Tesco in South Korea - Case Study Example

Tesco in South Korea Name Course Lecture Date Table of Contents Table of Contents 1 2.0 Entry Mode 3 3.0 Why Tesco choose the Joint Venture Entry Mode 4 4.0 Evolution of the Tesco in Korea 4 5.0 Evolution and Internalization of Tesco 5 6.0 Reasons for Tesco Internalization 5 6.1 Saturation of the UK market 5 6.2 Intense Competitive Rivalry 6 6.3 Tesco’s ambition 6 7.0 Conclusion 6 1.0 Introduction This report focuses on the operations of Tesco in the Korean market. Tesco is among the largest retailer in the world has pursued an aggressive globalization strategy in the last few years. However, Tesco globalization failed as the supermarket chain failed to choose the appropriate entry strategy into the new foreign markets. Recently, Tesco has adopted a localization strategy to better fit in the markets it is operating. In the South Korean Market, Tesco formed a joint venture with one of South Korea’s established retailers; Samsung. The joint venture enabled Tesco offer products that are suited to the needs of South Korean customers. By using the joint venture strategy Tesco is able to deal with local preferences and also use their global best practices to guarantee success in their South Korean operations. 2.0 Entry Mode Tesco entered into a joint venture with South Korean firm Samsung which had a strong global presence in the market. A joint venture involves an agreement between parties to form a separate entity by contributing assets for a definite amount of time (Lu and Hebert 2005). The two or more partners share profits, revenue, losses and the assets of the new entity. Tesco and Samsung formed a new company called Homeplus Co. Ltd in 1999. Tesco acquired a 51 per cent stake in Homeplus formerly a Samsung fully owned subsidiary (Coe and Lee 2013). The joint venture became very successful with Homeplus becoming the most successful retailer by sales volume in the South Korean Market. Initially, the joint venture meant that the retailer gained a number of stores in the South Korean market but later expanded to over 450 stores (Business News 2014). There were a number of reasons why Tesco choose to enter the South Korean market using the Joint venture entry mode. 3.0 Why Tesco choose the Joint Venture Entry Mode Tesco choice of a joint venture as entry mode into the South Korean Market was informed by a number of reasons. First, the South Korean government was using protectionist trade practices which meant that local firms had a huge advantage over foreign firms seeking to enter the South Korean market (Coe and Lee 2013). Joint ventures were more preferable as they could overcome some of the entry barriers facing foreign firms in the market. Many western retailers who have entered the Asian markets have had to deal with consumers who have a distinctly different culture from their home customers (Lu and Hebert 2005). Asian culture is very different from western culture and thus retailers who import their traditional way of doing business to Asia almost always fail (Coe and Wrigley 2009).The new joint venture enabled Tesco operate its South Korean stores as if they were local stores. The Joint venture enabled Tesco to retain local staff that it inherited from home. Tesco was also able to inherit the South Korean management staff who enabled the retailer manage the cultural challenges of dealing with foreign employees and customers. By the time Homeplus became a wholly owned subsidiary of Tesco, the British firm had become familiar with the South Korean way of life (Coe and Wrigley 2009). Tesco could easily handle the cultural challenges that had led to the failed expansion attempts by several international retailers in Asian markets. Tesco had also performed dismally in a previous direct entry attempt into Thailand. 4.0 Evolution of the Tesco in Korea When Tesco acquire a 51 per cent stake in Homeplus, the deal brought in a handful of stores already operating in the Korean Market. Today Tesco commands over a third of the South Korean market and is now considered the largest retailer in Thailand. In contrast, other retailers like French giant Carrefour have withdrawn from the South Korean market. Tesco benefits from the exit of large competitors as it buys stores from them. According to Business News (2014), over 13 million customers are signed on the retailer’s customer loyalty program. Interestingly, just a handful of the Tesco’s employees in the Korean operation are British expatriates. Recently, Homeplus became a Tesco fully owned subsidiary after Samsung decided to exit the joint venture. Tesco’s success shows that joint ventures are a good mode of entry in markets where cultural differences are a serious challenge. 5.0 Evolution and Internalization of Tesco Tesco began in 1919 as a small British retailer but soon expanded to become the biggest retailer in the British market (Child 2002). Tesco did not operate outside the British Isles until 1992 when it entered the French market. However, Tesco attempt at establishing itself in France was unsuccessful as French and British cultures were distinctly different (Coe and Wrigley 2009). Tesco realized that the offering British products to foreign customers would not be successful. Tesco had therefore realized that offerings to international customers had to have a local flavor to be acceptable. In the last two decades, Tesco has internationalized aggressively and now operates in 12 countries. It employs over 530,000 people in its operation and serves millions of customers daily (Business News 2014). 6.0 Reasons for Tesco Internalization The expansion of Tesco into Asia and other international markets was caused by a number of factors. These factors are discussed below. 6.1 Saturation of the UK market The UK retail market was becoming quickly saturated and opportunities for growth were limited within that market. According to Ruddick (2013), Tesco has a store in virtually every postal code in the UK. Tesco only chance for growth was in emerging markets and in markets were saturation was low. South Korea was an obvious choice for Tesco as it was already recording strong economic growth. 6.2 Intense Competitive Rivalry Although Tesco is the market leader in the UK, many high profile rivals mean that the retailer cannot dominate the market (Child 2002). Sainsbury and ASDA remain significant threats to Tesco’s market leadership in the UK. For a long time Sainsbury and Tesco were engaged in price wars which would see Tesco revenues decrease on occasions (Child 2002). Tesco thus sought markets where competitive rivalry was not as intense as the UK. 6.3 Tesco’s ambition Tesco aspires to become the world’s leading retailer (Ruddick 2013). Therefore, when other international retailer like Carrefour and Wal-Mart started expanding internationally, Tesco had to follow. Tesco has diversified its operation across many fields underlining its ambition to build a global business empire. Furthermore, Tesco was afraid that if its rivals Sainsbury and ASDA expanded internationally they would obtain revenue to fund expansion in the UK market (Child 2002). Profits from international revenue would also assist rivals to undercut prices in the UK. In effect, this would threaten Tesco’s position in the UK market. 7.0 Conclusion Tesco’s was able to enter the South Korean market successfully by using the Joint Venture mode of entry. By entering the South Korean market using this mode, Tesco was able to overcome some of the challenges retailers face in entering foreign markets. One of these challenges is protective government policies. Most of all Tesco was able to overcome the challenge of cultural differences. Tesco was able to gain an indepth understanding of the preferences of the Korean partner from its joint venture partners Samsung. Tesco can now be said to be a retailer that understands the South Korean customer very well. The Joint venture also enabled Tesco build a strong foundation in the South Korean market. Tesco has consequently used this foundation to successfully expand in the market and become the leading retailer by market share. So far, South Korea is Samsung’s most successful international market for the British retailer. South Korea and other international markets have provided Tesco with an opportunity for growth that was absent in the saturated UK market. They have also enabled Tesco escape the intense competitive rivalry in the UK that kept the chain’s profit down. Furthermore, Tesco is able to channel its ambitions for growth into the internalization strategy. References Ruddick, G 2013, Is Tesco's dream of building an international empire unravelling? The telegraph, October 2, accessed 19th November 2014, http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/10349392/Is-Tescos-dream-of-building-an-international-empire-unravelling.html Coe, NM & Wrigley, N 2009, The globalization of retailing. Edward Elgar. Coe, NM, & Lee, YS 2013, ‘We’ve learnt how to be local’: the deepening territorial embeddedness of Samsung–Tesco in South Korea, Journal of Economic Geography, 13(2), 327-356. Lu, JW, & Hebert, L 2005, Equity control and the survival of international joint ventures: a contingency approach, Journal of Business research, 58(6), 736-745. Palmer, M 2004, International retail restructuring and divestment: the experience of Tesco, Journal of Marketing Management, 20(9-10), 1075-1105. Business News 2014, Tesco's South Korea brand Homeplus under investigation, Business News, accessed 19th November 2014, http://www.bbc.com/news/business-29328712. Child, PN 2002, Taking TESCO global, McKinsey Quarterly, 3(7106143), 135-144. Read More

 

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