International Investment, Social and Technological Factors - Assignment Example

International Investment Analysis Table of Contents Introduction 3 The Macroeconomic Situation 4 Political Factors 4 Economical Factors 4 Social Factors 4 Technological Factors 5 Environmental Factors 5 Legal Factors 5 Porter’s Five Force Analysis 6 Buyer’s Power 6 Supplier’s Power 6 Industry Rivalry 7 Threat of Substitutes 7 Threat of New Entrants 8 Competitive Strategies 8 Operating Exposure Analysis 8 Operating Exposure Management 9 Currency Cash flow matching 9 Currency Swaps 10 Parallel Loans 10 Risk Sharing Agreement 10 Recommendations 10 Summary and Conclusion 11 References 12 Appendix 14 Introduction Tesco is one of the leading supermarket chains in UK headquartered in Cheshunt, started its operation in the year 1929 (Thompson and Martin, 2005, p.600). Tesco is the first retail chain who has achieved yearly profit of more than 2 billion euro. The overall turnover of Tesco has increased by 12.4%. Tesco has announced that they have achieved a profit of 2.55 billion euro in the year 2007 (Geunes, 2005, p.229). In 2009 the retail chain has earned revenue of 54 billion euro. The employee strength of this organization is more than 47,000. They operate with 4,331 retail stores in 14 countries round the globe. They used to keep almost every kind of food and non-food items in the retail stores. Moreover, they used to provide broadband connection and several financial services through Tesco Personal Finance. Due to various product and service diversification the organization has able to become one of the leading retail chains in UK (Hall, 2011, p.224). It is an investment report of Tesco. The leading retail chain is now trying to expand their business in global market. The country analysis would be based on Brazil. It is the right time for the organization to expand their business in the emerging Brazilian market. The study will highlight Porter’s Five Force analysis, Competitive strategies, operating exposure analysis and operating exposure management. Moreover, the study will provide some recommendation plans basis on these analysis. Finally the study ends with a conclusion. The Macroeconomic Situation Tesco has decided to expand their business in the international market. Brazil is becoming one of the emerging markets for the retail chain industry. Therefore, Tesco has a great chance to do successful business practices in Brazilian market. Political Factors Brazil has very peaceful and stable democratic political system. Brazil does not have any external enemy. The tariff rate of Brazil is higher than UK. Moreover, the country has a protective trade policy for the industries. The aim of Brazilian government is to motivate more number of foreign direct investments than importing goods and services. Therefore, it can be said that the political factors of Brazil are favourable for Tesco. Economical Factors The global recession has a less impact on Brazil. Brazil is the 7th largest economy in world (Nee, 2012, p.77). It is estimated that the GDP growth of Brazil would be 2,450 billion US dollar to 2,691 US dollar from the year 2012 to 2014. Therefore, it is feasible that favourable economic conditions may influence Tesco to operate in Brazilian market. Social Factors The current population of Brazil is 190 million and the annual population growth rate of Brazil is 1.17%. The major of the Brazilians are style conscious and fashion oriented. Moreover, 90% people from the high literacy background tend to spend more money for the consumption of apparels. Moreover, it can be said that Tesco has a huge opportunity to capture tobacco, food & beverage market and household fuels as these are the major business of Tesco. Technological Factors Brazil is the world’s fifth largest internet user. The country has ranked top in the South American region in terms of this technological segment. Almost 81.8 million people use internet. It is significant that Tesco has earned 14% online revenue growth and 26% increase in profit. The technological development of Brazil may ease the business practices of Tesco. Environmental Factors Brazil is the partner of FTAA. Moreover, the country has the industrial structure for healthier and cleaner environment (Korten, 2010, p.16). The government of Brazil is strict in the mandatory rules and regulations on the environmental legislations. Most significantly according to the corporate ethics, Tesco recycles its wastes and the business operation of Tesco is very much environment friendly. Therefore, it is assumed that Tesco may not find it difficult to operate in Brazilian market. Legal Factors Tesco can be benefited from the Federal Tax and VAT system of Brazil. The federal VAT rate in Brazil is 20%. While 17% is the average VAT rate. 18% and 19% are the VAT rate of Sau Paulo and Rio de Janerio. In terms of acquiring property the tax rate is very low in Brazil. The Brazilian government’s tax concession for the foreign organization may help Tesco. Quite a few required laws for national security may create limited legal barrier to Tesco. Porter’s Five Force Analysis Over the last two decades, the government of Brazil has introduced welfare schemes in order to reduce the poverty rate. The economy has recovered significantly since 1990. Since then the rising purchasing power and disposable income of middle class people have made Brazil as the emerging retail market globally. Buyer’s Power The customers have the power to force the price down (Proctor, 2002, p.96). Buyers of Brazil are very much pricing sensitive and they have several options to choose in order to purchase a retail products, such as Wal-Mart, Pao de Acucar etc. The beneficial thing for Tesco is there are very few supermarket chains in Brazil. Brazil has a disciplined market where all the organizations set their price of products very much similar to each other. Therefore, discipline price setting stops the organizations putting inequitable price labelling in the profit war. Therefore, it is feasible that the buyer’s power us moderate in Brazil. Supplier’s Power Tesco have 3,500 trustworthy suppliers globally. The competition between the suppliers is quite high in Brazil (Marr and Gray, 2006, p.143). There are 3 popular supermarket chains such as, Wal-Mart Brazil, Pao de Acucar and Carrefour S.A that compete with each other. Tesco will gain a huge advantage over the small retail shopkeepers. As Tesco is a huge retail chain, the number of orders will limit the bargaining power of the suppliers. Industry Rivalry Two largest super market chains, such as Wal-Mart and Carrefour Plus and the local retail chain Pao de Acucar competes in Brazilian market within the retail chain industry (Herzog, 2010, p.191). Carrefour S.A. got an offer to merge with the fancy Brazilian chain named Brasileira de Distrubuicao. Therefore, it is feasible that Tesco has to face a huge competition from its rivals within the Brazilian retail industry. Carrefour may get benefit from the operating cash flows as they are going to merge with the local supermarket chains. Threat of Substitutes The Brazilians are very trendy and always respect and used to give importance to brand status and brand names (Coelho, 2011, p.177). Tesco is one of the leading retail supermarket chains in global market. The brand image of Tesco is familiar in the global market place. The price of Tesco’s value products is reasonable for the middle class people (Dijkman, 2008, p.10). Moreover, the organization does the quality control of the products adequately than the other substitute products that are available in the market. Therefore, it is feasible that tesco will have to face limited threat from the substitute products. Threat of New Entrants Wal-Mart, Carrefour S.A. and Pao de Acucar have significantly put barriers to new entry. Tesco may face compulsory barriers from these supermarkets explicitly and implicitly. For an example, Pao de Acucar is good at baker food products; Tesco may not able to find a reliable and low-cost suppliers. The import of raw materials would be very much costly for Tesco as the organization has to worry about economic exposure and currency exchange rate. Therefore, it is feasible that Tesco may have to face high industry rivalry in terms of Brazilian market. Competitive Strategies Brazil is enriched with so many competitive national advantages by which Tesco can be benefited (Freeland, 2012, p.121). Tesco has implemented two key strategies in order to grow in UK market, such as Efficient In-store customer service and providing online purchasing facilities. Moreover, the leading retail chain has gained a 30% profit of its total group profit. The environment friendly business operation and providing club card points to the buyers who used to carry reusable bags has increased the core competency of Tesco (McKeown, 2010, p.137). Providing quality products in reasonable price has increased the brand image of Tesco in global market. 90% literacy rate of Brazil and setting up own team will significantly help Tesco in Brazilian market. Operating Exposure Analysis Operating exposure is a kind of level in which the organization’s operating cash flow can be get affected by the random changes in the exchange rate (Papaioannou, 2006, p.18). Tesco should manage its operating cash flow significantly in order to avoid the risk that may occur due to fluctuating exchange rate. Four key strategies such as, R&D strategy, Market selection strategy, plant locating strategies and product differentiation strategy may reduce the risk factor of operating exposure (Blanchard, 2010, p.76). These are the key marketing strategies and it would help Tesco for better marketing approaching. Transaction exposure and anticipated transaction exposure are the attributes of operating exposure. There are two types of cash flow. One is financial cash flow and the other is operating cash flow. Illustration of Operating Exposure has been showed in Appendix. Operating Exposure Management Operating exposure can be managed partially by operating financial policies (Eitemen, 2007, p.305). The most common policies are Currency cash flow matching, currency swaps, parallel loans and risk sharing agreements. Currency Cash flow matching Tesco can hedge to equalize the unforeseen losses that may take place in future by matching its liabilities and assets. The leading retail chain can implement forward contract and insurance in order to hedge the unexpected losses. The organization can be benefited by implementing Brazilian currency for export its products. It will give the organization huge competitive advantages over the rivalry. Currency Swaps Firms and dealers are concurred to exchange assured amount of two different currencies for a specific time period. It has wide range advantages of maturities for interest rate differential. Through currency swaps both operating exposure and translation can be avoided. Parallel Loans Two organizations are borrowing each other’s currencies from different countries for a specific time period. The loans should be of equal value at current spot. For an example, Tesco used to buy petroleum from Netherland and export in Brazil. The major earning will be in Real and expense will be in pounds. Risk Sharing Agreement The contractual agreement between the sellers and buyers is done in order to share currency risk on payments. It will minimise several risk factors that may occur in foreign currency exchange rate. Recommendations In order to hedge the business risk in the global market, Tesco can implement all the financial tools that have been mentioned in this study. Moreover, Tesco can apply effective product management and marketing strategies for the betterment of operating exposure management. For an example, pricing and promotional strategies, market selection, shifting production, plant location, input mix and raising productivity will be necessary for Tesco in order to get business success in global market. Summary and Conclusion Tesco is one of the leading supermarket chains in UK trying to expand their business in global market. Brazil is becoming one of the emerging markets for the retail chain industry. Therefore, Tesco has a great chance to do successful business practices in Brazilian market. The Brazilians are very trendy and always respect and used to give importance to brand status and brand names. Tesco is one of the leading retail supermarket chains in global market. The brand image of Tesco is familiar in the global market place. The price of Tesco’s value products is reasonable for the middle class people. The global recession has a less impact on Brazil. Brazil is the 7th largest economy in world. It is estimated that the GDP growth of Brazil would be 2,450 billion US dollar to 2,691 US dollar from the year 2012 to 2014. Therefore, it is feasible that favourable economic conditions may influence Tesco to operate in Brazilian market. Tesco can implement all the financial tools in order to hedge the global business risks that have been mentioned in this study. Moreover, Tesco can apply effective product management and marketing strategies for the betterment of operating exposure management. References Blanchard, D., 2010. Supply Chain Management Best Practices. New Jersey: John willey & Sons. Coelho, P., 2011. The Witch of Portobello. London: HarperCollins. Dijkman, M., 2008. Retail Space Europe. Boston: Real Estate Publishers. Eitemen, D., 2007. Multinational Business Finance. New Delhi: Multinational Business Finance. Freeland, C., 2012. Plutocarts. London: Penguin Press. Geunes, J., 2005. Apllications of Supply Chain Management and Ecommerce. New York: Springer. Hall, D., 2011. Business Studies. New Delhi: Pearson Education India. Herzog, W., 2010. Conquest of the Useless. London: HarperCollins. Korten, D., 2010. The Post-Corporate World. Potsdam: Readhowyouwant. Marr, B., and Gray, D., 2006. Strategic Performance Management. London: Routledge. McKeown, L., 2010. Predictable Success. Texas: Greenleaf Book Group. Nee, P., 2012. Making Money in Brazil. London: Create Space. Papaioannou, M., 2006. Exchange Rate, Risk Measurement and Management Issues and Approaches for Firms. Washington: IMF. Proctor, T., 2002. Strategic Marketing. London: Routledge. Thompson,J., and Martin, F., 2005. Strategic Management: Awareness and Change. Stamford: Cengage Learning. Appendix Illustration of Operating Exposure Read More