Critical Issues In Globalisation
Critical evaluation of Danone
1,925 words with the 10% allowance
This essay will critically evaluate the strategies that Paris based Danone adopt for entering foreign markets as this is fundamental to doing business internationally. From the information in the case study and wider research, I will argue that joint ventures/strategic alliances have been central to Danone’s success internationally; using international business theories/frameworks as analytical lenses to explain Danone’s international strategy. I will structure my essay by discussing and outlining key information about the Danone Group, analyse and have a critical perspective discussing the positives and negatives of several acclaimed academic frameworks and theories. For example FDI motives and strategies, choosing a location, Dunnings eclectic paradigm, FDI and joint ventures and recommendations. Finally I will decide if joint ventures and strategic alliances have proved to be the correct strategy to enter foreign markets for Danone.
Group Danone is a French multinational global food organisation who has four business divisions: water, fresh dairy, early life nutrition and medical nutrition. Danone operates in 140 countries, with 900 million consumers. Danone has a turnover of 21 billion euros, with over half of its sales (60%) coming from emerging markets. They have one belief that food must and can contribute to bringing health to consumers of all ages, in all countries, of all cultures (Danone 2015). In order to fulfil their mission Danone has had to internationalise and has been extremely successful in doing so. They have fulfilled this by becoming the world leaders and innovators in fresh dairy products, second in the world for early life nutrition and water and leaders in Europe for medical nutrition. Danones’s motivations for entering foreign markets was to diversify its customer base, increase economies of scale and market share, increase its knowledge and technology and to ultimately give the group a competitive advantage over its competitors in the food and drinks industry. International strategic alliances especially joint ventures are how they have encountered such paramount success.
FDI Motives and Strategies
Morrison (2008) discusses FDI motives and strategies (market-related motives, production-related motives, resource-related motives and control of specific strategic assets) I will apply this framework to Danone. Danone was well established in Europe meaning little scope for more paramount growth in those markets therefore this created a push factor towards
exploiting the opportunities available to maximise its growth in emerging markets. In Tahir and Weijing (2011) opinion FDI has emerged as a driving force of globalisation in the last two decades and the interest in host countries such as China has been encouraged because FDI flows are critical to economic growth and the significant impact on employment creation in emerging economies. Interestingly China is now the largest receiver of FDI as it exceeded the US in 2004; China is now the most favourable destination for FDI (Baharumshah and Almasaied 2009). Nevertheless there are challenges regarding FDI, as emerging markets may reject the organisation wishing to internationalise as consumers may prefer to purchase from native organisations. The organisation may also lack cultural knowledge. Although Danone have overcome these challenges as they chose to participate in joint ventures and strategic alliances with local organisations in order to penetrate untapped markets for example the joint venture with the Grameen Group in Bangladesh. The 159 million potential consumers suffered from poor nutrition and Danone’s early life and medical nutrition products had a huge impact on improving the health of the Bangladeshi society.
Production-related motives for Danone help them attain better economies of scale as they take advantage of the low cost labour. Danone made changes to its business practices by reducing the use of machinery to a minimum in order to create jobs for the community which has proven to decrease the poverty in the population. Resource-related motives include seeking raw materials of the ingredients used in Danone’s product ranges. Danone has been able to support local farmers in emerging markets as none of the ingredients used are imported, it’s all sourced locally. Danone had control of specific strategic assets as they spotted scope for growth and by creating a joint venture with a local organisation they acquired the knowledge/expertise required to be successful in emerging markets.
Choosing a location
Choosing the correct location is fundamental for the continued success of Danone. Using the Morrison (2008) location decision model I will discuss the tools that Danone have used and can use in the future to assess the suitability and profitability of locations they may consider to enter. The PESTLE analysis allows Danone to assess each location on imperative factors such as political, economic, sociocultural, technological, legal and environmental. FDI
involves major commitment and collaboration in the location therefore Danone are interested in an extensive range of environmental dimensions. Conducting a PESTLE and SWOT analysis can indicate the economic development of the chosen country. SWOT analysis is a useful technique for understanding the strengths and weaknesses and for identifying both the opportunities and threats of the chosen location (Mind Tools 2015). Developed in the 1960s the tool is still as useful as ever. The PESTLE analysis is a framework used to scan the locations external macro environment (Oxford Learning 2015).
Like many organisations Danone is looking specifically at the emerging markets and although they offer the greatest scope for growth they are weak in some environmental aspects. However the potential for the market and production elements are extremely high and this outweighs the weaknesses in political/legal areas. Figure 1 is a decision making tool that shows the aspects that Danone have assessed when entering far eastern markets. Although it has been argued that this is a simplistic tool if executed right it can be a critical aid in assessing the success and profitability of entering into specific markets.
Figure 1: “Location Decision” (Morrison 2008).
Dunnings Eclectic Paradigm
When assessing its capabilities for globalisation Danone would have analysed the organisation using Dunnings “Eclectic Paradigm”. Dunning is a seminal international theorist
and his theory of FDI is constructed on ownership advantages, location advantages and internalization advantages. “While location and ownership advantages had been highlighted by earlier theorists, the addition of internationalisation advantages based on transaction cost analysis, added a new element to form a more comprehensive framework” (Morrison 2008). There have been several criticisms of this framework including that there is no role of strategy as it is a static approach (Dunning 2001). Buckley and Casson (1998) make an interesting observation stating that the theory is too much of a paradigm and framework and too little of a model to provide detailed advice on research design and hypothesis testing. Although it has its limitations, based on the results from this analysis Danone was able to decide on creating joint ventures and strategic alliances in emerging markets such as India and China.
Figure 2: Dunnings Eclectic Paradigm (OLI) Dunning (1980)
FDI and Joint Ventures
As Morrison (2008) argues there is no single best internationalisation strategy, as different strategies are suited to different corporate goals therefore organisations will go down different avenues to internationalise. Success depends heavily on the suitability of a strategy to an organisation. Figure 3 shows the entry strategies that are available to Danone. Danone chose foreign direct investment (FDI) which means investment in an organisation from the host country; FDI is seen as the most complex mode of entry. The benefits of FDI include, increased control, profit potential and greater market share however the challenges in this strategy are political/economic risks and government policies.
Figure 3: Internationalization strategies (Morrison 2008)
Danone chose to enter foreign markets especially emerging markets by joint ventures with a foreign partner. A joint venture is “a type of strategic alliance consisting of a formal arrangement between two or more organizations to set up a new entity, in which each of the partners has an ownership stake” (Morrison 2008). Buckley and Casson (1998) state that during the 1980s a growing number of US organisations participated in international joint ventures as a quick fix to internationalise. This then encouraged organisations to look at the benefits of collaborative arrangements and in recent years it has become the most effective mode of entry.
In usual circumstances, one partner is local and the other is a foreign investor, for example Danone and Grameen in Bangladesh. The main attraction for Danone is the knowledge and expertise of the local partner. Joint ventures can be seen as a way for an organisation to enhance its capabilities (Pisano 1988 cited in Madhok 1997). For example the partner allows Danone to increase/expand its knowledge regarding the local environment and bureaucracy for example the legal system, political processes, distribution channels and the consumption habits of local consumers. Killing (1983) believes that “joint ventures provide the structural mechanisms for fostering more intimate interaction for the interchange of knowledge”.
The foreign investor (Danone) contributes financial investment, expertise and refined marketing skills. As Morrison (2008) states it is common for a western organisation (Danone) to have total control of decision making when embarking on a joint venture with
organisations in emerging markets, this is typically because the western managers are more experienced.
Joint ventures and strategic alliances are seen as a cost effective way of doing business. It allows organisations to get economies of scale and scope, deal with government regulation, shared risk and ease of market entry. It’s vital to choose a strategic alliance that is complementary, for example Danone and Coke was a successful alliance as it was carefully designed with a joint management structure. The organisations must bring something to the table that is complementary but not to compete, therefore the process to select partners is essential. Strategic alliances and joint ventures offer several benefits to organisations but need to be considered carefully before being entered into as there are many challenges to consider. For example “different cultures and management styles result in poor integration and co-operation” (RP Emery and Associates 2013). Loss of control over such important issues as product quality, operating costs, employees and fear of market insulation due to local partner’s presence (Delaney 2014). Although there are many criticisms of this entry mode it has proven to be successful and effective for Danone as they have many joint ventures and strategic alliances across the world for example Danone and Aqua in Indonesia and Danone and Mengniu in China.
“It is our conviction at Danone that food and nutrition are crucial for building and sustaining health and well-being for all, from birth through to old age” (Franck Riboud, CEO of Danone). With this belief it is clear to see that the organisations mission is to ensure its products are accessible to as many people across the world as possible, especially in countries who encounter poverty and poor nutrition. “Product accessibility is a key challenge, which is why Danone develops a distribution channel that is appropriate for each market” (Danone 2015). In order to gain the market share that they have seen in recent years Danone has had to appeal to a range of consumers of all cultures and ages so it has developed products that meet the needs and wants of the tastes and incomes of all populations. With the innovative products that Danone has produced it has improved the health and well-being of children and the elderly in developing countries, which fits seamlessly with its mission.
In my opinion this has also given Danone another dimension in its marketing mix as its activities are aligned with CSR. Danone could now create a cause-related marketing campaign based on the work they are doing in developing countries. As a consumer in Europe I was not previously aware of the phenomenal work they are doing and I believe more publicity in western countries would be good to ensure continued success. For example Danone could start a campaign; for every Danone product purchased in Europe and North America a percentage of the profits will go towards more activities to build a sustainable environment for developing countries.
Danone has encountered paramount success and growth through its joint ventures and strategic alliances and I believe this is a crucial factor to why they are global leaders in almost everything they produce; they could not have done this without internationalisation. Danone have expanded its knowledge and expertise in emerging markets and now has a sufficient lens of how to effectively penetrate international markets. They have benefited from economies of scale and are now recognised as a global brand. The local partners have benefited greatly as their quality of life and well-being has significantly improved and the creation of jobs has contributed to a better developed economy. Children in so many countries are now properly nutritioned and the elderly are living much longer thanks to the innovative products produced by Danone for poverty stricken markets.
In conclusion the academic frameworks I have looked at throughout this essay help to assess the suitable strategy to enter foreign markets, as none of them are completely flawless, to be effective the frameworks and theories need to be analysed collectively. From my research into Danone’s joint ventures and strategic alliances it has shown that this mode of entry has been phenomenally successful and has aligned seamlessly with its strategy. In case of failure it has been able to share its risk making the venture more favourable. In my opinion for future international expansion Danone should consider adopting a Greenfield strategy as they have acquired huge amounts of knowledge from its many collaborations with local organisations they are now in an incredibly strong position to open up its own operations in the chosen countries, this would ultimately maximise its profits and they could still support the chosen country by employing local people and having local suppliers. I would argue that porter’s five forces model is useful and will be beneficial in the future when Danone are assessing the attractiveness of their industry in a specific country. It is
refreshing to see a global corporate business who integrates its mission for the bottom line (profit) with improving the lives of millions of people in developing countries across the world.
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