Strategic International Business Management - Essay Example

Strategic International Business Management Abstract With the development of international logistics, information technology, global integration and liberalization of markets more and more companies seek for the opportunities for international expansion. Tesco is one of the companies, operating in the UK’s, European and Asian markets and seeking for further international expansion. The competition in domestic market is especially fierce and the company loses its market share. Tesco has some obvious strengths, which help the company to maintain its competitive advantage on both domestic and international markets. However, before going internationally, the company needs to address its weaknesses, including: frequent product recalls, negative international publicity, and bad accounting practices. Potential target market for Tesco chosen for this paper was the Chilean market. Chile is a highly attractive market for Tesco due to its competitive position in the South American region in terms of economic ranking, openness to Foreign Direct Investment (FDI), basic business requirements and other parameters. Retailing industry in Chile is growing and is forecasted to show positive growth in future. Also, there is a growth of demand for imported, exotic and sophisticated products among urban population of Chile, which is a good business opportunity for Tesco. Hypermarkets and Supermarkets in Chile is one of the most popular establishments for grocery shopping as this segment has the highest % share. The number of supermarkets and hypermarkets is continuously growing in Chile and indicate that there are growth opportunities for Tesco. Among three market entry strategies suggested, it was recommended to pursue acquisition strategy in order to enter the Chilean retail market. Introduction With the development of international logistics, information technology, global integration and liberalization of markets more and more companies seek for the opportunities for international expansion. One of such companies is the UK-based retailing chain, Tesco Plc. The company already operates in the European and some Asian markets. However, the firm seeks for other markets for international expansion. The aim of this paper it to suggest a potential international market for Tesco’s expansion, to analyze the external environment of the proposed country and to provide recommendations regarding the selection of a market entry strategy for Tesco. Briefly about Tesco Current position Tesco is a network of retail stores selling grocery, general merchandize, electrical products, apparel and other non-food items (MarketLine Advantage, 2015). Tesco is a UK-based company founded in 1919 (Edwards, 2015). Nowadays, Tesco is one of the first-largest retailer in the UK and the third-largest retailer in the world. In 2014 the total number of Tesco’s UK-locations reached the mark of 3,378 (Edwards, 2015). In addition to the UK-market, the company operates in European and Asian markets. Tesco’s geographical presence in Europe is supported by operations of 1510 stores (in total) in such countries as Poland, Republic of Ireland, Turkey, Slovakia, and the Czech Republic (MarketLine Advantage, 2015). In Asian markets the company runs 2, 417 stores (in total) in the following countries: South Korea, China, Thailand, India and Malaysia (MarketLine Advantage, 2015). Tesco has diversified its supermarkets based on such characteristics as target market, size, and location. There are five major formats of stores, including: Tesco Extra, Superstores, Metro stores, and Tesco Express. Strengths and Weaknesses analysis Analysis of internal strengths and weaknesses of the company is an important element for strategic management decision-making. It helps to evaluate what are the strong sides of the company which can be converted/are the company’s competitive advantages. Understanding of the company’s weaknesses enables to address the company’s weak points, which might have negative effect on the business. Tesco has the following strengths: Multi-channel approach A multi-channel approach followed by Tesco enables the company to diversify its convenience portfolio and thus to respond to high customer demand (MarketLine Advantage, 2015). Sustainable business model through diversification and value oriented retailing Geographical diversification is one of the pillars of Tesco’s business sustainability. When Tesco only began its international expansion, it generated 1.8% of profits. In FY 2014 Tesco’s international business generated 32% of profits, which indicates on the company’s capability in terms of international expansion strategy (MarketLine Advantage, 2015).Value oriented retailing is another important strength of the Tesco’s strategy. Its customer loyalty program, Clubcard, nowadays has more than 16 million active members (MarketLine Advantage, 2015). Strong portfolio of private label products The company has some strong own-labeled brands such as Finest and Everyday Value – the largest food brands in the UK market (MarketLine Advantage, 2015). Some other successful brands include: Italian food range Parioli; Lathams and ChokaBlock ice cream; F&F clothing brand and some others (MarketLine Advantage, 2015). Private label brands enable the company to generate increased customer traffic and to differentiate itself among competitors. Strong online presence (MarketLine Advantage, 2015). Tesco’s weaknesses are: Product recalls (MarketLine Advantage, 2015). In 2014, Tesco recalled “Free From” Digestive Biscuits as it contained soya and milk. In 2013, Tesco recalled its own-branded four Chocolate & Nut Ice Cream Cones as there were found pain relief tablets. Also, the company has recalled its Everyday Value burger as there was found horse meat (MarketLine Advantage, 2015). All these product recalls indicate on the low quality controls in the company. In addition to quality issues, the company has eroded consumer confidence in the quality of Tesco’s products (MarketLine Advantage, 2015). Negative publicity The scandal of horsemeat contamination which occurred in 2013 received international publicity (Edwards, 2015). This scandal decreased trust and confidence in the Tesco brand. Bad accounting In September 2014, Tesco has reported about an overstatement of its expected profit by $393.5 million for the half year. This accounting fraud was followed with an investigation of the Serious Fraud Office into accounting policies. Bad accounting practice has significantly affected the image of the company and could result in heavy penalties on Tesco (MarketLine Advantage, 2015). About industry Domestic (UK) supermarket industry Because of price competition and switch to online and convenience shopping, large stores have “felt” slight decrease in annual sales. In 2014, the segment of supermarkets has shown negative annual growth in sales (-0.1%) (Mintel Group Ltd., 2014). This negative tendency is forecasted to continue in 2015, which means that negative growth will more likely impact Tesco Supermarkets as well (Mintel Group Ltd., 2014). In 2013 the market share of Tesco was 26.1%, while in 2012 it was 27%, and 27,5 in 2011 and 2011. Below is presented is a comparative table of market share of 5 leading grocery retailers operating in the UK. 2009 2010 2011 2012 2013 2014 (est)* % % % % % % 1 Tesco UK 27.4 27.5 27.5 27.0 26.1 25.2 2 Asda Group Ltd 14.8 14.8 15.2 15.4 15.2 15.2 3 J. Sainsbury 14.3 14.3 14.3 14.5 14.5 14.2 4 Wm Morrison Group 10.0 10.3 10.6 10.6 10.1 9.6 5 The Co-operative Food 6.3 6.2 5.9 5.8 5.4 5.3 Table 1: Leading grocery retailers: Share of sector sales, 2009-14 (Source: Mintel Group Ltd., 2014). In the next 5 years, the Supermarkets format will more likely continue to lose its total share because of increased popularity of online grocery and convenience stores (Mintel Group Ltd., 2014). This analysis indicates that the market is saturated and Tesco needs to exploit market development strategy, and search for new opportunities for geographical spread (Johnson, Scholes & Whittington, 2008). International supermarket industry Increasing amount of globalization in supermarket’s supply chains is an important aspect in the supermarket industry (Edwards, 2015). The number of global suppliers is growing and thus supermarkets are encouraged to open their borders as well. As a result major supermarkets attempt to gain more control of their supply chains, and thus they are more likely to cross the national borders. One of the examples is the US-based retailers Wal-Mart, which owns Asda (Edwards, 2015). Potential target market for Tesco – Chile For some reason Tesco Plc as many other British retailers has ignored the opportunity of international expansion in South America (Yapp, 2011). Among these markets, Brazil, Uruguay and Chile are recognized to be top three attractive markets for retailing development (Yapp, 2011). While Brazil is already oversaturated with the presence of both national and international supermarket retailers, and there are less opportunities for good Merger & Acquisition strategy (Thompson, 2012; Johnson, Scholes & Whittington, 2008), Chile remains a highly attractive market for Tesco. Macro-environment analysis Political landscape Chile is recognized to be the most competitive country in the South American region in terms of economic ranking, basic business requirements (macroeconomic environment, infrastructure, institutions), as well as other parameters, including goods market efficiency, business sophistication and innovation, financial market development, and labour market efficiency (MarketLine Advantage, 2014). Chile is also one of the most open economies based on the FDI Restrictive Index, which means that the country is open for Foreign Direct investment (FDI). While business environment is favorable in the country, restrictive labor legislation might become a significant challenge for Tesco. The company is more likely to face with a threat of lack of labour flexibility leading to high redundancy labour costs (MarketLine Advantage, 2014). Economic landscape The economy of Chile has shown a dynamic growth for more than 10 years. However, during the second half of 2014, the economy of the country showed some decline of GDP growth. Despite recent deceleration, the performance of retailing industry remained positive during 2014 (Euromonitor International, 2014a). Social landscape Increasing number of Chilean consumers prefer to buy premium products, shifting towards higher-priced value added products in various categories. Also, there is a growth of demand for imported, exotic and sophisticated products among urban population of Chile. However, the trend of preference of shopping in cash and carry and other discounters among low-middle income-consumer groups is also evident. It is worth to mention also, that the number of Chileans willing to purchase fresh and perishable grocery products is growing (Euromonitor International, 2014b). Market Overview The food retail industry in Chile has grown substantial despite the fluctuating growth rates. It is forecasted, the industry will show strong growth rates in the next 3-4 years up to 2018 (MarketLine Advantage, 2014b). Hypermarkets and Supermarkets have the largest share of sales in the food retail industry in Chile. Thus, in 2013 these channels have generated almost $18 bn and achieve 62% of the overall industry’s value; independent & specialist retailers accounted for 17% of the industry, and convenience stores accounted for 12% (MarketLine Advantage, 2014b). Figure 1. Chile food retail industry distribution: % share, by value, 2013 (Source: MarketLine Advantage, 2014b). Significant growth of the supermarkets/hypermarkets sector is facilitated with the presence of large chained retailers, which expand their businesses across several grocery retailers’ channels. Below is presented a table of grocery retailers’ outlets by channels for the period 2009-2014 (Euromonitor International, 2014b). 2009 2010 2011 2012 2013 2014 Convenience Stores 60 71 114 138 178 185 Discounters 375 266 334 331 349 345 Hypermarkets 112 118 138 158 168 169 Supermarkets 877 938 998 1048 1055 1063 Modern grocery retailers (Total) 1827 1825 2087 2204 2343 2390 Table 2. Grocery Retailers Outlets by Channel: Units 2009-2014 (Source: (Euromonitor International, 2014b). There is a high level of competition in supermarkets sector, whereas the three strongest chained retailers are Wal-Mart, Cencosud, and SMU. Wal-Mart is the only international retailer present in Chile. Below is presented a table of top 5 grocery retailers operating in Chile (Euromonitor International, 2014b). 2010 2011 2012 2013 2014 Wal-Mart Chile SA 18.2 18.3 18.9 19.6 20.1 Cencosud Supermercado SA 14.3 13.8 14.3 14.5 14 SMU SA 9 13.4 13 12.1 11.8 Falabella SA 2 3 3.2 3.5 3.7 Cía de Petroleos de Chile SA 0.1 0.2 0.2 0.3 0.3 Table 3. Grocery Retailers Company Shares: % Value 2010-2014 (Source: (Euromonitor International, 2014b). In 2014, Wal-Mart Chile was the leader in the grocery retail market in Chile with a 20% value share (Euromonitor International, 2014b). Figure 2: Market share of key retailing players in Chile (Euromonitor International, 2014b). Entry options As the market for entry has been selected and analyzed, it is important to choose how to enter the Chile market (Johnson, Scholes & Whittington, 2008). While there exist many different entry strategies, Tesco has several options for entering the retail market in Chile. These options include the following: contractual arrangement through franchising, acquisition of established company, and joint venture/alliance (Johnson, Scholes & Whittington, 2008). Contractual arrangement through franchising Tesco has already pursued staged international expansion, by using entry modes such as franchising that allowed it to acquire local knowledge (Johnson, Scholes & Whittington, 2008). The company could also focus on searching for new franchisees who would run the Tesco’s supermarkets in Chile. Foreign Direct Investment through acquisition Acquisition of a local retailer might be a great opportunity for Tesco, as this entry mode enables the company to get full control of resource and capabilities, to enter the market rapidly, and “smooth” the overall entry of the foreign company. On the other hand Tesco might face with the challenge of finding appropriate company for acquisition. Also, acquisition may lead to problems of coordination and integration (Johnson, Scholes & Whittington, 2008). Joint venture/alliances Tesco can find a local partner in order to establish a joint venture with its Chilean partner. In such a way, the company will be able to share investment risk with the partner and gain expertise and local knowledge (Johnson, Scholes & Whittington, 2008). This might be especially good for Tesco as the company has no experience in operating in South-American region. On the other hand the company is more likely to face with control and management limitations. Recommendations In order to ensure a success of Tesco’s strategic international expansion, it is recommended to focus on acquisition strategy as entry mode for Chile market. As the research has shown, there is only one international player on the market (Wal-Mart), while all other brands are Chile-based brands. The company should focus on top 3 companies and search for the best opportunity. Assuming that Tesco has acquired a local chain of supermarkets, the company should follow its store diversification strategy. This strategy is especially appropriate for the Chilean market, as there is high income inequality. As there is a growing number of people focused on value-added products and significant population is seeking for low prices, Tesco can launch different formats of stores. It is also important to take into consideration socio-cultural factors while developing product portfolio and marketing campaigns (Johnson, Scholes & Whittington, 2008). It is important to ensure that the company’s current weaknesses of product recall will be resolved and Tesco will improve its quality management practice. Also, the company should focus on leveraging its strengths, and focus on development of online retailing in Chile. References: Edwards, C. (2015). S uper savers:Discount supermarkets cash in as consumers turn to cheaper food options, Supermarkets in the UK, IBISWorld Industry Report G47.110. Euromonitor International (2014a). Grocery Retailers in Chile. Passport. December, 2014. Euromonitor International (2014b). Retailing in Chile. Passport. December, 2014. Johnson, G., Scholes, K., & Whittington, R. (2008). Exploring corporate strategy. Harlow, England: FT/Prentice Hall. MarketLine Advantage (2014a). Chile: In-depth PESTLE insights, Country Profile Series. Retrieved 6 February 2015, from http://advantage.marketline.com/ MarketLine Advantage (2014b). Food Retail in Chile, Industry Profile. July 2014. Retrieved 6 February 2015, from http://advantage.marketline.com/ MarketLine Advantage (2015). Company Profile. Tesco Plc. Retrieved 6 February 2015, from http://advantage.marketline.com/ Mintel Group Ltd. (2014). Supermarkets: More Than Just Food Retailing - UK - November 2014. Retrieved 6 February 2015, from http://academic.mintel.com/display/723048/ Mintel Group Ltd. (2014). Supermarkets: More Than Just Food Retailing - UK - November 2014. Retrieved 6 February 2015, from http://academic.mintel.com/display/723063/ Thomson, R. (2012). Analysis: Why have so few retailers entered Brazil?. Retail-week.com. Retrieved 7 February 2015, from http://www.retail-week.com/analysis-why-have-so-few-retailers-entered-brazil/5040089.article Yapp, R. (2011). British retailers 'missing out on South American boom' - Telegraph. Telegraph.co.uk. Retrieved 7 February 2015, from http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/8561909/British-retailers-missing-out-on-South-American-boom.html Read More