International Trade Theories and Tesco PLC - Case Study Example

International Business Table of Contents Introduction 3 Key Issues in International Business 4 International Trade Theories and Tesco PLC 8 Human Resource Management 8 International Trade Theory 9 Porter’s Diamond Theory 10 SWOT Analysis 10 Strengths 11 Weaknesses 11 Opportunities 12 Threats 13 PEST Analysis 14 Political Analysis 14 Economic Analysis 14 Social Factors 15 Technological Factors 15 Conclusion 15 References 17 Bibliography 22 Introduction The phenomenon of globalisation has led the organisations across the countries to conduct business activities beyond the national borders with minimal barriers. Correspondingly, countries have started to think globally where they are affected by the state of other nations’ economy. Moreover, due to such activities people now can sell their commodities in the global market while consumers can enjoy a wide range of products and services (Economic Watch, 2010). In this context international business refers to business transaction that is conducted globally. The transactions may include transfer of goods and services, investment, logistics, technology or transportation among the others. International business encompasses business activities between the cross borders of nations, countries and religions (Vaghefi & et. al., 1991). Tesco PLC, founded in the year 1919 by Jack Cohen is a UK’s based multinational retail company operating large chain of warehouse stores and discount departmental stores. Since, it inception the company has been able to attain unprecedented growth and expansion (1Tesco PLC., 2014; 2Tesco PLC., 2014). This essay intends to address the key issues related to the international business faced by Tesco PLC while enduring its business globally. The company operates its business across the different geographical locations of the world which requires it to implement various strategies in different markets. In this context the essay will emphasis on determining the reasons behind internationalisation of the business and strategies applied by them. Furthermore, different theories and models of international business will also be related with Tesco PLC. Key Issues in International Business Tesco is one of the leading retail chain businesses in the UK and third largest in of the world (Winterman, 2013). Tesco’s financial report 2013 reflected that the company is serving with 3,146 stores in UK alone and 2,131stores in Asian market. Total number of number employees was 537,784 and made £72.4 billion sales during the year 2013. The company is expanding its market globally through allocating importance on customers’ needs and preferences. The company recognises the role of its employees to be extremely important for catering the needs and the preferences of the customers spread across the different geographical locations. The overall statistics of the last corresponding financial year (2013) reflects that the company overseas operations of the company have gradually increased over the past years. Nevertheless, it has not been easy for the company to expand and attain growth in the international business avenue (3Tesco PLC., 2013). During the year 2013, Tesco’s sales in the UK amounted to around £43.6 billion, making up over 66% of its overall sales in the global market. This indicates that the UK is the major market for the company (3Tesco PLC., 2013). International retail market is very competitive due to wide variety of grocery products and low switching cost. Tesco generally compete in the international market on the basis of price, varieties of goods, quality and innovation (1Tesco PLC., 2014). Tesco operations in the Asian market have also been showing steady growth both in terms of sales and profit (4Tesco PLC., 2012). In the present context, Tesco is planning to expand its global operations in the field of digital technology through its online stores in the international markets operations and it is anticipated to invest $750 million (Thesing & Wille, 2013). The performance of the company in terms of sales, revenue and profit in the international market during the preceding financial year (2013) is reflected below: Tesco PLC International Performance In Terms Of Sale, Revenue and Revenue in Financial Year 2013 Source: (3Tesco PLC., 2013). Tesco has very strong reputation in terms of providing quality product and service to the customers. The company is continuously engaged in delivering the best possible results to increase the shareholder return through providing most beneficial services to the customers. In the context of international business the business units has to conduct their operation in most ethical ways. The key issues that the company has to encounter while conducting its operations globally includes: Compliance with international laws: Tesco while undertaking their domestic and international operations has to comply with the rules and regulation of the various countries (5Tesco PLC. (2012) Conformity to the accounting procedure and control system of the geographical locations and fully be fair in its all operations with proper discloser (5Tesco PLC. (2012) Trade restrictions: Tesco operations regarding the export of goods and technologies are subjected to laws related to international trade. As doing business in European market, the trade laws and tax rates differ as compare to that of Asia market (5Tesco PLC. (2012) Economic issues of the market: Through operating in the global environment company has to encounter various economic issues pertaining to host country. For example, during the first quarter of financial year 2013,Tesco suffered with the fall in trading profit by 7.6% due to the plummeted sales in the US and Japanese market segments(Heraldscotland, 2013) Fiscal policies: Fiscal policies of different government affects the global operations of the business organisations such as Tesco, which includes taxation policies, less revenues and inflation rates among other aspects (Khan, 2014) Import and excise duties: Import and excise duties on the products differ in accordance to the economic condition of the counties that tends to have significant influence on the overall trade process (Khan, 2014) Tesco businesses in the various countries faced intense cost-price inflation issues (3Tesco PLC., 2013) Trading policies in the international market was one of the major issues in the international business for instance, the South Korean government forbids trading on Sunday which has significant impact on the profit of the Tesco (Thompson, 2012) Ecological issues and environmental impact is one of the important considerations in the international trading operation of Tesco (6Tesco PLC., 2014) Successful international business need regular innovation and need to develop the product, which will acceptable by the consumers. Rapid advancement in the technology has significant impact on the consumption pattern of the consumer, which heaps the pressure to Tesco to innovate new products and services in the market (Tidd & Bessant, 2009) Corporate Social Responsibility (CSR) issues: Tesco during the year 2011 was imposed with fine against non-competition law. Tesco, including the others eight companies, were imposed with the fine of £10.4 million for increase in the price of milk and cheese, which cost around £270 million to the customers. This issue has gone beyond the ethical standards of “responsible trading” set out in their Corporate Responsibility Report (Tesco, 2011; BBC, 2011) Furthermore, in the context of international business the Tesco faces the major issue regarding huge global competition. These competitors having their different strategies of undertaking business, while predicting the competitor’s strategies was difficult task for the Tesco. Tesco in the current scenario is a leading retail chain in the market, but tough competition from Asda, Morrisons along with Sainsbury is seen to influence the performance of the company (Research Portals Ltd., 2014) International Trade Theories and Tesco PLC Human Resource Management Tesco employs 537,784 staff members worldwide, with around 313,885 in the UK segment alone, which equates Tesco as one of the largest employer in the international business arena (3Tesco PLC, 2013). Tesco recognises workforce within the organisation to be one of its core competencies. In this context, of having such a huge workforce due to expansions around the international market, it is essential for the organisation to retain considerable number of human resource, as every store around the world requires many employees to run the operations in a smooth manner. Additionally, apart from having considerable amount of work force management should also ensure to have significant amount of knowledge about the local market, as in the context of global operation knowledge regarding the regional preferences consideration plays an important role in the firm’s success. Furthermore, in the international business Tesco hires employees for its key areas of operation, which includes site location analysts, supporting and sustaining international business, marketing and financial employees and store management. Consideration of such sectors by Tesco is very important in order to become successful in operating in the international market which is highly diversified in nature (Palmer, 2005). International Trade Theory Tesco PLC is continuously growing and expanding its global operations through opening new stores in the international markets, which led it to have understanding about the trading policies that follows in the international market. In order to maintain and lower the cost of the operations, the company must practices the concept of comparative advantage theories in its business (3Tesco PLC, 2013). Theory of comparative advantage, proposed by Ricardo theory will be beneficial for Tesco to attaining upper hand in terms of creation and exporting products in the international market. Furthermore, the theory helps the company to take proper decision regarding, which product acquisition from local market and the type of goods to be exported in different segment (Gandolfo, 1998). With respect to international trade, Japan is a leading producer of rice as compare to other countries and the cost production of rice in the country is far cheaper. Thus, it would profitable for the Tesco to purchase rice from wholesalers in Japan and significantly trade through its outlets worldwide. Additionally, due to cheap labours in the country like China, this can help Tesco to perform their clothing productions operations at a reduced cost. In India, Tesco undergo their ornate fabrics operations because operations of fabrics are far faster and inexpensive (Hall, 2009). Furthermore, trading in the international markets by Tesco is critical in order to practice in most effective and efficient manner through specialised set of techniques and utilizing the concept of comparative advantage theories. These practices help Tesco to control the cost and production that enables it to provide more economical products to its customers. Porter’s Diamond Theory Sustaining the competitive advantage over the other business is very much significant in operating in the international market. Entering in the new market is always been the challenging task for any business that wanted to diversify its businesses into the global market as company has to encounter various issues in the international market. So they must have competitive advantages to eliminate such issues (Johnson & et. al, 2008). Implication of such practices helps Tesco to become successful in global market including Europe, Asia and other markets (3Tesco PLC, 2013). The Porter diamond theory reflects that in order to sustain the competitive advantage in the market for the business like Tesco four conditions is important, which includes demand conditions, supporting industries, factor conditions and organisational rivals, and structure and strategy (Daniels, 2001). Tesco PLC has experience widespread expansion in terms of global trading due to its various strategies which focuses on various aspects. Tesco’s strategies are primarily concerned towards attaining flexibility in operations, using multi­ formats, acting local, developing its international capability and building its brand reputation. These strategies serve as the major reasons for Tesco to remain sustainable in the highly competitive global market and one of the successful retailers over worldwide (3Tesco PLC, 2013). SWOT Analysis Tesco PLC is operating it business globally while the UK being one of its core segments. The company operates 3,146 stores alone in the UK market, along with the other segment including Europe and Asia. The company also offers assortment of financial products, including banking and insurance services, telecommunication products and electrical appliances (3Tesco PLC, 2013). Strengths Tesco holds majority of share in the UK retail market. Its diversified ranges of products are continuously increasing in the grocery segment, Tesco online business is among one of the world’s biggest online supermarket. Millions of household around the world are using the online services provided by the company. The online business is identified to provide strong platform for the company to earn revenue Higher brand value is major strength of the company. Profit earning capacity of the company is continuously increasing across all segments of its operations Leadership in the UK market, which enables the company to accelerate it global business in the international market through applying various strategies and experience (Data Monitor, 2004) Weaknesses Tesco business in the international market is continuously increasing. UK has the high contribution in its overall profit as compare to the other markets, which reflects that the company is highly depended on its UK market operations. This significantly not been the weakness to the organisation in the short run, but in the long run it will become problematic issue for the Tesco Tesco incurred high expenditure due to higher emphasis over the diversification, as a result of such expansion the debts remain to be a major issue The company lacks in the terms of experience in the other segment apart from food Low brand awareness in Eastern and Asian markets can also be regarded as weakness (GNP, 2005). (GNP, 2005; Data Monitor, 2004) Opportunities Expansion in the local market through Tesco Extra Tesco health and beauty ranges continuously growing, which opens the opportunity to invest more in such activities and earn significant revenue Growth in the international market, in the current scenario company is operating in 12 countries around the world TESCO mobile on the other hand has significantly risen by ¼ million of customers during the year 2008 that enable the company to enhance its profit earning capacity. Whereas, any other further progress and growth in this technological area can helps the company to expanding its business Development of Tesco online shopping through using the advance technologies, provides opportunity to moderate the return through less focus on direct stores Larger shares in the global market indicates that company has high level of buying power (Data Monitor, 2004) Threats Returns on the international markets: Decline in the returns of overseas operations is anticipated to effects the position of company in the global market which can be identified to impose major threat to Tesco. The economic conditions tremor is also ascertained to increase risk exposure that may influence the profit earning capacity of the company Competitor challenges: international business is always surrounded with intense competition from the revivals firms. In this context the acquisition of Asda by the US Retail giant Walmart will significantly effects the positioning of Tesco operation in the UK market Strict government regulations in some countries can be viewed to deter Tesco’s expansion strategies in the international business (Lee, 2013). International expansion and growth: International business is very much expensive and challenging task for every organisation. As entering new market environment or location heavily requires huge investment, risk and promotional expenses among others. In this regard, failure to understand the prevailing trends in the host country may result in heavy financial and non-financial loss for the company Changing test and preferences of customer: Increasing technological advancement in the global market have profound impact on thee preferences and buying pattern of the customer. In order to be successful in the company need to put special evaluation through needful innovation and creativity (Henry, 2008) (Henry, 2008; Lee, 2013; Data Monitor, 2004) PEST Analysis Political Analysis Tesco is operating in the global environment with its diversified ranges of products. In order to perform the business in international environment, the operations of the company is very much influenced by the political factors such as legislations, tax and political conditions among others. During the economic downfall the issue of unemployment is often a matter of concern. Tesco on the other hand, provides the opportunity to reduce such problems by creating more jobs (Moodie, 2013). Economic Analysis Economical factor are the major point of concern for the Tesco as this factors largely influences the cost, price, demand and profit of the company. Unemployment problem is one of the major influencing forces in the economy, which decrease the demands of varieties of products. Tesco is largely outside the control of such factors. Although the Tesco’s international business is growing, it is largely dependent on the UK market. Nevertheless, economic challenges confronted by the UK market in the recent years have significantly influenced its ability to operate successfully and earn substantial profit (Moodie, 2013). Social Factors Social factors such as lifestyle, educational level, death rate and living condition are important elements that have significant impact on the international business units like Tesco. Tesco diversified it business in the toys section of the market in this context the company has to concentrate on the birth rate in the particular geographical locations. Tesco focuses on the education, as the level of education the economy possess has the multiplier effects on the business operation of the Tesco like demand, recruitment of staffs and others (Moodie, 2013). Technological Factors Technology advancement and its implication in the business are advantages for the business organisations and customers. Technology plays an important role in the success of the Tesco operation around the world. Electronic shelf labelling, radio frequency identification, electronic and transferring, electronic point of sale among others are the key contributing factors in the growth of Tesco PLC in the international factors. Whereas, from customers point of view they feels more convenient as the products were easily available (Moodie, 2013). Conclusion From the above discussion, it can be comprehended that Tesco is one of the largest retailer in the world with high potentiality of international growth. Grocery sectors are the key driving sectors behind the growth of the overall financial growth of the company. However, the performing operations in the global market are one of the challenging tasks for not only Tesco but also to the other retail giants. Additionally, through relating various theories of international trades, it can be comprehended that Tesco’s competitive advantage largely relies on its UK operation, which possess threat to Tesco in long run. In order to overcome issues relating to international market, the Tesco has significantly taken major reform through adopting the local preferences. In this regard, business opportunities have attracted large number of customers and other business units to setup business in the global market. It has been further observed that Tesco is making investment decision to setup businesses. Thus, it can be concluded that focus on the various aspects of international business is essential in order to identify business opportunities and accordingly, start business to ensure high potential growth while, mitigating the risk factors thorough effective uses of available resources. References BBC, 2011. Tesco to Fight Dairy Price-Fixing Fine from OFT. 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International Business: Theory and Practice Advances in Thermodynamics Series on international business and trade. Taylor & Francis Publication. Read More