Porter’s National Diamond Analysis In Indonesian Retail Market

Porter’s National Diamond Analysis Model

Discuss about the International Journal Of Research And Reviews In Applied Sciences.

As discussed above, for the concerned European firm to enter into the retail industry of Indonesia, it is of utmost importance to take into account the overall conditions and competitiveness of the concerned industry in the country. In a generalised framework, the retail industry of Indonesia is one of the most prospective, promising and fast expanding ones in Asia, much of which can be seen to be backed by the economic growth and a growing middle-class population (with decent income levels and standard of living) in the country with time.

However, to analyse the prospects of the concerned European firm in the retail industry of Indonesia, it is crucial to consider the different aspects of the retail industry and their dynamics in the country. For this purpose, the Porter’s National Diamond Model is considered in the concerned report. This model, by taking into account the characteristics of the concerned markets of a country, effectively analyses the national competitiveness of the country and the concerned industry in the country, which in turn makes it easy and comprehendible for a firm to analyse whether or not to enter the concerned foreign market (Fernando & Long, 2012).

The components of the Porter’s National Diamond Model can be seen to be as follows:

Figure 1: Extended Porter’s Diamond Model

(Source: As created by the author)

Factor Conditions- This component of the model refers to the different resources (like those of human, physical, capital, knowledge and infrastructural resources) for the concerned industry, which are present or absent in the concerned country. The resources range from basic (like natural resources) to more sophisticated ones (like human resources) (Zhang & London, 2013).

Demand Conditions- This component reflects on the demand traits, market size, growth of the market and other demand side aspects of the market, which in turn help the firms to know about the customers’ preferences and demand patterns, thereby designing the strategies in accordance to the same.

Related industries- This component shows the strength of the related and supporting industries, which in general produce inputs and components which are significant for the innovation and internationalization of the concerned industry, by contributing to the efficiency and cost-effectiveness of the industries.

Firm Strategy, rivalry and structure- This reflects the organization and management of the companies and also shows the nature of rivalry in the market of the concerned country, which in turn helps the new companies to estimate the level of competition and operational framework present in an industry, thereby designing their strategies according to the same (Huggins & Izushi, 2015).

Factors Influencing the Indonesian Retail Market

Government- The business frameworks in a country, in general, are influenced by the government of a country and the regulations provided by the same, which have the chance to influence all the other components of the Porter’s Diamond Model. The actions of the government can have positive, negative or no implications at all (Fainshmidt, Smith & Judge, 2016).

Chance- This component of the model, takes into account the random events which are not in the control of the company but which have considerable implications on the international competitiveness (both positive as well as negative) of the industry in the country taken into consideration.

Keeping this into consideration, the Porter’s Diamond Model is applied to the Indonesian retail market in the following section of the report, to analyse the prospects which are present in the market and the problems which the new firm, aiming to venture in the market can experience.

As discussed above, the retail market of Indonesia can be seen to be expanding over the years, emerging as one of the fastest growing one in the whole Asia. The primary reason behind the growth of the market in the country can be attributed to the large population of a growing middle class in the country, with a change in the modern spending habits. The different trends of the retail industry of Indonesia, can be analysed with the help of the different components of the Porter’s Diamond Model, which is as follows:

1. Demand Conditions in the Retail Industry of Indonesia

The retail industry of the country, in spite of being one of the most dynamic in the whole of Asia, can be seen to have mixed growth patterns in the contemporary period, as can be seen from the sales figures of the same over the years, which is as follows:

Figure 2: Dynamics in the sales of the retail market of Indonesia

(Source: Tradingeconomics.com, 2018)

As is evident from the above figure, the sales of the retail market in the concerned country, have been subjected to considerable fluctuations (both positive as well as negative) over the years. However, with time the magnitude of the fluctuations can be seen to have decreased and the sales in the concerned marker can also be seen to be maintaining a steady and impressive trend, which may be attributed to the demand conditions in the market (Razdan, Das & Sohoni, 2013). The demand patterns in the retail market of Indonesia can be seen to be positively influenced by the increasing demands of the population in the country, especially with the increase in the segment of the middle-class and affluent population, as can be seen from the following figure:

Sales Trend of Indonesian Retail Market

Figure 3: Increase in the population of Middle-class and Affluent Consumers

(Source: Hkmb.hktdc.com, 2018)

As is evident from the above figure, in the contemporary period, the number of middle-class and affluent customers, in the total population of the country can be seen to be increasing. The MACs, can be further seen to be segmented in four different groups, namely, the middle-class, the upper-middle class, affluent class and the elites, the share of all (Except middle-class) of which are expected to increase in the coming years (Lewis, 2013). This, in turn, is expected to have positive implications on the demand conditions of the retail market of the country.

The effects of increase in the MAC population in the country can be seen to be reflected on the demand in the retail industry in Indonesia, both in the food and the non-food sector, can also be seen to be increasing sales in both of these categories, over the last few years (Toiba, Umberger & Minot, 2012, July).

Table 1: Increase in demand for food and non-food retails in Indonesia

Year	2006	2007	2008	2009	2010	2011	2012	2013	2014	2015
Food retail sales (USD Billion)	121.8	145.6	162.9	165.2	208.1	243.3	270	298	328.9	362.5
Non-food retail sales (USD Billion)	47.2	57.3	64.9	66.4	84.3	98.5	109.2	121.2	134.9	150.4

(Source: Gbgindonesia.com, 2018)

As is evident from the above table, both the demands for food and non-food retail products in the country have increased over the years. However, the magnitude of the former can be seen to be much higher than the magnitude of the latter.

The consumption patterns of the population of the country can also be seen to be becoming more sophisticated and the price sensitivity can also be seen to be decreasing with the growth of the middle class (Ardhanari et al., 2013). The increasing popularity and usage of internet can also be seen to influence the demand as well as growth of the online retail markets in the country.

1. Factor Conditions in Indonesian Retail Market

For the growth of any industry, in any country, it is of utmost importance to analyse the presence of different factors required for production in the country. One of the primary factors of production, required in the retail industry is that of labours in the economy. In Indonesia, the dynamics in the labour market can be seen from the labour force participation rate, which shows the working age population (either employed or looking for jobs):

Figure 4: Labour Force Participation Rate in Indonesia

(Source: Tradingeconomics.com, 2018)

The section of population, eligible to work, can be seen to be drastically increasing in Indonesia post 1996 and the share can be seen to be consistently remining high in the current periods, which in turn indicates towards the presence of labour in the economy (Reardon, Timmer & Minten, 2012).

Demand Conditions in Indonesian Retail Market

Although the minimum wage of the country can be seen to be increasing and currently at a standard level. however, with the increase in the labour supply, often the actual labour rates can be seen to be existing at lower levels than the minimum wage rates in the economy, especially in industries like retail industries, where the labour required are mostly those with basic skills (Khamis, 2013).

Apart from the labour resources, the country can also be seen to be experiencing increase in the capital formation in the present years, which can be seen to be as follows:

Figure 6: Gross Fixed Capital Formation in Indonesia

(Source: Tradingeconomics.com, 2018)

This indicates towards the increase in capital resources in the country, which can also be considered to be having favourable impacts on the industries of the country, including the retail industry of Indonesia.

However, the country lacks in terms of infrastructural development, both in terms of hard infrastructure (like roads, airports) as well as soft infrastructure (social welfare and healthcare), as can be seen from its moderate rank (62^nd out of 140 economies) in terms of global infrastructural development as can be found in the Global Competitive Report of World Economic Forum.

1. Firm Strategy, Rivalry and Structure

The structure of the retail industry of Indonesia, can be segmented in terms of product category, to be as follows:

• Food and beverages
• Apparel and footwears
• Consumer electronics
• Beauty and care products
• Home appliances and improvement products

In terms of outlet types and retail formats, the retail market in the country can be segmented into the following types:

• Convenience stores
• Supermarkets and hypermarkets
• Department stores
• Pharmacies and drugstores (Sunanto, 2013)

Over the last few years, there has been considerable increase in the number of these stores in the country, as is evident from the following figure:

Figure 7: Increase in outlet numbers of modern retail channels in Indonesia

(Source: Cariasean.org, 2018)

This in turn indicates towards the increase in the level of competition in the retail market of the country in the recent periods of time. However, in spite of the presence of increasing competition in the market, the same can be seen to be dominated by several vendors like:

• Hero Group  
• Circle K
• Sumber Alfaria Trijaya
• Indomaret
• Super Indo

Apart from the same, vendors like Lotte Shopping, METRO and Gingersnaps can also be seen to be highly popular along with the presence of several convenience stores across the country, which offer ever-day commodities to the customers. Apart from the same, many international companies can also be seen to be venturing in the market, especially in the era of increasing popularity of online retailing in the industry (Howard, 2013). The companies venturing in the market, especially the big and dominating ones can be seen to be highly structured and organized in their operational framework and they also differ in terms of their ownership, thereby adding diversity to the retail market in the industry.

1. Government

Increasing Population of Middle-Class and Affluent Consumers

The government of Indonesia, although being not that actively involved in the operations of the retail industry of the country, however, tend to influence the same to a considerable extent, primarily due to the regulations imposed by the same in the economy in general. While the weakening of the rupiah can be seen to have negative impacts on the disposable income of the population of the country, thereby affecting the retail industry, especially the traditional retail companies negatively, the same can be seen to be combated to a considerable extent by the assistance programmes launched by the government, especially for the lower income groups, which in turn has facilitated to keep the demands for food retail products afloat (Poynter, 2013).

The government of the country also has implemented several pro-growth policies to draw foreign direct investments in the country and to attract companies from all parts of the globe to boost up both the production as well as the overall demand in the economy (Poynter, 2013). These primarily include the tax cuts and amnesties which are to a considerable extent favourable to the growth of the retail industry in the country.

However, the government of the country does not seem to have emphasised on the development of the infrastructures in the country, due to which the country and its industries tend to suffer in terms of both hard and soft infrastructure. However, in the recent periods, this issue seems to be taken seriously by the government, as can be seen from the increasing funds allocated by the same in this domain

1. Related and Supporting industries of retail industry in Indonesia

The primary supporting sector of the food retail industry in the country is the agricultural sector. However, in case of Indonesia, the top import products of the country include

This to some extent hampers the cost efficiencies of the local retail businesses as they have to import their inputs to a considerable extent. Apart from this, the technological development of the country is low and there is also high cost and difficulty in accessibility in the manufacturing sector, which hampers the operations of the non-food retail sector of the country (Ariff & Hill, 2012). However, the big businesses in this domain enjoys strong supply chain framework with long and sustainable relationships with the suppliers.

1. Chances in the Retail Market of Indonesia

The retail market in Indonesia, in spite of several negative trends, has the chance of future expansion primarily due to the following facts:

• The growing middle-economic class in Indonesia
• The increase in the number of entrepreneurs in the country
• Increasing numbers of small and medium enterprises in a favourable business environment
• Increasing global integration of the country and attractive opportunities foreign entrepreneurs by the government of the country

For a company to enter in a foreign market, it is of immense importance to for the company to take into account the institutional environment of the country as the same helps the company to assess the dynamics and problems which can be faced in its aim of venturing in the market, thereby deciding on the mode of entrance in the concerned market. In general, the institutional environment of a country, refers to the rules and requirements which are confronted and have to be conformed by the business organizations, in order to receive legitimacy in their operational frameworks in the concerned country (Roxas & Coetzer, 2012).

Food and Non-Food Retails Demand in Indonesia

Indonesia ranks 166^th, globally, in terms of ease of doing business, primarily due to the rigorous processes which are involved in doing business in the country. The primary and common problems which any new business usually face in the institutional environment of Indonesia, are as follows:

• Tedious and long term (nearly 158 days) process for acquiring construction permits in Indonesia
• The country has nine procedures to set up any new business entity, which is much higher than that of OECD (Web.worldbank.org, 2018)
• Indonesia also ranks 129^thin the world, in terms of ease of getting credit for the purpose of businesses
• The tax payment structure of the country is also highly cumbersome and there are nearly 51 tax payments which have to be made each year, which on an average takes 259 hours of each company time every year (Web.worldbank.org, 2018)
• Enforcing contracts also takes huge amount of time and it is also a considerably costly process. This trend can also be seen to be existing in case of resolving insolvencies
• The corporate governance culture also suffers from a lack of transparency to some extent, which leads to widespread corruptions in the business domains of the country

However, there are also several positive aspects in the institutional environment of the country, which may be beneficial for the industries and companies venturing in different markets of the country. The primary positive components of the institutional environment of the country being as follows:

• Indonesia ranks 50^thin the world in terms of the protection of the investors and the government of the country does not seem to enforce any excessively restrictive norms upon them. The Investment Law of Indonesia (2007) also helped in opening the major sectors of the economy of the country for foreign investments.
• Due to high trade reliability of the country, the costs of importing and exporting are comparatively low in the country, which in turn, makes it easier for the businesses to invest and operate in the concerned country (Daniel, Cieslewicz & Pourjalali, 2012).

Given such a scenario, one of the possible ways for the concerned European company, to enter the retail market of Indonesia, is that of Foreign Direct Investment, in which the company can have direct ownership of the facilities in the concerned country and can transfer capital, technology as well as human resources from their home country to Indonesia. In general, entry with the help of FDI involves acquisition of existing businesses in the country of interest or establishment of whole new business in the country itself by the concerned company (Blomstrom, 2014). In the concerned case, the European company can face several advantages as well as disadvantages if they choose to enter the retail market of Indonesia through the mode of FDI.

• This method can help the company in achieving greater control of their resources and their operational framework in the new country they are venturing, thereby giving the company an opportunity to exploit the efficiencies and comparative advantages which they already have in their operations in the home country.
• This way of entry in the retail market of Indonesia can also help the concerned company to be able to know their new clienteles better and to get an idea about the level of competitions in the new country, thereby facilitating them to design their strategies in accordance to the same (Ramamurti, 2012).
• The entry through FDI, by keeping the controls in the hands of the company itself can minimise knowledge spill-overs and the company can also apply their specialised skills.
• This may also help the company to be viewed by the local customers as an insider (especially if the company enters through the method of acquisition).

However, entering with the help of FDI can have the following disadvantages for the concerned company too:

• Entering through FDI can lead to the problem of adjustments and management of the local resourced as the company may face cultural and operational differences from that of their home country.
• This method may actually require more resources and more commitment on part of the company, then in any other forms like that of joint venture, exporting or licensing.
• This mode of entry is also subjected to considerably higher risks than that of the other methods, as the company gets less local resources and knowledge along with less local control (Conconi, Sapir & Zanardi, 2016).

However, for the given European company, in spite of the presence of the above-mentioned limitations, this strategy can be an effective one, given the fact that Indonesia protects the interests of the investors and also have less trade barriers. However, the company needs to keep into account the high levels of corruption in the aspects of corporate operations and the cultural differences in the country, both in terms of employees as well as consumers to design and implement their strategies and for bringing in new products and services (Conconi, Sapir & Zanardi, 2016). It is recommended for the company to conduct an extensive survey regarding the tastes, preferences and socio-economic trends of the country in order to decide their target clientele and operate according to the same.

From the above discussion, it can be asserted that the concerned European company can face several management issues and hurdles in venturing in the retail market of Indonesia, the primary ones being as follows:

1. Managing local human resources-The company will need to hire a considerable number of local resources like labours, store workers and others as bringing them from their home country can be a costly process. In hiring the local resources, the company has the chance to face issues in controlling, managing and driving them for achieving the long-term goals as there can be considerable differences in work culture, interests and motives (Gillespie & Riddle, 2015). Making the local resources understand the needs of the company and encouraging them to work for the same without feeling exploited can be a challenge for the company in the already competitive and expanding retail market, where the options of employment for the local resources are already high.
2. Identifying the needs of the customers-For any company to make profit and achieve sustainability it is of utmost importance to identify what their targeted clients need from them and to produce according to the same. However, this aspect might be of huge challenge for the concerned European company, aiming to venture in the retail market in Indonesia. The options being huge, the company might have the problem of deciding what products to emphasize on, how much to produce, for whom to produce and in which areas of operations to invest (Ambos & Håkanson, 2014). The cultural differences between the home country and the country of interest of the company being noticeably high, identifying the needs of the diverse clientele in Indonesia can pose as one of the serious issues for the management of the concerned company.

These two key management issues have to be taken into consideration by the concerned company before the venture in the retail market of Indonesia.

Consumption Patterns of Indonesian Retail Market

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