Strategic International Business Management: Lidl's Expansion Plan in Mexico
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This report evaluates the suitability of Mexico as a market for Lidl's expansion plan. It includes PESTLE analysis, Porter's five forces model, and VRIO framework analysis. The report suggests Joint Venture as the mode of entry for Lidl in Mexico.
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Strategic International Business Management
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1 Executive Summary International business challenges have increased. This report will make a choice for Lidl about to which company they should enter into. The political condition of Mexico is not so good but still government policies supports new investments. The economy is performing well, purchasing power of people is on the higher side as well as legal, technological and environmental factors will support Lidl in its expansion in Mexico. The industry analysis of Lidl suggests that competition is on the higher side, threats related to substitution is high, bargaining power of people is also on the higher side, while that of suppliers is on the lower side and the threat of new entrants is moderate. It was also found in the report that the resource capability of this company is good and it is able to provide competitive advantage to the firm. The mode of entry that can be suggested for the expansion is Joint Venture. Content
2 s Executive Summary...............................................................................................................................1 INTRODUCTION.................................................................................................................................3 Task 2....................................................................................................................................................3 Choice of Market...............................................................................................................................3 Task 3.....................................................................................................................................................5 Porter’s five Forces model.................................................................................................................5 Task 4.....................................................................................................................................................7 VRIO framework................................................................................................................................7 Task 5...................................................................................................................................................10 Mode of entry..................................................................................................................................10 Conclusion...........................................................................................................................................11 References...........................................................................................................................................11 Appendix.............................................................................................................................................15 Task 1...................................................................................................................................................15
3 INTRODUCTION In the supermarket industry there is a very competition especially in the European market. Due to this their growth has not been so significant. Due to this, many companies are searching for new markets for their expansion.The firm such as Lidl which is a German supermarket firm has a chain of supermarkets and are operational in the retailing industry. This firm has its operation in across 29 nations operating in over 10,500 locations (Shaikh, Karjaluoto and Häkkinen, 2018). This report will choose the best suitable market for Lidl among Mexico and Norway in order to ensure growth. Different strategic development tools will be used to evaluate and analyse suitability of the market for the expansion plan of Lidl. Resources and capabilities of this company will also be evaluating using strategic tools so as to understand the aspects that give them competitive advantage over the rivals. At last mode of entry into this suitable market will be provided in this report. Task 2 Choice of Market According to the PESTLE analysis done in the Appendix section it can be said that Mexico is a choice for the Lidl expansion. In Mexico there are more growth opportunities available with the firm when compared with the Norway. This can be understood by the PESTLE analysis of Mexico. Political: However the Norway has a more stable political environment still Mexico’s political environment provides better growth opportunities for the company. As Mexico is an emerging market hence the government policies are more likely to supportLidl(Fernandez-Dengo,NaderpajouhandHastak,2012).Mexican government runs corporate welfare program which gives the strategic support to the supermarkets. Government is also providing land at lower rate to the company when compared with Norway. The taxation in the Mexico is also lower down than the Norway. One major disadvantage with Mexican political condition is that it has its rivalry with U.S. which is putting negative pressure on the companies in their expansion plans. Government’s gross debt was slightly decreased where it had gone to 53.8% from 54.3% and public deficit stood at 2.6%. New trade agreements such as United States-Mexico-Canada Agreement will give boost to the economy of this country.
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4 Economic: Mexico is a developing nation while Norway is a developed market but the GDP of Mexico (434.76 USD billion) is higher in the Norway (Shenkar, Luo and Chi, 2014). This will provide new growth opportunities for the company. Investors are looking for the markets where cost of expansion is less and the returns are higher. For this Mexico will be the best market in terms of the fact that it is the 2ndbest economy in the Latin American region. IMF expected the growth rate to be around 2%.Europeanregionisexperiencingheavyfinancialcrisisinvestorsarenot supporting expansion in this region and hence it would be beneficial for the company to invest in the American region. According to the World Economic Forum, the competitiveness index is higher in Norway which suggests Norway has higher competition hence Mexican market will be more beneficial for the company. Since the service sector in the UK comprises of 60.9% hence finding skilled employees is easier in the market. Figure1: Economic indicators of Mexico market (Source: Santandertrade, 2018) Social factors: Mexico has lower cost labourers hence making it a good market for expansion. At the same time the population of Mexico is around 131.37 million which is quite larger than Norway which is having population of 5.3 million hence Lidl will have larger audience whom they can target (Campos and Valenzuela, 2013). Apart from this, there are larger numbers of unemployed (employment rate 3.5%) in Mexico which can act as low cost labourers for Lidl. Culture of Mexico is totally different from Norway or Germany. But at the same time it is also the fact that the purchasing behaviour of the Mexican people is changing especially when the median age of the country has reduced to 28.3%. In Norway due to increasing economic volatility
5 people are reducing their expenditure power. The scope of socio-economic growth also seems to be higher in Mexico when compared with Norway hence it would be wise to invest in Mexican market. Technology: Norway has better technological infrastructure than Mexico but the future of E-commerce is better in Mexico (Pisani and Richardson, 2012). An early expansion in this county will give the firm a boost in the online retail market. With many emerging cities the technological infrastructure is estimated to be on the better side hence Lidl will be able to use the technology in a more effective way so as to do their business. Environmental: Environment related concerns are increasing in Mexico. After the Paris agreement most of the countries including Mexico and Norway have become strict over reduction in carbon emission because of the operations. Mexico has a greater biological diversity hence following the rules would be more beneficial for Lidl (Durán-Vázquez, Lorenzo-Valdés and Moreno-Quezada, 2012). Legal: The legal environment is Mexico is very strict and various commissions have been made by the government of Mexico to ensure that companies are following the norms. However the literacy rate about the laws and consumer rights are poor in Mexico when compared with Norway hence doing business in Mexico will be easier for the company (Parnell, 2010). Task 3 Porter’s five Forces model In order to understand the internal environment of the industry in any country, Porter’s five force model is a highly effective model. This model evaluates all the pressures in the internal business environment that has bigger impact on the operations of the firm. Porter’s five force model for Mexico in the supermarket industry is provided below: Bargaining power of suppliers: The bargaining power of the company is on the lower side. This is because there is an increment in the numbers of suppliers that is available in Mexico and also in the local states. With many big suppliers located in USA the bargaining power of suppliers goes to further lower levels. This also reduces the cost of changing suppliers within Mexico for Lidl and hence bargaining in terms of prices is a challenge for the suppliers (Vilchis, 2016).
6 Bargaining power of buyers: Being an emerging country there are many companies that have recently come up within the country and many have come from other parts of the world to do their business in Mexico (Needle, 2010). This has provided customers with larger amount of choices. This is increasing the overall bargaining power of customers. Customers have also become efficient user of technology where they match prices of all products sold by different companies at one click. This will give the customers an extensive power to bargain with Lidl in terms of quality, prices and differentiation. Threat of competition: Competitive rivalry within Mexico is on the higher side. There are many bigger firms like Amazon and Wal-Mart that are operational in this country hence giving a tough competition to Lidl. Since these big firms have larger resources hence they are providing products at highly lower cost this will have impact on the profit generation capacity of Lidl. For this Lidl will have to plan something out of the box and something that is more realistic and more attractive (Cavusgil, et al. 2014). A smart supply chain management along with good local suppliers can be effective option for leading into the market. It is also to be understood that Mexico is a market where still people prefer to purchase from the local shops hence increasing the competition within Mexican market. This is much bigger in the case of grocery and fresh food market. In Mexico the major competition remains to be from the side of the Wal-Mart which is having approx. 2,397 stores and in the e-commerce e-bay and Amazon are topping the list (Carless, 2018). Threat of substitution: Since the number of substitute stores are larger in Mexico especially in terms of individual shop owners, local grocery sellers, other mediums and small sized markets where products are available at relatively lower cost hence the threat of substitution remains to be on the higher side (Macias, 2015). But at the same time the bigger players who have lots of things to offer under the single roof is less hence the threat of substitution in this regards is lesser. This makes the overall threat of substitution to be on the moderate side. Threat of new entrants: Mexican market is an emerging market. There are quite a large numbers of investors that are thinking of doing expansion within the country. Withthegovernmentsupportmakingtheprocessofexpansioneasierforthe companies hence the threat of new entrants is on the higher side (Hernandez and Montalvo, 2012). The initial investment is on the higher side but still it is better than many of the European nations hence making it a one of favourite market for the
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7 expansion of companies like Lidl. This is placing the threat of new entrants to be on the higher side. Task 4 VRIO framework In the modern day business dynamics it is critical for the company to not only analyse the business environment that exist in and out of the organisation but it is also critical that companies analyse their resources and capabilities on the basis of which they can develop their strategies. VRIO framework is one such framework that helps the company to analyse the quality of the resources they have and its suitability in the market (Espinoza Aguiló and Espinoza Aguiló, 2012). Financial resources Rare: This Company has a string financial base which is rare when compared with its competitors like K-Mart and other smaller existing competitors in the Mexican market (Bruch and Vogel, 2011). Although it is not very rare when compared with its big competitors like Amazon and Wal-Mart. This makes its financial resources to slightly rare. Valuable: Due to higher degree of competition in the market exist in which strong financial base is highly required by the company which it has hence making the financial resources to be valuable. This will help them in reducing their prices to lower level which can attract the customers and hence can give competitive advantage to the rivals (Geppert, Williams and Wortmann, 2015). Imitability: Competitors such as K-Mart and other small retail owner will not have the capacity to imitate their financial resources when they will enter into the Mexican market hence the resources of this company are said to be inimitable. Organised: With the help of strong investor’s pool, this company has effectively organiseditsfinancialbase.Thishashelpedthecompanyinsuccessfully implementing its projects at the international level. It is this organisation of financial resources that their debts are lesser than many of its rival’s debts. They have been able to utilise it whenever required. Technological resources
8 Valuable: The type of technology that is used by the company is supporting its business to optimum level. With the help of this they have been able to bring effectiveness in their projects and their operational capabilities. Since this company has a customer-centric approach towards service and product delivery hence this technological resource becomes very much valuable. With the technology that Lidl is utilising it is easier for them to enhance value that is added to their products and services (Lowery, 2014). This is making their technological resources to be further on the valuable side. Rare: Lidl is known for the type of technologies it uses. In order to bring the user- experience to be on the better side they are making continuous innovations in their technology mediums. This is making their technology and its use to be rare. For making their technology further different from that of their competitors they have hired Sam Gaunt who is having an experience of media and digital agency as he has already worked in the firms such as Kellogg’s, Heinz and McDonalds (Oltermann, 2014). Imitability: With the type of training that is provided by the Lidl to its staffs along with their technology heads like Sam Gaunt is making their technology resources to be utilised in a much better way than their competitors. This is making their technological resources to be inimitable and hence giving them competitive advantage over the rivals. Organised: In order to remain effective player in the industry, it is critical that any firm utilises the technology they have in an effective manner for which organisation of the technology resources is highly critical. For this they conduct regular audits in the technology they use to ensure that they are working according to the plan and technological resources base is also as effective as required by the company (Felsted, 2014). Human Resource Valuable: For any company, their employees are the most valuable resources they have. Lidl has trained and skilled employees that helps them in adding value to their business model. They ensure that the top positions within the firm are filled by the individuals who have experience. Rare: Since this company has an employee base of 315,000 hence making it a company that has huge employee base (The Irish Times. 2018). Most of their
9 employees have innovative skills that help in adding value to their product and helps in improving the effectiveness of the overall organisation. This is also evident from their customer support initiatives where larger role is played by human resource which is rare. This would benefit them in their expansion in Mexico. Imitability: Having such a large human resource base that too so skilled and trained is hard to get imitated. It takes time and constant efforts from the side of the company to build such a strong relationship with the employees who are ready for improving the overall performance of the company which this firm has done efficiently. Organised: Resources of Lidl are highly organised and they ensure that each of their employees remains so effective that they utilise their available resources effectively. Employees are provided with value and ethics training which helps them in organising their employees according to the value and ethics of the organisation. They also ensure organisation of employees by implementing the skill development initiatives as well as promoting team work within the firm. Assets, Knowledge and infrastructure Valuable: They have assets that are world class. The inventory that they have along with the transportation medium that they are using is very much hi-tech which ensure longer life time of their products. They have a knowledge base that is bigger than most of the organisations which they have gathered through years of business (Lidl. 2017). This makes their overall resources to be valuable. Imitable: It cannot be imitated because gathering such a huge knowledge base is not easy. At the same time it is not easier for the companies to imitate such kind of knowledge. On the other hand the assets and the infrastructure that they have developed is not easy is to get imitated as it will require huge financial base to create such resources (Lidl. 2018). Rare: The quality of the assets, knowledge and infrastructure that they have is very high. This makes all these resources to be rare. With the help of research and development initiatives and the innovation that they have created over the years has helped them in making these resources to be rare.
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10 Organised: In terms of dealing with different situations it is critical that all these resources that are utilised within the firm are organised. With the help of the skills of their employees and use of technology has helped them in making these resources to be more organised and hence they have been able to achieve organisational and functional objectives. Task 5 Mode of entry For the success of any organisation it is essential that a company select a mode of entry that suits the market and the environment present in the organisation. Some of the modes of entry that Lidl can utilise for successful expansion in Mexico are: Export: Lidl can utilise export option for entry into the market. Since this company has a strong supply chain network hence it will be easier for them to expand into a market with the help of export. This company can provide apps or other online mediums in the Mexican market where people can order online and with the help of the supply chain network that they have doing export becomes easier (Export.gov, 2018). But since the cost and the laws of importing in Mexico are moderate hence export can be an able option (Javalgi, et al. 2011). Wholly owned subsidiary: It will be effective for the company to choose wholly owned subsidiary as the mode of entry. But the problem with this mode of entry is the fact that Lidl is unaware about the Mexican market and culture hence it will have impact on their set-up. However this company has experience in different markets hence it would not face so many issues in this regards. This would be an option where large amount of financial resources will be required but it will ensure that company do not fail because of other partner’s failure (Enríquez, Adame and Camacho, 2012). Joint venture: This will be the best strategy for the company to enter into any market. This is because the joint ventures will allow the company to ensure that they are working according to the culture of the organisation. This will assist that firm gains competitive advantage over the rivals as they will have to improve the ways in which they are dealing with the initial glitches (Muller and Kolk, 2010). Joint Ventures also improves the way in which expertise and knowledge base of the company as both the companies work with each other to look at the difficulties in the market and formulate
11 strategies that on the basis of the strengths they have in the market. This is critical for the long term success of the organisation. Among all the modes of entry the best mode of entry will be joint venture as they will get cultural support from the already existing local firm in the market. It will also assist in terms of human resource management, supplier’s integration, and availing resources from the local market. Conclusion From the above based report, it can be concluded that the environmental factors suggests that this company should expand in Mexico over Norway. On the other hand the internal environment of the retail market is also supporting the expansion within Mexico. There are large numbers of suppliers available in the Mexico market hence expansion will not be the problem for the company. The VRIO analysis of the company suggests that they have an excellent and diverse resource which enables them to improve their operations and also allows gaining competitive advantage over the rivals. Among the different mode of entry strategies available with the firm, the best strategy that can support the expansion of the company is Joint Venture. References Blasco, M. and Zølner, M., (2010) Corporate social responsibility in Mexico and France: Exploring the role of normative institutions.Business & Society,49(2), pp.216-251. Bruch, H. and Vogel, B., (2011) Strategies for creating and sustaining organizational energy.Employment Relations Today,38(2), pp.51-61. Campos, H.M. and Valenzuela, F.A.A., (2013) The relationship between entrepreneurial orientation,timeorientationandsmallbusinessperformance:anevidencefrom Mexico.Revista Da Micro E Pequena Empresa,7(1), pp.48-63. Carless, J. (2018)How Lidl Is Making The Most Of Its Tech Investments. [Online] Available from:https://www.cmo.com/interviews/articles/2017/12/25/lidls-sam-gaunt-digital-roi-tough- to-justify-but-worth-the-investment-anyway.html#gs.CJg6XXs. [Accessed on 26thJuly 2018]. Cavusgil,S.T.,Knight,G.,Riesenberger,J.R.,Rammal,H.G.andRose,E.L., (2014)International business. Pearson Australia.
12 Durán-Vázquez, R., Lorenzo-Valdés, A. and Moreno-Quezada, G.E., (2012) Innovation and CSRimpactonfinancialperformanceofselectedcompaniesinMexico.Journalof Entrepreneurship, Management and Innovation (JEMI),8(3), pp.5-20. Enríquez, L.A., Adame, M.G. and Camacho, R.R.R., (2012) The Relationship Between the Strategic and Growth Factors of Enterprise: Data of Mexico (Empirical Evidence).Chinese Business Review,11(9). Espinoza Aguiló, T.I. and Espinoza Aguiló, N.F., (2012) Family business performance: evidence from Mexico.Cuadernos de Administración,25(44), pp.39-61. Felsted, A., (2014) Aldi and Lidl lead charge of discount supermarkets.Financial Times,9. Fernandez-Dengo, M., Naderpajouh, N. and Hastak, M., (2012) Risk assessment for the housing market in Mexico.Journal of Management in Engineering,29(2), pp.122-132. Fitjar, R.D. and Rodríguez-Pose, A., (2011) When local interaction does not suffice: sources of firm innovation in urban Norway.Environment and Planning A,43(6), pp.1248-1267. Geppert, M., Williams, K. and Wortmann, M., (2015) Micro-political game playing in Lidl: Acomparisonofstore-levelemploymentrelations.EuropeanJournalofIndustrial Relations,21(3), pp.241-257. Hernandez, C. and Montalvo, R., (2012) Entrepreneurial clusters in China and Mexico– implications for competitiveness.Hernandez-Rodriguez, Clemente & RF Montalvo Corzo (2012).“Entrepreneurial Clusters in China and Mexico–implications for Competitiveness.” GCG: Journal of Globalization, Competitiveness and Governability,6(1), pp.55-90. Høgevold, N.M. and Svensson, G., (2012) A business sustainability model: a European case study.Journal of Business & Industrial Marketing,27(2), pp.142-151. Javalgi, R.R.G., Gross, A.C., Benoy Joseph, W. and Granot, E., (2011) Assessing competitive advantage of emerging markets in knowledge intensive business services.Journal of Business & Industrial Marketing,26(3), pp.171-180. Lidl.(2017)Learning&Development.[Online]Availablefrom: https://careers.lidl.co.uk/cps/rde/career_lidl_uk/hs.xsl/training-development-1822.htm. [Accessed on 26thJuly 2018].
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13 Lidl. (2018a)About us.[Online] Available from: https://www.lidl.com/about-us. [Accessed on 26thJuly 2018]. Lowery, J., 2014. Lidl: Surprisingly high returns for a surprisingly low investment.Warc UK, pp.2-20. Macias, R.A.G., 2015. Economically-driven partisanship—official advertising and political coverage in Mexico: The case of Morelia.Journal of Latin American Communication Research. Meléndez,L.A.M.,2010.NAFTA,tourism,andenvironmentinMexico.International Environmental Agreements: Politics, Law and Economics,10(2), pp.107-131. Muller,A.andKolk,A.,2010.Extrinsicandintrinsicdriversofcorporatesocial performance: Evidence from foreign and domestic firms in Mexico.Journal of Management studies,47(1), pp.1-26. Needle, D., 2010.Business in context: An introduction to business and its environment. Cengage Learning EMEA. Oltermann, P., (2014) Germany’s Lidl seen overtaking big rivals Tesco, Carrefour and Aldi.The Guardian,23. Parnell, J.A., 2010. Competitive strategy and performance in Mexico, Peru, and the United States.Journal of Centrum Cathedra,3(2), pp.150-165. Pisani, M.J. and Richardson, C., 2012. Cross-border informal entrepreneurs across the South Texas–NorthernMexicoboundary.Entrepreneurship&RegionalDevelopment,24(3-4), pp.105-121. Shaikh, A.A., Karjaluoto, H. and Häkkinen, J., (2018) Understanding moderating effects in increasing share-of-wallet and word-of-mouth: A case study of Lidl grocery retailer.Journal of Retailing and Consumer Services,44, pp.45-53. Shenkar, O., Luo, Y. and Chi, T., 2014.International business. Routledge. The Irish Times. (2018)How Lidl’s graduate programme puts staff on a fast-track to success. [Online]Availablefrom:https://www.irishtimes.com/sponsored/lidl/how-lidl-s-graduate- programme-puts-staff-on-a-fast-track-to-success-1.3632009 [Accessed on 26thJuly 2018].
14 Vilchis,F.L.,2016.Socialresponsibilityandcorporatesustainabilityfactorsin Mexico.Universidad & Empresa,18(31), pp.103-119. Santandertrade,2019. Mexico:Economicand PoliticalOutline.[Online] Availableat: https://en.portal.santandertrade.com/analyse-markets/mexico/economic-political-outline. [Accessed on 26thJuly 2018]. Export.gov,2018.Mexico-MarketEntryStrategy.[Online]Availableat: https://www.export.gov/article?id=Mexico-Market-Entry-Strategy.[Accessed on 26thJuly 2018]. Appendix Task 1 Exhibit 1: Mexico’s PESTEL environment PoliticalThe present economic environment within the nation is not so good. There is instability because of the presidential crisis. The political relation of the country is also not good as they have political conflicts going on with USA. This is having impact on the decision making and strategic abilities of the firms within Mexico.
15 EconomicMexico is a developing nation and the growth in the GDP is also 2.49 %. This growth is creating more chances for the companies to come and expand. There will be easy availability of the investors who wants to extend their arms in the Mexican market. On the other hand since in American region the economic crisis of Venezuela and the higher cost of investment in USA are promoting investors to look into the new states that can give boost to their overall growth. Due to this they can easily again success in the market (Blasco and Zølner, 2010). SocialSociety has changed in Mexico and the purchasing behaviour of the people also got affected by it. People love to buy from big stores especially the ones that provide quality. With huge target segment available in the country, it is easier for the company to ensure higher degree of sales. With increasing expenditure capacity of people in Mexico along with enhancement in the life standards has enabled them to look at these brands for shopping. Since there is easy availability of the human resource at lower prices hence management of human resource will not be the problem for the company. TechnologicalMexico is enhancing in terms of the infrastructure that they poses. This can be understood in terms of the fact that the mobile network is reaching deeperintothevillagesandtheyaregettingconnectedwithmobile technologies. This technology will help the government to ensure that they can reach to hands of each people and they will also be able to improve the customer’s satisfaction. LegalLegalities in Mexico are not so harsh and can be changed according to the business demands. Land acquisition laws are not so fierce when compared with various other countries in the world (Meléndez, 2010). EnvironmentEnvironmental concerns are increasing day by day and this is promoting countries like Mexico to become harsh on any illegal practices conducted by companies.Lidl will have to ensure that they are following all the environment related laws so as to avoid any legal consequences. Exhibit 2: Norway’s PESTEL analysis PoliticalNorway poses a political environment that is stable and the same time corruption level within the country is also on the lower side. Governments
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16 plan for investments within the country is giving boost to the companies that aim of expanding within the country. EconomicThe average GDP of Norway is on the higher side hence creates a stable market for most of the companies. Norway being a part of the European Free Trade Association is facing challenges due to the economic slowdown of the European economy. SocialNorway is a developed society and hence it is an excellent market for the super market companies but in the past few years the disturbing economic condition of European regions has reduced the capacity of the people to reduce their expenditure (Høgevold and Svensson, 2012). TechnologicalTechnology is a base to success for any company and Norway has well established technology infrastructure. This will boost any kinds of new expansion within the nation. Since retail market is shifting towards e- commerce market hence it is critical that any company utilises advanced technologies to do their business (Fitjar and Rodríguez-Pose, 2011). LegalNorway is very much strict towards any kind of labour misconducts. The privacy laws of Norway are also powerful hence it is critical that the companies trying to expand in this nation chooses best legal framework to do their business. EnvironmentGreenhouseGasEmissionTradingActalongwiththeirfocused environment related strategies have forced companies to make sure that they are doing environment connected business. Exhibit 3: Attractiveness ranking Factor + [References]MexicoNorway Political [Stability]7/109/10 Economic [Competiveness/population/GD P Growth rate] 8/104/10 Social[ManPower’s availability/ Literacy rate] 8/108/10