Environment analysis and strategy orientation for local retailers in Vietnam

Nguyễn Thị Uyên Tạp chí KHOA HỌC & CÔNG NGHỆ 125(11): 49 - 55 49 ENVIRONMENT ANALYSIS AND STRATEGY ORIENTATION FOR LOCAL RETAILERS IN VIETNAM Nguyen Thi Uyen* Vietnam University of Commerce SUMMARY After January 11, 2015, Vietnam will fully open retail market to foreign companies what create significant pressure on local retailers. In-depth study about strategic situation and strategy orientation of Vietnamese supermarkets should be useful not only for the local supermarkets but also for Vietnamese government to protect local firm from competition of foreign retailers. Based on the data that is collected from investigation from consumers, experts’ opinion and other sources from secondary data as well as the previous study of the author, this study has examined strategic situation of the local supermarkets in Vietnam and generated TOWS analysis to formulate solid strategies for local supermarkets in order to leverage their competitive advantages in Vietnam. Key words: Vietnam Local supermarket, competitive advantage, business environment, TOWS analysis, strategy formulation. INTRODUCTION TO THE STUDY* Vietnam became the WTO’s 150th member on 12 January 2007 that brings to local supermarkets with both opportunities and challenges due to this internationalization. With high potential retail market, Vietnam has been attracting many foreign retailers and this generates many threats on local supermarkets. Especially under WTO commitments, from January 11, 2010 to January 11, 2015, Vietnam has given the right to set up joint venture to provide services related to production, in which foreign investors can own up to 50 percent of the charter capital of the joint venture. Having to fairly competed with foreign firms even in their home market remains a big challenge for domestic retailers. In the changeable environment with tough competition, the enterprises cannot do well without environment scanning; identifying strategic factors to formulate strategy solidly. The strategy formulation is the development of long-range plans for the effective management of environment opportunities and threats, taking into consideration corporate strength and weaknesses. The formulation of strategy forces organizations to examine the prospect of change in the future and to prepare for change rather than to * Tel: 0979118679; Email: uyendhtm@gmail.com wait passively until market forces compel it. Therefore, a deep study on accessing current strategic situation of local supermarket environment, and formulate solid strategies for the local retailers is indeed necessary for local supermarkets in Vietnam. It does not only make sound with Vietnamese retailers but also create the significance to Vietnamese Government who wants to protect local retailers from competition and expansion of global retailers in Vietnam. RESEARCH FRAMEWORK AND METHODOLOGY Chandler (1962) defined strategy as "The determination of the basic long term goals and objectives of an enterprise and the adoption of the courses of action and the allocation of resources necessary for carrying out these goals". The strategies exist at several levels in any organization - ranging from the overall business (or group of businesses) through to individuals working in it. Strategy formulation begins with a scanning of the external as well as internal environment. To formulate effective strategies, managers in an organization need to be aware of realities in the business environment. Analysis of external environment helps to identify the possible threats and opportunities while analysis of internal environment helps to identify Nguyễn Thị Uyên Tạp chí KHOA HỌC & CÔNG NGHỆ 125(11): 49 - 55 50 strengths, weaknesses and the key people within the organization. The ten schools of strategy formation proposed by Mintzberg et al. (1998) gives an overview of the development in the field of strategy process and demonstrate the nature of its complexity. Of which, design School - It sees strategy formation as achieving the essential fit between internal strengths and weaknesses and external threats and opportunities. The formation of SWOT matrix results in four sets of possible strategic alternatives after matching the company’s internal strengths and weaknesses with the external opportunities and threats. Based on the related theory and the results of previous study of the author about the “key determinant of retail performance in Vietnam”, the author has created the research model for this study as shown in figure 1. Of which, Macro environment includes the political and legal, economic, social and cultural, technological factors. The industry environment includes factors of competitors, suppliers, buyers, substitutes and new entrants. The internal environment includes the firm-specific characteristics such as: firm size, economy of scale (Douglas & Donald, 1969; Reid, 1984), retail market strategy (Michael and Barton, 2004); influence of technology (Melvin and Harriet, 1992); marketing, experience, location (Roger, Daekwan, Jeffrey, 2006); Experiences (Douglas & Donald, 1969); human resource (Melvin and Harriet, 1992); Location and property (Clifford Guy, 1994; Stepenson,8th edition); merchandise, product lines, square feet of store space (Robbins, 2004; Angie and Sarah, 2004 ). The strategic situation of the local supermarkets will be explored based on the data that is collected from investigation from consumers, experts’ opinion and other sources from secondary data as well as the previous study of the author. Three groups of environment factors (macro environment, industry environment, internal environment). By using SWOT matrix, this study generates alternative strategies and recommendations for local supermarkets. Figure 1. Research Model of Environment Analysis and Strategy Orientation (Adapted from the Strategic Decision-Making Process, Wheelen and Hunger 2001) Data analysis of Strategic Situation of Local supermarket External environment As one of the countries having the fastest economic growth in the region and several forces, many of which are interconnected: for example, increasing incomes, urbanization, more female participation in the labor force and openness to foreign investment, opening in lifestyle of young people, Vietnam is a potential and attractive market to foreign retailers worldwide. In the period of 2009 - 2011, although the world’s economy in general and Vietnam’s in particular were Macro environment scanning Industry Environment Analysis Strategic Alternatives Strategic Factors Best strategies Internal Environment analysis Nguyễn Thị Uyên Tạp chí KHOA HỌC & CÔNG NGHỆ 125(11): 49 - 55 51 severally affected by the economic downturn, the retail industry in Vietnam still saw impressive growth. In 2011, total retail sales and consumer service revenue reached VND 2,004 billion, up 24.2 percent compared to the previous year. In 2012, that number reached VND 2,320 billion, up 16 percent compared to 2011. Although it has dropped out of the top 30 attractive retail markets in the world in 2013, according to economic experts, the Vietnam market still attracts great interest from large retail corporations in the world. The report “Vietnam Retail Market Forecast to 2014” says the modern retail channels will play a crucial role in the future growth, improving their position in the market. Increasing purchasing power, changing lifestyle, and influence of western culture are some of the key growth drivers in the country's modern retail market, it says, adding that, during the next few years, a short wave of consolidation will emerge as foreign retailers are trying to consolidate their position and deepen their market penetration. Furthermore, Vietnam has a very receptive attitude towards welcoming FDI and developing Trade relations. The government is committed to improve the country's business and investment climate. So the retail market industry in Vietnam is attracting many international retail groups all over the world. So Vietnamese retail businesses are meeting with difficulties to compete with foreign rivals and are struggling to survive (Dinh Thanh, 2011). However, Vietnam’s application of Economic Needs Test (ENT) requirement before allowing foreign retailers to open the second retail outlets is a favorable factor for local retailers. The Departments of Industry and Trade will use many criteria to decide whether to grant licenses to the opening of supermarkets or not. In term of Technological environment, an estimated 2.0% of Vietnamese households have a broadband-enabled computer, representing a significant increase from the 0.1% of households in 2005. The rapid uptake is partly as consequence of the ease and low price of connection. According to the Ministry of Information and Communication, Vietnam’s internet penetration is at 35.6 percent of the total population. For number of internet users, Vietnam has been ranked seventh highest among the countries with high internet use in Asia, by Internet World Stats, that creates potential opportunity for promoting well online marketing as well as online retail to support offline retail in this market. However, it also results in the strong substitute from online retail. In term of industry environment, according to the statistics from the Association of Vietnam Retailers, modern retail channel accounts for only 20 percent, so the market to exploit remains big and plan, by 2020, Vietnam will have raised this rate to 45 percent. The country currently has about 130 commercial centers, 700 supermarkets, over 1,000 modern retail outlets, concentrating mostly in Hanoi and Ho Chi Minh City. To meet the increasing living standard, the traditional trade will be instead by modern trade day by day. The consumption from traditional market with unstable and smaller size could not compete with modern retailers in gaining power of bargaining with suppliers. The modern retailers with bigger size than traditional retailers have more advantages in negotiating with suppliers. However, the cooperation among local supermarkets and suppliers are still very weak. So in expert’ opinion, the suppliers actually do not have strong bargaining power with modern retail chains and they still have many difficulties with this cooperation (Ms Dinh Thi My Loan, General Secretary of the Association of Vietnam). In term of threat of new entrants, current competitors, all of experts said that the current and potential foreign competitors are very strong competency especially after being a member of WTO. Under WTO commitments, from January 11, 2010 to January 11, 2015, Vietnam has given the right to set up joint venture to provide services Nguyễn Thị Uyên Tạp chí KHOA HỌC & CÔNG NGHỆ 125(11): 49 - 55 52 related to production, in which foreign investors can own up to 50 percent of the charter capital of the joint venture. After January 11, 2015, Vietnam will allow the set up of enterprises with 100 percent foreign capital. It means that Vietnam's retail market will be fully open to foreign companies, which will create significant pressure on local businesses (Investment and Trade Promotion Centre, 2006). According to Investment and Trade Promotion Centre of HochiMinh City, recently, Vietnam's retail market has also welcomed the participation of many big names in the world such as Auchan, one of the largest retail groups in France, which announced plans to invest US$500 million in Vietnam retail market, NUTC Fair Price. However, most of current participants are supermarkets and hypermarkets, so the segment of convenient store is still available. The threats of new entrants and the degree of rivalry are strong negative forces. The bargaining power of consumers also increases along with the greater number of strong competitors and new comers. The customers with higher living of standard bring opportunities for modern retail expansion but also threats of higher requirement from customer. The substitutes from traditional retailing, online retailing should be taken into account by the modern retailers. The active and young population is enjoyable with online shopping while the older generations prefer to keep the habit of shopping at traditional market. The fact indicated that the consumers with traditional shopping habits prefer buying from traditional market than going to modern supermarket. Hang Da Market after upgrading is an example proving for this reality. A lot of Vietnamese people prefer the convenience of the traditional market where they don’t have to go to car park and just take a few minutes to finish daily shopping on the way they go back home from work. Especially, the fresh food in traditional market is currently a significant strength of traditional market. Internal environment By using the questionnaires with 5 point rating scale to measure respondents’ evaluation by asking them the degree of variable that ranked from (1) to (5) toward positive extension, the statistics results from 185 respondents who are quite familiar with shopping at supermarket indicates as follows: Table 1. Mean statistics of respondents for characteristics of local supermarkets in Vietnam Statistics Location Space Layout Brand Sales Force Promo- tion Product Diversifi- cation Product Quality Competitive Price Added Value Service After sales service N Valid 185 185 185 185 185 185 185 185 185 185 185 Missing 0 0 0 0 0 0 0 0 0 0 0 Mean 3,0919 2,2108 2,6000 2,8000 2,6108 1,9081 2,0108 4,1027 2,0054 1,9946 2,7027 Std. Deviation ,83222 ,74738 ,49123 ,40109 ,65929 ,53891 ,63408 ,70344 ,63842 ,62985 ,45831 The statistics indicated that local supermarket evaluated at quite high level of location convenience and product quality. It means that the customers find the convenience from the local supermarket locations and these supermarkets are good at product quality. However, the competency in brand, layout, sales force and after sales service still moderate, especially they are quite weak at space, promotion, value added services, product diversification and price. It is also transparent that the local retailers will understand customer needs more deeply than the foreigners do. Being Vietnamese firms, local retailers are also familiar to business manner of Vietnam. This will help them to easier in penetrating the local market. Saigon Coop Mart has taken good advantages of this strength; it localized products such as increasing fresh food at supermarket to meet the customer requirement. Nguyễn Thị Uyên Tạp chí KHOA HỌC & CÔNG NGHỆ 125(11): 49 - 55 53 However, except Saigon Coop mart, most of local small-size supermarkets are small and slightly poor at competitive price. They do not have the deep cooperation with suppliers so the price is not competitiveness. Comparing to grant foreign retailers, the local supermarkets are les competitive in price (Viet Trung, 2011). The fact also indicates that marketing program plays important role in retailing performance. Advertisement, promotional program, supported services for entertainments at shopping places are employed well at foreign supermarkets while still poor at the local firms. Attractive promotional programs at foreign supermarkets such as Big C always attach crowded customers. Discussions and Recommendations There is no doubt about the positive effect from modern retail that AT. Kearney, in its 15 years analysis, indicated, “modern retail drives the economy through increased productivity, investments in capital stock, new job creation and lower prices”. Vietnam has potential market for retail industry and need to stimulate the retail industry as a key driver of the economy. However, experience from Thailand shows that the monopolistic power and over- expansion of foreign modern retailers can disrupt the local economy and culture. The global retailers has put local traditional retailers and suppliers at a competitive disadvantage and ultimately put those that are unable to adapt out of business. Thus, finding strategic solution to enhance local retailers is necessary to create a sustainable development for retail industry. To formulate solid strategies for local supermarkets based on careful environment scanning, the SWOT matrix is quite match in this situation and it can illustrate as follows: Table 2. SWOT Matrix for Local Supermarkets in Vietnam Strengths:  Young and dynamics  Understand well local customer needs  Familiar to business manner of Vietnam  Reliable quality Weakness:  Weak financial resource  Small size, poor space  Poor product line.  Slightly poor competitive price  Moderate in sales and Management Skills  Poor after-sales service  Poor relationship with suppliers  Poor marketing and R&D competency Opportunities  fair and healthy market  Growing market  High demand for a new and modern retailing  Favorable Culture and social trend  Regulation to constraint expansion of foreign retailers SO strategies - Market Penetration strategy: focus on R& D and Marketing to strengthen image and services - Niche marketing: setting up local convenient store or small size of supermarket which match to local customer needs - Being First mover to take advantages of government policy in constraining expansion of foreign retailers. WO strategies - Diversification strategy: diversify product lines - Merge and alliance strategy: small local firm should integrated to enhance capacity - Strong Integrated with suppliers - Focus on Marketing and R&D.. Combine online marketing with traditional marketing Nguyễn Thị Uyên Tạp chí KHOA HỌC & CÔNG NGHỆ 125(11): 49 - 55 54  Niche markets of convenient retail still available for modern retailers Threats  Direct competition from giant international retailers  Higher requirement from customers.  Modern Retail expansion generate higher bargaining power for customers  Competition in setting up the sustainable relationship with suppliers ST strategies: - Niche market focus: setting up local convenient store or small size to avoid direct competition of foreign supermarket. - Apply e-commerce software such as CRM, CPM, EPR... to strengthen competency and avoid threats - Take advantage of online marketing to stimulate firm attractiveness WT strategies - Strong Integrated with suppliers - Merge and alliance strategy: small local firm should integrated to enhance capacity - Focus on Marketing and R&D - Growth strategy with higher investment - Apply e-commerce software such as CRM, CPM, EPR... to reduce operating cost and strengthen relationship with partner The TOWS matrix plays an important role in suggesting the strategic alternatives so the theories of strategy formulation should consider the TOWS matrix as an important part in the process of generating the solid strategies. 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(1985). Competitive advantage: Creating and sustaining superior performance. 9. Tanabe Mario, Claudio De Angelo Flisoni and Alexander Nicholas (2004) The effectiveness of Strategic planning competitiveness in the Brazilian supermarket sector, Jounal of Retailing and consumer services,11(1), pp.51-59. Nguyễn Thị Uyên Tạp chí KHOA HỌC & CÔNG NGHỆ 125(11): 49 - 55 55 TÓM TẮT PHÂN TÍCH MÔI TRƯỜNG VÀ ĐỊNH HƯỚNG CHIẾN LƯỢC CHO CÁC DOANH NGHIỆP BÁN LẺ NỘI ĐỊA TẠI VIỆT NAM Nguyễn Thị Uyên* Đại học Thương mại Việc mở cửa hoàn toàn thị trường bán lẻ cho các công ty nước ngoài vào ngày 11 tháng 1 năm 2015 của Việt nam sẽ tạo ra những sức ép lớn cho các nhà bán lẻ trong nước. Chính vì vậy, việc nghiên cứu sâu về tình thế môi trường để định hướng chiến lược cho các các siêu thị trong nước hiện nay đang là vấn đề cấp thiết đối với các siêu thị nội địa cũng như chính phủ trong việc bảo vệ các siêu thị này trước sự cạnh tranh khốc liệt từ các siêu thị nước ngoài. Trên cơ sở nguồn dữ liệu thu thập từ điều tra khách hàng, ý kiến chuyên gia và các nguồn thứ cấp cũng như từ chính nghiên cứu trước đây của tác giả, bài viết này chỉ rõ tình thế chiến lược của các siêu thị trong nước và vận dụng mô thức TOWS để định hướng chiến lược cho các doanh nghiệp này nhằm tạo ra lợi thế cạnh tranh trên thị trường bán lẻ Việt nam. Từ khóa: Siêu thị nội địa của Việt nam, lợi thế cạnh tranh, môi trường kinh doanh, phân tích TOWS, hoạch định chiến lược. Ngày nhận bài:09/4/2014; ngày phản biện:25/4/2014; ngày duyệt đăng: 26/9/2014 Phản biện khoa học: TS. Nhâm Phong Tuân – Đại học Quốc gia Hà Nội * Tel: 0979118679; Email: uyendhtm@gmail.com