Question 1: Evaluate various exit strategies (e.g., divestiture of assets, handing over to joint venture partner, diversification, or shutting down operation), and contingencies for your global venture (Costco Wholesale Warehouse in South Africa) and
Question 2: Why I would choose these exit strategies.
Question 3: Make final recommendations about the feasibility of this global venture which is opening a Costco Wholesale Warehouse in South Africa.
Question 4: Examine how contemporary trends in the global environment might impact your final recommendations.
Global Considerations:
Team Global outlined in the South Africa risk analysis that careful planning must be taken into consideration before Costco enters this promising and volatile market place. Establishing an effective marketing strategy, Team Global has developed ways to address key marketing components. In order to market Costco Warehouse to Africa’s population, Team Global must build the correct marketing strategy to avoid creating too broad of a marketing mix. A broad marketing mix would reduce the chance of reaching the target market, as well as, being unable to capitalize financially.
The four “P’s” of marketing refer to the product, price, place, and promotion. The marketing mix of South Africa is a dynamic one. “A major shift away from traditional ways of life toward urbanization and low-income employment has occurred due to the continued resource extraction and new economic policies” (CFR, 2007). Massive migrations have inflated urban population; therefore, “many rapidly growing African cities cannot adequately treat sewage, provide efficient transportation or protect the surrounding areas from urban sprawl” (CFR, 2007). Military rule and emerging democracies are the political structures in the northern Saharan nations. These political structures operate with great economic hardship.
South African nations are eagerly borrowing money in hopes of building up their economies. Despite the safety and health issues, South Africans are on the verge of a renaissance as the middle class’s head starts to peep out of the ground. When determining what the marketing mix will consist of, Costco needs to understand the role of political risks in international marketing and its impact on the 4 P’s of marketing. In international markets, considerations of the consumer’s cultural background, buying habits, and levels of personal disposable income need to be taken into account in order to deliver a tailored marketing mix program to suit consumer needs. Therefore, Costco will make some adaptations to suite the needs of the growing South African economy. Costco’s mode of entry will be joint ventures with local super markets in the countries major cities and largely populated areas. The products and services of Costco will be tweaked to meet the region’s needs.
The South African consumer must be taken into consideration regarding what products would be needed and easily sold in the region the store is operating. For example, drinking water is a need specific to areas where Costco will set up shop. Therefore, drinking water will be available in abundance, however; the pricing will be higher than in the U.S. due to the demand curve. The risks of providing various products are the perishable items shelf life, the life cycle of the product, and the likelihood of returns on said products. The price must reflect a discount to the consumer who purchases products at Costco to re-sell in their own place of business and reward Costco with a profit after shipping, purchasing, and operating costs are covered. The place Costco opens must be strategically located in an affluent area that entrepreneurs would be willing to come to purchase goods for their businesses. Entrepreneurs would have the ability to transport the products purchased back to their own place of business, as well as, to areas that have a concentration of working families that can band together and create purchasing power. The drug plans accepted by the Costco Pharmacies in the U.S. are not valid in South Africa. South Africa is a developing country without national health insurance. Over half of South Africans with private healthcare hold consumer-driven plans with medical savings accounts equivalent to health savings accounts in the United States. Private healthcare covers 15% of the population, including almost all high-income South Africans, regardless of race. Everyone else is forced to rely on the under funded public sector (Adler, 2005). Costco will need to make adjustments to cater to the healthcare policies and PBMs (Pharmacy Benefit Managers) in their chosen country in order to continue the array of services currently offered in the U.S. Additionally, considerations such as terror attacks have to be taken into account. Costco’s are often large crowded places. In other words, perfect targets for terrorist attacks. One of the main contributing factors for Africa’s vulnerability is its proximity to the Arabian Peninsula and Somalia. Weak counterterrorism and “Police capabilities of host nations, the probable continued presence of the al-Qaida cell that was responsible for the 1998 U.S. Embassy bombings in Nairobi and Dar Es Salaam” (Bureau of Public Affairs, 2005), will require Costco to implement higher security while still maintaining lower costs.
Marketing indicators such as the JSE for South Africa have fallen to 1.48 percent. South African stocks closed weaker on Tuesday, erasing hopes that markets had reached some stability following last weeks global sell-off because of fears of credit tightening. The Johannesburg Top-40 index of blue chip shed 1.6 percent to close at 24,712.41 points, while the broader All-Share index slipped 1.38 percent to 27,369.72 points (Business Report, 2007).
Nevertheless, growth opportunity for South African business is high. Foreign companies are considering South Africa as a good market for their goods and source of supply of raw material and partly processed goods. Research on 73 companies quoted on the Johannesburg Stock Exchange established that all these companies had a comprehensive annual marketing plan, followed the procedures, and used the techniques described in the normative marketing literature. Conclusively, global organizations looking for South African partners will find the level of marketing planning sophistication highly satisfactory (Abratt & Higgs, 1994).
Costco Wholesale’s Human Resource Management Department in America will need to develop a human resource department in South Africa using local talent from the area the store is being opened. Trust with the native culture is important to develop and foster strong employer and employee relations. Many cultural considerations must be addressed that American management would not be familiar with. Employees are first motivated by earning a living, but stay as a dedicated employee by being treated with respect and importance. Training sessions should include hands on training, positive reinforcement, accountability, demonstrative examples and role play in proper customer service.
Training on computer equipment, reading invoices, shipping and receiving, bills of lading, sales to stock ratio, scheduling, payroll, ordering supplies, ordering produce and products are important to address to all members in the new Costco, so employees will understand the management’s needs when being asked to address any internal issue. The locals should be aware of the opportunities to promote and become supervisors in the store. Natives of South Africa should be hired from the ground up and as deserved, earn promotions and raises to show an example of the rewards from being a responsible employee.
Cultural factors must be understood through hiring locals to integrate the ability to use the customs and language of the area. Should the parent company’s employees be introduced into the country, great efforts should be made to train said employees in language and culture. Honoring the traditions, holidays, and rituals are important to assimilate and be accepted. Other cultures are not familiar or concerned with the American way of conducting business. Brief meetings, lunch dates, and so forth are not going to win the hearts and minds of the new neighborhood. Good relationships are built with foreign entities by demonstrating the effort to try their food, honor their traditions, and not offend or diminish the respect of the people.
There are some American managers that have become immensely successful by participating in the festivals and rites of the local employees. They have been able to win the trust of the locals and this has made dealing with the locals easy. An important factor is the extent to which the parent country’s employees are willing to be posted. If they leave after a year or two it hurts the sentiment of the locals. Most important, the cultural factors are important in marketing. The use of symbols, colors, local names and packaging play an important role in marketing a product. It is important to understand the local culture to be able to establish business relations with locals, especially in the context of supplies and property. If an American company is able to understand “the cultural nuances it will be successful in going global” (Baxamusa, 2007).
Costco will minimize inventory costs and improve connectivity through connecting all stores as a communications network that will also include its headquarters, distribution centers and suppliers. The Extranet system will facilitate a modified just-in-time process of inventory control. As each store sells an item, a message will be automatically sent to the supplier of that item. Consequently, the supplier will send a replacement of that item in the next shipment, which is usually the same day, to the nearest distribution hub. The Extranet’s degree of connectivity allows swift response to inventory needs and dramatically reduces the amount of inventory required. More important, due to South Africa’s high cultural diversity, Costco will be able to ascertain the preferences and tastes of its consumers in a particular are with the use of advanced consumer relationship software. Additionally, Costco will adapt other wireless technologies such as XML (Extensible Markup Language) to integrate the system of its business with its vendors and customers (Chase, Jacobs & Aquilano, 2004).
Using Business to Business (B2B) e-markets will lower the cost of procurement for Costco and reduce acquisition and customer service costs for Costco’s suppliers. Costs are reduced because standardization and disaggregation. E-markets standardize and streamline time consuming processes and procedures such as account information management, product development and tracking vendors that take place during procurement and sales of goods. Disaggregation means that Costco will focus on the high-end pain points and outsource other functions. These high end points can be marketing for sellers or procurement for buyers. By assuming some of the functions of the company itself, Costco will have a competitive edge in production and R & D. The benefit for the suppliers is that they will have opportunities to reach new customers, as well as, reduce acquisition and customer service costs (WorldWide Retail Exchange, 2000 - 2005).
Costco will establish a network of innovative hubs which will use cross-docking to reduce inventory at the distribution center and aid the need-based inventory delivery system. “The need-based inventory delivery system is enabled by the satellite/extranet network” (WorldWide Retail Exchange, 2000 – 2005). Costco’s merchandise will be moved directly to trucks carrying outbound shipments to specific stores as shipments arrive at the warehouse. In many cases, these same trucks will be used for inbound or outbound shipments to carry new, returned, outdated or unneeded merchandise. Consequently, round trip shipping costs are minimized.
Costco will also adopt UPC codes and bar codes to scan equipment. The company can reduce costs by using a RFID (Radio Frequency Identification)-based Electronic Product Codes to reduce costs related to supply chain management. Moreover, the labeling will be changed to be in different languages of South Africa, contingent upon the region (VeriSign, 1997-2007).
Finally, Costco will implement a video surveillance system to help improve security. The use of video surveillance will reduce shoplifting, as well as, monitor work and productivity of Costco’s staff. More important, a video surveillance system can be used to monitor specific aspects of Costco’s consumers’ behavior. A detailed analysis of tiny consumer movements and gestures will enable Costco to optimize the positioning of its goods and devise the most effective shopping itineraries (VeriSign, 1997 – 2007).
Computers have been an integral part of globalization; in that, computers have facilitated many aspects of the day to day aspects of an organization. Communication between organizations at home and abroad is conducted through internet capabilities such as email. Market research on subjects such as sales, inventory, and customer preferences can be stored in data bases and accessed at the click of a button. This allows global companies to trend information to suit their product or service to the varying tastes and preferences of the global customer.
The main component in making this type of management successful is information technology (IT). Information technology encompasses the development, implementation, support, and management of computer based systems (Career Builder, 2007). When Costco Wholesale Corporation expands its business into South Africa, it is essential to have the appropriate set up in regard to IT.
Costco Wholesale Corporation currently possesses a system to track the amount of sales in each of the Costco locations in order to maintain up to the minute inventory information. Sales of goods at Costco and repeat customer sales are achieved through a centralized data base which monitors the sales at the individual Costco warehouses and replenishes inventory on a weekly basis (Costco Wholesale Corporation, 2007).
Costco will also make available to its customers the choice to do their shopping online and to pick up their products at the Costco in South Africa. Costco will store this information in a data base to offer similar products or introduce new products to anticipate customer needs. In order to make this venture successful, Costco processes information from various persons in the distribution chain such as customers, suppliers, and vendors. To meet the needs of all three, it sometimes becomes necessary to share information on one with the other. Besides meeting customer needs in terms of goods, Costco must protect this information from cyber predators such as hackers who seek to obtain financial information to use in illegal gains.
Costco Wholesale Corporation has policies and procedures specific to IT so that the publics can feel that their information is safe and will not be violated or exploited for individual gain. As such, Costco only provides vendors and suppliers with information necessary to process an order like shipping and billing information, email, telephone number, and product orders. Other relevant information is kept confidential. Costco further ensures this privacy by mandating that vendors and third party suppliers not provide this information to any other party and can only use this information themselves.
Research and development is vital for Costco in South Africa in order to meet the demands of the population and guarantee the success of the Costco brand. The first step should include segmentation of the population by education level, income, and language. There are 11 different languages spoken in South Africa and although there is high poverty, a portion of the population is affluent enough to afford some of the premium products Costco has to offer such as high definition televisions and computers.
Segmenting the population will provide Costco with insight into the purchasing behaviors of the target market and allow Costco the ability to design appropriate strategies to communicate with the target audience. In this way, Costco will be able to ensure that the warehouse carries the products and offers the services which possess the appropriate product attributes. This also represents good business sense because Costco can also set pricing according to the demand and supply of various products regardless whether the products are standardized or customized for individual market tastes.
Research and development can also focus on how to communicate with the target market. Due to the size of the Costco warehouse, it will be more advantageous to institute a pull rather than push strategy. The pull strategy will incorporate mass media advertising that will be tailored to communicate to the target audience through the use of images and to a lesser degree, text to inform the external publics of the ability to purchase goods wholesale. This philosophy is suitable when dealing with a population with multiple languages and the high cost entailed in reaching the population through the written word. This perspective is more correct than standardized global advertising which fails to address the individual tastes and preferences of the population. By placing billboards with the Costco logo on well traveled roads and advertising in areas where there is high foot traffic Costco can reach the target market and align this audience with the target brand.
The legal system in South Africa has changed dramatically since the end of the apartheid era. The changes have brought hope, faith and economic promise to a nation of underprivileged citizens. Costco’s venture into South Africa will facilitate these promises and create balanced financial opportunity to all parties.
Currently there are firms in South Africa that are oligopolistic. Oligopolistic firms create high prices for products and competitors. South Africa has imposed new laws in reference to oligopoly and has tried to create a more competitive market. The purpose of the new law is to reduce market dominance, curb restrictive practices and closely regulate mergers (Risk Wire Via Thomson Dialog NewsEdge, 2007). It is imperative for Costco to form relationships with established businesses in order to understand the tastes, preferences and needs of the local community. Forming relationships will be an immense financial benefit to surrounding businesses and to Costco.
In order to be successful in this new venture, Costco must adhere to all laws and legal requirements of South Africa. Costco must ensure that all business adheres to the Foreign Corrupt Practices Act. This means that all ventures are done without out bribes and kickbacks. As stated earlier, new laws in South Africa are closely monitoring mergers and practices to ensure a competitive market. Costco will conduct business in a manner that is legal and proper under United States and foreign laws.
Costco is a company that relies heavily on their members to be successful. Customers must purchase membership cards in order to shop in Costco. Understanding the importance of establishing relationships is vital to the success of Costco. In order to create relationships with local businesses and citizens, Costco will waive the membership fee during the first year of business. Waiving this fee will allow all locals and businesses the opportunity to see for themselves the benefits of shopping Costco. Establishing relationships with the community will benefit Costco because doing so will allow Costco the opportunity to tailor products to the tastes and preferences of the surrounding communities.
Costco’s customers are critical to the success of the company. Therefore, providing to top quality products at the best possible prices is imperative. Moreover, Costco must establish trust with their customers and do everything possible to not violate that trust. Local vendors must be in compliance with all food, safety and health standards. Costco will establish relationships with local vendors for numerous reasons. Local vendors are members of the community and will benefit from selling products to Costco. Using local vendors increases income in surrounding communities and leads to more disposable income in these areas. Relationships formed with local vendors are beneficial to all parties involved because income is increasing on all levels. Costco will provide customers with the most pleasant shopping experience in the retail industry. Giving back to the community through corporate contributions and employee volunteer programs will also assist in forming relationships with the citizens of South Africa.
The location of Costco will create jobs and opportunities for the local community and the surrounding areas. The employees of Costco will be provided with competitive wages, a healthy working environment, a non-discriminative work place, career opportunities and benefits. Hiring people from surrounding areas will also have a positive affect on the unemployment statistics of South Africa. There is an enormous amount of uneducated people in the area and it is the responsibility of Costco to educate new hires. Educating new hires will benefit Costco, but more importantly it will benefit the people of South Africa.