From Hollywood to Bollywood


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International Management and Marketing Case Study for Quickflix, an online film rental subscription company to enter India

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From Hollywood to Bollywood

  1. 1. Online DVD Meets BollywoodThe entry of Quickflix Limited into the India marketMGMT 8505: International ManagementMBA Trimester 2, 2011Tina Brune 20852407Carl Celedin 19109861Patrick Gallagher 20805458Christina Gravdahl 20872627Nur Farahana Khalid 20893861Wei Zhe Poh 20605321Ayrin Tjoe 20727067 Page 1
  2. 2. Online DVD Meets BollywoodEXECUTIVE SUMMARY Quickflix Limited is an Australian online DVD-by-mail company where subscribers canselect DVDs and build a queue online through Quickflix‘s website or iPhone application andreceive them from the Australian post. The online DVD rental industry in Australia is currentlyundergoing a significant change as after a number of years of intense competition, Big PondMovies announced a closing down of their DVD- by- mail service in July 2011. Now thatQuickflix has strengthened their position as market leader, increased paying subscribers 48percent to 82,000 and are planning to release their new digital streaming service in August 2011,the company is looking to expand their business internationally. This is part of their forward-looking business strategy to increase revenue and build a regional brand in Asia-Pacific.Thisreport presents a case study and in-depth analysis of Quickflix Limited into the Indian market.India is one of the most important emerging global markets with a growing 20s and 30s agepopulation, GDP and disposable income levels. Furthermore, with the entertainment and filmindustry presence of Bollywood, many opportunities exist to engage with and reach out to Indianconsumers. Therefore, Quickflix has decided to target India‘s young professional, time poor buttechnologically savvy emerging middle class through a low cost focus strategy. The first part of this report, a case study, introduces the current online DVD rental marketin Australia and information concerning the host country India. A country analysis is performedon India and investigates marketing and government factors, consumer purchasing behaviours,cost factors and possible entry strategy options that are available to Quickflix. Furthermore, thecurrent competition, political structure and barriers to conducting business in India are explained. The second part of the report is an analysis of the case study using internationalmanagement frameworks and models. This presents communication and negotiation methods,different foreign entry modes and partner selection options, IHRM policies, organisationalstructures and marketing recommendations to Quickflix‘s entry into the Indian market.Strategies  Form an international joint venture with local courier company Gati  Enter the Indian market starting with Mumbai  Roll-out the DVD-by-mail service in year 1 of the IJV Page 2
  3. 3. Online DVD Meets BollywoodTable of Contents Executive Summary ............................................................................................................ 2 Quickflix Limited Case Study ............................................................................................ 4 Introduction ..................................................................................................................... 4 Decision Point ................................................................................................................. 7 India ................................................................................................................................ 8 Government Drivers........................................................................................................ 8 Market Drivers .............................................................................................................. 12 Competition Drivers...................................................................................................... 18 Cost Factors .................................................................................................................. 22 Entry Strategy ............................................................................................................... 27 Case Study Analysis ......................................................................................................... 28 Introduction ................................................................................................................... 29 General Business Environment ..................................................................................... 30 Market and Competition factors ................................................................................... 32 Communication and Negotiation .................................................................................. 34 Organisational Structure, Process and Strategy ............................................................ 36 Entry Strategy ............................................................................................................... 40 Ethical Issues ................................................................................................................ 46 Marketing and Segmentation ........................................................................................ 47 Current Issues Facing The Company ............................................................................ 49 Recommendations ......................................................................................................... 50 Conclusion .................................................................................................................... 51 Appendix ....................................................................................................................... 52 References ..................................................................................................................... 61 Page 3
  4. 4. Online DVD Meets BollywoodQUICKFLIX LIMITED CASE STUDYINTRODUCTIONHistory of DVD-by-mail DVD-by-mail services were first introduced in the USA by entrepreneur Reed Hastingsin 1997. The service allows customers to rent DVDs, Blu-ray Discs and other film media onlinefor delivery by mail. Examples of such companies include Blockbuster Video Online, Netflixand LoveFilm. A typical DVD-by-mail operation model can be found below: Customers join the rental service online and create a list of titles they wish to watch. The titles from the list are then put into a queue and mailed to the customer once available. The customer watches the films and then sends them back to the rental company. Customers are allowed to keep the films as long as they want, but there is a limit on the number of films rented out at any given time.Quickflix HistoryQuickflix Limited is an online DVD-by-mail company based in Perth, Australia. The companyapplies a similar business model to the USA-based Netflix Inc and UK-based LoveFilmInternational. It maintains a library of 500,000 DVDs and offers a choice of 44,000 DVD andBlu-Ray titles across 400 genres from its website and iPhone application through trial and payingsubscription based rentals across Australia. Quickflix‘s network of distribution centres inSydney, Melbourne, Brisbane, Perth, Adelaide and Hobart handle service with delivery throughthe Australian Post to the whole of Australia.Quickflix was established in December 2003 with a simple website, a distribution centre andsmall DVD library. It became publicly listed on the Australia Stock Exchange in June 2005.DVD sales was added to its product offering in 2006, but was terminated in 2008 as a result ofthe global financial crisis and declining DVD sales across the industry. During 2010, thecompany achieved the market leader position in the online movie subscription market segment inAustralia with over 68,000 subscribers. This number has grown to over 82,195 at the end of the Page 4
  5. 5. Online DVD Meets Bollywoodfinancial year in June 2011, representing a 48% growth from 2010 (Figure 1). Quickflix hasallocated a significant proportion of its expenditure on marketing to attract new customers. Thisis expected to increase to over $5 million in 2011. Figure 1: Quickflix trial and paying subscriber base (Quickflix 2011).Quickflix Business Model Quickflix has no physical retail outlet and operates exclusively online. Customer serviceis also mainly provided via email or phone. Quickflix partners with Australia Post which handlesdelivery of films requested by customers within one day for metropolitan customers and twodays for regional customers. The company also has a network of distribution centres acrossmajor cities in Australia to service its customers nation-wide. Quickflix negotiates differentcontent rights and pricing with American and Australian movie studios and distributors for itsDVD library. Exhibit 3 in the appendix demonstrates the step by step rental process, and thevarious price points and rental volume flexibility offered by Quickflix. Quickflix‘s primary target markets are young professionals and families who spend a lotof leisure and recreation time indoors. The company aims to provide a value proposition througha flexible, simple, convenient and customised experience for its customers. The development ofits technology platform is crucial to deliver this experience to the customers. Page 5
  6. 6. Online DVD Meets Bollywood The core competencies of Quickflix‘s business are its technology platform, asubscription-based model with different price points and monthly volume choices, web-basedqueue selection system, its large DVD and Blu-Ray library and its distribution and deliverysystem. Quickflix also plans to introduce its leading-edge digital streaming services to customersin August 2011.Australia Market Australia is predominantly a middle-class society with an unemployment rate of 5.1%. In2009, approximately 61% of total households had an annual disposable income of more thanUS$45,000. In purchasing power parity terms, 36% of Australian households had an annualdisposable income of more than US$75,000 while 10.5% had an annual disposable income inexcess of US$150,000. Attending the cinema is a popular social activity especially among young Australians.The rise of technological progression and decreasing equipment prices have driven an increase ofhousehold technological spending on items such as DVD players. It is estimated that only 16%of Australian households did not have a DVD player in 2011 (Euromonitor, 2010c).This numberis expected to decrease to 12% in 2015 and to 11% in 2020(Euromonitor, 2010c). Consequently,an increase in DVD sales is expected over the coming years. Australia‘s annual A$600 million video rental market is dominated by the traditionalrental store networks with over three million annual customers. The main video rental outlets areVideo Ezy, Blockbuster, Civic Video and Network Video. Furthermore, large Australian retailerssuch as, K-Mart, Target, Big W, Myer, JB Hi-Fi, Sanity and Harvey Norman are includingDVDs in their product offerings. Internet retailing in Australia has grown by 47.4% amounting to nearly A$2.9 billion in2009. Despite this growth, Australian household expenditure on internet retailing is stillrelatively low in international terms. Currently there are four DVD-by-mail companies includingQuickflix in Australia (Table 1). Pay TV in Australia is delivered either through cable or satellite for a monthlysubscription fee. FOXTEL is Australias leading subscription television provider and isconnected to over 1.63 million subscribing households through retail and wholesale distribution. Page 6
  7. 7. Online DVD Meets BollywoodFOXTEL commenced distributing its services on cable with 20 channels in 1995 and increasedits offering to 45 channels in 2002. The FOXTEL Digital service was launched in 2004 andFOXTEL is now giving Australian viewers the choice of more than 200 digital channels.Table 1: Summary of Australian Online DVD Rental companiesCompany Name DVD Titles SummaryBig Pond Movies 44,000 Inception since 2003 by Telstra and have distribution network all over Australia. Introduced the ability to buy movies online, which can be downloaded and played on the computer for a limited amount of time. Only service which offers a 12 month contract.DVD Direct 10,000 Inception since 2002 operating in WA. Only service which offers both DVD and video game rental and sales service.WebFlicks 17,000 Inception since 2003 operating from two distribution centres.The global entertainment market The Global Entertainment & Media (E&M) industry has grown 2.2% in 2009 and wasvalued at US$13 billion. The E&M industry is dominated by TV, print and filmed entertainment,and the majority of revenues came from the non-digital segment. However, due to the increasingaccess to Internet, broadband and smartphone, the E&M industry is expected to continue tomigrate to digital format. In 2009, digital accounted for 24% of spending and is expected to riseto 32-33% by 2014. It is expected that, globally, in the next five years, digital technology willprogressively increase dominance. In overall, the E&M industry in North America, EMEA (Europe, Middle East, Africa),Asia Pacific, and Latin America will increase from $1.3 trillion in 2009 to $1.7 trillion in 2014,growing at a compounded annual rate of 5%. Spending in Asia Pacific increased by 1.3% in2009 and will average 6.4% compounded annually through 2014, rising to $475 billion in 2014from $348 billion in 2009. Excluding Japan, Asia Pacific will increase at a projected 9.2%compound annual rate during the next five years. Therefore, the global E&M market outlook ispromising.DECISION POINTOn 5 of July 2011, Quickflix entered into an agreement with its competitor Big Pond Movieswho announced that it was shutting down its DVD-by-mail business on 30 September 2011. This Page 7
  8. 8. Online DVD Meets Bollywoodagreement provides additional payments from BigPond Movies DVD customers transferring toQuickflix and the BigPond Movies DVD library acquisition. Therefore, with success in thehome-market and enormous control of market share, Quikflix has started to considerinternational expansion. The market of India with the size of its entertainment industry,popularity of Bollywood in Mumbai and distribution system in place has presented an excitingopportunity for Quickflix.INDIA Entering the Indian market presents both challenges and opportunities for Quickflix.India covers an area of 3.3 million sq. Km (Exhibit 1), extending from the snow-coveredHimalayan heights to the tropical rain forests of the South, and is the seventh largest country inthe world (CIA, 2011). India is the second largest country in the world by population whichsupports currently 1.18 billion people (CIA, 2011). Internet and technology are embraced by theyounger generation with a median age of just 26.2 years in the country. As one of the mostimportant emerging markets in the world and the opportunity to build a regional brand in Asia-Pacific, the potential market for Quickflix is present. However, Quickflix will also facechallenges such as regulatory inefficiencies, poor infrastructure, piracy and cultural distancebetween India and Australia.GOVERNMENT DRIVERSPolitical System India is a democratic country with a federal republic government of 25 states and sevenunion territories. The president of India is the head of the republic and the first commander ofchief of India‘s armed forces (UBC, 2008).The United Progressive Alliance (UPA) won theelection in 2007 with their left centred politics and nominated Smt. Pratibha Devisingh Patil asthe first female president of India.Political and Regulation Barriers and Risk Corruption presents one of the largest political risks to foreign investment in India.Corruption involves government officials accepting bribes to give advantage to privatebusinesses to reduce regulation and accelerate legislation process (Collins et al., 2009). Indiaexperienced a major scandal in 2010 involving 122 licenses for 85 MNCs that were under priced Page 8
  9. 9. Online DVD Meets Bollywoodand manipulated to favour some companies. This scandal cost the Indian government US$39.33billion (BMI, 2011).Despite the high corruption rate, anti-corruption movements have alsoflourished involving thousands of anti-corruption activists (Suri, 2011). India also ranked relatively high for its ineffective governmental processes that hindersmooth and effective practice (Morris, 2010). For example, there were 597 infrastructure projectsfacing delays in 2010 (BMI, 2011). Another challenge is the change in government and the constant discussions and conflictsbetween caste, religion, socialists, leftists and capitals which leads to the rules being changedrandomly. Though the Indian market welcomes foreign enterprises, they also have nationalisticlaws that protect India‘s local businesses (UBC, 2008). India has recently reformed its FDI policy allowing foreign firms to invest directly inIndia either on their own by setting up a branch office or wholly-owned subsidiary or as a jointventure with an Indian partner (Ernst&Young, 2010). This reform is meant to encourageinvestment and allow foreign firms to invest without prior government approval (Khan, 2011).FDI up to 100% is allowed to proceed under the automatic route for most sectors except for retailtrading (RBI, 2010). India allows only 51% of FDI in single brand retail and no FDI is permittedfor multi-brand retail (Guruswamy et al., 2010). Exhibit 15 in the appendix provides a summaryon the level of FDI allowed in the E&M industry.Trade Blocs Being the leader of the developing world and the Non-Aligned Movements (NAM), Indiastrengthens its political and commercial ties with United States, Japan, the European Union(EU), Iran, China, the Association of Southeast Asian Nations (ASEAN) , the South AsianAssociation for Regional Cooperation (SAARC) , the World Trade Organization (WTO) and hasremain a long participant in United Nations (UN) peacekeeping operations (State, 2010).Historical Context When India became independent in 1947, the signs for prosperity and growth werepropitious; it had a large domestic market, a diversified natural resource base, large supplies ofskilled and semi-skilled labour, sufficient home-grown entrepreneurship, an efficient Page 9
  10. 10. Online DVD Meets Bollywoodbureaucracy and a political leadership seemingly committed to development (Lal, 1999).However, the next few decades were characterised by strong centralised planning, governmentownership of key industries, excessive regulation of private enterprise, trade protection and ageneral ‗inward-looking‘ economical approach(Prasad, 2008). In 1991, India started to change itseconomic policy by privatising government-owned firms, mobilising the labour market,introducing automatic approval of foreign investment and lifting import restrictions onintermediate and capital goods (Lal, 1999) .Gross Domestic Product (GDP) India is ranked as one of the top economies in the world in terms of purchasing powerparity (PPP) of the Gross Domestic Product (Figure 2). Figure 2: India GDP growth rate (TradingEconomics 2011). As you can see from Figure 2, India‘s GDP has been relatively robust over the years. Theaverage GDP rate from 2004 to 2010 was 8.4% with highest point of 10.1% in 2006 and lowestpoint of 5.5% in 2004. GDP growth has slowed towards the end of 2008 and early 2009 due tothe global financial crisis. However, India‘s economy has recovered and GDP expanded to 7.8%by the end of the first quarter in 2011 (TradingEconomics, 2001).Despite the robust GDPgrowth, income distribution is highly unequal in India. The top 10% of the population earns 31%of the country‘s income and the lowest 10% earns merely 3.6% (InternationalBusiness, 2011). Page 10
  11. 11. Online DVD Meets BollywoodEmployment Unemployment rate fell from 9.2% in 2005 to 8.6% in 2008. However, it rose again in2009 to 9.1% due to the global financial crisis. An increase in unemployment leads to a decreasein consumer spending, since there are no unemployment benefits that one can claim in India.Unemployment rates were particularly high among the 25-29 years old age groups (21%) and 30-34 year olds (17%) with these age groups representing the majority of workforce for the ITsector. However, the economy has since recovered with as many as 230,000 jobs are estimated tobe created in 2010 in healthcare, real estate, IT, education, manufacturing and Banking, FinancialServices and Insurance (BFSI) sectors (Euromonitor, 2010c) .Disposable Income Disposable income per capita in India grew by 11% from Rs36,020 in 2005 to Rs39,857in 2009 (Euromonitor, 2010c) .The biggest growth is seen in the middle income households withdisposable income between US$10,000 and US$25,000, which constituted 5.4% of the totalhouseholds in 2009. This proportion has increased from 2.6% in 2005 (a growth of 127%). Thesecond highest rise can be seen in households with disposable income between US$5,000 andUS$10,000, which constituted 22.4% of the total households in 2009. This proportion hasincreased from 12.9% in 2005 (a growth of 86%). The proportion of well-off households, thosewith an income above US$25,000, has increased from 1.0% in 2005 to 1.5% in 2009(Euromonitor, 2010c) . In 2009, the highest earners were the 35-44 year olds, followed by the 25-29 year olds.The rise in average income of the 25-29 age group can be attributed to growth of the informationtechnology enabled services (ITES) sector, which has created employment for people in this agegroup. In addition, this age group prefers to complete their education to a Masters level and thisallows them to obtain higher salary (Euromonitor, 2010c) .Inflation Rate Inflation rates have increased to all-time high levels in recent years. Drivenpredominantly by higher food and fuel prices, Indias annual inflation rose from 1.4% in May2009 to 10.2% in May 2010. The high inflation rate implied a significant reduction in household Page 11
  12. 12. Online DVD Meets Bollywooddisposable income (Euromonitor, 2010c) .Forecasts for Indias 2011/12 inflation are set at 7.9%,on the back of surging oil prices globally and heightened demand side pressures(, 2011).Savings rate Indians consider savings as highly important, especially for the education of theirchildren and for retirement support. Around a third (34%) of their monthly income goes invarious forms of savings. According to the Central Statistical Organisation (CSO) Indians areamong the largest savers in the world with a savings rate of 32.5% of GDP in 2008-2009(Euromonitor, 2010c). Financial savings constituted around 50% of household savings in 2008-2009. The share of bank deposits in financial savings, increased from 33% in 2000-2001 to 55%in 2008-2009. (Euromonitor, 2010c).MARKET DRIVERSSocial and Cultural Barriers India has a diverse culture with several different ethnic groups with various customs andbehaviour patterns. Hindu is the main religion practiced in India but Christianity, Islam, Sikhism,Buddhism and Jainism are also practiced. The caste system is also widely accepted within theIndian society. The caste system is a hierarchy that places individuals from birth into distinctcategories. Social responsibility and appropriate work are assigned for individuals within thecategories (Manian, 2011). Although this type of discrimination exists, in urban India differentclasses work side-by-side and foreigners are not expected to treat individuals of different classesdifferently (Manian, 2011). It is not uncommon, however, for local leaders to give orders to lesssuperior caste employees who then follow these without question (Nehruzii). The British colonisation of India has had a significant impact on language (Mahtani,2006). Hindu is the most common language spoken in India, but people are often trilingual withthe mix of Hindu, local language and English. There are 18 official languages recorded in Indiaand more than 1600 local languages. 15 % of the population speaks English although thelanguage is modified to suite the Indian culture. India also has the highest illiteracy rate in theworld (which represents approximately 33.8% of its population). Page 12
  13. 13. Online DVD Meets BollywoodDoing business in India Being aware of cross-cultural communication barriers is important when doing businessin India (Mahtani, 2006). The word ‗no‘ is perceived as confronting, hence negotiations can beambiguous (Mahtani, 2006). Messages in communication are at times misunderstood e.g.western people might utter ‗that‘s impossible‘ meaning a challengeable task (Mahtani, 2006),whereas the same message can be interpreted in India as an unaccomplishable task. Bodylanguage and humour are also culture related. Body language is essential due to the implicit highcontext culture of India. It is not uncommon for business meetings to be delayed in India. Although there can belegitimate reason for the delays, to an extent the delay is cultural related (Mahtani, 2006). It isalso essential to establish good relationships between expatriates and their host counterpartsbecause trust and social power is seen as important for future successful business. Due to thelegacy of the caste system, it is common to address leaders as Mr and Mrs and either first nameor second name. The formality is there to keep a distance between work and social life.However, relationship is still prioritised before business(Nehruzii). Business meetings can be perceived as laid back and informal. It is common to havefrequent interruptions, food during the meeting, and small talk between participants. Meetingscan therefore take more time and be perceived as ineffective, but it is part of building trust(Nehruzii). Dress codes in India are similar to Western style, however it is important for womennot to expose too much skin (Nehruzii).Consumer Purchasing Habits Indian consumer expenditure grew steadily by 22.5% between 2005 and 2009 as incomelevels increased. India is forecasted to become the fifth largest consumer market in the world by2025 with an expenditure market of US$ 1.7 trillion from US$430 billion in 2009 (Euromonitor,2010a).As can be seen in Figure 3, expenditure on DVDs and VCDs is placed fifth in thehierarchy above categories such as eating out, accessories, home line accessories and going tothe movies and theatre (Singhal, 2009). Spending time with family and watching TV together is highly valued as leisure activitiesin India (Euromonitor, 2010b) .In cities such as Delhi, Mumbai and Kolkata, households watch Page 13
  14. 14. Online DVD Meets Bollywood15 hours of television per week. Women that stay at home watch in excess of 2 hours oftelevision daily in the afternoon, which has impact on the television broadcasting during theafternoon. India‘s soap operas with Indian actresses, scenes and spoken in Hindu are usuallytelecasted during the afternoon. Indian youths spend 98 min a day on average watchingtelevision, 32 minutes reading news, 44 minutes reading magazines, 70 minutes surfing theInternet and 61 minutes listening to the radio (Euromonitor, 2010a). Figure 3: Categories of consumption in India (Singhal, 2009). Movie rentals from mom-and-pops operations are becoming part of the past (Prasoon,2010). A recent study conducted in cooperation with Bigflix states that the Indian DVDconsumers within 18-35 years age group prefer online rental. The main reasons for this attractionwere convenience, price, variety and privacy. Table 2 summarise the finding of the research. Page 14
  15. 15. Online DVD Meets BollywoodTable 2: Summary of findings on Indian Online DVD Rental consumersCost at which DVD are bought by the companies Rs 300Average run by a copy 20 consumersCost of renting one movie Rs 15Average numbers of movies ordered 12Courier charges per delivery Rs 2Cost of supplying movies per month per to costumers Rs204Average monthly plan prescribed by costumer Rs 650Net profit margin Rs 446Mobile and Internet Usage Indian consumers have a remarkable appetite for digital content. In fact, they consume anaverage of 4.5 hours of it daily across offline channels such as television, DVDs, and CDs. This isbeing driven by a market of 826.93 million mobile phone users with 66 percent being in the urbanareas. However, just 17 million are mobile-internet users (or less than 1percent of the totalpopulation) but this is growing tremendously. India has 12 telecommunication firms offeringmobile phone internet access.While India is a relatively poor country, more than 70 percent of itsurban consumers already spend about $1 a month on content and services through offline,unorganized retail channels—a market estimated to be worth more than $4 billion annually. Theaverage price of smart phones that deliver much richer content, including video, is falling rapidlyalready nearing $125, which is significantly less than the cost of PCs. Mobile devices also areinherently easier to operate than PCs, and the ability to access web sites with a single touch or avoice command. The mobile Internet could deliver the personalized entertainment that Indianconsumers crave. If India‘s latent demand is unleashed, the total number of Internet users willincrease more than fivefold, to 450 million, and total digital-content consumption will double, toas much as $9.5 billion by 2015 to $20 billion representing 184.5 million mobile internet users(Figure 4). Page 15
  16. 16. Online DVD Meets BollywoodFigure 4: Share of Internet use by channel in India Figure 5: Online Video Monthly Figures for (Narasimhan, 2011) India (Comscore,2010) India‘s base of 81 million internet users is the world‘s third largest and has been steadily increasing since 2000 with a projected 100 million users by 2011. However, this figure is a function of sheer population, not acceptance as this is just 7 percent of the total population in 2010 and 8.5% in 2011 (Figure 4), which means it is one of the lowest penetration rates in Asia. Furthermore, only 20 percent of India‘s urban citizens are connected to the Internet. This low rate is driven by the cost and ease of access to Internet services and infrastructure development in rural areas of India that support broadband establishment or PC availability. In urban area, however, households PC penetration rate has doubled between 2008 and 2010, which means 28 million people have PCs in their homes. The desirability of obtaining a PC is also rising from 35- 57% within the middle class of India (Manaktala, 2010). India is currently experiencing a rise in online video content as a result of the increase in internet users. 71% of the total internet audience consumes videos monthly, resulting in 1.7 billion total videos and 5 total hours per viewer (Figure 5). Most of this time is spent on YouTube with 78% of all Indian monthly unique viewers where entertainment and multimedia consist of the top two video categories. Furthermore, 66% of the visitors are males, which are predominantly in the 15-34 age range, while females account for 34% with a large percentage in the 35-44 age range (refer to Exhibit 6 for further details). The increase of internet usage has also changed consumer pattern behaviour. Online shopping is now perceived to be more reliable and consumer numbers are increasing (Rastogi, 2009). The e-commerce market has increased from $227.6 billion in 2010 with projections of $395.56 billion in 2011 and $785.12 billion by 2015. However, about 75% of this comes from travel related expenses such as airline and rail Page 16
  17. 17. Online DVD Meets Bollywoodtickets. Online Retailing comprises about 12.5% of the industry with close to 10 million onlineshoppers and is growing at an estimated 30% annually. Indian consumers choose online shopping mainly because of greater variety in productsand convenience. 46% of consumers buy less than five products annually and around 26% buyup to ten products annually. Out of these consumers, 61 % pay for goods on delivery, whereas26% buy and pay for the goods online and the remainder search for products online and purchasegoods in stores. The number of credit cards in India has witnessed noteworthy growth during therecent years and this is expected to reach around 28 million by 2014, reflecting a CAGR(compound annual growth rate) of around 13% between 2011 and 2014. However, credit cardpenetration is just 2-3% in India, and many consumers are wary about the security of bookingonline. Exhibit 5 presents the number of annual credit card transactions in India. Consumers of the Indian market are used to promotional giveaways. These are oftengiven in conjunction with purchases of electrical appliances. They come in the form of toiletriesand snacks. Indians are also price sensitive and seek value for money (Chennai, 2005) .However,Indian consumers are also becoming more service oriented and prefer reliable and quality goods.Accordingly known brands and organized retail chains are seen as more accountable and havebecome increasingly popular. Indians are also becoming more environmentally aware and aretherefore interested in environmental friendly services and products (Chennai, 2005) .The growthin disposable income has shifted the consumer savings mentality to spending mentality. Social networking is also popular in India. There are more than 29 million Facebookusers in India, and 75.9% of them are in the 18-34 age group. This is growing at 10.71%monthly, representing a penetration of 2.51%. Mumbai alone has around 3.6 million Facebookusers representing 18.8% penetration rate (SocialBakers, 2011) .Furthermore, Indian users arethe 2nd most populous country on Linkedin with over 10 million users representing a 0.89%penetration rate and Orkut also has over 20 million Indian users accounting for a 20.2% marketshare.Consumer Perceptions of Local and Foreign Products India‘s entertainment and media market is booming. Indians tend to prefer Bollywood toHollywood movies. Bollywood movies are usually musicals with melodramatic story lines. The Page 17
  18. 18. Online DVD Meets Bollywoodsuccess of the movie is largely dependent on the quality of song and dance presented.Bollywood movies are unrated and children usually watch the movies together with theirfamilies. However, the demands for Hollywood movies, western fashion and music are alsogrowing. Exhibit 7 in the appendix outlines the preferred movie type, language and source by theIndian population.COMPETITION DRIVERSDomestic Competition India‘s domestic media and entertainment industry has increased by 11% to $14.5 billion(Rs 652 billion) in 2010 with an estimated growth of 12.4% to $23.15 billion ($1.040 Rs trillion)by 2014 (Exhibit 4). The industry, however, still continues to be dominated by traditional mediasuch as television, print and filmed entertainment. Furthermore, digital spending in India has notbeen growing at the same pace as that internationally due to the lack of adequate digitalinfrastructure . However, Internet advertising is expected to increase to Rs 15 billion by 2014representing a 20% growth. Quickflix‘s entry into the Indian market will be impacted by directcompetitors in the home video segment and indirect competitors in television, digital streamingand cinema from both domestic and international companies.Home Video Segment The home video segment in India represented revenues of Rs. 6.5 billion in 2009 and isexpected to grow to Rs. 12 billion in 2014. India is heavily affected by piracy which accounts for600 million DVDs sold annually representing $1 billion dollars worth of revenue(FilmIndustryNetwork.Biz, 2010). Increasing initiatives by the Government to curb piracy aswell as decreasing dependence on rental market and growing digitisation will drive the homevideo market. There are currently five major domestic competitors in the online DVD rental space inIndia which include BigFlix, SeventyMM, Clixflix, Cinesprite and M (Exhibit 8). However,unlike online DVD rental companies in other countries, Indian companies individually charge asecurity deposit, registration fee and membership fee ranging from Rs. 150 to Rs. 500.Furthermore, the business format in India comprised of both online and physical retailing with abusiness model of sell-through from rental (Figure 6). Sell-through from rental accounted for Page 18
  19. 19. Online DVD Meets Bollywood100% of sales in 2004 and is expected it will capture 90% of the market by 2014. This willinherently lead to sharp declines in rental spending (PWC, 2010). Figure 6: Typical India Home Video Value Chain (PWC 2010).Digital Streaming The digital streaming rental segment in India started slowly in the early 2000s but in2008 expanded with iTunes India and now has included major players Big Flix, SeventyMM,Eros and Shemaroo. However, in India, only limited episodes of a few TV shows are streamedonline legally, but movie production houses and distributors on the other hand are slowly optingto make full length feature films available on the Internet and their choice for distribution seemsto be YouTube (Zdnet, 2011). The cost for streaming a movie online in India ranges from $1 to$2 (Rs. 38.2 to 68) per view, which include the content rights fee of Rs. 20 to Rs. 50 andbandwidth and server costs.Cinema Watching movies is the most popular social activity across all socio-economic classes inIndia and over fourteen million people attend movie sessions daily, representing about 1.4% ofthe population. Driving the film industry in India has been the Bollywood genre, which is thelargest film producer in India and one of the largest centres of film production in the world.There are 10,000 theatres in India, comprised of multiplexes and single screen theatres. TheCinema market is dominated by two domestic major players, Big Cinemas and PVR Cinemasand an international player, Cinepolis from Mexico (Exhibit 9). Page 19
  20. 20. Online DVD Meets Bollywood In the last three years there has been a decline in the industry of box office revenues by20% from $2.3 billion in 2008 to $1.85 billion in 2010 which can be contributed to the economicslowdown and a major strike in the multiplex industry in 2009. However, the Indian filmindustry is projected to grow 12.4% over the next five years, with a focus on regional areas.Television The television industry in India is an integral aspect of family tradition. As a result,television households escalated to 124 million in 2009 from 118 million in 2008, indicating apenetration rate of 60% within the country. The industry is projected to continue to be the majorcontributor to overall industry revenues and is estimated to grow at a healthy rate of 13.0%cumulatively over the next 5 years. Subscription revenues form the biggest share of revenues forthe television industry, accounting for 62%, while the rest goes to advertisement and contentrevenues. India is dominated by five cable television networks and one government owned freeto air network (Exhibit 10).International Competition International competition in the Indian market has also been prevalent in recent yearsthrough a number of acquisitions and mergers as well as the presence in India from the top sixmotion picture studios of 20th Century Fox, Warner Brothers, Disney, Paramount Pictures,Universal and Sony Pictures. The US and International film industry in India had an estimatedsize of Rs 3 billion ($66 million) in 2009 and is expected to increase steadily. Sony PicturesTelevisions International (SPTI), recently, acquired Channel 8, a Bengali language film channelto mark its increase presence in the regional space. Disney has also distributed three channelsdevoted to the children market in India.Marketing and Promotional Strategies Quickflix must recognize the most suitable and effective ways of marketing andpromoting itself to Indian consumers, if it was going to set up its online DVD operations andservice in India. They need to position themselves as an affordable low cost product offering anextensive library of titles, guaranteed and speedy delivery and a high-quality and reliabletechnology platform. Furthermore, the Indian consumers are also very interested in ease ofaccess and the complete user experience, which is reflected in the fact that a majority of onlineDVD companies have established either physical stores or drop boxes to complement their Page 20
  21. 21. Online DVD Meets Bollywoodwebsite service. These stores and drop boxes are located in high traffic areas such as malls andare concentrated in larger cities such as Mumbai, Delhi, and Bangalore which can act as avehicle to increase the company‘s brand awareness and some even offer free trial promotions. A traditional marketing strategy has been around the bundling of services includingrental, sell-through and the availability of up to 15,000 titles of international and Indianlanguages. Another marketing channel has been the use of 3rd party logistic services for deliverywhich provides a highly visible presence and promotion of the company and its website throughtheir vehicles and even some rickshaws throughout each of the cities. Furthermore, the websitesof online DVD companies in India in conjunction with its digital streaming services have beenadapted to act as a platform for increasing brand awareness and technology expertise by offeringthe ability to watch upcoming movie trailers thus driving traffic. The emergence of social mediahas also been an integral medium for marketing and promotions through contests and brandingand banner advertising on Facebook, Orkut and Linkedin (Exhibit 11). BigFlix has expanded itspresence on Facebook with 34,710 Facebook fans representing 3.26% growth and even haveincluded an application for users to download to add movies to their queues. Furthermore,SeventyMM has 17,360 Facebook fans and have been running 25% off sales and 75% off rentalsmobile coupons to fans who ―like‖ their page in cooperation with Mastercard and the MumbaiIndians of the India Premier League. In India, advertising is still controlled by the three main mediums of television, print andoutdoor advertising. Although the popularity of these three mediums in India is extremely high,the prices are very expensive. Star India charges RS 90,000 to 450,000 for a 10 second televisionadvertising spot and during the recent Cricket World Cup rates increased to as much as 1.7million rupees for a 10 second spot. However, both SeventyMM and BigFlix have continued toinvest in majority television advertising with numerous campaigns. BigFlix even received somerecognition for their very successful campaign titled ―Don‘t kill blockbusters. Choose originalDVDs over pirated ones‖, which was complemented with television and print advertising.Furthermore, Online DVD companies have also been using local television and print to launchnew products and services at hotels and clubs through celebrity endorsements. Lastly, internetmarketing has been increasing due to its cost-effective and tracking metrics where MovieMarthas focused solely on search engine marketing through Google India. Page 21
  22. 22. Online DVD Meets BollywoodCOST FACTORSSetting up a Business India is ranked 134 out of 183 economies in the ease of doing business with Singaporebeing the top ranked nation (IFC, 2011). Setting up a business in India is very challenging anddifficult due to their long delays in legal formalities and procedures (Exhibit 12). Despite the poor rank, starting up a business in India has improved recently due to thecomputerisation method introduced by the government. It takes an average 29 days to start abusiness and only 12 initial procedures are required with cost as low as USD 560 (IFC, 2011).However, the estimate excludes procedures of dealing with permits, registering property, tradingacross borders, enforcing a contract, getting electricity, employing workers and closing abusiness. These activities can take years for foreign firms to complete. However, average totalcosts that foreign firm can spend is limited up to USD 4000 (IFC, 2011).Location Factors India stands apart from the rest of Asia, surrounded by mountains and the sea, whichgives the country a distinct geographical entity (, 2011). Well-plugged informationcan easily be found in localized business areas such as New Delhi , Mumbai , Chennai ,Ahmedabad , Bangalore and Calcutta (, 2011) . In addition to these cities, there are30 other cities in India with a population of more than 1 million people. Each of them has its ownunique advantages and drawbacks. Relative cost of real estate is rising fast across India with Mumbai ranked as the 4th mostexpensive market in terms of office space rentals in the world and New Delhi the 11th (ET,2010) . Occupancy cost per square feet in Mumbai is USD130.41 annually, while that of NewDelhi is USD 101.21. However, rents have started to stabilize slowly since 2010.Distribution System Distribution systems in India involve many intermediaries between companies and retailcustomers. Multiple channels and multiple layers are common; although each layer may berelatively inexpensive, the cumulative costs can be substantial (Bhalla et al., 2007). This systemis designed to isolate foreign companies from end-customers and their changing preferences. Page 22
  23. 23. Online DVD Meets BollywoodIndia‘s retail sector also ranks among the lowest in terms of organised distribution system in theworld1 (EconomyWatch, 2011).Availability of Labour Law and Labour Costs With a rapidly growing middle-class, demand for education is high among all levels(Kumar, 2010). Despite India‘s high illiteracy rate, there are currently over 100,000 Indianforeign students studying abroad in the USA (Euromonitor, 2010b).Hence there is an abundanceof law, engineering, management, and science graduates available for foreign businesses inIndia. With the recent downturn in the United States, more English speaking foreign students arereturning to India to complete their studies. While many foreign companies are initially attracted to India because of the low labourcosts, low health workers‘ compensation and other insurance costs, the basic yearly salaries inIndia differ with regards to their position and job nature. The salary of a managerial position cango as high as USD 225,000 or as low as USD 5,500 per year (CCI, 2011) . According to the CCIdatabase, a marketing and sales person earns as high as USD 110,000 basic salary a year and cango as low as USD 2,200 a year for junior levels, whereas the minimum average salary ofadministrative job is about USD 2,000 per annum but an executive salary could earn USD10,000 a year.Expatriate and Repatriation Cost and Training Expatriates in India are among the highest paid globally, and many expats receiverelocation packages, including monthly complimentary rent housing up to Rs 600,000(Hattaway, 2011). However, cost of living in India can be relatively high particularly in Mumbaiand New Delhi due to the high property prices. Expats residing in India must pay income tax, which is calculated on a progressive scale.There is no tax on salaries less than Rs 160,000 per year; 10% on an amount earned between Rs 1 Distribution in the retail sector especially is measured by the reach of its products to people and impliesthe dispersion among the organised and unorganised stores ECONOMYWATCH. 2011. Retail Distribution in India[Online]. Economy Watch. Available: [Accessed 6th July 2011 2011].. Retail store is nominated as organised only when it features more than10 employees. Page 23
  24. 24. Online DVD Meets Bollywood160,000 and Rs 300,000; 20% on an amount earned between Rs 314,000 and Rs 500,000 and30% on an amount earned above Rs 500,000 (Hattaway, 2011).Infrastructure: Power, Telecommunication and Transport India‘s power generation is estimated to be around 174.3 GW, with the private sectorcontributing around 21% of the capacity. Even with increases in the last few years, powergeneration has not kept pace with the growth in demand, which has resulted in power shortagesthroughout the country. Hence most factories and offices require backup power in the form ofdiesel-fired generators and batteries (IFC, 2011). In addition, the costs of setting up an electricityconnection in a newly constructed building may reach up to Rs 200,000. The Indian Minister ofPower, however, has set a goal to deliver ―Power for All by 2012‖ (Powermin, 2011). Currently, almost half of the population does not have access to electricity (Euromonitor,2010b). Within a population of 1.18 billion people, India represents the world‘s largesttechnology, communications and media market. Since the liberalisation of thetelecommunications market in the early 1990s, the national incumbent (BSNL) still controls 75%of the Indian fixed-line market. Fixed-line telephones connection is still one of the lowest in theworld at 18.8% in 2009. This has grown from 13% in 2004, largely due to the increase inconsumers‘ incomes and strong economic growth. Internet connection is relatively expensive inIndia and only 2.8% of Indian households had a broadband connection in 2009 (Exhibit 13). Thegovernment, however, has set out a policy to connect India‘s rural population to the digitalnetwork, along with its district offices. It is forecasted that more than 15% Indian householdswill have access to Broadband connection by 2017 (Exhibit 14). India has the fastest growing market for mobile phones. Household possession of mobilephones was 18.4% in 2009. There was a good GSM network coverage of about 70% of thecountry in 2010 with a current 3G network being planned for the near future (BBC, 2010).However the plan costs approximately US$1.0 billion to implement, which will be a major issuefor 3G operators in India. Page 24
  25. 25. Online DVD Meets BollywoodFinancial Institutions and Foreign Exchange Restrictions The banking sector has experienced extensive reforms since the 1990s. This has resultedin more competition, although the public sector still dominates. Other types of entities in thissector include the private sector and foreign banks (Chakrabarti et al., 2008). The rupee is freelyallowed to be exchanged on the trade market by foreign companies. In addition, any foreigncapital invested in India is allowed to expatriated, along with any profits or dividends, providedany taxes have been paid.Availability of Energy Resources India suffers from a shortage of domestic fossil fuels required to meet the energydemands. Fossil fuels provide up to 65% of the energy output required to meet energy demand.The Ministry of Power estimates that by 2020, over half of fossil fuels required to meet energydemand will have to be imported. Coal, oil and gas supplies are slowly diminishing. Thegovernment is looking to renewable and nuclear energy to continue to meet the growing demandof a burgeoning population.Accounting and Legal System The accounting and legal systems in India are well established, albeit slow-moving(2009). The system is based on British law and legal system. India has a written constitutionand is based on common law with individual and property rights. The major laws affectingforeign investment are the Foreign Exchange Management Act 1992; the Companies Act of 1956and the Competition Act of 2002 (Rathinasamy et al., 2003). India has strong labour laws that make it difficult for an employer to arbitrarily removeand mobilise employees. They also varies with different states , territories and districts (Carver,2010). Other laws include protections of intellectual property rights, anti-trust regulation,Negotiable Instruments Act 1881, the Sale of Goods Act 1930 and the Arbitration andConciliation Act 1996. This varied and complex nature of business investment, accounting andtax laws ensures a tough time is in store for any new foreign business in India. The accounting standards in India are developed and issued by the Institute of CharteredAccountants of India (ICAI). The government has proposed a move to accept the InternationalFinancial Reporting Standards (IFRS) over the next few years which will be an advantage for Page 25
  26. 26. Online DVD Meets Bollywoodforeign companies moving into India. The ICAI may even allow foreign companies to issueyearly reports based on these international standards even before it becomes mandatory to do so. India‘s entertainment law includes the copyright law of 1957 which says that copyright isa right granted under law to creators of literacy, dramatic, musical and artistic works andproducers of cinematograph films and sound recording in respect of their creation. Copyrightensures certain minimum safeguards of the rights of authors over their creation therebyprotecting and rewarding creativity (, 2009).The creation of ―rental right‖ in theact in 1994 for copies of films , sound recordings and computer software was one majorimprovement (LexisNexis, 2009) . The 1994 Amendment stated that the copyright owner wouldhave the exclusive right to control the resale and/or hire of a copy of a film or sound recordingeven after its first sale (EBC, 2010) . This has prevented the development of a legitimate second-hand market in films without the consent of copyright owners and disallowed the recognition ofthe first sale doctrine. In 2000, the information technology act was amended which provides thatif any person without permission of the owner or any other person who is in charge of acomputer, computer system or computer network shall be liable to pay damages by way ofcompensation to the person so affected for the following: If they engage in the business ofdownloads, copies or extracts any data, computer data base or information from such computer,computer system or computer network including information or data held or stored in anyremovable storage medium (, 2009).However , India has not yet enactedlegislation on protecting technological measures and digital rights management information thatconform with the Internet treaties (LexisNexis, 2009).Taxation Issues The corporate income tax effective rate for domestic firms is 30% while the profits ofbranches in India of foreign companies are taxed at 40%. 7.5% surcharge also applies todomestic companies and 2.5% for foreign companies if income exceeds Rs 10 million (Deloitte,2011). Companies incorporated in India (any setup other than a branch) even with 100% foreignownership, are considered domestic companies under the Indian laws. However, the Export-Import Policy of 1992 provides substantial tax incentives forinvestments in export. Major exporters are allowed to operate bank accounts abroad to facilitatetrade. Companies that sell in the Indian market as well as international markets may deduct Page 26
  27. 27. Online DVD Meets Bollywoodexport earnings from their tax liabilities. Exporters and other foreign exchange earners have beenpermitted to retain 25% of their foreign exchange earnings in foreign currency. For 100% ExportOriented Units and units in Export Processing Zones, Electronic Hardware Technology Parks,retention up to 50% is allowed (Outsource2India, 2011). The government is attempting to implement a uniform value-added tax across states ; thesystem is currently plagued with differential tax rates for various states leading to increased costsand complexities in establishing an effective distribution network (Bhalla et al., 2007).Availability of domestic capital market to local and foreign business Doing Business in India 2011 has ranked India 32 out of 184 in ―Getting Credit‖. A fullyfunctioning and well regulated banking sector exists for local and foreign companies alike toobtain credit from the domestic market. The credit market is robust with a wide range offinancial institutions to choose from. The capital markets are run by the Securities and ExchangeBoard of India (SEBI) and now rank as some of the most mature markets in the world.ENTRY STRATEGY One of the most critical decisions associated with a firm‘s international strategy is the choiceof foreign entry mode. Many factors will affect the foreign market entry choice including thecultural, legal, political and economic environments. In addition, host-country market size andmarket potential will also contribute to the method of foreign market entry. There are numerousmodes of entry to a foreign market for a firm; however they are not all mutually exclusive. Inany market (or country), one firm could avail itself of more than one entry mode. Differentmodes suit different firms at different times and in different markets. However, the main factorsthat decide which mode of foreign entry is chosen are ‗degree of control‘ and ‗resourcecommitment‘. For Quickflix, there appears to be only three options available under the currentmarket conditions. 1. Establishing a wholly owned subsidiary in one or several of the major markets in India (for example Mumbai, Chennai, Delhi); 2. Entering into a joint venture (JV) with a local distribution agent; 3. Not to enter the Indian domestic market at this stage. Page 27
  28. 28. CASE STUDY ANALYSIS Strategy – Structure – People - Performance General Business Environment Market and Competition Factors • PESTLE • Porter’s 5 Forces • Hofstede Cultural Dimensions Entry Strategy Ethics • Joint Venture with Local • Corruption Partner: • Location of Entry: Mumbai • Negotiation Process Organisational Structure People • Porter’s Generic Strategies • 5 Model Factor I-HRM • Porter’s Value Chain • MBI Model Performance Figure 7: Strategy-Structure-People-Performance (Ganganahalli,, 2011) Page 28
  29. 29. Online DVD Meets BollywoodINTRODUCTION This part of our report consists of an analysis of the case study presented in Part A. Thissection identifies the critical issues faced by Quickflix‘s entry into the Indian market, and usesappropriate theoretical concepts and international management models to evaluate theinternational strategies and processes applicable to Quickflix. Our analysis is based on a modified version of the ―Strategy-Structure-People-Performance‖ framework, developed by Michael Porter (Ganganahalli, 2011). Each section ofthis framework ties in together to deliver our conclusion and recommendations. A summary of the recommendations are made (both short term and long term) at the endof this section, in addition to a conclusion regarding the method of entry into this market. Page 29
  30. 30. Online DVD Meets BollywoodGENERAL BUSINESS ENVIRONMENT There are many factors that can influence a company when entering a new market in aforeign country. The PESTL analysis framework is developed to capture these elements inpolitical, economical, technological and legal aspects (Table 3). The PESTL analysis is veryuseful for Quickflix in strategic planning, marketing, research and development (Kotler, 1998).Table 3: PESTL AnalysisPolitical  Stable democratic politic environment  Corruption is one of the largest risk factors for investors – High corruption rate  Anti-corruption movements  Governmental bureaucracy  Random change of rules and regulations  100% FDI allowed to proceed in entertainment industry.  Considered the leader of developing world  Trade blocs such as NAM , EU , ASEAN , SAARC , WTO and UN  Long delays in legal business procedures to set up a business in India are common  On average, 29 days and 12 procedures are required to start business  Business areas are New Delhi, Mumbai, Chennai, Ahmedabad, Bangalore and CalcuttaEconomical  2nd largest country in the world - population supports 1.18 billion people  One of the top economies in the world in terms of purchasing power of gross domestic product  India‘s GDP expanded to 7.8% by the end of the first quarter in 2011. The average GDP rate from 2004 to 2010 was 8.4%  Disposable income per capita is growing, especially in the middle income households  Rise in average income of 25-29 age group attributed to growth of the information technology enabled services (ITES) sector  Inflation rate rose from 1.4% in May 2009 to 10.2% in May 2010  34% of monthly income in various savings  The corporate income tax effective rate for domestic firms is 30%  The profits of branches in India of foreign companies are taxed at 40%  High unemployment rates among the age group of 25-29 and 30-34 representing IT workforce  India is among the largest savers in the world with savings rate of household savings in 2008- 2009 Page 30
  31. 31. Online DVD Meets BollywoodSocial and Cultural  7th largest country in the world, covers an area of 3.3 million sq. km  Population median age is 26.2 years  Diverse culture with different ethnic groups  Language barrier: Most common language spoken is Hindu, though 15% speak English  India has the highest illiterate rate in world  Working environment is highly hierarchal due to the cast system where Indian leaders delegate and demand without being questioned. Foreigners are not to treat individuals in low rank cast differently.  The word ―No‖ is perceived as confronting  Delay in business meetings is not uncommon  Important to establish relationship with business counterparts before business is conducted  Trust and social power is important  Important to address leaders as Mr and Mrs and either first name or second name  Laid back and informal business meetings are not uncommon  Young generation embraces internet and technology  High valued leisure activities in India are spending time with family and watching TV together  High penetration rate among younger generations who rely on Internet  Real estate in the major cities in India is very expensive and cost of living is high  There is tension between Pakistan and India over the territorial claim of Kashmir, which periodically cause outbreak of violence  There exist longstanding history of violence and breach of human right initiated by the Armed Forces of India  ―Quick‖ in Hindi language means any area of the body that is highly sensitive to pain (PMA, 2011).Technological and Legal  Power shortages are common  Half of the population has no access to electricity  World‘s largest technology, communications and media market  Fixed line telephone communication is one of the lowest in the world at 18.8% in 2009 but increasing  Expensive cost of internet connection  Fastest growing market for mobile phones  Micro level transportation systems  Low level of infrastructure projects  Will adopt the International Financial Reporting Standards (IFRS) over the next few years  Retail sector is the most disorganised distribution system in the world  India has British law and legal system based on common law with individual and property rights.  India has stringent labour laws  Intellectual Property and Content Rights create barriers to entry for foreign companies  Low labour cost  India has the highest paid expatriates globally Page 31
  32. 32. Online DVD Meets BollywoodMARKET AND COMPETITION FACTORSIndustry Attractiveness Two things determine your company‘s profitability, namely, the industry in which itcompetes and its strategic position in the industry. Strategists need to understand and cope withcompetition which includes their view on the five competitive forces that shape the strategy ofrivalry, customers, substitute products, potential entrants and suppliers (Figure 1). Quickflix‘sentry into India will be impacted by a number of factors including internet penetration, reliabletransport and distribution systems, IP rights and protection, consumer demand and purchasebehaviour (Table 1). Figure 8: Porter‘s 5 Forces (Porter, 1987)Table 4: Porter’s 5 Forces (modified by author)Industry Rivalry Threat Level Fierce competition from Online DVD companies in India from two big High players, Big Flix and SeventyMM Numerous small companies operating similar business models Medium Growing entertainment industry and home video segment in India Medium Increase in media content competitors such as television, retail DVD and High illegal downloads Page 32
  33. 33. Online DVD Meets BollywoodSupplier Power Threat Level Reliance on third party packaging, distribution networks and courier services High Reliability of payment processing companies and systems Medium Control of movie studios and production companies whom control DVD High release dates, and content rights with different pricing structures Internet hosting companies and platforms LowBuyer Power Threat Level Fluctuations in customer demand influenced by release date, celebrity High appeal, different types of genres, award winners and language formats Low switching costs for end users due to numerous competitors High Increase of disposable income levels for middle-class people Medium Increase in population of 11.1% and 20% for people in their 20s and 30s High respectively Consumer purchasing behaviour of DVD expenditure among all consumer Low categories Low credit card penetration levels for consumers MediumThreat of New Entrants Threat Level Content and Distribution License from film studios and production High companies DVD retailers such as MoserBaer, Eros and Shemaroo moving into the online DVD market Medium Major corruption and bureaucratic red tape to start a business (12 licenses and 29 days) Issues with internet capabilities, technology and bandwidth storage Medium Infrastructure (transport, electricity and utilities) in place Intellectual Property protection for technology platform and content rights for DVD library Medium Reliability and location issues of distribution and delivery systems and logistics High Complementary products such as television sets and DVD players are Medium required for use Page 33
  34. 34. Online DVD Meets BollywoodThreat of Substitutes Threat Level Leisure and entertainment alternatives at home such as internet browsing, Medium digital streaming, books, magazines, video games, radio and television Recreational alternatives away from home such as movie theatres, theme Low parks, sporting events , music concerts, live theatre , restaurants and bars New entertainment and media content options (iPad, Google+) LowCOMMUNICATION AND NEGOTIATIONCommunication Cultural distance influences social and business interactions. Therefore, Quickflix needsto manage these cultural differences in order to avoid miscommunication and other unintendedconsequences. Hofstede‘s (1993) cultural dimensions have been used in the analysis to highlightthe different cultural behaviours between Australia and India (Figure 9). As can be seen,Australia and India differs widely on power distance, long term orientation and individualism.Quickflix needs to understand the implication of these underlying characteristics when runningits operation in India. PDI: Power Distance IDV: Individualism Australia & India Cultural Dimension MAS: Masculinity UAI: Uncertainty Avoidance LTO: Long Term Orientation Australia India 90 77 61 61 56 51 41 39 36 31 PDI IDV MAS UAI LTO Figure 9: Australia & India Cultural Dimension (Hofstede, 2009) . As Indians are a highly collectivist culture, they are generally group-oriented. Assertingindividual preference is seen less important than maintaining harmony even in a business Page 34
  35. 35. Online DVD Meets Bollywoodcontext. Consequently, a direct ‗no‘ answer is never given and open disagreement should beavoided (Katz, 2008). Building relationships is also important prior to the start of any businessdiscussions. Due to the difference in long term orientation, Indians will expect commitment to alonger term business relationship than Australian. In a high power distance culture such as India,status distinction is highly valued. Hence addressing the appropriate professional or academictitle is very important (Katz, 2008). Status difference can also be observed in daily conversationbetween subordinates and supervisors.NegotiationTable 5 lists the following aspects of cross-border negotiations with potential Indian jointventure partners that need to be considered.Table 5: Aspects of Cross-Border Negotiations for Indian marketNegotiation Aspect Description and Application to IndiaAttitudes and Styles Negotiations tend to follow formal procedures but atmosphere tend to be relaxed (Metcalf et al, 2006). Negotiation style tends to be competitive, but in overall Indians value long term relationships and seek for win-win solutions.Negotiation Pace As India is highly collectivist and power distance, Quickflix can expect a slow negotiation pace as decisions are made by the consensus of senior ranking officials. In addition, there is a strong preference to develop relationships first before getting into serious business discussions (Katz, 2008). Consequently, Quickflix needs to take this into account during negotiation and a initiate negotiation process as early as possible in anticipation of the slow negotiation pace. Page 35
  36. 36. Online DVD Meets BollywoodBargaining The bargaining stage in a negotiation process can be extensive and price can moved more than 40% from initial offer to final agreement (Metcalf et al, 2006). However, overly aggressive bargaining style should be avoided as it may affect trust.Decision Making When making decisions, Indian businesspeople tend to consider personal feeling and emotions (Katz 2008, Metcalf et al 2006). Therefore, arguments based on emotional appeals are more convincing than factual based appeals.Agreements and Contracts It is important to note that signed contracts may not be honoured on time, deadlines are viewed as important but delays can still be expected. Flexibility to change the condition of the contract is also expected.ORGANISATIONAL STRUCTURE, PROCESS AND STRATEGYOrganisational StructureThe design of the organisational structure for the JV was based on Porter‘s value chain. Thevalue chain provides a systematic way to divide the firm into its discrete activities, and thus canbe used to examine how the activities in the firm are and how it could be grouped. Table 6demonstrates the activities within the value chain in the proposed JV. From the activitiesillustrated in Table 6, Figure 10 describes the proposed organisational structure for the JV. Theorganisational structure in the JV is grouped into activities under organizational units such asMarketing, Technology, Services, Finance and Administration which would be directly reportingto the Chief Executive for the Indian market. Page 36
  37. 37. Table 6: Value Chain for Quickflix in India Firm See figure 10 for detailed organisational structure Infrastructure  Software  Expats  Expats  Local full time & Human Resource developers –  Local full time &  Locals part time workers Expat & Locals part time workers Management  Training & Development  Website design  Information  Online payment  Customer for the India System System Database Technology market development  Customer  Customer call Development  Inventory Control demand centre support System Indicators System Margin  Computer  Computer  Transportation  Media Agency  Call Centre Hardware and Services Services Services Services Procurement Software  DVD Suppliers / Publishers Inbound Logistics Operations Outbound Marketing & Sales Service  Website Logistics  Advertising  Customer Service maintenance  Warehousing  Promotions Representative  Orders processing  Strategic  Product Alliances distribution  Customer preference search engine Notes:1. Inbound Logistics: Activities associated with receiving, storing and disseminating inputs to the products.2. Operations: Activities associated with transforming inputs into the final product form.3. Outbound Logistics: Activities associated with collecting, storing and physically distributing the product to buyers.4. Marketing and Sales: Activities associated with providing a means by which buyers can purchase the product.5. Service: Activities associated with providing service to enhance or maintain the value of the product. Page 37
  38. 38. Figure 10: The Proposed Global Geographic Organisational Structure – Quickflix. Page 38
  39. 39. Online DVD Meets Bollywood Human Resource Management Staffing for the JV is an important component in the strategy implementation process. Itis expected that Quickflix will be required to send a few of its Australian based managers toassist with the business in India. It is important that the selection of expatriates is performedcarefully whereby the potential issues for expats in India taken into consideration. Table 7illustrates the 5-factor model used to highlight the potential issues for Expats in India.Table 7: 5 Factor model of I-HRM (Reid 1999)Factor Potential Issues for Expats in IndiaHome Company  Appropriate compensation rewarded to international managers  Lack of in-country support or discrimination to international managers at different levels  No future career planning and policies in place for repatriation back into home countryLocal Company & Job  The adaptability of managers to two different organisational cultures resulted from the JV  International managers who have gone ―native‖Expatriate Executive  The selection process should be based on international experience and willingness to relocate.  The possibility of experiencing culture shockSpouse & Family  International managers who have spouses with dual careers and schooling children  High cost of living particularly main business areas  Lack of time and preparation during the relocation processCountry & City Issues  Exposure to government corruptions  Local violence (the rich and poor gap in the second largest population in the world behind China)  Low language barrier (15% of the population speaks English) International Managers must understand the different cultural perspective and maintaincommunication with employees to manage the culture gap. Language in India where only 15%of the population speaks English can potentially be a huge barrier for managers who wish tocommunicate with local employees. Therefore, the MBI model described in Figure 11 shows thatselectively choosing an international manager with cross cultural skills and the appropriateleadership skills is essential. Page 39
  40. 40. Online DVD Meets Bollywood Figure 11: The MBI Model (Lane et al.,2006) ENTRY STRATEGY Entry Mode The decision on the mode of foreign entry is a significant strategic choice for international firms. The choice of entry modes depends on the required involvement, risk factors, cost and the returns of investment. Table 8 shows a summary of the five main entry modes into foreign markets for international firms. Quickflix needs to take into account these factors when making a decision on how to enter the online DVD rental market in India.Table 8: Characteristics of Entry Mode Degree of Systemic Dissemination Resource Cost ReturnsType of Entry Mode Control/ Risk Risk Commitment Involvement Moderate Low Low Low Low LowExport Low Low High Low Low LowLicensing Low Low High Low Low LowFranchising Moderate Moderate Moderate Moderate Moderate ModerateJoint VentureWholly Owned High High Low High High HighSubsidiary Source: Adapted from Phatak et al (2009) Page 40
  41. 41. Online DVD Meets Bollywood Quickflix will be mainly looking for an entry mode with medium to high control andmedium to high returns, resulting in international joint venture (IJV) and wholly-ownedsubsidiaries (WOS) as the preferred entry mode. Table 9 presents an analysis of the suggestedtwo entry modes for Quickflix to consider in India.Table 9: Entry modes advantages and disadvantagesEntry Strategy Advantages Disadvantages  Loss of controlInternational Joint  Market Entry  Issues of goal congruencyVenture (IJV)  Provides local knowledge and  Takes time to build the right relationship connections  Different cultures and managements can result in  Transfer of technology resources poor integration  Joint Product Development  Potential problems of mistrust over proprietary  Risk and Reward sharing technology  Partner can get around government regulations and legislation  Increased difficulty of operating in India withoutWholly-owned  Complex and costly, but gives full local partner and no contactssubsidiary control to the firm  Contains high risk due to the costs of  Provides the most potential to provide establishing a new business in a new country. above average return  Integrating two organisations can be quite  Offers the fastest and the largest initial difficult due to different organization cultures, international expansion of any foreign control system, and relationships entry mode  Takes much time due to the need of starting new  Method to achieve greater market operations and distribution networks, power.The IJV is an opportunity to take Quickflix‘s existing product into the new foreign market(Figure 12) where risk and reward sharing is present. Therefore, the decision for Quickflix is toenter into an international joint venture with a local partner in India. Furthermore, this entrymode is less costly and risky than a WOS and offers the advantages to gain the local knowledgeand connections from a partner, whom in return can gain a transfer of technology resources fromQuickflix. Page 41
  42. 42. Online DVD Meets BollywoodFigure 12: Motives for International Joint Venture Formation New Markets To take existing products to To diversify into a foreign markets new business Existing Markets To strengthen the To bring foreign products to existing business local markets Existing Products New ProductsSource: Beamish, P (2008), Modified by AuthorPartner SelectionSuccessful IJV‘s emphasizes on building relationships, creating a mutual understanding andshare values and having a long-term vision and commitment. Therefore, the selection of an IJVpartner who brings complementary operation skills and resources, which a venture requires forits competitive success, is of paramount importance (Geringer and Hebert, 1991). Quickflix hasidentified the following potential business partners for an international joint venture in India:  International motion picture studio and distributor  Local motion picture studio and distributor  Local online DVD company  Established ‗brick and mortar‘ rental store  Local courier and delivery serviceTable 10 summarizes an analysis of Quickflix potential business partners. Page 42