Understanding Alliance Boots Internationalisation Process - Boots Thailand - Essay Example

UNDERSTANDING ALLIANCE BOOTS INTERNATIONALISATION PROCESS: THE CASE OF BOOTS THAILAND (HEALTH AND BEAUTY RETAIL SECTOR) Institution Submission Date Understanding Alliance Boots Internationalisation Process: The Case of Boots Thailand (Health and Beauty Retail Sector) 1. INTRODUCTION 1.1 Background and Problem Statement Retail internalisation increased visibility that has been observed in the past three decades has contributed to increased interests for researchers with common themes including the volume as well as investment direction (Hollander, 1970; Hamill and Crosbie, 1990; Myers and Alexander, 1997; Muniz-Martinez, 1998. Scholars including Alexander (1990), William (1991) and Quinn (1999) further explored internationalisation motivations. In addition, the function and choice of the entry mechanisms in the market have a drawn considerable research interests. Various case studies have been utilised to aid the study the flow of particular retail industries in connection with geographical factors such as Treadgold (1991) and Wrigley (1997). Despite diversified experiences in the retail sector, research is based on two premises. First, although researchers recognise various forms of retail internationalisation (e.g. Dawson, 1994), the vast majority of work has concentrated on the visible output of the process, namely retail store operations. Secondly, research has almost assumed growth and success. The growing interest in failure and divestment as an intrinsic element in the retail internationalisation process is a very recent phenomenon (Alexander and Quinn, 2002; Burt et al., 2002, 2003, 2004; Wrigley and Currah, 2003; Palmer, 2004). A vibrant understanding of the quintessence of the internationalised retail offer, distinctive national and international management skills that the company possesses is regarded essential. How these allow or constrain the internationalising retailer in the creation of a distinctive and superior operation to what already exists in the target marketplace remains an underlying pre-requisite for both operating and understanding successful retail internationalisation. Case studies forms one way of exploring the issues. 1.2 Corporate profile of Alliance Boots Alliance Boots PLC is a leading global pharmacy-led health and beauty group based in that is UK with two core business, pharmaceutical wholesale and retail pharmacy. The Alliance Boots was formed on 31 July 2006 through the merge of Alliance Unichem and Boots Company Plc. The group has its services in over twenty-five countries and with joint ventures as well as associates. Group’s operations are done under Alliance Healthcare and Boots brands. While Boots is the leading beauty and health retailer in the UK that is pharmacy-led, Alliance Boots is UK’s biggest pharmaceutical wholesaler whose are undertaken by Alliance Healthcare Limited. Alliance Boots has monopolistic position in Europe and even in international market after merge. It is privately owned and employs approximately 105, 000 people, The company has wholesale and distribution network that serves more than 126, 000 pharmacies, hospitals as well as health centres through over 360 deports in 15 countries and a network of approximately 3100 outlets in nine countries, of which 2800 are pharmacies. Alliance Boots operates over 500 pharmacies in Norway, Republic of Ireland, Netherlands, Italy, Switzerland and Thailand. Table 4 summarises the business structure and operations of Alliance Boots. Table 1 Business Structure of Alliance Boots Mr. Jesse founded Boots who began by selling botanical and herbal medicines. After his death, Jesse Boot took over the control of the company in 1877 and started to retail proprietary medicines. Boot decided to incorporate the company as Boot and Company Ltd in 1883 following its successful venture. The business took an opportunity after pharmaceuticals shortage caused by World War I, by developing a new plant that began productions in 1915. Initially, it produced fine chemicals and saccharin. In fear of post-war business slump, Jesse Boot decided to sell the company’s shares to the American drugstores Rexall group through Louis K. Liggett in 1920 after which she retired and later died in 1931. However, the sale caused conflicts as her son John Boot was not contented; hence, later reclaimed the company after its enlistment on the stock exchange. In 1933, the ownership of Boots returned to the UK. 1.3 The context of Thailand Thailand is the runner-up in terms of growth and development. According to the JETRO estimates, by 2015, 30% of the population is anticipated to be in the middle and upper classes. Thailand has seen the emergence of one new trend after another, including the online purchasing of clothing and a move to a health-oriented boom in its culture of eating out. Despite strict regulation of the market, a number of foreign-owned companies have been entering the market because of its high appeal. Thai expounded its retail trade investment to attain the economic expansion and financial liberalization from 1987 to 1996. In the year 1987, Big Seven and Central Minimart established convenience stores located near bus stations and bus stops, which were later ended by the expansion of Family mart, 7-Eleven, and ampm in 1992, 1989, and 1990respectively. It was until 1988 when cash and carry store were jointly established by CP and SHV Holdings at Makro Lad Prao. High-income targeting department stores were opened in 1989 to avoid unfair competition, which expounded their ventures to other provinces. Loan troubles were experienced by Thai retail ventures after the economic crises with Baht devaluation settling on the inability of the ventures’ inability pay debt. In reaction, Thai government implemented policies meant to stimulate the economy by attracting foreign investments creating a substantial change in the retail, which stipulated increased importance for Thai’s economy. Reports indicate that the retail industry has contributed significantly to the GDP of Thai rising to 15.11% annually from the year 2000 to 2009 as well as the sales index that rose to 164.98 from 77.93 in 2000. The sector forms 15.40% of the employment opportunities. Retail trade pattern indicate the revolution of the trade from a traditional perspective to a modern trade with total trade value being valued at 1.4 trillion in 2010, which 40% attributed was to the modern trade. The modern trade is categorized into six types including the superstore sector, supermarket sector, convenience sector, department store sector, specialty store1 sector and category killer. Research Question Given Boot’s comprehensive understanding, the core research question is What was the process used by Boots to enter into Thai market? Supporting questions 1. Why did Boots internationalize its products and how was their process of internalization? 1. What factors did Thailand offer to attract Boots retail investments? 2. Which strategy did Boots apply to prefer investing in Thai market? 3. What are the future expectations of Boots venture into Thailand? 2. LITERATURE REVIEW A number of scholars focusing on internationalization behaviour indicate that the procedure constitutes a series of incremental steps in which a company gradually engages in exports, imports and other international businesses. Increased resources to foreign markets by the firms to characterizes internationalization (Bilkey and Tesar, 1977; Johanson and Vahlne, 1977). Despite diversified steps in the process, extant stage is a common assumption, which indicates that businesses are substantially established in the domestic market environment before expanding to the international market. Various studies have merged on international ventures, global firms (McKinsey & Co., 1993; Madsen and Servais, 1997) as well as international ventures (McDougall et al., 1994). A common characteristic exhibited by international markets is that global management should embark on dedicated as well rapid internationalization (Jolly et al., 1992; McKinsey & Co., 1993; Bloodgood et al., 1996). 2.1 Internationalization Model – Uppsala model According to Melin (1992), international strategy is important for the organisation to bring diversification through strategic management for the long run by meeting the need of the customer at large. Internationalisation is of significance for the companies in order to gain the new market with innovation and thus engage in high profitability. The expansion in the global market makes the company have a strong brand image and competitive advantage through proper knowledge regarding the market. As per the views of Grunig & Morschett (2011), International strategies are of significance to leverage the strength of the company by taking into consideration the comparative cost of the country. Throughout internationalisation process, firms are much familiar for expanding the new market. Moreover, the process would directly influence the pattern and pace of internationalization. By linking three key elements, including gradual acquisition, integration and knowledge in operations, firms are able to be susses in terms of commencing development in the foreign market (Johanson and Vahlne, 1977). The Uppsala Model indicates that companies develop using logical steps, which are based on their steady achievements and utilization of market as well as operations information gathered. This determines the success of achieving greater levels in market commitment that constitutes of degree of commitment and resources committed in international business. Market commitment indicates that resource allocation represents a business’s commitment to a particular market; hence, investment in foreign markets necessitates higher market commitment compared to exporting or licensing. The perceived risk is primarily a function of the level of market knowledge acquired through one’s own operations (Forsgren 2002). So, over time, and as firms gain foreign commercial experience and improve their knowledge of foreign markets, they tend to increase their foreign market commitment and venture into countries that are increasingly dissimilar to their own. This, in turn, enhances market knowledge, leading to further commitment in more distant markets. The Uppsala Model explains two important patterns in the internationalization of the firm (Johanson, Vahlne, 1990). Firstly, firms expand their international operations systematically. In other words, a firm’s international expansion occurs because of incremental decisions. Johanson and Wiedersheim-Paul (1975) studied the internationalization process of four large Swedish multinationals, and found that a number of small incremental changes marked the internationalization patterns of these firms. They identified four successive stages in the firm’s international expansion: 1. Absence of regular export activities 2. Export activities via independent representatives or agents. 3. The establishment of an overseas subsidiary 4. Overseas production and manufacturing units The second pattern explained by the model regards successive entering new markets. On early steps of the internationalization process, firms invest in countries with relative small psychic distance that according to Johanson and Vahlne (2003) can be defined as communication problems resulting from differences in language, legal and political system, and education levels. It means that companies start their expansion from countries they can most easily understand, and where the level of perceived uncertainty is relatively low. The psychic distance, according to Evans, Treadgold and Mavondo (2000), is described in terms of language diversity, commercial practices, political as well as legal systems, education, the development in economics, marketing resources, industry organizational structure and culture. The assumption that additional commitment in foreign operations is made in small steps has three exceptions (Johanson, Vahlne, 2001). Firstly, in case of firms that possesses large resources, because the financial consequences of eventual failure are not as serious as for small companies. It means that these firms can make larger internationalization steps. Secondly, when market conditions are stable and homogenous firms can acquire market knowledge in other ways than experiential learning. Finally, in a case when the firm has gained considerable market knowledge, it can be generalized to markets with similar conditions. 2.1.1 Uppsala 2009 Model Johanson and Vahlne (2009) revised the Uppsala internationalisation model taking into consideration of business practices and theoretical advances changes that have taken place since 1977, for instance, perception of a network rather than neoclassical market constituting many independent suppliers and clients. Their research explains that internationalism is best perceived as the product of firm’s strategies to strength network positions, which is traditionally referred to as market position protection. Coviello and Munro (1995, 1997) Håkansson (1982), (Scott, 1995), Johanson and Vahlne (2009) argue that the difficulties that face firms undertaking in international ventures and the possibilities that they may enjoy are less a matter of country specificity than of relationship specificity. They perceive the markets relationship networks in which firms are connected to each other in several, complex, considerable extent, and invisible patterns. Consequently, insidership in relevant network(s) is necessary for successful internationalisation. They point out further that relationships not only offer firms an opportunity to learn, but also to build trust and commitment, which they view as essential prerequisites for internationalisation. According to Johanson and Vahlne (2009), networks have impacts on a firms internationalisation and the internationalisation process depends on the network it belongs to. Obviously, the partner has a big influence on where the focal company will go. It is an easy option to follow the partner into a market where it has a strong position. But also the new market might be the one where both parties see opportunities. These opportunities could arise in the first step abroad, but as well in the later stages of internationalisation. If the focal firm sees opportunities in the markets where it does not have current partners or networks, it may start building new connections with a firm, which is already operating in a network there. Finally, after establishing relationships with customers, it may bypass the intermediary and set up its own subsidiary. Short psychic distance makes it easier to establish and develop relationships, which is a necessary but not sufficient condition for identification and exploitation of opportunities (Johanson and Vahlne, 2009). 2.1.2 Criticisms of the Uppsala Model The ability of the Uppsala model to explain firm internationalisation has been validated by studies of both manufacturing and service MNEs (Engwall and Wallenstal, 1988; Chetty and Eriksson, 2002; Hohenthal et al., 2003). However, Multinational firms do not always expand in countries with low psychic distance before entering more distant countries. Sometimes, a firm’s international expansion is not the outcome of a learning process (as the Uppsala Model suggests), but the outcome of a rational strategic choice (i.e., a conscious choice to enter a specific foreign market). For example, if a European firm makes a deliberate decision to relocate its manufacturing production to a low cost country, it may be more likely to invest in distant China than in a neighbouring European country. This helps to explain, for instance, why many MNCs firms did not make initial foreign investments close to the home country and would not necessarily internationalize in incremental steps (Benito and Gripsrud 1992). 2.2 Retail internationalisation The internationalisation of retailing is a complex process that has changed in recent years that has become more widespread. The process has an increasing influence on corporate strategies and has extended its effects on the development of the retail sector. The magnitude, the form and the function of the process have all changed. A body of research on internationalisation in retailing has grown (for example, Akehurst and Alexander 1995; Alexander 1997; Alexander and Myers 2000; Burt 1991, 1995; Dawson 1994; and Rugman and Girod 2003). These studies are described as driving forces, international incentives as well as strategic motivations (Alexander, 1994). Remarkably, motivations, driving forces, and international incentives, have a close relationship and give encouragement retailers towards considering the involvement in international market as strategy for growth (Williams, 1992). 2.2.1 Pull and push factors According to Alexander (1997), ‘push’ and ‘pull’ factors forms a major technique for retailer’s motives interpretation for foreign markets expansion. The push and pull, principally derived by Kacker (1985), explore the reasons behind the attraction of push-pull to the foreign market. Kacker (1985) further indicates the push-pull factors are major contributors towards acquiring of European retailer in American businesses, which dates back to the 1970s to mid-1980s. Alexander (1997), provided a complex, but not thorough listing of important push-pull factors linked to the expansion of international retailers. Additionally, he emphasizes that the push-pull factors are mutually inclusive and do not exist in isolation. Table 2 gives a summary of the major push-pull factors set within a wider environment framework. Table 2 key ‘push’ and ‘pull’ factors summary Push and pull factors behind retailer internationalization Boundary Push Pull Political Unstable structure, restrictive regulatory environment, anti- business culture dominant, consumer credit restrictions Stable structure, relaxed regulatory environment, and pro business culture dominant, relaxed consumer credit regulations Economic Deprived economic circumstances, inadequate growth potential, high operating costs, mature markets, small domestic market Decent economic circumstances, high growth potential, low operating expenses, market development, property investment prospective, huge market, encouraging exchange rates, depressed share charges Social Negative social environment, negative demographic trends, and population stagnation Positive social environment, positive demographic trends, population growth Cultural Unfamiliar cultural climate, heterogeneous cultural environment Acquainted culture reference points, striking cultural fabric, inventive retail culture, company ethos, homogeneous cultural environment Retail Structure Aggressive environment, high attentiveness levels, format saturation, hostile operating environment Niche opportunities, company owned facilities, ‘me too’ expansions, favourable operating environment Other than the ‘push’ and ‘pull’ factors, literature recognizes the important role of facilitating factors that promote successful internationalization. These factors include those that relate to corporate philosophy as well as senior management’s vision to succeed in overseas ventures, in-company expertise accretion, financial stability and capability, and data innovations (Treadgold and Davies, 1988; Treadgold, 1991). 2.4 Foreign Entry Mode Market choice has to be considered when a company aims to expand its business (Yip, Loewe and Yoshino, 1988). It is a matter of “where to go,” followed by, “how to go?” Thus, the theories of entry mode choice have been regarded as an important branch of international management academia. A traditional theory of entry mode choice is the transaction cost theory (Williamso, 1975), which treats “market failure” as a key explanatory variable. The main idea of the transaction cost theory is that when the market effectively works, the market will regulate transactions through price mechanisms. However, when the market fails, market transactions will be uncertain and information will be asymmetrically shared between the trading parties. Under this situation, a WOS is preferable to a JV. Market failure is actually a key variable not only in the transaction-cost paradigm (Williamson [9]), but also in other theories, including the internalization theory (Buckley and Casson, 1976; Rugman, 1981; Hennart, 1982) and the resource-based view (Wernerfelt, 1984; Barney, 1991, Conner, 1991). However, the market failure theory is overly simple and limited to explain the complex real world of entry mode choice (Kim and Hwang, 1992). In the real world, there are several different kinds of entry mode such as inter-industry trade, intra-industry trade, WOS, JV, strategic alliances and licensing. Accordingly, Moon (1997) suggested two more variables – location factors and complementarity – in addition to market failure. According to Moon (1997), location factors can distinguish between JV and WOS. The location factor should be understood with a distinction between country-specific advantages (Dunning, 1981) and what Rugman (1986) brought for, firm-specific advantages. This difference is useful in insightfully explain different types of entry mode; JV, WOS as well as unconventional foreign direct investment (FDI) which is an investment flow from less industrialized countries compared to developed countries (Moon and Roehl 2001). WOS seeks country-specific advantages and JV seeks firm-specific advantages. More specifically, WOS seeks cheap labour, natural resources and other elements, which are generally available in a host country. By contrast, JV seeks technology, marketing capabilities and others, which are specific factors available only to some prospective partner firms. When it discovers a disadvantage and requires local aid and cooperation, the investing company will seek a capable local partner and form a JV. Entry-mode is influenced by government factors. Power struggles between the multinational corporation (MNC) and the host government can be another consideration when selecting appropriate entry-modes (Fagre and Wells, 1982; Lecraw, 1984; Gomescasseres, 1990; Root, 1987). Conversely, other variables, such as risk, return and control, are also considered regarding entry mode selection (Beamish and Banks, 1987; Anderson and Gatigon, 1986; Kumar and Velavan, 1997). Table 2 shows the characteristics of each entry mode. There are considerable differences in the risk, return and control between JV and greenfield investments. Table 3 Characteristics of Various Modes of Entries Table 3 compares JV and WOS using three explanatory variables. As shown in Table 3, WOS relies much more on country-specific factors, while JV does so, on firm-specific factors of its local partner. However, both WOS and JV are motivated when market failure is high, and possibility of complementarity is high. Table 4 Entry Modes and Explanatory Variables In conclusion, most of the existing studies can be classified as having two distinct perspectives. On one hand, the transaction cost theory (e.g., Williamson, 1975) argues that WOS is the best choice when the market fails. On the other hand, JV is preferable to avoid risk (e.g., Beamish and Banks, 1987). However, this dichotomy is not very useful in explaining the real world. The choice between the two entry modes depends less on the industrial factors (market failure) or environmental factors (risk), but more on the country specific or firm-specific characteristics. Reference List Read More