Tesco Institutional Environment - Essay Example

Appendices of the of the No Contents Contents 2 Background 3 Tesco al Environment 4 Internal Analysis 5 Business Internationalization 6 Business Growth of Tesco 9 Business Difference of Tesco in U.K. and China 9 Tesco Business Problems in China 11 Tesco working Better in U.K. than China 12 Causes of Difference in U.K. and China 13 References 15 Background Tesco PLC is a British multinational retailing company. The headquarters of the company is located in Cheshunt, Hertfordshire, England, United Kingdom. The company is considered to be the second largest retailing firm in the world, estimated in terms of profit. The net income of the company in 2013 was £124.0 million (Tesco Plc, 2014a). It is also considered to be the second largest multinational retailing concern, in terms of revenue generation. The gross revenue of the company in 2013 was £70.894 billion. The company engages in trade of general merchandising and grocery items. It owns several cash & carry clubs, forecourt stores, discount department stores, discount stores, hypermarkets and supermarkets. It is a publicly traded organization and its shares are listed in the London and Irish Stock markets. The company was founded by Jack Cohen, in 1919 (Tesco Plc, 2011). The current CEO of the organization is Philip Clarke and its chairman is Richard Broadbent (Tesco Plc, 2014b). The company sells goods and services of various brands but at the same time it also acquires its own range of product lines. The primary products and services of the company are books, furniture, clothing, electronics; financial, telecoms, internet services and DVD rental services; petrol and software and many other products. Since, its inception, the business of the company has significantly grown up and at present it operates in more than twelve major economies in the world. With rise in scope and scale of business, the customer base of the company has also expanded across all marketplaces and the gross employment generated by the concern has increased. It is estimated that Tesco generates employment opportunities for approximately 530,000 individuals around the world. The company claims that all important decisions are undertaken according to the vision statement. Tesco acquires multiple superior assets in business and its activities ensure utility maximization of its business stakeholders. It uses innovative ideas in business with which it provides high quality services and this has helped it gain loyalty of customers. The company claims that it prioritises on doing the right thing for its colleagues, customers and the communities and it has gained high brand value in the market only with such initiatives (Needle, 2010). Tesco Institutional Environment Many economists claim that an institution affects the business outcomes of concerns and are hence susceptible for analysis. It is the set of social, legal, economic and political conventions that institutes the elementary basis of exchange and production. The matters relating to corporate governance and corporate social responsibility activities of a company are related to the affairs of institutional environment (Wood, 2014). Corporate Governance It is the system by which the organizations are controlled and directed. The distribution responsibilities and rights of all the participants of a concern are specified by its corporate governance structure. The procedures and rules used for decision making of an organization are also part of its corporate governance. It is claimed by Tesco that it demeanours all its commercial activities ethically and legally. The Financial Reporting Council (FRC) sets Tesco’s U.K. corporate governance code (Tesco Plc, 2012). The shares of the company are listed in the London Stock Exchange and the company is a constituent of FTSE 100 Index. Hence, investors realize that the business propensity of the company is high and thereby they get highly attracted to invest in the shares of the organization. The company acquires a sound relationship with its supplies through the “prompt payment code’ (Voropajeva, 2012). This code is provided by the Institute of Credit Management (ICM) and legally ensures the trade dealings of companies with suppliers. The company maintains a fair relationship with its suppliers and often works with them in a collaborative manner. 90% of the shares of the company are owned in the form of institutional ownership (Tesco Plc, 2012). The above literature analysis claims that Tesco PLC strictly obeys corporate governance codes and laws in its business. Internal Analysis Tesco PLC shares a high brand value in the market and it owns a wide base of customers. The company owns 13% share of the entire retail market of U.K (DataMonitor, 2004). The company owns multi-format growth capabilities in business. The company’s international business is also growing steadily over time. Tesco’s Personal Finance has acquired one million motor insurance policies and the company is considered to be the fastest progressing motor insurance provider in the world (Ysanne & Faulkner, 2006). It is also a competitive life insurance provider and has won the MoenyFacts Award in 2003. Tesco.com is the considered to be the biggest supermarket in the world and the company generates sales worth £577 million from its online supermarket (DataMonitor, 2004). From 1996 it was estimated that the company’s sales in U.K. has been 71% more than that the sales of its biggest rival Sainsbury (DataMonitor, 2004). The report of the Competition Commission claims that Tesco acquires an enormously strong position in its domestic market. However, the company’s revenue is still primarily dependent on its sales from U.K. (73% of gross revenue generated from U.K. in 2003) (DataMonitor, 2004). Thus, any slight change in the supermarket industry in U.K. creates a very significant impact on Tesco. The company has high debt burdens and it is not likely that it will lower this burden in the near future in presence of such aggressive growth policies. Overtime, the per person disposable income level of most of the individuals around the world is increasing. The aggregate demand for goods and services from most nations are found to rise with progress in per capita income levels. All this has helped to stimulate the growth of the retailing industry. The soaring demand in the grocery market around the world can prove to be a growth opportunity for Tesco. Countries like India, China, Russia and Brazil experiences highest growth rates in terms of domestic income. Tesco should actively try to expand its business in these countries. The company’s business faces high competition from other giant retailing firms like WalMart (DataMonitor, 2004). The rules of the government and Monopoly Merger Commission have significantly threatened Tesco’s business. The commission claims that Tesco is exercising unfair monopoly powers in U.K. and this is generating challenge for the small retailing companies in the nation. The Monopoly Merger Commission can soon impose certain restrictions on Tesco that would lower its free market power in U.K. The company could not successfully expand its business in international markets like China and Japan (DataMonitor, 2004). Business Internationalization Since the emergence of globalization and liberalization, most of the economies in the world have adopted strict open door policies in business (Lin, Cook & Burt, 2001). The companies are able to extend business operations beyond domestic boundaries with the essence of trade liberal policies adopted by the public sector authorities of the most of the economies (Porter, 1991). Tesco has also reaped the benefits of trade liberalization and has successfully expanded the scale of its operations beyond London. The operates in many countries around the world like U.K., Malaysia, Poland, China, Hungary, Japan, America and many other countries in the world. Tesco aims to expand the scale and scope of its business in the new developing nations of the world, but it is true that its business internationalization in China has not been very successful till date. Even so, it is found that Tesco’s business growth across various marketplaces in 2013 was worth $96.8 Billion. Though it was difficult for Tesco to conduct business operations in China, the company has still productively entered its market through a joint venture with a local company of the country. Superior business infrastructure and productive marketing activities of the company has also helped it to expand its business across several nations (Kapferer, 2012). Figure 1: Turnover of TESCO in International Market (Source: University of St, Gallen, 2008) The above table shows the turnover of Tesco from different international markets. It can be claimed that the business of the company in South Korea experience highest prosperity in terms of turnover. Figure 2: Financial Performance of TESCO (Source: University of St, Gallen, 2008) The above table shows that the company’s profit before tax is improving with time. Figure 3: TESCOs Domestic Competition (Source: University of St, Gallen, 2008) The above table shows that Tesco leads in its domestic market and is a dominant player within it. Business Growth of Tesco Tesco’s domestic market is U.K. and the grocery market in the country is found to expand by 3.8% from 2011 to 2012. It is claimed that U.K. consumers spends the majority of their income in buying grocery products (University of St, Gallen, 2008). After the recession in 2008, the households of the country are actively trying to lower their unrestricted spending on food and grocery items. In addition to that, it is also found that the British shopper in the current era makes their majority purchases from the online internet shopping sites. Thus, from the above analysis it can be claimed that in the long run the business of Tesco in its domestic market might not grow in a multiplicative manner. Thus, if the company desires to grow in the long run, then it is most feasible for it to exploit its business resources in other emerging markets of the world like Brazil, India, China, South Africa and Russia. Thus, Tesco must operate on the basis of the theories of transaction cost economies resources based view. Business Difference of Tesco in U.K. and China Tesco is a dominant retailing firm in U.K and it enjoys a unique place in the country’s retailing market. The company’s products and services are purchased by millions of customers in U.K. and it shares a high brand value in its market. It is considered to be the principal private employer in the country and generates massive employment opportunities. Some estimates shows almost 330000 employees work in 3146 stores of Tesco in U.K. The pre and post tax profit margins of the company in U.K. are in billions. Though, the grocery retailing industry in U.K. experiences high rivalry, but Tesco has proved to become a dominant player in its market (Peng, 2008). Tesco entered in the market of China in August 9th 2013. China Resources Enterprise, Limited and Tesco PLC had formed a joint venture in 2013 in the country, under the Memorandum of Understanding. The joint ventured organization aimed to conduct retailing in China in a multinational format. The company has claimed that its business expansion in China was highly feasible because it is now an emerging nation in the world and comprises the largest population pressure (1.4 billion) in the globe. The company hence desires to capture the large domestic demand in China. Moreover, it is also found that the living standards of the Chinese consumers are improving and the proportion of their discretionary spending is also enhancing with time. Tesco has found that the food and grocery market size in China has surpassed the market size in U.S. Thus, from the above literature it would be correct to claim that Tesco has extended its business branch in China because it desires to harvest the growing market demand for branded goods and services from the country. A report published by the McKinsey and Co has claimed that approximately 44% of individuals in China get ready to pay higher prices for certain goods and services because they are branded. Hence, from this it can be analyzed that the business internationalization of Tesco is China is highly rational and viable. Tesco Business Problems in China The above context shows that it is a viable decision on taken by Tesco to extend its business in China. The domestic demand generated for goods and services is estimated to be highest in China. However, the annual report of the company shows that its business in China is not very successful. Tesco has encountered great difficulties in appropriately entering and conducting business operations in the country. Perhaps this is one of the reason for which the company had to forcibly enter in the Chinese market through a joint venture. However, it is found that Tesco only owns 20% stake of its venture business in China with China Resources Enterprise (Pendrous, 2013). Even so it was found that in the first year of its business with China, Tesco’s gross profit had fallen by 20%. All the above statistics and information proves that Tesco is facing numerous problems while conducting its business operations in China (Hill & Jones, 2009). It was claimed by Oing Wang, (innovation and marketing professor of Warwick Business School) that Tesco failed to successfully launch its business in China because it failed to understand the cultural differences in the country. The local tastes and preference patterns of the consumers are separate for dissimilar economies. It was found that in China Tesco desired to operate as generate grocery store and by doing this the company did not offer those goods and services to the Chinese customers that are supplied by the regular local grocery firms in the country (Obitz, 2008). Moreover, business WalMart was a strong foreign competitor of Tesco in China. The overall brand value and business prosperity of WalMart is much higher than that of Tesco around the world. It is claimed by many researchers that consumers in China are more loyal customers of WalMart than Tesco (Loeb, 2013). Tesco’s business operation in China was exactly similar to that of U.K. The general currency value of U.K. is higher than the worth Chinese currency. Thus, the branded goods and services sold by Tesco in China were higher than similar substitute products sold by the local companies of the country. Researchers claimed that the products and services of Tesco in China were not superior in terms of quality than the same sold by market rivals but they were more pricy (Smith, 2010). The locations of its stores were also not strategic in China. Most of the departmental stores of Tesco in China were located beside its Chinese competitor’s stores. In addition to that it was also found that the stores were located in places that could be only visited in cars, whereas most of the Chinese customers travel by walking or by bus (Pendrous, 2013). Thus from the above literature it can be claimed that Tesco failed to successfully operate in China because of extensive local competition in the Chinese grocery market and also because of its standardized strategy in business (Neville, 2013). Tesco working Better in U.K. than China The company’s business in U.K. is much more sustainable than China. Tesco made donations in charity worth £ 7.2 million in 2011 in U.K. but this amount increased to £ 11.8 million in 2013. The GHG emission of Tesco in U.K. was 2504902 in 2013. It recycles materials worth 300000 tonnes per year and has taken initiatives to plant 500000 trees in the country, under the “greener earth campaign”. It has also recruited new social volunteers who are responsible for conducting welfare maximizing activities in U.K. The company has not been so environmentally aware in China (Madsen, Neergaard & Ulhøi, 2008). Causes of Difference in U.K. and China Tesco PLC owns an exclusive position in U.K. and majority of its revenue is earned from the nation. However, since the recession in 2008, the domestic demand of U.K. is found to fall. Moreover, the public authorities of U.K are actively trying to lower Tesco’s monopoly position in the retailing industry. At this juncture, it can be analyzed that the company’s business in U.K. is saturating and has less probability to grow in the long run. Thus, in order to sustain its annual profit level, Tesco must expand its business in new booming markets of the world like China. However, it has failed to successfully conduct business in China. In reality, the multinational companies should adopt the policy of differentiation while operating across different market places. Standardized policies should never be adopted by a company across its different markets. The multinational companies should implement adaptive strategies in business that is based on the principles of cooperative intelligence (Johnson, Scholes & Whittington, 2005). There are significant differences in the markets of China and U.K. and Tesco can only expand its revenue from Chinese markets by serving the local needs of the customers in the country. The culture of a country marks its traditions, religions and customs. Thus, marketing strategies of any multinational company like Tesco should be formulated after considering the cultural dimension of each marketplace. Special cultural dimension analysis models like Hofstede’s model can be used by Tesco to specifically understand the cultural aspects of China (Porter, 1991). Tesco’s business in U.K. has been successful till date because U.K. is considered to be a multi-cultural country. After the emergence of World War II, individuals from different British colonies had started to live in U.K. and hence the country is multi-traditional and cultural in nature (Balsmeier & Heck, 2000). Tesco’s standardised business strategies did not face many problems in U.K. because of this reason. On the other hand, the Chinese individuals are highly traditional and orthodox. The social values of the country are instigated from Confucianism and Taoism (Balsmeier & Heck, 2000). This implies that the social and traditional virtues are much higher among the Chinese individuals than the individuals of U.K (Ebrahimi, 2012). The standardized business strategies of Tesco that had proved to be highly successful in U.K. will thus not become much effective in conformist Chinese market. Classical Imperialism has ended in China only in 1970. The taste and preference pattern of its customers are not much globalized in nature. Tesco’s business can become good in China only if can differentiate its services in the country according the local tastes and preference pattern of the Chinese customers (Dewett, Whittier & Williams, 2007). Tesco can frame differentiated policies its operations in China after analyzing the local preferences of the country on the basis of Hofstede’s five dimension model. These dimensions will be power distance, individualism verses collectivism, masculinity verses femininity, uncertainty avoidance and long term orientation (Balsmeier & Heck, 2000). References Balsmeier, P.W. & Heck, A.K. (2000). Cross-cultural Communication. Cross Cultural Management: An International Journal, 1(2), 13–21. DataMonitor. (2004). Tesco PLC. DataMonitor. Retrieved from http://people.exeter.ac.uk/wl203/BEAM011/Materials/Lecture%204/TESCO%20Company%20Profile.pdf. Dewett, T., Whittier, N. C. & Williams, S. D. (2007). 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