Tesco International Management
INDEX: Page: Index1 Introduction2 Question 1: YIP’s drivers of globalisation framework3-9 • Market5 • Cost6-7 • Government8 • Competitive9 Question 2: Thailand / Korea / Japan10-16 • Entry Strategy11 • Brand Management12-14 • Politics/ Economy15-16 Question 3: Fresh & Easy Neighbourhood Markets17-23 • Macro Assessment18-20 o Risk in foreign markets18-19 o Economic Recession19 o Infrastructure19 o Socio-cultural20 • Micro Assessment21-23 Question 4: Tesco US – Porters Diamond24-27 • Factor Conditions24 • Home Demand Conditions25
• Related & Supporting Industries25 • Firm Strategy, Industry Structure & Rivalry26-27 Question 5: PESTEL analysis28-38 • Political29-31 • Economic32-33 • Socio-cultural34-35 • Technological36 • Environmental37 • Legal38 Conclusion: Appendix (if applicable) Bibliography:39 1. Identify the reasons behind Tesco’s internationalisation strategy and evaluate Tesco’s international expansion in the context of YIP’s “drivers of globalisation” framework Tesco’s internationalization strategy was both proactive and reactive.
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In 1997 Tesco was the third largest retailer in England but quickly surpassed its rivals Marks and Spencer’s and Sainsbury’s with a business 5-6 times their value by 2010. – Terry Leahy (1. The Art of management Tesco Economist Interview, 2012) One of the key drivers of this success was the development of big data to drive big growth. Terry Leahy copied the idea from a co-op in Manchester who had developed a primitive membership scheme. By the time of implementation technology was sophisticated enough to handle and make sense of this big data.
The development of the Tesco club card revealed not only what customers shopped for in Tesco, but also rich data on what other services they were spending their money on. The use of this big data was often more telling than traditional market research as there was often great variance in terms of what people said in traditional market research vis a vis what they actually spent on as verified by their Tesco club cards. This telling data was also to provide the blue print for growth into other non-food retailing such as banking, insurance and clothing.
By 1998 Walmart was on the offensive in the UK and while Tesco was gaining ground on domestic rivals, the threat of a U. S retailer gaining significant market share was real. The strategic imperative was to act both defensively and offensively to retain and gain market share both locally a globally. This big investment offensive move not only provided strategic framework for growth but maintained stakeholder morale in a company with very visible rivals both domestically and globally. In real terms Tesco, although a leader in the UK with profits of 3 Billion, The UK accounted for only 2-3% of the world’s GDP.
International expansion and access to world markets was essential to growth– Terry Leahy In examining Tesco’s globalization strategy, Yip 1992 provides the most widely used framework for assessing the extent of and potential for industry and market globalization. Yips research suggests that there are four categories of drivers (market, cost, government and competitive), which must be analysed in order to determine the degree of globalisation within an industry. The strength of the drivers vary from industry to industry and from market to market.
We will look at these four categories of drivers across key market entries for Tesco and see where Tesco successfully evaluated these and acted with informed execution and the markets where it is floundering due to ill-informed strategic execution. We shall then evaluate these with a synthesis of evaluation using porters five forces framework. Market We can see examples of Tesco’s opportunistic market entry whereby it fruitfully analyses and executes market opportunity as in the case of its Central Europe and Asian expansion.
In central Europe and east Asia there was rapid liberalization of previous restrictions on retail and in east Asia Tesco sought opportunity in buying up cash strapped retailers which were the casualties of the Asian economic crisis of 1997/98. In 10 years Tesco opened 1047 stores in South Korea accounting for 33% of the global operating space- (2. Lowe and Wrigley 2010) The U. S market entry however, although researched heavily, execution seems to be at odds with the strategic vision, giving rise to investor unrest and potentially 1 billion in investment loses with market exit a distinct possibility in 2013.
Cost The cost driver is also one of Yips (1992) key categories of consideration of international expansion. A cash rich Tesco capitalized on cash strapped retailers in Asia acquiring major stakes in lotus in Thailand and Homeplus in South Korea. Initially Tesco’s share of partnerships was 73% in Thailand and 81% in South Korea. Subsequent cash injections reduced CPs group share to zero and Samsung’s share from 11% to 1% while Tesco retained the Samsung name affording Tesco knowledge of local business and regulatory conditions. The cost implication of the U.
S expansion came with a hefty price tag. A 1. 2 billion 5 yr. investment was over half of total international capitalization for 1 year 2008/2009 with heavy infrastructural investment with slower than expected store openings. With only 130 underperforming stores opened in 2009 the U. S strategy does not seem to have yielded the results expected of a 1. 25 billion investment The heavy investment cost was due to a Tesco decision to build its own processing plants adjacent to the Tesco distribution centre where shelf ready prepared meats, poultry fruit and veg would be prepared.
(3. Lowe & Wrigley 2010) This huge investment before determining the cost comparison of local supply vis a vis consumer behaviour in suburban retailing has come at a large price. The model of Tesco express did not translate to southern California where lower footfall but higher volume/trolley spend were different to high footfall lower basket spend as seen in UK Tesco express. This also comes at a cost as customer and investor dissatisfaction with minimal staffing and self-checkout does not appeal in the suburban market space in the U.
S. In its nearly five years of operations, Fresh & Easy has a troubled track record including: Repeated shifts in strategy and revised benchmarks, leaving investors unable in o to predict future performance; Total investment and losses of ? 1. 94 billion from Fresh & Easy operations Inadequate disclosure of the costs associated with the US operations, further frustrating investors who seek to understand this risky venture. (4. CTW Investment Group, The Altitude Consultancy 107-111 Fleet Street London) Government
Tesco has historically been strategically nimble in reacting to government restrictions and has more recently been seen to be more responsible in terms of its corporate citizenship creating neighbourhood regeneration schemes in the U. S in addition to highlighting the benefits of local employment and investment in new markets. In the UK land acquisition restriction was the key determining factor for the development of smaller format retailing spaces in high footfall areas. This strategic dexterity has proved profitable. Government restrictions on land acquisition and opening hours
can have a dramatic effect on operating profits in existing and potential markets. As seen in the case of South Korea Tesco’s highest performing international market, restriction on Sunday opening hours in 2012 has had a major impact on operating profits. Competitive YIP (1992) consideration of competitive forces is key to the feasibility of international expansion. Tesco has shown very astute understanding of competitive forces in some markets while in others a blinkered approach to the real risks involved in overinvesting in a mature market such as the U. S.
and in the case of it de neuvo expansion in Taiwan where it exited with a divestment strategy with Carrefour due to land acquisition difficulties and market dominance of Carrefour. The divestment and market exit came with asset swaps with Carrefour giving both strategic leads in their respective market where each held dominant positions- Carrefour gained 6 stores and 2 development sites in Taiwan in exchange Tesco gained 11 stores in Czech Republic and 4 in Slovenia. This competitive manoeuvring came with minimal capital losses and increased market share for both companies.
In examining YIPs (1992) key categories of consideration of international expansion it is clear that Tesco’s has had mixed results as a result of inconsistent assessment and execution of market entry Rummelt’s 1991 study suggests that company specific factors in terms of strategy adopted are of much greater importance in determining the profitability of a business rather than its competitive environment i. e. it’s the strategic action taken within the set of circumstances in a given operating environment that has the most determinacies of profitability. 2.
What factors might be considered in assessing Tesco’s performance in Thailand and South Korea and in comparing / contrasting their performance to that in Taiwan? Britain’s largest retailer is Tesco and it is ranked in the top ten multinational retailers worldwide behind such companies such as Wal-Mart and Carrefour. Tesco was successful in its first stage of international expansion with stores all over Europe and managed to fight off competition from other multinational retailers such as Aldi, Metro and A-hold. So Tesco were keen to expand even further.
With its large and growing population Tesco saw a significant opportunity to grow and expand in Asia, and managed to become extremely successful in South Korea and Thailand although seemed to misjudge their expansion into Taiwan. Tesco’s entry into Taiwan was exceptionally different to that in Thailand and South Korea. We will see this as we analyse key factors in assessing Thailand, South Korea & Taiwan’s performance. In this question we will compare and contrast Tesco’s performance in such factors as: Entry Strategy Brand Management Politics/Economy
Modernisation Entry Strategy: Tesco’s entry into South Korea and Thailand was established based on a joint venture. It first entered Thailand “via an investment of $350 million and it then needed a platform for regional expansion and entry to the Chinese market and that platform was Korea. ” (5. Suh and Howard, 2008, p. 34). Tesco entered Thailand in 1998 and acquired majority stakeholder in the retail company ‘CP group’ (Charoen Pokphand) and held a share of 75% of the company and so Tesco began trading under the title ‘Tesco-Lotus’.
In South Korea Tesco gained entry in 1999 and partnered with the Samsung Corporation and acquired 81% of the Samsung Corporations shares, Tesco Korea started to trade under the name Tesco Homeplus. This proved to be significant in Tesco’s expansion into Asia, as they had partnered themselves with successful, well-established, trusted companies. As the market in Asia was still at this time dominated by the more traditional market and was only starting its transition into the modern world it was key that Tesco’s partner was successfully established and had a strong knowledge of the local environment.
In 2000 Tesco entered Taiwan with a view of opening 22 stores; they believed that because liberalisation had been established in Taiwan a number of years previous that the market was already heating up so it would have been less complicated. Although Tesco found it difficult to find a suitable local partner therefore they entered Taiwan based on ‘de nouvo’ expansion. (6. Lowe and Wrigley, p. 658) They didn’t realise was that many global companies had already expanded into Taiwan and become well established so the market was becoming unbreakable and this was proved
problematic for Tesco. Due to South Korea and Thailand’s alliance with retail companies they found it much easier to fight off competitors. In fact Tesco-Lotus and Tesco Homeplus are one of the most successful retailers in Asia and had outperformed its rivals that many retailers had left Asia leaving Tesco the dominant trader. South Korea and Thailand’s mode of entry proved to be successful and worthwhile for Tesco in the expansion into Asia. However this differed dramatically in Taiwan.
Tesco entered Taiwan in 2000 based on ‘de neuvo’ expansion and one of Tesco’s major competitors had been operating for a number of years and had become well established within Taiwan and Tesco found it hard to live up to Carrefour’s name. Brand Management: The Tesco brand has been particularly successful due to powerful marketing and brand management, which has carried Tesco’s name throughout its expansion. Tesco-Lotus and Tesco Homeplus are two of the most successful chains Tesco have administered.
Tesco-Lotus sources 97% of its goods from Thailand so people are aware of what they are buying and are familiar of its origin; this in turn makes people feel more comfortable shopping in Tesco. In 2011 Thailand suffered its worst floods in nearly 70 years. Tesco-Lotus worked thoroughly with the community to make a difference by using Tesco stores as donation centres for customers who wanted to support victims of the flood, Tesco also contributed ? 500, 000 of essential products and offered aid and shelter to employees of Tesco (7. Tesco plc, 2012).
With the aid of Tesco the community surrounding Tesco stores had the support and assistance in dealing with this experience. This in turn boosted Tesco’s morale and brand value. Another positive strategy by Tesco to enhance their brand and to establish a greener environment are responsibility programmes such as planting tree’s across the countries National Parks to date Tesco have planted over 7 million tree’s (8. Tesco plc, 2012). The “Get active with Tesco Lotus” programme attracts people to participate in a vast range of activities from sponsored walks to football (Tesco plc, 2012).
Tesco-Lotus has also opened ‘zero carbon stores’ for the benefit of the environment and from this people can associate Tesco’s brand with a greener environment. The Korean people are some of the busiest hard working people in the world so Tesco Homeplus had to come up with something innovative and relevant to give busy commuters the chance to do their grocery shopping. So the store opened the first ever-virtual store in Korea. SH Lee, CEO of Tesco Homeplus said: “The growing trend in Smart phones in South Korea means that virtual grocery shopping is even more accessible and convenient than ever before.
” (9. Tesco plc, 2012). So Tesco designed a Homeplus app, which customers needed to shop at the virtual store. These virtual stores were found at bus stops so people could scan the relevant barcode they required and order their shopping whilst waiting on the bus to go to work. Customers could then pick their shopping up on the way home or have it delivered to their door (10. Tesco plc, 2012). This saved a great amount of time for the people of South Korea and over 1 million people now have this Homeplus app which has given Tesco Homeplus an edge over other competitors and a great brand image.
Tesco’s idea was so innovative that it was nominated for best digital design by the London design Museum (11. Tesco plc, 2012). Brand management however was not at all created in Taiwan. No consumer relationship was established between Tesco and the Taiwanese public due to: • Tesco having no specific image that the Taiwanese consumer could relate to. • Lack of distinction; was seen as no different to other hypermarkets • Tesco’s own brand comes across as ‘cheap’, ‘poor quality’ and wasn’t trusted. • There was little brand reliance with Tesco.
• Negative perceptions of Tesco, which led to a serious lack of trust. • There seemed to be no comparison between the UK and Taiwan, what Tesco was credited for in the UK they seemed to have lost in Taiwan. [pic] Tesco Taiwan did not support local produce and distributed goods that were unknown to the people of Taiwan. There was little advertising carried out for the Taiwan stores and no brand building was achieved so a negative perception of having an unclear brand image was viewed from the Taiwanese public and this was not positioned well within the consumer minds of the public (12.
Chaoyang and Temperley, p24). A serious lack of communication was seen with Tesco in Taiwan. Brand management was an important factor in South Korea and Thailand as they originally had been an unknown brand, but carful marketing and brand management ensured Tesco became a well-known name in these countries however this contrasted in Taiwan where there was little or no brand management pursued. Tesco’s unclear image in Taiwan caused a lack of trust between Tesco and the Taiwanese consumer. Politics/ Economy:
Rapid growth in the 1990’s saw great changes in retailing throughout Asia as the Economic crisis of 1997/1998 had left major corporations needing financial aid. This was ideal for Tesco as they had the funds necessary to finance these companies and offer the ‘cash injection’s’ required. As the Tesco group expanded in Thailand and South Korea they were able to rapidly reduce the amount of shares the CP group and Samsung possessed. Until the 1990’ s Korea’s retail sector had always been a closed market, “lagging behind the impressive advances made in the country’s manufacturing industry” (13.
Suh and Howard, 2008, page. 29). The retail industry then began taking positive steps towards liberalisation, which had been influenced by two main drivers: “The Korean governments agreement to full scale liberalisation with the implementation of the GATS (General Agreement on Trade in Services) and the economic crisis of 1997 which induced extensive economic reforms. ” (14. Suh and Howard, 2008, page. 29). So foreign retailers saw the opportunity to enter the Korean market and expand. Korea’s advancement towards liberalization saw many other retailers try to take over the Korean market.
Tesco also faced problems in opening stores in Asia. Opening hours were challenged in South Korea and Tesco had to close at least two Sundays a month and 24 hour stores were prohibited; in order to give the smaller traditional stores an opportunity. Thailand’s military council restricted the expansion plans of Tesco and other major retailers by freezing the opening of new stores. New regulations and rules were also enforced to help protect the smaller businesses as the smaller “moms and pops” stores were suffering and having to close down.
These stores “have an average space of 10 m2 and employs fewer than two people” (15. Schaffner et al,. 2005, page. 167). So they didn’t stand much of a chance against the hypermarkets. It proved difficult to develop large hypermarkets in Thailand due to regulation of store opening hours, retail formats and ‘below cost’ selling so Tesco had to find another way of developing the brand by “infilling its hypermarket framework with dense networks of small-format (express) convenience stores” (16. Lowe and Wrigley, page. 661).
Which also had unlimited opening hours so this was an added boost for the company The Taiwan market appealed to Tesco as competition was already heating up due to liberalisation taking place years before it had in South Korea or Thailand. So many of Tesco’s main competitors were already established in Taiwan; for example Carrefour is one of the leading retail chains in Taiwan and was already well established before Tesco arrived. Tesco-Lotus and Tesco Homeplus made an enormous effort in working with the local community to “counter mounting regulatory pressure” by explaining the benefits of employment, infrastructure, training and opportunity.
This is where they lacked effort in the Taiwan stores. Although Tesco-Lotus and Tesco Homeplus came across some difficulties during the expansion into Asia their experience such as fitting the Hypermarket framework into a smaller format to lift restrictions was beneficial to Tesco. Compared to Taiwan where Tesco felt there was less work needed in the expansion. Due to Tesco’s more laid back approach into entering Taiwan the most attractive sites for expansion had already been developed by Carrefour. Modernisation: The development of superstores changed the Asian market industry.
Asia was moving into a new modern world with the arrival of multi-national stores such as Tesco. Competition from these large hypermarkets resulted in shrinking independent traders. Independent shops were shrinking by the year while modern trade space was growing. Thai Hypermarkets were dominated by Tesco-Lotus, and this is partly because Tesco didn’t target any class in particular but aimed at the masses. The expansion of Tesco’s virtual stores will allow them to respond efficiently to market demand. As I. T. has become such a part of society and so important to everyday life.
Tesco will always look to technology for competitive advantage and better service for its customers. Tesco Taiwan used basic technology and were behind other multi national Companies. As there was little advertising and brand building, Tesco Taiwan could not compare to the other hypermarkets which is another reason for them exiting in 2005. Where Thailand and South Korea were moving forward with virtual stores and large supermarkets, Taiwan was very much struggling. Conclusion: Tesco-Lotus has been very successful with 782 stores in Thailand and employing over 38,500 people.
Tesco-Lotus is also one of the leading retailers in Thailand. Tesco Homeplus has 354 stores and employs over 23,000 people and is Koreas second largest retailer. However Tesco exited the Taiwan market in 2005 after opening only 6 of the 22 stores originally planned by Tesco, although it wasn’t a complete loss as it was announced that Tesco Taiwan’s six stores and two development sites would be transferred to Carrefour in exchange for Carrefours four stores in Slovakia and eleven stores in the Czech republic.
This gave Tesco a great boost in Central Europe and strengthened their position in the market there. 3. In the light of the above cases, consider Tesco’s entry to the United States of America as “Fresh & Easy Neighbourhood Markets”, how does the United States case fit against the criteria for success and failure that have been examined in the Asian cases (above)? The appointment of Terry Leahy as CEO in 1997 was a key moment to the future strategic development of Tesco. The UK sales and market were nearing saturation point.
Tesco was going through a domestic renaissance in terms of the shift from traditional discount store, lagging behind Sainsbury, to adopting a more flexible/convenient store approach. His arrival also coincided nicely with the economic crash in Asia. This, in my opinion, provided the perfect stimulus for an Asian market entry. Local alliances with Samsung and CP provided local knowledge, reassurance and legitimacy to the Tesco entry. The capital investment was critical and gave them a huge advantage to achieve dominance very quickly in a cash strapped economy.
This foothold they never gave up and success has been considerable. In many ways the experience in Taiwan reflects that of what happened in the USA. Taiwan was essentially a saturated market. There was no real brand awareness achieved in Taiwan, and locals didn’t like or trust the Tesco name. Coupled with the lack of a local partner, Tesco stores really struggled. Carrefour exercised dominance, which ultimately proved unassailable. Other factors such as complex land ownership issues meant Tesco exited the market in 2005. Macro Assessment: Risk in foreign markets:
There is always a risk when expanding into the external environment, even more so internationally. This is very evident in Tesco’s expansion into the US market where over a decade of in-depth investigations and research were carried out before a decision was reached to commit to the project. “In February 2006, after a year of intensive but closely guarded market research by a CEO-selected team of managers despatched to Los Angeles, and building on more than a decade of in-depth investigation to the potential intention to commit ? 1. 25billion over five years to enter the western USA.
This expansion was certainly a risk and was avoided for a long time by Tesco. We should probably look at the World Economic Forum for some sort of explanation. In 2012 The USA is ranked 7th but when Tesco decided to make its entry in 2007, the USA was ranked 1st! The importance of assessing the 12 pillars of competitiveness in relation to the USA would have been vital in deciding to bring Tesco/’fresh and easy’ to the USA. The USA continues in the decline that began a few years ago, falling two more positions to take 7th place this year.
Although many structural features continue to make its economy extremely productive, a number of escalating and unaddressed weaknesses have lowered the US ranking in recent years. US companies are highly sophisticated and innovative, supported by an excellent university system that collaborates admirably with the business sector in R&D. Combined with flexible labour markets and the scale opportunities afforded by the sheer size of its domestic economy—the largest in the world by far—these qualities continue to make the United States very competitive.
On the other hand, some weaknesses in particular areas have deepened since past assessments. The business community continues to be critical toward public and private institutions (41st). In particular, its trust in politicians is not strong (54th), perhaps not surprising in light of recent political disputes that threaten to push the country back into recession through automatic spending cuts. Business leaders also remain concerned about the government’s ability to maintain arms-length relationships with the private sector (59th), and consider that the government spends its resources relatively wastefully (76th).
A lack of macroeconomic stability continues to be the country’s greatest area of weakness (111th, down from 90th last year). On a more positive note, measures of financial market development continue to indicate a recovery, improving from 31st two years ago to 16th this year in that pillar, thanks to the rapid intervention that forced the deleveraging of the banking system from its toxic assets following the financial crisis. (17. No. 1. World Economic Forum/global competitive index website) Economic recession: The economic recession had not hit the USA properly in 2007.
Lehman brothers did not fall until September 2008. The global recession affecting the world as a result of the US Financial Services downfall has had a massive effect on companies looking to expand externally. Unemployment rates, interest and taxation rates have all increased in recent years which have affected millions of people worldwide. Disposable incomes have dropped massively, resulting in thousands of smaller companies in all sectors going bankrupt. Tesco has also been hit with drop in sales volumes however as they are a market leader they have not been affected as much as smaller companies.
(18. 2. Financial Times ) Infrastructure Tesco’s strategy into the US market was “to develop dense networks of a new breed of convenience oriented, smaller format stores served by a short-lead-time integrated food preparation/distribution system. By the end of 2008, a year after opening its first store, it had already rolled out a chain of 115 stores together with a 675,000 square feet distribution centre with capacity to serve over 500 stores in Southern California, Arizona and Nevada” (19. 3. Tesco Case Study) Socio cultural:
In the USA the option of partnering with a local supermarket was possible but Tesco chose to ignore this route of entry for many years. They decided to ‘go it alone’ which they did by bringing the ‘convenience’ model which had worked so well in the UK to the western sea board of America, in the form of ‘Fresh and Easy Neighbourhood markets’. This model allowed them to open stores in lower income areas in the USA without restrictions. Tesco tightly limited the number/range of SKU’s and focused on their short lead times and flexibility advantages.
Self-scanning machines were the order of the day. The online and text messaging marketing campaigns again seemed appropriate to a modern, tech savvy population, but none of these had the required effect. (20 3. Tesco Case Study) The focus on low income communities also seemed like a logical approach, as this section of the community was underserved by the larger supermarkets. This tactic has worked to a large extent but the group have fallen victim to interest groups opposed to Tesco’s non-unionised employment policy.
In my opinion the vision of the brand and the efforts to operate and stay true to the vision were good. I do think they fell short on realising the detailed preferences of the US consumer within that vision. Food suppliers of Tesco committed whole heartedly to the project by moving their operations to California to best serve the market. Micro- economic assessment: What was probably very obvious from the above cases is the very different market conditions Tesco had to deal with in the USA versus Asia. The logic and approach for market entry was radically different.
The USA was a relatively mature market. The decision was taken not to partner with a local retail chain. This factor is not solely liable for the lack of success however. What seems obvious to me between the successful Asian entry to market to that of the USA is timing! Entry into Asia following an economic crash gives Tesco some obvious advantages. The effects of the crash had not been felt in the USA by the time of market entry. Tesco are in many ways still dealing with those effects to this day in the USA. Local partnerships
and cash injections achieved much more in poorer countries in Asia by comparison to the relatively affluent west coast of America that already had a well serviced food and retail market. (21. 2. Financial Times) So were Tesco simply unlucky? Perhaps the decision to not enter the USA earlier, and not acquire a conventional local partner has worked against Tesco in the USA. They have spent the best part of ten years deliberating over the best way to approach the attempt. The conventional UK convenience store model has not worked in the USA.
One reason to attempt an assault on the USA was the perceived gap in the market for affordable, fresh and chilled meal products. (22. 3. Tesco Case Study) Retailers in the U. S did not traditionally supply these types of foods. Tesco committed fully to the concept through opening the Riverside fresh food production plant in California. Adopting and investing in the ‘timed response’ UK model was in many ways logical and not misguided, but still however does not seem to have worked. The shining examples of success with this model in the USA have been ‘Aldi’ and ‘Trader Joe’s’.
The success of these two chains has even seen the great powerhouse of ‘Wal-Mart’ struggle to compete in some urban markets where Wal-Mart encountered resistance to their huge supercentres. A sign of the worsening situation and seriousness of how Philip Clarke (new Tesco CEO) and Tim Mason (CEO of Fresh and Easy) were taking the situation saw the departure of the Chief Marketing Officer, Simon Uwins in 2011. The losses in 2012 have not been any better than 2011. International pre-tax profits fell by 12% to ? 1. 66BN in the 6 months to August.
This was the first fall in 18 years! Sales had risen however by 1. 6% to ? 32. 3bn. (23. 3 . Financial Times) Reverting to the use of coupons also seems like a complete divergence by Tesco away from what they were offering initially with the USA entry to market. Are they competing on price (with coupons) or are they offering something new, novel and different to what they see as a gap in the market for convenience and packaged fresh food? Another break from the original plan saw the addition of 500 new grocery products/lines to ‘fresh and easy’ stores.
All this suggests to me that Tesco have admitted that they have misinterpreted the market, they got it wrong, and now they are changing the strategy. The last roll of the dice seemed to be the overhaul of the loyalty club card scheme. Hopes of breaking even by year end 2012/13 have also been scrapped! (24. 3 . Financial Times) I do believe that Tesco got a few things wrong in the USA market. They misinterpreted the customer tastes and preferences badly. This has cost them a lot of money and has seen them re-invest in extending their grocery lines and launching in-store bakeries across about 100 stores.
Their partnership with Fornaoi Bakery does seem to contradict entirely the original model Tesco had of going it alone and offering something different. The USA CEO (Tim Mason) announced ? 574m losses along with the ? 800m capital expenditure in 2011. Glass doors on chilled cabinets and more wooden flooring are attempts at making the stores more appealing and less clinical. Stores were said to be ‘easy’ for sure, but did not have the ‘fresh’ feeling, despite the investment in the Riverside food production plant in California. (25. 3 .
Financial Times ) Americans simply preferred to pick their own individual fruit and veg rather than have it pre-packed for them. Flowers were now placed at the front door of stores to make them warmer to the public. Terry Leahy original aspirations of 10,000 stores across America were a long way off. By 2012, capital to sales ratio was reduced to 5% by Philip Clarke and his team in the USA. The first half results announced in Oct 2012 were terrible. Philip Clarke has decided that they will focus on making profitable what they have and open only a limited number of new stores in future.
The ‘click and collect’ programme has been an attempt to ‘keep up with the Jones’ in my opinion as online shopping is becoming more and more popular in the USA. It remains to be seen how Americans will like ordering online and collecting from the store. The company now expects to break even by mid- 2012 /2013. There are already shareholders calling for the abandonment of ‘Fresh and Easy’ altogether and a return to focus on the much more profitable domestic, European and Asian markets. (26. 4. Shareholder report 2012) The U.
S market has proven in the past to be a graveyard for UK retailers, and history does seem to be repeating itself at the moment. Yet Tesco persist. The definition of insanity is to repeat the same thing over and over and expect different results. Tesco have tried to adjust and change the approach but with very little success. One wonders how long Philip Clarke will allow this very expensive gamble to keep rolling? Bibliography 1. World Economic Forum/global competitive index website 2. Financial Times 3. Tesco Case Study 4. Shareholder Report 2012 4.
Consider the globalisation of Tesco – and specifically the recent 2007 + entry into west coast US markets – in light of Porter’s diamond Porter’s Diamond suggests that locational advantages may stem from local factor conditions; local demand conditions; local related and supporting industries; and from local firm strategy structure and rivalry. (27. Exploring Strategy Ninth Edition, Johnson Whittington Scholes) Porter’s diamond theory explains how some businesses such as Tesco have a sustained competitive advantage in their industry when their competitors have not been as successful (28.
Johnson et al, 2008) Tesco have more then 15 years experience overseas due to their international strategy. These factors include; to be flexible, act local, maintain focus, use multiformats, develop capability and build brands. (29. Tesco plc, 2012) These factors are evident in Tesco’s globalisation into the US markets. Factor Conditions: This relates to the factors of production, raw materials, land and labour, that are involved in the making of Tesco’s products.
Factor conditions at a national level can translate into general competitive advantages for national firms in international markets. Tesco’s strength is its ability to manage stores in multiple formats as well as multiple markets. The key core competence is technology, or more precisely data management. Tesco has taken its wireless network connecting all Tesco stores and applied this into the US market. Workers use handheld PDA’s for data entry and reporting, and radio frequency identification tags allow them to conduct crates and pallets to stores everywhere.
In the US, Tesco relies on a data-mining firm called Dunnhumby to manage everything from targeting sales promotions to designing store formats and developing private-label products. This system which is a competitive advantage for Tesco in the UK, has portrayed itself into US where Tesco has developed an 80,000 square foot food preparation facility which is alongside its distribution centre in Riverside. These facilities cater for hundreds of Tesco’s Fresh and Easy outlets all over California. Home Demand Conditions: The nature of domestic customers can become a source of competitive advantage.
Dealing with a variety of customers from different backgrounds and demographics at home helps train companies to be effective overseas. This was very evident in Tesco’s commitment to develop Fresh and Easy stores in low income / deprived and ethnically segregated communities. “Transferring the development-coalition and community-specific retail operating skills gained since the late 1990’s in opening urban regeneration –partnership stores in deprived areas of many UK cities, Tesco quickly developed stores in Compton, South Central and similar areas of Los Angeles.
” This has allowed Tesco’s to develop strong local community support at the same time as establishing a brand identity. Related and supporting industries: Local clusters of related and mutually supporting industries can be an important source of competitive advantage. This was evident when two of Tesco’s leading UK suppliers, Nature’s Way Foods and 2 Sisters Food Group, supported Tesco’s expansion into the US where they have jointly invested $170 million in processing plants adjacent to Tesco’s distribution centre in Riverside.
These suppliers interact with Tesco’s distribution centre providing shelf-ready packaged produce and also 40 per cent of the prepared meat, poultry, fruit and vegetable ingredients used in the food preparation facility. Firm Strategy, industry structure and rivalry: The characteristic strategies, industry structures and rivalries in different countries can also be bases of advantage. Tesco’s strategy of “Every Little Helps” represents everything they stand for and this has grown in importance as Tesco has expanded. Over time, Tesco has gone from simply selling groceries to providing anything from loans to mobile phones.
By setting out in all these new directions, Tesco have used this philosophy to prevent losing its way and to promote its brand recognition. (30. (http://www. tesco-careers. com/home/about-us/visions-and-values) Domestic rivalry can also be an advantage and this has been evident for Tesco where they face ongoing competition in the UK and Europe from companies like LIDL, Aldi and Carrefour. Tesco’s ability to adapt and overcome threats from their rivals has given them an advantage in their expansion into the US markets where their biggest competitor is the world largest retailer, Wal-Mart.
As previously discussed, Tesco have used what they have learned from its other global markets to challenge Wal-Mart indirectly by creating convenience style stores rather then facing Wal-Mart head on by developing large supermarket stores. Porter found that domestic competition was vital as a spur to innovation and global expansion. However, this did not account for government interventions or companies risk / chance. Some issues of concern with regard to Porter’s Diamond include the sample size. In other words, how universal is the application to other countries and industries?
Will all factors be applicable to all forms of industry and all types of companies? For example. Will a non-demanding home market always lead to complacency and non competitiveness in foreign markets? Another concern is the impact of government policies, in particular, national competition policy in different markets and countries. Chance is another factor which is covered in Porter’s Diamond. Some events may only happen by chance and these may have huge factors on companies and industries. The main example would be a natural disaster or to a lesser extent flooding.
This cannot be strategically accounted for and the only explanation is “that it happened by chance”. Porter’s starting point also included that countries compete with each other, but in fact it is companies in those countries that compete. (31. Lynch R, Corporate Strategy) 5. Use the PESTEL framework to evaluate Tesco’s Internationalisation strategy Within business management and strategy, it is important for managers to be aware of the external environment when looking at the strategic position of their company. One model for addressing the external environment involves classifying key external factors.
These are Political, Economic, Socio-cultural, Technological, Environmental and Legal, the PESTEL analysis. The above factors are the “key drivers for change”. (32. Johnson, Scholes and Whittington 2007,p55) They are the environmental factors that are likely to have an impact on the success or failure of a strategy. A strategy is the use of resources in organisations to achieve goals. In order to succeed a company is always trying to gather competitive advantage over its competitors, while addressing any changes which may occur in the business environment, for example the global recession.
The PESTEL framework helps to strategically plan and operate the business as successfully as possible. Tesco Plc (Tesco) are the 117th largest company in the world with sales of $99. 1 billion dollars, and a market value of $41. 7 billion dollars. Over the past decade Tesco have grown internationally as company moving in many foreign markets. These markets include Europe, Asia and the United States. Political: The below are some of the main factors which Tesco had to evaluate when considering expanding internationally.
Government Stability: “The Asian economic crisis of 1997/98 left major domestic conglomerates urgently seeking cash injections. As a result, Tesco was able to enter both markets via majority share partnerships in the non-core retail businesses of the leading conglomerates: the CP Group in Thailand and Samsung in South Korea. ” This opportunity has allowed Tesco to become a market leader in these markets due to the rapid growth of the company in a time when investment was needed most.
Governments that are more stable are more likely to have more competition, barriers to trade and other factors which are not as attractive to foreign companies looking to expand. An example of this is the comparison in results Tesco has faced trying expanding in the US market, a more stable government. Risk in foreign markets: There is always a risk when expanding into the external environment, even more so internationally. This is very evident in Tesco’s expansion into the US market where over a decade of in-depth investigations and research were carried out before a decision was reached to commit to the project.
“In February 2006, after a year of intensive but closely guarded market research by a CEO-selected team of managers despatched to Los Angeles, and building on more than a decade of in-depth investigation to the potential intention to commit ? 1. 25billion over five years to enter the western USA. This move has been seen as Tesco’s most risky projects as Wal-mart, the world’s largest leading multinational retailer, hold the market share in the US. Tesco, usually foreseen to most people as a large retail outlet store, entered the market as a “convenience” store.
“Tesco’s decision to enter the US also represented an important reversal of it previous view of the likelihood of success in the market. Indeed, it had consistently resisted many opportunities to enter the USA via acquisition of regional food retailer chains of conventional large-format supermarkets – not least because of their track record of low profitability and the threat posed to them by the decade-long super-centre driven transformation of Wal-Mart from purely general merchandise to US food retail market leader.
The change in Tesco’s assessment related to its growing-skills in small format store operation, its belief in the competitive potential of dense networks of “convenience” – focused neighbourhood stores providing an innovative retail offer, and evidence that the Wal-Mart threat could be countered in the type of urban markets Tesco had targeted for its US expansion. ” Since entry in to the US market, Tesco have not hit the targets they had projected and this shows how big a risk is involved when entering foreign markets, especially the US market.
“It was also, very clearly, a high risk decision as the US market had a long record of proving to be the “graveyard” of overambitious expansion by UK retailers. ” Competition regulation: A major factor Tesco, or any company, face when expanding internationally is the competition and competition regulation already in place. The main reason behind Tesco’s success in the South Korean and Thailand markets was their ability to adapt in a new environment, and with heavy capital investment, quickly establish itself as a market leader.
This was partly down to the fact that during the Asian Economic Crisis, there was very little competition. Example’s where Tesco has failed to win market share in foreign markets is mainly due to the level of competition existing in those countries. “Several of the elements which has been key drivers to Tesco’s success in Thailand and South Korea were absent in Taiwan. In particular, Tesco entered the market in which one of its major multinational retail competitors, Carrefour, had been operating for more than a decade and had built a strong, and in practice, unassailable market dominance.
As previously discussed, Tesco was unable to find a suitable local partner and was therefore obliged to attempt an entry based on “de nuovo” expansion. The competition proved to be too big in the Taiwan market, however Tesco managed to use this to their benefit when they decided to exit the Taiwan market. “In late 2005 Tesco announced an innovative strategic divestment solution to its problems in Taiwan. The solution involved a cross region swap of retail assets with its rival Carrefour, whereby each firm would simultaneously secure scale and benefit from strengthened market positions in different countries.
It was agreed that in Taiwan Tesco’s six stores and two development sites would be transferred to Carrefour whilst, in exchange, in Central Europe Carrefour would transfer 11 stores in the Czech Republic and four stores in Slovakia to Tesco. ” The Slovakian part of this deal was blocked by the Slovakian government’s Anti-Monopoly Office. There are also plenty of other political factors affecting Tesco in the external environment.
These include factors surrounding government owned industries, taxation policies, effect of government changes, foreign trade regulations for example the differences faced in China and the US involving demo-graphic governments v non-demographic governments and incentives for trade. These incentives include construction subsidies in Thailand, reduced interest rates and tax incentives. Economic: Global recession: The global recession affecting the world as a result of the US Financial Services downfall has had a massive effect on companies looking to expand externally.
Unemployment rates, interest and taxation rates have all increased in recent years which have affected millions of people worldwide. Disposable incomes rates have dropped massively, resulting in thousands of smaller companies in all sectors going bankrupt. Tesco has also been hit with drop in sales volumes however as they are a market leader they have not been affected as much as smaller companies. The Asian Economic crisis in 1997/98 is a perfect example of how large companies can expand and take advantage of these economic conditions.
The Asian governments were left needing urgent foreign investment. Tesco entered Thailand and South Korea via majority-share partnerships with the CP Group in Thailand and Samsung in South Korea. “Initially Tesco’s share of the partnerships was 75 per cent in Thailand in Thailand and 81 per cent in South Korea. However, subsequent capital injections by Tesco into the expansion of the chains rapidly reduced CP Group’s share to zero, and Samsung’s share first to 11 per cent and then in two subsequent stages to 1 per cent. ” Tesco strategic plans in the US
have also included maximising development opportunities in underserved communities. “An important component of Tesco’s entry into Los Angeles has been its commitment to develop stores in low income / deprived and ethnically segregated communities. As not many of their competitors have focused on this area, Tesco and “Fresh and Easy” expanded in poorer areas by introducing convenience stores which served a large number of people in highly populated area with little competition or product choice. Unemployment Rates: Tesco’s expansion into foreign markets have created a large amount of job opportunities.
Tesco operates in 14 worldwide markets across Europe, Asia and North America, employing over 500,000 workers in 6,612 stores. (33. (http://www. tescoplc. com/index. asp? pageid=71) Tesco’s partnerships with thousands of companies worldwide, distribution networks, production and transport links also contribute to millions of more jobs. Tesco also believe that local hiring is essential to keep stores local and vibrant. They have set up local hiring agreements and held job fairs to make it easy for local communities throughout the world to apply for jobs.
As a result, more than half of their employees live within walking distance of their stores. (34. (http://www. tescoplc. com/index. asp? pageid=85) Infrastructure: Tesco’s strategy into the US market was “to develop dense networks of a new breed of convenience oriented, smaller format stores served by a short-lead-time integrated food preparation/distribution system. By the end of 2008, a year after opening its first store, it had already rolled out a chain of 115 stores together with a 675,000 square feet distribution centre with capacity to serve over 500 stores in Southern California, Arizona and Nevada.
At the point of market entry into Thailand and South Korea in 1998/99 Tesco acquired majority stakes in two retail chains (Lotus in Thailand and Homeplus in South Korea) together having fewer than 20 stores or development sites and operating in markets still dominated by traditional forms of retail. Other economic factors which Tesco have considered are inflation rates, availability of natural resources, educated workforce, interest rates, disposable income, exchange rates and GDP trends. Socio-Cultural: Brand recognition
One key component of Tesco’s successful strategies in Asia was the ability to enter Thailand and South via majority-share partnerships with recognised and trusted businesses – CP Group and Samsung respectively. “The partnerships offered Tesco knowledge of local business / regulatory conditions and consumer culture, plus the ability to build upon the “local”appeal and customer image of the acquired chain – particularly in South Korea where the retention of the Samsung name (Samsung-Tesco) proved to be essential”.
This strategy gave Tesco a foothold in the market place, which further allowed them to expand by pumping further investment capital to build scale and accrue market leadership. In addition to this Tesco have focused and developed their own products. These products can be seen in any Tesco store throughout the world and the range of Tesco branded products is endless. Tesco’s, “Every Little Helps”, represents everything they stand for and this has grown in importance as Tesco has expanded. Over time, Tesco has gone from simply selling groceries to providing anything from loans to mobile phones.
By setting out in all these new directions, Tesco have used this philosophy to prevent losing its way and to promote its brand recognition. (35. http://www. tesco-careers. com/home/about-us/visions-and-values) Tesco gets as much as 60 percent of its revenue from its own products and 70 percent of “Fresh and Easy” sales come from their private label products. This can be seen in Tesco’s entry to the US market where products for small convenience stores, “Fresh and Easy” were served by a short lead time integrated food preparation and distribution system.
“Our range of high-quality own-label products is an integral part of our offer in every market in which we operate. (Terry Leahy CEO) Homemade food / products: One common factor in most areas / markets Tesco have expanded into is the importance of homemade food. Tesco have many large distribution stores in each market where food is prepared daily and delivered fresh to its stores. As a result of societies demand for local and homemade food this factor has been crucial for Tesco. “Tesco has been obliged to take the unusual step of managing its own food preparation.
It has developed an 80,000 square feet “food preparation” facility alongside its distribution centre in Riverside, California. ” Other social factors Tesco have considered are consumer preferences, their values, symbols and beliefs towards price, customer experience, competition and technology. Technological: Data Management: Tesco operates over 6000 stores in 14 worldwide markets and its ability to manage stores in multiple formats as well as multiple markets is one of the company’s greatest strengths. Tesco data management optimises inventory selection, size and distribution and helps them be ruthless in supply chain management.
“For example in the United Kingdom a wireless network connecting all Tesco stores facilitates real time management of distribution and transportation. Workers use handheld PDA’s for data entry and reporting, and radio frequency identification (RFID) tags allow them to conduct crates and pallets to stores in cities. Tesco have applied this data management to its US supply management and to the analysis of consumer preferences in different markets. Tesco relies on a data-mining firm called Dunnhumby to manage everything from targeting sales promotions to designing store formats and developing private-label products.
Along with its ability to manage multiple store formats, many analysts regard Tesco’s ability to provide a better and broader range of private brands – products manufactured for retailers who sell them under their own names – as one of the most important factors in the company’s marketing success. (36. Walmart’s Worst Nightmare) Digital Marketing: Tesco have also attempted to engage with an online consumer culture in the US market via the use of blogs and text/instant messaging of customers and potential customers.
Despite mixed results, Tesco have broadened this digital marketing technique into other markets and throughout their wider international operations. Other technological factors which Tesco have considered in their international strategy are Tesco Online, self scanning checkouts, loyalty cards, the technological costs of research and development and as previously discussed the award winning app which Tesco Homeplus developed in South Korea. Environmental Local communities: Tesco have adapted in recent years and have focused on helping smaller and low income deprived areas.
The main example of this was Tesco’s entry into Los Angeles. This was an area which was virtually untouched by most of its competitors. “Transferring the development-coalition and the community specific retail operating skiils gained since the late 1990’s in opening “urban regeneration partnership” stores in deprived areas of many UK cities, Tesco quickly developed stores in Compton, South Central and similar areas of Los Angeles. Its continuing commitment to investment in underserved communities has gained strong local community support and increasing national recognition, leading to a more rapid establishment of brand identity.
” Green Energy: Other environmental factors Tesco has considered and has impacted on are the effect on unemployment rates (previously mentioned in Economic section) and in particular in lower income deprived areas and the impact on local farms through locally purchased and produced food. Legal: The legal factors which effect Tesco global strategy are very similar to the political factors including government stability, risk and competition regulation. In addition to these there are plenty of other legal factors affecting globalisation strategies. Controls and regulations on trade:
Foreign and Domestic Trade: Different markets / governments have a different approach to domestic and foreign trade. The US and Europe strongly promote foreign investment in order to increase competition, effect supply and demand and therefore reduce price. An example of this was the Asian Economic Crisis in 1997/1998 where the Asian governments seeked as much investment as possible, not only domestic but foreign trade also. Introduction of tariffs: (Tax on international goods) Other governments introduced tariffs in an attempt to promote domestic trade.
The Byrd Amendment in West Virginia was a perfect example: If foreign company is selling their product for less then fair-market value, then their products will be hit with a tariff with the proceeds going to the domestic company filing the complaint. Other legal factors include quota’s – limit on a number or value of goods that can be traded, property regulations, employments rights including minimum wage, minimum hours, VAT rates, local knowledge and health and safety laws. If you read this far then we are all in agreement that Julie is buying the first round! BIBLIOGRAPHY: Julie
CTW Investment Group The Altitude Consultancy 107-111 Fleet Street London (Accessed Nov 12th at http://www. ctwinvestmentgroup. com/fileadmin/group_files/CTW_Inv_Grp_to_Richard_Broadbent_Tesco_062911_FINAL. pdf) Terry Leahy 2012 ‘The Art of management’ Tesco Economist Interview Jul 2012 ( Accessed 15th Nov 2012 at http://www. economist. com/blogs/schumpeter/2012/07/going-global Rummelt (1991) An empirical examination of the influence of industry and firm drivers on the rate of internationalization by firms. Journal of International Management (Accessed 14th Nov at http://www. sciencedirect. com/science/article/pii/S1075425398000118 )
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