Reasons behind Tescos International Strategy - Assignment Example

Tesco Xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Name Xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Course Xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Lecture Xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Date 1. Identify the reasons behind Tesco’s international strategy. According to Lowe and Wrigley (2010) one of the major reasons for Tesco supermarkets going international was a problem in its local UK market. The UK had become well developed and was fast becoming saturated therefore meaning that Tesco’s future growth would be limited. Most companies in developed countries have a growth imperative to search for new markets? Earlier other companies like Fedex which seemed to be struggling had strategically acquired flying rights over Asia a strategic move that is rewarded by impressive growth (Deresky 2006). According to Deresky (2006), a new foreign market gives an organization a new life as it moves it to an earlier stage of its lifecycle. This proactive move to go international has been associated with the success of such firms as Avon, Fedex and McDonalds. They now perform well but had been struggling before becoming global corporations (Deresky 2006). International markets provide an opportunity for firms like Tesco which was making huge profits an opportunity to invest. It is also an opportunity to make use of other resources including technology, management and machinery. According to Herald Scotland (2005) slowing population growth rates in the UK were among the reasons for Tesco proactive internationalization strategy. The UK alongside other developed countries faces an aging population problem (Poulter 2009). According to Herald Scotland (2005), the Total Fertility Rate in the UK stands at 1.94 below the 2.1 population replacement level. This has the effect of the mean age of the population increasing every year and more people dying than those being born. This has the effect of meaning the market is contracting while purchasing power goes down as more people move to pension schemes. For a very long time the UK market has been experiencing prolonged periods of low food inflation. According to Data monitor (2010) the largest percentage of sales volumes in supermarkets is accounted for by food sales. All big fours UK supermarkets including Tesco’s three main rivals (Wal-Mart, J Sainsbury and William Morrison Supermarkets) have complained about low food inflation hurting their businesses (Datamonitor 2010). In June 2010, Tesco said its UK sales growth had stagnated for three months as food inflation continued falling for successive months (Shales 2009). It seems Tesco’s Proactive move to go international was aimed at compensating for this problem on the local front as other markets have differing inflation rates. For a while Tesco’s expansion in the UK was also hindered by regulatory factors. By the 1990s it had become extremely difficult for Tesco to gain planning permission to build new stores in large Greenfields sites (Lowe and Wrigley 2010). Tesco was also experiencing strong competition by both large operators and small scale retail businesses. Its main rivals included Sainsbury, Safeway and ASDA. In the UK, the favoured position of market leader was occupied by Sainsbury (Daily Mail 2010). Further challenges in the UK market came in the form of new stores format pioneered by Costco (warehouse clubs) and Netto, Lidl and Aldi (assortment stores) (Lowe and Wrigley 2010). 2. Evaluate Tesco’s international expansion in the context of Yip’s ‘drivers of globalisation’ framework? Yip’s globalization drivers are concerned with how a company times its globalization strategy to be in line with the best factors for success. The Yips globalization drivers are categorized into: Market Globalization, Cost Globalization, Competitive Globalization and Government globalization drivers (Adler 2010). Market Globalization Drivers and Tesco Although most of Tesco’s new international customers have the same preferences as its UK consumers Tesco must ensure that local tastes are taken care off (Adler 2010). Tesco’s entry into the Asian market reflects the organizations effort to recognize local tastes as it was partly owned and managed by locals in South Korea. This partial ownership and management of the chain by locals enabled Tesco understand local culture than fully owned subsidiaries of its rivals. The Irish market where Tesco is the dominant player is among the regions Tesco has taken full advantage of market globalization drivers (Lowe and Wrigley 2010). In Ireland Tesco acquired Quinnsworth one of the most popular retail store in Ireland and adopting the culture of Quinnsworth which had advertising slogans like “let’s get all together at Quiinnsworth” (Palmer 2004). Although it rebranded the stores with it colours but it runs its adverts with the Quinnsworth and Crazy prices names (Palmer 2004). However, Tesco slowly upgraded its stores to Tesco standards indicating its preference for standardization. Despite this the Irish population embraced Tesco stores and they are now the leading retailer in Ireland. Cost Drivers Among the cost advantages Tesco gains from international operations is utilization of its highly trained and experienced management pool. Tesco also has the advantage of economies of scale on its side as it can order large quantities of products from one supplier for all its global or regional operations. According to Palmer (2004) cost saving through a centralized distribution system is among the largest factors that contribute to Tesco’s success in Thailand and South Korea. Tesco expansion into Asia was a strategic move to take advantage of lower labour costs in the region (Lowe and Wrigley 2010). Tesco was able to retain highly skilled and experienced employees in Asia who worked with the business they bought as Tesco could effortlessly afford their lower wage bills. These retained workers provided Tesco with valuable market knowledge and experience. Government Globalization Drivers Tesco took advantage of the unprecedented liberalization of most of the world’s economies to expand into the new markets that were opening up (Palmer 2004). From the case study, it’s seen that Tesco launched its international strategy by launching in former Soviet Union countries where the markets had been liberalized (Lowe and Wrigley 2010). The wave of market liberalization then went to Asia and Tesco followed, establishing store after store in several countries. However, the Asian governments seem keen to limit the expansion of international businesses in their economy and may make restrictive trade and investment policies. Land-use zoning policies have been used in several Asian countries to curb the expansion of International retailers in these countries; a good example is Thailand where it has become impossible for Tesco to construct a large format store (Lowe and Wrigley 2010). In response to this challenge, Tesco now uses a dense network of express stores, a strategy Tesco had developed and perfected in its UK home market. Government drivers have also affected Tesco’s internalization strategy in Slovakia where the anti-monopoly office prevented Tesco from taking over its Carrefour stores in agreed asset swap with its rival (Lowe and Wrigley 2010). Competitive Globalization Drivers The decision by Tesco to go international was as partly a result of intense rivalry in the UK retail shopping sector. The dominant players in the UK retail market is Salisbury meaning, Tesco had to keep reacting to the tactics of the dominant players with price wars always impending. Tesco was also threatened by discount stores and stores that adopted new formats. According to Datamonitor (2010) during recession consumers prefer to shop in discount stores like Aldi and Lidl. However, even in the international market competitive rivalry in the retail sector is very high. In markets like Taiwan where an international rival is already dominant it is difficult for Tesco to enter and operate in the market successfully (Lowe and Wrigley 2010). Tesco seems to have learned a lesson about competitive rivalry as it seems to prefer to operate in countries where its main international rivals are not established. Tesco can also be comfortable in markets where it has a dominant presence as the threat of entry by new competitors is very low. According to Mintel (2010) the food retail industry requires massive investment to establish a competitive brand name. In addition, obtaining authorisation to construct premises is a daunting task which eats up considerable time and resources. 3. a). What factors might be considered in assessing Tesco’s performance in Thailand and South Korea and in comparing / contrasting their performance in Taiwan. According to Lowe and Wrigley (2010) Tesco’s outstanding performance in Thailand and South Korea is based on the company’s preferred mode of entry, its expansion strategy and adaptability to government pressure. In Thailand and South Korea, Tesco was able to acquire majority shareholding in major conglomerate who desperately needed capital to stay afloat in the wake of the Asian financial crisis. In Thailand, Tesco bought 75 per cent of local conglomerate; CP group while in South Korea it’s acquired a 75 per cent shareholding in Samsung (King 2009). Tesco was later to dilute the local ownership of these firms to one per cent but by then it had gained knowledge about local business regulation and consumer culture. It was also able to retain a local identity; in the Samsung case stores bore the name Samsung Tesco (Lowe and Wrigley 2010). Secondly, Tesco pursued an aggressive store expansion strategy and by 2009 it had over 800 stores in Thailand and South Korea from less than 20 it had when it entered into these markets (Lowe and Wrigley 2010). However, this store expansion was not without challenges. In Thailand, land zoning regulation prevented Tesco from building any large format stores and in response to these regulations; Tesco adopted a strategy where it had a number of express stores in the same location. Tesco also launched social initiatives to counter the regulations that were threatening its business and painstakingly explained the benefits of hosting international businesses in the local community (Lowe and Wrigley 2010). Finally, when Tesco entered the Thailand and South Korean markets they were still dominated by traditional format retailers and none of its international rivals had a dominant presence in the market. In contrast, the failure of Tesco in Taiwan can be attributed to the absence of some of these success factors. First, when Tesco entered into the Taiwanese market the Asian Economic crisis had subsided and no local businesses were in dire need of international investment. Lacking local partners Tesco entered the market through the de nouvo entry mode which is expensive and highly risky (Lowe and Wrigley 2010). Therefore, Tesco was not able to make use of local business expertise and established distribution channels as it had in South Korea and Thailand. Secondly, Unlike the South Korea and Thailand markets where traditional format retailing was dominant, Carrefour a rival modern large-format retailer had established a dominant presence in the Taiwanese market (Lowe and Wrigley 2010). Carrefour had already acquired and developed its store on the most attractive site or had taken up development options. Thirdly, the land ownership system in Taiwan was highly complex and Tesco skills in this area couldn’t work around the problem (Lowe and Wrigley 2010). This problems meant Tesco was unable to build market scale that could enable it effectively compete with Carrefour. b). How does the United States case fit against the criteria for success and failure that have been examined in the Asian cases? Most of the factors underlining the Tesco’s success in Thailand and South Korea are present in the US. Despite this Tesco’s entry into the United States has been criticised as a bad strategic move (Lowe and Wrigley 2010). Similar, to the South Korea and Thailand there was no shortage of business partners willing to sell majority shareholding to Tesco. In the case, study it is shown that Tesco had multiple opportunities to buy into some of the US large-format regional retailers which it declined (Lowe and Wrigley 2010). However, in 2006 Tesco announced a decision to buy a series of US neighbourhood stores which it named “Fresh and Easy” (Lowe and Wrigley 2010). In comparison to the Thailand and South Korea, Tesco seems to have gotten the entry strategy right as these acquisitions would provide knowledge of the business environment and culture. In contrast to Thailand and South Korea the US market was mature and almost saturated and was characterised by the presence several of Tesco’s international rivals and well established local retailers (Grünig and Morschett 2012). Most importantly, Wal-Mart dominated the large-format segment of the market while there was no dominant international player in the two Asian countries when Tesco made its entry. Just like in Thailand it was impossible to develop large-format stores as this segment of the market was completely dominated by Walmart. Therefore, Walmart decided to adopt the strategy of locating a number of small-format stores within the same region. Similarly, Tesco was met with low public approval of large scale retailers which had already began to form as result of negative perceptions of Wal-Mart’s activities (Lowe and Wrigley 2010). In summary, the US market was a more challenging expansion option than either South Korea or Thailand. 4. Consider the globalisation of Tesco – and specifically the recent 2007+ entry into west coast US markets – in the light of Porter’s diamond. According to Jin and Moon (2006), Porter’s diamond is a model that attempts to explain the competitive advantage an organization has over others. In this model the factors give an organization competitive advantage over rivals. These determinants of competitive advantage are: Factor Conditions Demand Conditions Related and Supporting Industries Firm Strategy, Structure and Rivalry Government Chance Factor Conditions According to Porter (1998) factor conditions include skills, physical resources, capital resources, knowledge resources and infrastructure. In the Case of Tesco, the firm had the human resources and knowledge resources necessary to enter and succeed in the US market. Tesco had already successfully pursued the small format store business model in the UK and Thailand (Lowe and Wrigley 2010). Its staff also had superior skills in market/site location analysis and property acquisition/development (Lowe and Wrigley 2010). Tesco was also experienced in developing relationships and serving underprivileged neighbourhoods in the UK. Tesco also had the capital resources to expand into the US. At some point Tesco’s CEO commented the 1.25 billion pounds used for the expansion was a small fraction of Tesco’s revenue and expansion budget (Lowe and Wrigley 2010). Demand Condition According to Backhaus, Büschken and Voeth (2005), most of the food retail market in developed countries including the US is saturated with multiple players. However, Tesco targets underserved neighbourhoods where demand is untapped. Related and Supporting Industries In a well-developed industry like the US, supporting industries in the retail sector will also be highly competitive (Backhaus, Büschken and Voethn 2005). Tesco had carried out comprehensive research of the US market and would have the knowledge of the existence of reliable supporting industries. Firm Strategy, Structure and Rivalry In contrast to other markets, Tesco decided to pursue a strategy that targets low income neighbourhoods where its rivals have a smaller presence. However, Tesco’s strategy was not unique as it had already been in use by another retailer called Trader Joe’s. Despite this Tesco’s offering was unique as it offered higher quality cooked meals than even Walmart the dominant retailer. Firm rivalry in the US retail market including the West Cost is very intense. It is characterised by the dominant player Wall-mart which runs the majority of large format stores, well established local large-scale retailers and convenience discount stores like the Aldi and Trader’s Joe (Lowe and Wrigley 2010). This is one of the factors that is most likely to impact success of Tesco’s operations in the US Government Government policy can impact any of the above factors that are determinants of a firm’s competitive advantage. The influence of the US government on business activities is usually felt through taxes and licenses. The US is one of the most highly liberalized economies and thus Tesco would not have to worry about barriers erected by the government to its operations. Chance These are occurrences that are beyond a firm’s control. The recent economic depression in the US halted the expansion of Tesco in the world’s largest retail market. References Adler, M 2010, A structural analysis of the German Web Design industry by using the model of Porter's five forces, GRIN Verlag. Backhaus, K., Büschken, J., & Voeth, M 2005, International marketing, Palgrave Macmillan. Daily Mail 2010, “Tesco starts Pounds 1bn price war”, Daily Mail, Jan 18, 2010. p.7 Datamonitor 2010, ‘Company Profile – Tesco’, Datamonitor Europe, 2010, Ref Code: 1674 Deresky, H 2006, International Management: Managing Across Borders And Cultures, 5/E. Pearson Education India. Grünig, R., & Morschett, D 2012, Strategic planning of a domestic company as the starting point for going international, In Developing International Strategies (pp. 65-87). Springer Berlin Heidelberg. Herald Scotland 2005, ‘Baby boom gone bust, Policies needed to tackle worryingly low birthrate’, Herald Scotland, November 11, 21 May 2013 http://www.heraldscotland.com/sport/spl/aberdeen/baby-boom-gone-bust-policies-needed-to-tackle-worryingly-low-birthrate-1.37681 Jin, B., & Moon, H. C 2006, The diamond approach to the competitiveness of Korea's apparel industry: Michael Porter and beyond. Journal of Fashion Marketing and Management, 10(2), 195-208. King, I. 2009, ‘Tesco shows its claws’, Daily Mail Sun, Jan 18, p.42 Lowe, M., & Wrigley, N 2010, Case study-Tesco: from domestic operator to multinational giant, 21 May 2013, www.esrc.ac.uk/my-esrc/.../206fe475-7559-410a-83b0-11a96710fe9a‎ Lynch, R 2006, Corporate Strategy 4th Ed, Pearson Education Limited, Harlow Mintel 2009, Food Retail Industry – Including Online, Mintel Research Palmer, M 2004, International retail restructuring and divestment: the experience of Tesco, Journal of Marketing Management, 20(9-10), 1075-1105. Porter, M.E 1998, The Competitive Advantage of Nations, The Free Press, New York, NY. Shales, A 2009, ‘An unpalatable attitude towards food’, Financial Times, Oct 22, 2009. p.19 Wanga, C., Boateng, A., & Hongc, J 2011, What drives internationalization of Chinese firms: Three theoretical explanations. Working paper. Nottingham University School. Read More