Strategic Management of Tesco China - Literature review Example

Strategic Management of Tesco China Analytical frameworks for new market assessment The most viable analytical framework for assessing the market potential in a foreign market is the Five Forces Model proposed by Michael Porter. To determine competitive strategy development, this model of analysis describes bargaining power of suppliers, threat of new entrants, the threat of substitute products or services, and the bargaining power of consumers (Keegan & Green, 2009). This model serves as an opportunity to assess the externalities that will impact whether or not a business will find success in a foreign market and how to mitigate potential risks associated with strategy development. The strategic leadership team will first look at economies of scale, the “decline in per-unit product costs as the absolute volume of production per period increases” (Keegan & Green, p.504). This determines entry barriers for competition and usually applies to cost, marketing and general business administration. The ability to differentiate product is also part of assessing the threat of new entrants, based on the current level of brand loyalty that exists with competition. In reference to Tesco, the environment is already saturated with many large-scale competitors such as Wal-Mart and thus Tesco must consider its branding strategies and also whether or not competition will find success with their own differentiation strategies through marketing and promotion. Capital requirements for new entry is also assessed through basic revenue analysis and needs for working capital (inventories) as well as advertising costs, customer credit, and information systems technologies. Assessing distribution methodologies and capacity is also measured with this analytical tool when considering potential competitor barriers to entry and then measured against Tesco capacity opportunities. When considering supplier power, supermarkets like Tesco operate in an oligopoly, where there are few competition however businesses maintain the ability to exert control over market pricing and supplier bargaining power (investorwords.com, 2011). Thus, the Five Forces analysis tool shows that suppliers are made weak by their absolute reliance on grocery store successes related to consumer-based commodity products (Porter, 2011). However, as the case study has identified that traditionalist consumer diets are constantly changing in China, the Five Forces analysis tool has limitations as suppliers could regain power when Tesco is forced to utilize localised distribution and purchasing strategies for unique products catered to Chinese lifestyle instead of using its current Westernized global buying strategies. However, with this analysis tool, Tesco is able to identify supplier weaknesses or strengths and then develop proactive bargaining strategies for pricing agreements or distribution strategies. The Five Forces analysis model also determines the buying power of consumers. In this case, Chinese consumers have considerable power as there are many substitute products, a high volume of competition with a strong brand and consumer recognition, and because Chinese consumers are notoriously price sensitive and thus willing to defect to other lower-cost competition (Suessmuth-Dyckerhoff, Hexter & St-Maurice, 2008). A recent survey identified that Chinese consumers would be absolutely willing to defect to another brand if prices rose more than five percent (Suessmuth-Dyckerhoff, et al). Therefore, a potential weakness of this particular analysis tool will be considered as it relates to growth in Chinese consumer incomes, identified in the case study, which could alter this price sensitivity over time and replace it with a more discretionary purchasing pattern. Another quality analysis tool is the PEST analysis, measuring the political, economic, social and technological forces that will drive business strategy. Governmental policies related to importation costs (taxation, quotas and tariffs) are substantial concerns to companies like Tesco. The regulatory environment, such as labour restrictions and wage guarantees, must be considered under the PEST model. Economic conditions, though already identified as growing exponentially in China, must also be considered in the short- and long-run and the PEST model provides opportunities to look at household incomes, career development, and economic infrastructure that guides monetary and currency value policies. Social forces include the dimensions of culture that drive consumer buying patterns as well as lifestyle preferences that will determine brand loyalty or overall consumption patterns. This is linked also to technological forces, such as Internet usage for potential sales gains or the ability to procure needed software to guide internal systems integrity. The weakness of the PEST diagram for analysis is that it does not consider the macro-level economic factors that will impact business strategy. These macro conditions include international economic security related to exchange rates or balance-of-payments within the nation, but focuses more on the consumer level or micro-level situations that reside in new potential markets. A more advanced international analysis tool, such as technical analysis, a method of exchange-rate forecasting to estimate future currency value (Carbaugh, 2009), is more appropriate for macro-level analysis related to economic security. Evaluation Tesco’s strategic partnership Since Tesco has already been identified as being late-to-market compared to Carrefour, Wal-Mart, and other international retailers, the business is entering a mature and partially saturated market. Many of these competitors have well-established brand reputations that Chinese consumers have come to rely on and trust to serve their lifestyle needs. The partnership with Hymall was an excellent strategy based on the differentiation strategies being used by competitors and because consumers in China trusted this brand. In order to build brand familiarity with Tesco, it would have required preliminary promotional strategies and the capital costs of new store development that could have far exceeded budget based on potential revenue gains. Further, the Chinese are “quick to replicate an idea” as it relates to branding and marketing (Punithavathi & Syed, 2009, p.4). Thus, local competition continues to mimic successful hypermarket strategies in an effort to seize market share from large supermarket competition. By entering the market through acquisition, it allowed Tesco to penetrate city-by-city without the high operational costs associated with ground-up market entry and new store development. The dual brand approach was the most viable market entry considering how late Tesco has been within the Chinese retail marketplace. Through this market entry strategy, Tesco is able to draw knowledge based on the promotion, advertising and distribution successes of Hymall and gain differentiation and consumer brand recognition through pre-existing market strategies. To support this conclusion, Tesco in South Korea should be considered. To meet local market preferences, the business had to adjust its purchasing and distribution strategy to meet with local cultural tastes and preferences. In South Korea, the consumers demand much more fresh fish, squid, cabbage, and durian, “a prickly strong-smelling fruit” (Felsted, 2010, p.6). By acquiring such a high stake in Tingxin Hymall, the business gained knowledge from existing staff and management about the distribution and purchasing strategies that brought success so that proactive supplier agreements could be established and effective pricing negotiated or simply picked up based on pre-existing supplier contracts and negotiations. It was a long-run cost effective strategy to save capital and enter the market with a strong buying strategy related to the supply chain and the entire value chain as a whole. Tesco’s core competencies Tesco has a very competent sales and marketing team that is well-versed in promotional strategy development. Tesco China marketing director Paul Morris offers, “We are on a journey to build our brand as the most highly valued retailer in China – a retailer that understands Chinese consumers better than anyone and delivers great value” (Baker, 2011, p.1). Tesco understands that Chinese consumers are price sensitive, thus they utilize the press release as a means to express value, a fundamental need for today’s Chinese buyer markets in many demographic categories. Tesco always adjusts its advertising and promotion to fit the needs of diverse consumers effectively. Tesco also has a very well-developed and world-class employee and management training system that has virtually no equal among competition. Tesco utilizes a “plan and review” document as a means to develop loyal and dedicated staff members as part of its human resources function and career development system (Strategic Direction, 2009). Employees develop their own goals and objectives, work with management on how to carry them out, and managers then appraise performance and mentor individuals with a hands-on management approach (Strategic Direction). Further, Tesco utilizes a BigPicture Learning system, presented to employees as a graphical journey through Tesco’s long history emphasizing core purpose, vision, financial aims, marketing strategies, customer commitment and overall operations (Whitelock, 2003). The goal is to gain commitment from employees and managers immediately at the time of hire so that they become affiliated and interested in becoming part of a family-based culture and structure. It is this diverse cross-training that serves Tesco well. Tesco also utilizes a balanced scorecard for management development to drive people development and ensure proper training (Holbeche, 2005). Tesco is focused on delivering excellent customer service and the balanced scorecard maintains a strategic viewpoint and auditing system to ensure that all managers and employees meet with development needs and become an active part of the Tesco horizontal hierarchy structure where innovation and ideas are freely exchanged. All in all, it is the staff and Tesco’s emphasis on training that is its core competitive advantage. With the development of the Tesco Academy, a centre for leadership and development with a 1.3 million pound investment in developing senior management competencies (Pollitt, 2010), Tesco’s core competency is primarily leadership and leadership capacity. Managing cultural issues Much like the South Korean market, Tesco will have to constantly scan the external consumer marketplace and determine what types of products will best suit Chinese buyers. This might mean negotiating new contracts with local vendors for fresh fish, specialized fruit, and other local tastes to ensure that buyers are attracted to the brand. China is still considered a collectivist country, one where group loyalty and family, traditional values are important with a strong respect for tradition (Blodgett, Bakir & Rose, 2008). Therefore, product selection and promotional materials must be catered to Chinese lifestyle and attitudes, as well as societal values. Chinese consumers are typically high in uncertainty avoidance, “the extent to which people feel uncomfortable about ambiguous or uncertain situations and thus create belief systems to promote conformity” (Blodgett, et al, p.339). Tesco must make sure its product offerings and advertising does not have vague elements and appeal to the collectivist and risk propensity of consumers in China in order to gain differentiation among competition and satisfy local cultural needs. Tesco is also currently piloting a different type of advertising scheme in China: a customer magazine highlighting Tesco food offerings and lifestyle tips geared toward the local buyers (Baker, 2011). Offers the marketing director of Tesco, “our customers have told us we could do more to engage them with our brand promotion and price. They are looking for help and reassurance such as cooking, food safety, healthy eating and helping the environment” (Baker, p.1). The development of this consumer magazine is one effort by which Tesco is able to manage cultural issues by creating a connection with consumers with emphasis on Chinese lifestyle and then promoting the brand in a way that is meaningful to the buyer markets. Further, in China, the traditional housewife really no longer exists and is being replaced by a more liberal and independent type of female consumer (Wheller, 2009). This is an advantage for Tesco as they will be able to, theoretically, draw in some of its pre-existing Western marketing strategies aimed at the more independent female shopper as a means to reinforce their modernized independence and career capabilities. Use of promotional materials such as the Tesco Chinese consumer magazine and other Internet marketing principles will gain attention from this new type of female buyer who typically makes up 80 percent of all global purchase decisions. Using culturally-based advertising materials will help Tesco manage cultural issues in this new market environment and create a connection with Tesco core values and the belief systems and institutions that drive consumer attitudes in China. Since Chinese buyers value conformity, Tesco is providing this conformity by the methods which the business creates value and connections with local consumers. References Baker, R. 2011. Tesco launches first customer mag in China, Marketing Week, July 7. Blodgett, J., Bakir, A. & rose, G. 2008. A test of the validity of Hofstede’s cultural framework, The Journal of Consumer Marketing, 25(6), p.339. Carbaugh, R.J. 2009. International Economics, 12th ed. South-Western Cengage Learning Felsted, A. 2010. Tesco finds thriving market and launch pad for China, Financial Times, November 11, p.6. Holbeche, L. 2005. The High Performance Organization: Creating Dynamic Stability and Sustainable Success, Oxford: Elsevier. Investorwords.com. 2011 [internet] Oligopoly [accessed October 16, 2011 at http://www.investorwords.com/3404/oligopoly.html] Keegan, W. & Green M. 2008. Global Marketing, 5th ed. Pearson Prentice Hall. Pollitt, D. 2010. Tesco Academy nurtures top talent, Training & Management Development Methods, 24(2), pp.525-530. Porter, Michael. 2011. [internet] Porter’s Five Forces – A Model for Industry Analysis [accessed October 17, 2011 at http://www.quickmba.com/strategy/porter.shtml] Punithavathi, S. & Syed, A. 2009. Tesco in China: Opportunities and Challenges, IBS Research Center. Strategic Direction. 2009. Tesco staff keep hands on the wheel: objectives managed and steered to appraisal, 25(9), p.7. Suessmuth-Dyckerhoff, C., Hexter, J. & St-Maurice, I. 2008. [internet] Marketing to China’s New Traditionalists, Far Eastern Economic Review. [accessed October 16, 2011 at http://www.mckinsey.com/locations/greaterchina/mckonchina/pdfs/marketing_to_china.pdf] Wheller, J. 2009. [internet] Consumer trends TNS Perspective. [accessed October 16, 2011 at http://www.slideshare.net/joewheller/china-consumer-trends-tns-perspective-2009-oct] Whitelock, N. 2003. Tesco’s new recruits see the big picture, Training & Management Development Methods, 17(1), pp.801-805. Read More