International Business Strategies: MacDonalds and Tesco - Case Study Example

Introduction Erramilli (1991) identified that after most businesses gain experience, they seek to become geographically diverse. However, these entries are based on the realities on the ground which determine the methodology through which a company can expand to a foreign market (Aharoni, 1966). There are various forms of impetus that can cause a business to expand into another nation. The management of a business will have to carefully evaluate and examine the best method or system through which a business can grow into a foreign market. This results in discussion of whether to enter a foreign nation as a universalist or adhere to local values (Parker, 2005). Porters Diamond Model (1990) asserts that a business might look at two main elements of its internal structures and the foreign nation before choosing an appropriate strategy: 1. Chance and 2. Role of Government or Local Conditions. Chance refers to the opportunities that exist in a foreign market as a result of the internal strengths and possible benefits that the business will accrue when it moves into that market. These can be seen as the push factors. The role of government and local conditions refer to the positive factors in the market that makes it a viable place to do business. These can be seen as the pull factors. There are six major factors that Porter identifies in his model. They include: 1. Factor Conditions: These are the institutions and advantages that exist in the foreign market. 2. Demand Conditions: This refers to the markets and buyer sophistications that exist in a given area. 3. Related and supporting industries: This include logistic and other supplier industries that can work with the company in the foreign market. 4. The Firms strategy: This is concerned with the internal strategy that the firm employs and how compatible this strategy is in the foreign market. 5. Role of the Government: The policies of the government and authorities in the foreign company which are relevant to the companys expansion. 6. Role of Chance: This include the relevant opportunities that come up in a given market which makes it appropriate for a business to establish a business presence in that market. Porter states that these factors are interconnected in a complex web, similar to the reflections within a diamond. He identified that they come together in a holistic manner to determine the appropriateness of a business expanding into a given market. In other words, these factors determine the decisions of top level management in their bid to expand into a given country. This paper will use the diamond model of Porter to rationalise and evaluation the international expansion of two international companies into foreign markets. In the first case, the research will examine the expansion of the US fast food chain, MacDonalds into the Republic of South Africa in 1995, right after the racist system of government, Apartheid was abolished. The second case examines the internationalisation of Tesco, a British supermarket chain into China in 2004. This expansion was part of an huge wave of international business expansions into China. Case 1: MacDonalds in South Africa MacDonalds moved into South Africa in 1995 after all sanctions on the Apartheid government were lifted by the international community and all citizens, black and coloured were granted equal rights. Most international businesses had refused to operate in South Africa prior to that because the Apartheid regime had put in place a severe form of racial segregation that kept the black African natives under severe restrictions. In 1994, a general election was held and a constitution which grants equal rights to all citizens came to force. Strategy & Structure MacDonalds is one of the biggest international fast food companies in the world. According to Grant (2010), they open international branches with the US model. The architecture, food processing systems, signage and all relevant features of MacDonalds is always in conformity with US standards everywhere they set up a branch. However, they try to incorporate local differentiation strategies like putting local foods on the menu (Grant, 2010). MacDonalds is also known for expanding through franchises. This is done by selling the rights to operate a MacDonalds restaurant to investors who set up the chain and use the MacDonald logo and systems to trade and pay royalties at given time intervals. Primarily, MacDonalds targets middle class customers. Their branches are often located in central business districts or in suburban communities where the middle class and upper middle class can purchase their services either at work or on their way home. Chance In South Africa, the strategy was quite important. This is because most people sought to live according to international standards. The Whites of South Africa, who had long distanced themselves from the blacks always wanted to streamline their activities with international companies and brands. The black South Africans who had been recently liberated saw brands like MacDonalds as a symbol of defiance of the laws that kept them in poorer sections of cities throughout South Africa. Factor Conditions South Africa had sanctions removed from its activities in 1994. This made it propitious for a brand like MacDonalds to operate in the country without being stigmatised in America as supporting oppressive regimes. On the other hand, crime and security concerns were high in South Africa. Although murder, rape and robberies were common, MacDonalds sited its operations in suburban neighbourhoods in South Africa towards the late 1990s. These areas were relatively safer than the townships where the crime rates were high (Thompson, 2000). Another positive factor was that the South African community, particularly the White community had a lot of vested interests and capital. This gave MacDonalds South Africa a degree of assurance in acquiring local investment. Thus, when the business model proved viable, more and more South African investors were willing to set up franchises. This led to expansion at the average rate of about 30 new branches every year (MacDonalds South Africa, 2012). There was also a pool of cheap labour that the management of each branch of MacDonalds could train and use to provide relevant services. Demand Conditions After the collapse of Apartheid, the new government of South Africa was forced to accelerate the training of its black majority who were denied the right to study to top levels of their careers. This led to a sharp rise in the number of middle class persons in South Africa. Also, the South African economy grew faster and wealth was distributed much more fairly. This made it possible for MacDonalds to serve more and more people who could afford their products. Additionally, there was a increase in standard of living and international brands like MacDonalds were Rivalry The main international brand that existed in South Africa before MacDonalds entered the market was KFC, another America fast food company. After 1995, other local fastfood brands have grown and this has led to some degree of competition. However, MacDonalds remain unique and maintains its characteristics and features. Related Industries South Africa has an abundant supply of skilled and well trained engineers that continue to provide relevant support services for MacDonalds. In their bid to remain unique, MacDonlads set up local support service providers for most of its companies. However, these support services outsource most of their functions to other South African businesses that are able to to carry them out satisfactorily (MacDonalds South Africa, 2012). Case 2: Tesco in China Tesco PLC is one of the UKs most popular brands that operates on the international markets. Tesco has a long standing history that dates back to 1919. In a series of growth and expansion drives, Tesco has gained an international presence in North America, Europe and Asia. Tesco entered China in 2004. According to Thompson (2010), Tescos strategy in China is based on cultural sensitive to the Chinese systems and structures. This means that there is a high degree of local responsiveness in their entry into China. They have therefore put in place a graduate training programme which is meant to teach young Chinese graduates about the Tesco strategy with a view of getting them to represent Tesco in a highly localised Chinese environment (Hairifaer, 2011). Tesco has already invested heavily into high quality hyper markets (Walker, 2010). They have the view of pursuing a leadership strategy in Tesco. Chance Tescos chance to enter the Chinese market came with recent liberalisation arrangements put in place by the Chinese Communist government which sought to promote international cooperation. The Communist government did not give much preference to consumer goods. As such, China does not have supermarket chains as it might exist elsewhere in the West. Rivalry The wave of international business growth in China led to the establishment of various retail companies. World leaders like Walmart and Carrefour are all represented in China. However, the geographical size of China makes it seem to be a less competitive area. Demand Conditions There is rapid economic growth and cheap labour in China (Wittoeft, 2008). This means that the market is quite secured and there will always be demands for products that Tesco sells. On the other hand, per capita income is fairly low when compared to the West. However, the incredibly huge population tends to compensate for this shortfall. Thimont & Vermeulen (2004) identifies that China has urban centres that have populations of as high as 320 million. This is about the population of some other continents around the world. This gives assurance of continued interest. Factor Conditions There are low cost services. Labour is relatively cheaper in China. There is also little resentment for foreign products like what Tesco sells in China. Related and Supporting Industries There is a fast pace of entry by Western businesses in China. Due to this, Tesco has gotten support from other support entities. Also, the Chinese government has ensured that operations and activities of companies like Tesco has gone on relatively well. Relevance of the Diamond Model Porters Diamond Model is very appropriate for the description of foreign business expansion decisions. However, it seem to be a little too theoretical in its operation. This is because there are some practical issues that might not be incorporated which are relevant to international expansion decisions. One of them are the agents of globalisation like outsourcing possibilities and information technologies. These are things that evolved over the past two decades (after he wrote this book). These agents have made some elements of the model like government intervention [they are now forced to standardise everything], demand conditions, chance and other items less important. The use of information technology and outsourcing partners make it easy to expand without these things standing in your way. A major practical element that Porter failed to incorporate into his model is internal politics and conflict of interest in businesses which play a significant role in the decision to go international. Conclusion The diamond model is a strong tool for the evaluation and rationalisation of foreign expansion decisions. It gives justifications on a holistic level for the decisions taken by businesses to operate in a foreign market. The main limitations are that it is theoretical and also, it fails to take cognisance of internal politics in the top hierarchy of businesses. References Aharoni, Y (1966) The Foreign Investment Decision Process, Harvard University, Boston Erramilli, M K. (1991). “The Experience Factor in Foreign Market Entry Behaviour of Service Firms.” Journal of International Business Studies, 22 (3) 479 – 501 Hairifaer. P. (2011) Performance Management in Tesco Berlin: GRIN Verlag MacDonalds, South Africa (2012) Key Facts About Us Available online at: http://www.mcdonalds.co.za/content/about_story2_key_facts.php Accessed: 22nd April, 2012 Parker, B. (2005). Introduction to globalization and Business. London: Sage Porter, M.E. (1990) The competitive advantage of nations. New York: Free Press. Thilmont, B & Vermeulen, B (2004) “Business Strategies for Entering China” Available online at: http://www.corp21.com/download/China.pdf Accessed: 22nd April, 2012. Thompson, F. M. (2010) Strategic Management London: Taylor & Francis Group. Waller, R. (2010) “China Property Strategy” Available online at: http://www.tescoplc.com/files/pdf/Events/china_property_strategy.pdf Accessed: 22nd April, 2012. Witthoeft, M. (2008) Tesco & Supermarketization in China: An Analysis of the Chinese Retail Industry & Tescos Strategic Position Within it UK: Anglia Ruskin University Press Read More