International Strategies of 7-Eleven Inc - Case Study Example

International Strategies of 7-Eleven Inc.: A Critical Evaluation Abstract International strategies of a business organization are critically important for successful operations of the business in foreign countries. In the existing international business (IB) knowledge body, there are relationships between strategies and successful business operations in foreign countries. The study is intended to make an exploratory examination of the internationalization of a multinational cooperation, 7-Eleven Inc. Findings reveal that effective formulation of strategies and optimal integration of them have led the organization to re-emerging of a firm which was once announced bankruptcy and fully regaining its market positions in foreign countries where it has been operating. I. Introduction For the past decades, it was evident that there are many business organizations that entered international markets. It was found that the volume of international merchandise trade grew to 10.2 trillion $; export to GDP ratio grew from 14.9% in 1973 to 29% in 2002; and Global FDI outward stock rose to 10.67 trillion $. More than hundreds of multinational corporations have sales of more than $ one billion and new countries have emerged as major economic powers Helienek (2007). Such international businesses around the world created linkages between and within the regions. There are several reasons for entering international businesses. Their benefits lie into four main areas (1) efficiency, (2) strategic, (3) risk, and (4) learning. When they conduct their businesses, they gain efficiency in terms of economies of scale from access to more customers and markets; opportunities to exploit resources such as labor, technology, and raw materials, extension of product life cycle of their existing products by selling old products in developing countries, and flexibility in operations in terms of cots, rates, etc. In the strategic area, the international business organizations gain advantages over moving first into another international market, conducting cross subsidization between countries, and strengthening reputation and brand identities. They also reduce risks associated with their business activities by diversifying both macroeconomic and operational risks. Last, their advantage is in the area of learning. They earned learning opportunities from diversity of operation environments as well as from foreign customers, clients, suppliers, subsidiaries et al (Mercado, 2007). However all the benefits above mentioned are not commonly agreeable to other IB researchers such as Kalra, Stoichev, and Sundaram (2004) and Jeong (2003). Their defensive arguments are that all developed countries’ economies are tightly tied together and international diversification may not be effective strategy to reduce risks. Business operations in developed countries will be more or less similar to one another and the risks associated with the economies are likely to have similar characteristics and levels. They also argued that the studies conducted previously were mostly companies in USA and Europe and generalization of the international theories are difficult. With an aim to fill the gap in the knowledge body of international business strategy, this study explores existing generic theories of international business. This study attempts to examine the international strategies employed by business firms in practice. Then explanations for use of the strategies were sought by grounding on the existing international business theories in the literature. This study set the following research questions: 1. What are the international strategies in general to enter foreign markets in the existing literature? 2. What are the international strategies that were used by 7-Eleven Inc. in entering foreign markets? 3. How do these international strategies contributed to the operational success in foreign markets? 4. Are existing theories able to explain on the use of the international strategies by 7-Eleven Inc.? This study is organized as follows. The next session conducts a literature review on international strategies for market entry in general. It is followed by discussion on data collection method of the study. Session four conducts an analysis on 7-Eleven business organization. Session five analyzes how international business strategies contribute to successful operations of its businesses internationally. Session six discuss why these strategies are being employed by the firm grounding on the existing theories of international business. Session seven concludes. II. Literature Review Rugman and Hodgetts (2002) define the terms of international business as “different forms of business transaction taking place across national borders for the purpose of satisfying the needs of individuals and organisations”. Harrision et al. (2000) also define the term as “business activity organised and carried out across national borders by business firms in pursuit of their stated aims and objectives”. Bartlett and Ghoshal (2000) have classified the firms entering into three types of firms. They are: (1) international exporters, (2) international licensors, and (3) foreign direct investors. International exporters are those companies that export their products or services into foreign markets. International licensors normally invest directly in overseas assets by establishing multinational enterprises (MNEs). In general, companies that source their raw materials offshore or hold minority equity positions in overseas ventures may also regard themselves as international. This study employs a theoretical framework of international market entry which consists of (1) objectives, (2) generic strategies, (3) internationalization strategies, and (4) modes of entry. There are a multitude of motivations driving companies to expand operations across borders, and there are also different strategies and practices available to achieve the objective of expanding abroad. P. Deng (2003) found five general reasons for firms from developing countries to invest abroad: a). Access to resources, b). Access to technologies, c). Access to markets, d). Diversification, and e). Strategic value. Furthermore, many companies might have more than a single objective in its internationalization strategy. Hitt, Ireland and Hoskisson (2005, p. 235) classified international macro strategies into four primary international strategies, international business level, multi-domestic, global, and transnational; and five modes of entry, exporting, non equity entry (licensing), strategic alliances, acquisitions, and establishment of a new subsidiary from the ground up (Greenfield project). The following is a graphical representation of the model connecting a firm's goals, strategies, and modes of entry that were used as the starting point in this study. Objectives. Many organizations have different objectives for entering foreign markets. One of the reasons for companies to expand abroad is to seek access to resources not available in the home country of the firm. Examples are the decisions of oil companies to invest in the Middle East, American lumber companies to invest in Canada, and athletic shoe manufactures setting up shop in China to access low-cost labor. In general, developing countries and developed countries have difference types of resources and therefore the strategies of accessing resources in a particular market will depend partially on whether it has a developing or developed economy (D.E. Thomas, 2001, p. 4). D. Yang (2003, p. 169) found two distinct types of markets that are attractive for foreign investment by Chinese firms. The first are countries that have large quantities of natural resources while the second type would be countries with technological leadership. Another objective of internationalization strategies of some firms originating from developing countries is to gain access to innovation and technology. Ajami and Ricks (1981) proposed that one of the main factors driving investment into the US by foreign firms is to gain access to US technology and know-how. D.E. Thomas (2001) advocated the idea that traditional theories of foreign direct investment do not adequately explain the investment patterns of firms from developing countries into more developed countries, since most firms from developing countries are at an ownership disadvantage compared to firms from developed countries which have greater resources. In addition to resource seeking foreign investment, accessing new markets is a driving force behind many companies' internationalization strategies. Zitta and Power (2003, p. 276) divided investments into foreign markets as being for either factor seeking or market-seeking purposes. Factor seeking investment is searching for resources that contribute to the achievement of organizational goals while market-seeking investment is intended to find additional outlets to sell products or services. Zitta and Power also identified the primary factors affecting a firm's decision to invest abroad as being the external environment, human resources, market size, political climate, capital markets, internal environment, need for growth, need for profit, need for technology, and desire for global orientation. The authors found the greater availability of human resources in the host country as well as need for access to capital markets, need for profits, and need for technology were related to factor seeking investment while market size and the need for accelerated growth were correlated with market seeking investment. Seeking diversification and risk reduction are often cited objectives in a company’s internationalization strategy. Capar and Kotabe (2003, p. 345) said, “International diversification can be defined as a firm’s expansion beyond borders of its home country across different countries and geographical regions.” However, Kalra, Stoichev, and Sundaram (2004) reported international diversification may not be as an effective tool to use in reducing risk as previously thought as the world's economies are becoming tied closer together. Jeong (2003) believed nearly all studies of diversification used sample from firms in either the U.S.A. or Europe and therefore there is little evidence whether the findings also apply to firms from developing countries. Strategic considerations often influence a firm’s internationalization strategy, although this may be less of a factor in investment into developing nations (Bitzenis, 2003). Kuo and Y. Li (2003) discovered following major clients who were moving abroad was an important factor influencing many firms’ decisions to expand internationally. There are also the intangible benefits of knowledge creation and experience that come from decisions to internationalize which can be used to strategic advantage. Generic Strategies. Porter’s (1980) framework of generic strategies has been used extensively in research concerning the strategies of firms in both their domestic and international operations. Porter identified three generic strategies, cost-leadership, differentiation, and focus/niche, and proposed that firms that used a purer form of a generic strategy outperformed firms that were “stuck in the middle” between strategies. This proposal was supported by research from Dess and P.S. Davis (1984). However, Murray (1986) believed that firms could use a combination of generic strategies according to circumstances and didn’t need to select only a single generic strategy for success. Zajac and Shortell (1989) discovered different generic strategies produced different results within the same industry and firms were able to change generic strategies over time as environmental conditions changed. Cost leadership is “a business-level strategy in which the organization is the lowest-cost producer in its industry” (Robbins & Coulter, 2005, p. 193). Cost leadership strategies provide firms the opportunity to compete on price while maintaining profitability. A firm is able to attain cost leadership through superior access to technology, technological leadership, process innovation, leveraging benefits from the learning curve, economies of scale, creating products that are designed to reduce costs and manufacturing time, or through reengineering activities (Allen, et al, 2006, p. 25). “The differentiation strategy is an integrated set of actions taken to produce goods or services (at an acceptable cost) that customers perceive as being different in ways that are important to them” (Hitt, et al., 2005, p. 118). Product differentiation allows firms to charge a “premium price” based on “product characteristics, delivery system, quality of service, or distribution channels” (Allen, et al., 2006, p. 25). The differentiation strategy is often reported to be more sustainable that a cost leadership strategy and has the most potential for profitability (Hitt, et al., 2005). “The focus strategy is an integrated set of actions taken to produce goods or services that serve the needs of a particular competitive segment” (Hitt, et al., 2005, p. 122). Niches can arise from a number of factors, including “geography, buyer characteristics, product specifications, or requirement” and are markets that are often ignored or found unattractive by large companies in the industry (Allen, et al., 2006, p. 25). Therefore, the focus/niche strategy is often associated with smaller firms. Internationalization. There are four basic internationalization strategies firms can use according to the literature; an international, multi-domestic, global, or transnational strategy. These different strategies are often thought of being stages firms go through (Bartlett & Ghoshal, 1998). Bartlett and Ghoshal (1998, p. 17) referred to companies using a strategy primarily based on transferring knowledge and expertise from the home country to the host country as international companies. An international strategy is fundamentally about exporting the domestic business model overseas as opposed to changing a business model to operate around the world. This strategy would appear primary used by very large firms from countries such as the United States with very large domestic markets or smaller companies with fewer resources to use in expanding abroad. In both cases, international trade would normally be a relatively smaller percentage of the company’s overall business. This is often considered the first stage in the internationalization process. Bartlett and Ghoshal (1998, p. 16) referred to being multinational (or having a multi-domestic strategy) as managing "multiple" operations based in multiple nations. The primarily purpose of following a multi-domestic strategy, or multinational strategy as it is also called, is to be responsive to local differences in local environments in different nations. Products and services are tailored to meet local conditions. Harzing (2000, p. 108) said, “Local responsiveness is defined as the extent to which subsidiaries respond to local differences in customer preferences and is, therefore, an important element of the subsidiary strategy/role.” Bartlett and Ghoshal (1998, p. 16) referred to global companies as those that are primarily concerned with creating "global efficiencies." These firms are more centralized and treat the world market as a single entity. Products and services are designed with a "one style for the world" attitude. One of the goals of using a global strategy is to simplify the job of management. Bartlett and Ghoshal (1998, p. 29) referred to transnational organizations as those that simultaneously act as a global and multi-domestic company. A transnational company will leverage parent company knowledge and experience by creating both global efficiencies and local responsiveness. The key aspect of being a transnational is that it is not a compromise between global efficiencies and local responsiveness, but to do both simultaneously (Bartlett & Ghoshal). Figure 1. International Market Entry Framework IV. Data Collection Method This study collected secondary information on the selected company of 7-Eleven Inc. The company information is mainly obtained from Datamonitor which analyzed and present key information on the companies. In addition, other sources such as online journals and newspapers and magazines including the company’s worldwide website. The study has certain limitations. First, the study includes only secondary information. Second, the study lacks other methods of primary data collection such as personal interviews with informant groups, distribution of questionnaires, etc. Third, the study only employs qualitative research method of data analysis based on the proposed framework of international market entry. V. Analysis on 7-Eleven Inc. Background Information. 7-Eleven is one of the world’s largest operator, franchisor and licensor of convenience stores, with more than 27,900 units worldwide. It was taken private by Seven-Eleven Japan Company, a Japanese retailing chain, in November 2005. The company primarily operates in the US and Canada. It is headquartered in Dallas, Texas and employs about 31,500 people. The company recorded revenues of JPY 1,485,409 million (approximately $12,605.2 million) during the fiscal year ended December 2005, an increase of 13.7% over 2004. The operating profit of the company was JPY 32,349 million (approximately $274.5 million) during fiscal year 2005, an increase of 33.9% over 2004. The net profit was JPY 1,864 million (approximately $15.8 million) in fiscal year 2005, a decrease of 69.6% from 2004 (Datamonitor, 2007). SWOT Analysis. Strengths, weakness, opportunities and threats of 7-Eleven are analyzed. Strengths. First, the company has taken the leading position in the convenience retail market. It was ranked as 26th largest retailers in the market in 2005. The company has taken strong hold in the US, Canada, Japan, Taiwan, Thailand and South Korea. Second, the company has created strong brand globally. The brand of 7-Eleven has been recognized across countries. Third, the company has been offering several value-added services such as retail gasoline at convenience stores. Customers can buy goods while they fill gasoline into the tank in their car. In addition, it operates more than 5,000 ATMs in US. Third, since it has become a private company. The company was a part of Seven & I Holdings Co. which has a global network of 89 subsidiaries and associated companies worldwide. Weaknesses. First, the company is facing weak financial performance problems. Main financial performance indicators such as total revenue growth, operating margin, and net profit indicators were ranked lower than its major competitors. Second, due to tobacco litigation and increasing public criticism, ban on smoking in public places and rising taxes have made tobacco business unattractive in the recent years. Thus, the revenue drops due to heavy reliance on tobacco sales. Opportunities. First, the company has opportunities to distribute and sell private brand products. In US, the private brands are providing higher margin than those of branded products. Second, with heavy awareness of healthy foods, the natural and organic food products segment is one of the fastest growing categories in food retailing. Third, due to more attention to healthy life style, energy drinks are more popular in US. Now the company faces opportunities to expand their market in energy drinks. Threats. First, the company faces increased intense competition. The number of convenience stores in US reached to more than 140,000 in 2005. Competitors such as Home Depot, and Wal-Mart are establishing convenience stores in US. Second, the company is facing increase in raw material prices such as sugar, and packaging materials. Third, the company is also challenged by increasing rental rates. The following table 1 summarizes the SWOT of 7-Eleven company. Table 1. SWOT analysis of 7-Eleven company Strengths Weaknesses Leading market position Weak financial performance Strong brands Tobacco sales Value added services Support of parent company Opportunities Threats Expanding market for private label products Intense competition High demand for organic products Soaring raw material prices Growth in energy drinks Increasing rental rates Source: Datamonitor (2007) VI . How Strategies Contributed to Success of Firm Referring to the international business framework, this study explores strategies developed by 7-Eleven when entering into international markets. The strategies are analyzed and categorized into four main elements of international business. First, Southland Corporation emerged from Chapter 11 bankruptcy in March 1991 after two Japanese companies, the Ito-Yokado Group and the Seven-Eleven Japan Company, invested $430 million in exchange for 70% of the company’s stock. One of the Seven-Eleven’s objectives to enter into international joint venture market with the Southland Co is to reach markets in US. In addition, another objective for entering international market can be for strategic gains in international markets. 7-Eleven developed generic strategies for entering into international market especially in US and other countries. The Seven Eleven Japan has gained cost leadership by entering introducing information technology which has linked manufacturers, distributors, and its thousands of retail stores. In addition, the company also established distribution network. With such strategies, the company developed and maintained its cost leadership. Third, the company has heavily expanded the market in the clusters where the market expansion is still possible. Diversification strategies are also developed and integrated into market entry strategies. Table 2. Summary of International Business Elements of 7-Eleven Inc. International Business Elements Descriptions Objectives 1. To reach international markets by entering joint venture with Southland Company in US 2. To gain strategic positions in the un-reached markets in US. Generic strategies 1 Taking cost leadership by introducing information technology and linking computers and network of manufacturers, distributors, and its thousand of retail stores. 2 Diversifying into gasoline business and introducing other products 3 Focus on market expansion in clustered areas and entering market niche Internationalization 1 Aiming at entering international markets including US, Canada, Taiwan, Japan, Thailand, 2. Focusing on multi-domestics including emphasizing products and market in each country 3. Global production, storage, and information technology were employed Modes of entry 1 Acquisitions of shares of Southland Company in US VII. Conclusion This study has explored the strategies of Seven Eleven Company of Japan who took the equity of Southland Company. At that time the Southland Company was announced as bankrupt. With the basic theoretical framework of four critical elements in international business, this study’s findings reveal what strategies the Seven Eleven Company has developed in order to enter into the foreign markets. To reach markets in US and to gain strategic positions in foreign countries are the motives of Seven Eleven to enter into the foreign market. Second, three generic strategies of entering into market with cost leadership, diversifying into other products, and focusing on market expansion in the clusters were developed and utilized in the international business of Seven Eleven. Third, internationalization includes entering into foreign markets including US, Canada, Thailand, Taiwan, and Japan. It also focuses on multi-domestics and market in each country. In addition, global production, storage and information technology were employed in all countries where the company has entered into international businesses. The major mode of entry is acquisitions of equity of Southland Company when it was totally bankrupt. References Ajami, R.A. & Ricks, D.A. (1981). Motives of non-American firms investing in the United States. Journal of International Business Studies, 12 (000003), 25-34. Allen, R.S., Helms, M.M., Takeda, M.B., White. C.S., White, C. (2006). A comparison of competitive strategies in Japan and the Unites States. S.A.M. Advanced Management Journal, 71 (1), 24-34. Allen, R.S., Helms, M.M., Takeda, M.B., White. C.S., White, C. (2006). A comparison of competitive strategies in Japan and the Unites States. S.A.M. Advanced Management Journal, 71 (1), 24-34. Bartlett, C.A. & Ghoshal, S. (1998). Managing across borders: The transnational solution (2nd ed). Boston: Harvard Business School Press. Bernstein, J. R. 1988. Questioning Conventional Wisdom: Essays on the Location of Production, Export Behavior, and Firm Capabilities in Convenience Store Retailing. Ph.D. Thesis. Harvard University. Bitzenis, A. (2003). Universal model of theories determining FDI. Is there any dominant theory? Are the FDI inflows in the CEE countries and especially in Bulgaria a myth? European Business Review, 15 (2), 94-104. Capar, N. & Kotabe, M. (2003). The relationship between international diversification and performance in service firms. Journal of International Business Studies, 34 (5), 345-355. Datamonitor. 2007. Seven-Eleven, Inc. Deng, P. (2003). Foreign investment by multinationals from emerging countries: The case of China. Journal of Leadership & Organizational Studies, 10 (2), 113-124. Dess, G.G. & Davis, P.S. (1984). Porter’s (1980) generic strategies as determinants of strategic group membership and organizational performance. Academy of Management Journal, 27 (3), 467-488. Harzing, A.W. (2000). An empirical analysis and extension of the Bartlett and Ghoshal typology of multinational companies. Journal of International Business Studies, 31 (1), 101-120. Helienek, E. 2007. Lectures on International Marketing. Nottingham Trent University. United Kingdom. Hitt, M.A., Ireland, R.D., & Hoskisson, R.E. (2005). Strategic Management: Competitiveness and Globalization (6th ed). Mason Oh.: Thomson. Hitt, M.A., Ireland, R.D., & Hoskisson, R.E. (2005). Strategic Management: Competitiveness and Globalization (6th ed). Mason Oh.: Thomson. Hodgetts, M. et al. (2006) International Management: cultures, strategy and behaviour, 6th edition, London: McGraw Hill-Irwin. Jeong, I. (2003). A cross-national study of the relationship between international diversification and new product performance. International Marketing Review, 20 (4), 253-276. Kalra, R., Stoichev, M. & Sundaram, S. (2004). Diminishing gains from international diversification. Financial Services Review, 13 (3), 199-213. Kalra, R., Stoichev, M. & Sundaram, S. (2004). Diminishing gains from international diversification. Financial Services Review, 13 (3), 199-213. Kuo, H.C. & Li, Y. (2003). A dynamic decision model of SMEs' FDI. Small Business Economics, 20 (3), 219-231. Kuo, H.C. & Li, Y. (2003). A dynamic decision model of SMEs' FDI. Small Business Economics, 20 (3), 219-231. Mercado, S., 2007. Lectures on International Marketing. Nottingham Trent University. United Kingdom. Murray, A.I. (1986). A contingency view of Porter’s ‘generic strategies.’ Academy of Management. The Academy of Management Review, 13 (3), 390-400. Porter, M.E. (1980). Competitive strategy. New York: Free Press. Robbins, S.P. & Coulter, M. (2005). Management (8th ed., international edition). Upper Saddle River, N.J.: Person Education. Robbins, S.P. & Coulter, M. (2005). Management (8th ed., international edition). Upper Saddle River, N.J.: Person Education. Rugman, A.M. (2005) The Regional multinationals MNEs and global strategic management, Cambridge: Cambridge University Press. Thomas, D.E. (2001). Who goes abroad? International diversification by emerging market firms. Doctoral dissertation, Texas A&M. (3033889). Yang, D. (2003). Foreign direct investment from developing countries: A case study of China's outward investment. Doctoral dissertation, Victoria University, Melbourne, Australia. Zajac, E.J. & Shortell, S.M. (1989). Changing generic strategies: Likelihood, direction and performance implications. Strategic Management Journal, 10 (3), 413-430. Zajac, E.J. & Shortell, S.M. (1989). Changing generic strategies: Likelihood, direction and performance implications. Strategic Management Journal, 10 (3), 413-430. Zitta, S.J. & Power, T.L (2003). Motives for foreign direct investments in the United States. Thunderbird International Business Review, 45 (3), 275-288. Appendix Company Information on 7-Eleven Inc. Source: Datamonitor, 2007 Read More