the national and local governments through
elected leaders. Several laws apply to businesses in the UK and London specifically. Some of
these legislations relate to employment laws, contract laws, and environmental laws.
The national and local governments of the UK are concerned about the maintenance of a clean
and safe physical environment. The Environmental Protection Act 1990 demands that domestic,
commercial and industrial wastes be properly disposed to ensure that the environment remains
clean (Tromans 1991). The London County Council has also instituted laws to ensure that the
physical environment is conducive and that all kinds of pollution are minimised. Appreciating
the fact that climate change is a serious global issue, the different levels of government of the
UK are taking measures to ensure that nationals minimise emission of greenhouse gases.
SWOT Analysis of the Company
A Strategic Management tool that associated with the in-depth analysis of a company is known
as SWOT Analysis (Ronkainen & Czinkota, 2002). This particular technique has been divided
into two different sections that deal with both internal and external factors of the marketplace.
Strengths and Weaknesses of a company will be considered as internal elements, while
Opportunities and Threats are to be evaluated and assessed as external conditions (Sternquist,
1998).
Strengths
Al-Ain Dairy enjoys a great reputation in the country due to its customer-centric
approach. Combined with its policy of helping the nation at various junctures, and its
dedication to food standards, Al Ain Dairy Farms has been in the eye of the consumers
for a long time. Its expertise in keeping its customers happy has led to it being one of
the largest dairy farms in UAE. The quality of their milk is almost unparalleled and only
a few companies like Al-Rawabi Dairy, and Digdaga Dairy are able to match the high
quality of Al Ain Dairy high quality of milk. Hence its customer satisfaction is
unparalleled in various aspects.
Al Ain Dairy also boasts of a huge milk volume production. With more than 20 million
liters of milk produced annually, Al Ain Dairy Dairy Farms holds the leading position in
the dairy industry with more to come. Its high-quality cows ensure maximum milk
production at minimal cost of maintenance of these cows. This helps it in maximizing its
profits and provides for more capital to invest in the coming years. Its locally bred cows
are extremely resilient to any changes in the environment and have a better lactating
span than the average cow, which again translates into great investment for the dairy
company.
Weaknesses
Cost of manpower and setup is relatively more in Australia than in Dubai.
Perception of people in Australia. Probably, because DP world comes from a small
Middle Eastern country, that may neither appeal to government nor the public.
Opportunities
Australia is growing market for International Business. In a research conducted by
(Drewry Maritime, 2013) shows that container volume is expected to grow by 3.9% in
the Australia/Asia region.
Gaining access and usage to the current available domestic technology. This means
company would have to spend less on buying new technology and shipping costs with
which that is delivered to Australia. Thereby, enhancing its overall operational efficiency
and capability.
The company can take advantage of long term concession agreements given by ports
Australia (national body for representing interests of ports and marine authorities) should
DP world wish to enter the Australian market through equity alliance.
Threats
The strict legal constraints may be a challenge. This involves dealing with manpower
health insurance, pension funds, and social security. For example, the fear of strikes
leaded by local trade union in order to enhance salary pay and working conditions. In
addition to complicated tax management.
Ports Australia might impose to buy existing assets in the domestic port or at least invest
in it by offering to buy new technology.
Modes of Entry
International Expansion (IE) or International Business (IB) will always create positivity for the
organizations; however it should be initiated with immense care and positive mindset. The thing
that will certainly works in this particular scenario of IB is Modes of Entry (Ronkainen &
Czinkota, 2002). It means organizations have to select the best available modes of entry to
compete with identical organizations, already operating in the country. Obviously, it is not
possible for a new company to enter in an already existing business unit and flourish in the new
marketplace; therefore a proper mode of entry is required which is equally applicable on the
scenario of DP World.
Exporting
Exporting is a cross border sale of domestically grown or produced goods Cavusgil,
2004). There are three types of exporting: indirect exporting, direct exporting and
cooperative exporting. Indirect exporting is the most low risk entry mode as there is
effectively no exposure to the foreign market and its associated risks (Kotler &
Armstrong, 2012). The organisation is merely selling their product to an agent in the
foreign market who then sells the product on to an intermediary. Exporting is a common
method used by organisations when they first enter a new market. Organisations
choose this options as it's low risk, it requires less commitment, and gets their brand
exposure to the new market. A number of organisations choose indirect export as an
entry mode to see if the foreign market is receptive of their brand. In situations where
the foreign market is receptive, an organisation may choose to further ingrain their
presence in the foreign market with higher commitment, higher presence, and higher
risk foreign entry mode strategies (Cavusgil, 2004). Exporting has become more
prevalent across the globe due to the removal of trade barriers, and transport becoming
cheaper and more efficient (Shaver, 2011).
A direct export is the same as an indirect export except that it doesn't involve an agent
who sells the good to the intermediary. Direct exporting is a very common entry mode
used by organisations who want exposure to a foreign market, but want to limit the
risks associated with other types of entry modes. The Austrian energy drink Red Bull
entered Australia using direct export as its entry mode. Red Bull is the leading energy
drink brand in the Australian market, holding a 36% market share (Speedy, 2011). This
case of Red Bull supports that exporting can be a very successful foreign entry mode
strategy.
Cooperative exporting is another exporting option that organisations can use as a
foreign market entry strategy. Organisations use this entry mode by entering an
agreement with another foreign or local organisation to use its distribution network
(Kotler & Armstrong 2012). This entry mode allows organisations reach to the foreign
market without the associated risks that come with other entry modes. Cooperative
exporting is generally mutually beneficial, provided the goods being exported don't
impede the sale of other products being sold (Kotler & Armstrong, 2012). For
cooperative exporting to be successful the exported product should complement, as
oppose to compete against other products being sold. US chewing gum company
Wrigley successfully entered the Indian market using cooperative export as their foreign
entry mode. Wrigley entered a cooperative export agreement with Parrys, a local
confectionery company, by doing so Wrigley gained access to 250,000 retail outlets
(Kotler & Armstrong, 2012).
Licensing
International licensing is a cross border agreement that permits organisations in the
target country the rights to use the property of the licensor (Kotler & Armstrong, 2012).
This property is generally intangible and includes: trademarks, patents, and production
techniques. The licensee is required to pay a fee in exchange for the rights specified in
the contract between the parties. Licensing is commonly chosen because it's low risk,
has low exposure to economic and political conditions, has high return on investment
and is preferred by local governments (Agrawal & Ramaswami, 1992). Microsoft Corp
and Walt Disney Co are two examples of large multinationals that have had success in
foreign markets using licensing as their entry mode. Whilst licensing in these examples
have been very successful and undoubtedly the right foreign market entry mode,
licensing does have its limitations. Licensing can reduce the potential profit of outright
ownership, affect the image of the brand due to lack of control over licensee, and
nurture a potential future competitor (Brouthers, 2013).
Franchising
Franchising is a foreign market entry strategy where a semi-independent business
owner (the franchisee) pays fees and royalties to the franchiser to use a company's
trademark and sell its products and/or services (Kotler & Armstrong, 2012). The terms
and conditions of a franchise package vary depending on the contract, however it
generally includes: equipment, operations and management manual, staff training, and
location approval (Alon, 2014). Franchising is commonly used and a largely successful
method of cross border market entry, however organisations pursuing this entry mode
need to consider both the positive and negative aspects of franchising.
The most common advantages of franchising are that it capitalises on an already
successful strategy, the franchisee generally has local knowledge, it's less risky than
equity based foreign entry modes, and the franchisor isn't exposed to risks associated
with the foreign market (Alon, 2014). Subway, 7-Eleven, Pizza Hut, and McDonalds are
just a few examples of organisations that have been successful using franchising as
their foreign market entry mode. Subway was founded in 1965 in the United States;
using franchising as a foreign market entry strategy it has grown to have over 42,000
stores in 107 countries. Subway is now the world's largest franchise and highlights how
successful franchising can be (Subway, 2014). Just like in the case of Subway,
franchising allows for rapid expansion that would be unlikely using other foreign entry
modes.
Whilst in general, franchising is a popular and successful mode for foreign market entry,
there are a few potential shortcomings. These shortcomings include: decreased brand
quality due to not having full control over franchises, not maximising profit as franchisor
only receives a royalty fee and not the full profit made, and the possibility of nurturing a
future competitor. Whilst these potential shortcomings could be detrimental to an
organisation, franchising is continually chosen as a foreign market entry mode as
franchisors believe that the rewards outweigh the risks.
Joint Venture
An organisation may choose a joint venture as their foreign market entry mode for a
number of different reasons, for example: to divide the risk with other parties, to
leverage of each other's strengths etc. However if a joint venture is to be successful the
two or more organisations that form the joint venture must/should have common
objectives in regards to: the market of entry, acceptable levels of risk/reward of the
market entered, the sharing of technology, joint product development and the following
of local government laws (Kotler & Armstrong, 2012). Joint ventures often thrive if the
following conditions are present between the partners: converging goals, small market
share compared to the market leader, and are able to learn from one another without
surrendering their competitive advantage or intellectual property (Chang, Chung &
Moon, 2012).
Under the right circumstances, a joint venture can allow an organisation to gain access
to a new market which it previously wouldn't have been able to do so by itself. The main
restriction in this situation is generally the local government. A local government may
choose to impose restrictions on wholly owned foreign investment for a number of
reasons, such as: threat to local players, threat to the environment, threat to the long
term prosperity of the industry etc. A real life example of this is Singapore Airlines
entering the Indian market. The Indian government imposes restrictions on foreign
airlines entering the local airline industry as a wholly owned subsidiary (The Indian
Express, 2014). However Singapore Airlines entered a joint venture with the Tata group,
and owns a 49% stake in the SIA/Tata alliance (The Indian Express, 2014). Whilst SIA
wanted to enter the Indian domestic airline market with maximum presence, entering
as a wholly owned subsidiary was not possible. Entering as a joint venture in this
situation was the best entry mode for SIA as it allowed maximum exposure, maximum
commitment, maximum flexibility and maximum potential rewards.
Wholly Owned Subsidiary
A wholly owned subsidiaries is the process where by an organisation enters a foreign
market with 100% ownership of the foreign entity (Yiu & Makino, 2002). The two ways
that wholly owned subsidiaries come about is through either acquisition or greenfield
operations. Acquisition is the purchase of a foreign organisation as a way to enter a new
market. A greenfield operation is the creation of a new organisation and legal entity in
the foreign market. A number of organisations that want to limit their risk, while
maximising their exposure to the foreign market will choose acquisition as their entry
mode. This is because an acquisition uses an already established brand name and
customer base. However neither acquisition or greenfield are seen as superior to one
another, the entry mode which is more beneficial is dependent upon the organisations
circumstances, goals and objectives.
Wholly owned subsidiaries incur more risks than all the entry modes previously
mentioned, however if implemented correctly and in the right circumstances, it
generally results in high rewards (profits). An organisation that enters a market as a
wholly owned subsidiary has: high control, high commitment, high presence and high
risk/reward. A wholly owned subsidiary allows an organisation to reach diverse
geographic regions, markets and different industries. Through entering the correct
markets and with good management a wholly owned subsidiary is a good hedge against
market changes, such as political changes, legal changes and declines in different
sectors (Yiu & Makino, 2002).
Resources Need
When operating a business organization there are mainly two resources needed which are
financial resources and human resource. Financial resources are the funds that are required by
the company to run its basic operation in the new market where as the human resource is needed
to perform different functions of the company like marketing, production and accounting. The
financial resources and huam reosurces are directly linked with the expansion project of Al Ain
dairy in the UK market. The cost of this project in indicated in the table below.
Amount in million (£)
Budget for Employees 9.00
License 1.00
Rent 5.00
Machinery 20.00
Patents 10.00
Total Investment 45.00
Patents/Rights;
10000000; 22% Labor Cost ; 9000000;
20%
License; 1000000; 2%
Rent; 5000000; 11%
Machinery; 20000000; 44%
Labor Cost License Rent Machinery Patents/Rights
The pie chart above indicates that cost required for machinery is highest of 45%. The second
highest cost is for the patents which is 22% of the total investment. The labor cost needed by Al
Ain Dairy to operate business in the UK is £ 9.0 Million which is 20% of the total investment.
Licensing requires the least cost of just 2% of the total investment.
1st Year 2nd Year 3rd Year
revenue Revenue Revenue
(Million £) (Million £) (Million £)
30 40 60
Return on Investment (ROI) 47.206% 70.925% 104.947%
Return on Investment
Revenue 3rd
Year; Return on
Investment;
104.947
Revenue 2nd
Year; Return on
Investment;
Revenue 1st 70.925
Year; Return on
Investment;
47.206
The ROI in the 1st years of operation for DP world would be 47%, and it will increase
tremendously in two consecutive years. The ROI in the 2 nd and 3rd years of operations will be
70.92% and 104.94% respectively, showing that the company will be gaining economic
prosperity during their expansion in the Australian market. This particular ROI located in the
favor of DP World, and the company should expand its operations in the said market.
Conclusion
Without any doubt, international expansion is essential for the economic prosperity of a
company, and it has the tendency to capture a high market share accordingly. History evident
that, organizations expanded their operations reached on the peak of wealth, like Proctor &
Gamble, Unilever, Nestle and others.
This assignment also talks about the International Expansion or having an International
Operations in a new market. The company is Al Ain Dairy strategizing to enter in the United
Kingdom for its expansion. Strategic management tools like PESTLE and SWOT has been used
for the same analysis along with analyzing the modes of entry as well. From this entire
expansionary analysis, it is evaluated that this particular expansion will be in the best possible
course for Al Ain Dairy, as the UK market has now emerged as one of the most powerful
markets in terms of business expansion. High per Capital Income and high Purchasing Power
Parity (PPP) are some of the pinpoints that differentiate this market from the other. It will be a
perfect opportunity for Al Ain Dairy to expand their operations in the UK market because it will
provide net benefits to the company in the near future, but keep in mind that a detailed visibility
study need to be performed in order to get more accurate study for such investment.