Carrefour Group - Finding Retail Space in All the Right Places - Research Paper Example

I. Introduction The global economy has been undergoing a significant elemental shift over the course of the past decade. We are transitioning from a world in which most major economies were independent units, inaccessible to each other due to international trade barriers and restrictions on multinational investment opportunities, in addition to the differences in geographical and political climates, as well as variations in language and even time zones. And we are shifting toward a global environment where international trade and investment blockades have been lifted; distances between world economies have shrunk due to improved and increased telecommunications and transportation methodologies; and natural resources are shared between countries and their respective industries. While this globalization is certainly advantageous to most world economies, it can also create issues for international organizations that are looking to maximize long-term profitability without wholly sacrificing their natural, financial, and human resources that comprise the viability of any business. Carrefour is faced with said problems, as it is a global outfit seeking to cost-effectively expand its operations to include regions of the world that were more recently considered to be underdeveloped and socioeconomically unstable, making the recapitalization of its business a much more high-risk investment, as pioneering costs are always a critical part of the equation if a business enters its respective market first. This is counterproductive to one of its goal of achieving expansion at reduced costs. Moreover, the company cannot shop new locations in the United States or Britain, as those markets are mature and completely saturated with hypermarkets and supermarkets. Realistically, this particular move to developing regions could put the company at risk of overleveraging its assets and resources, as it has wholly owned subsidiaries--traditionally gained through acquisitions--that typically operate in a foreign country. Given that the company owns these subsidiaries outright, it is assuming all risks and costs involved in establishing an operation in these regions where the socioeconomic climate is fragile but progressive. In addition to location selections, the organization is plagued with issues surrounding its relations with the public, as meeting the various region-specific demands of consumers is a difficulty with which it grapples. This type of a disconnect is absolutely detrimental to the financial welfare of the company; however, if aligned with a suitable partner and certain legal and technological firewalls are set in place for security reasons, an organization would be able to revive its relationship with its consumer base and maintain more continuity, in terms of both profit and workflow. II. Discussion Like any entity, the objective of expansion is designed to be pursuant to increased profit margins, yet achieved with low cost. However, it is confronted with conflicting issues. While it must hold steadfast to its existing markets in which it thrives with growth continuity, the company must also look to establish operations in other countries where economies are on the fast track to development and the markets are still in their infancy stages, thereby creating an early point of entry and beating out any potential competitors. This triggers a quandary, typically, for management because while it is more cost-efficient to maintain status quo and focus strictly on sustaining its existing consumer base, the entity must also build its book of business by expanding its operations and gaining exposure in new or newer markets, which means higher costs to the company. Carrefour has some additional concerns that may affect its vision for the future. While it’s experiencing significant growth in Belgium, Spain, and Italy, the outfit still does not meet the local needs of the economy in which it is headquartered—France. A company typically cannot sustain itself in foreign markets if it cannot leverage its valued skills and succeed at home base. It must have a sense of local responsiveness, which is an acknowledgement of consumers’ needs and penchants for a particular region in which a company operates, and an integration of those demands through an emphasized distribution of those specific products that have been targeted by its consumer base. Hill wrote (2005) that “pressures for local responsiveness arise from a number of sources, including differences in consumer tastes and preferences; differences in infrastructure and traditional practices; and differences in distribution channels and host-government demands” (p. 424). Since local responsiveness is such a critical cog in the profit-inducing machine, it can be argued that companies must equate this market awareness with its ability to raise capital, which has traditionally been the fundamental consideration when an organization looks to expand operations and gain market exposure. III. Analysis Certainly, Carrefour is in a compromising position. On one hand, it needs to maintain its growth in countries where profits are surging due to an ability to meet the demands of its consumers. But it also needs to expand and try to enter some premature markets where competition is sparse, if not non-existent. However, numerous young economies also have host-government regulations with which to contend. This could cause significant issues for management as they attempt to continue development in these regions, as a government has the authority prohibit foreign companies to establish any type of wholly-owned subsidiaries in its country. One such company in the early 1960s was faced with like circumstances, yet developed a solution that would benefit both the company and the host country in which it wished to expand and begin production. Two companies that formed a joint venture prior to globalization were Fuji and Xerox. According to Hill (2005), these entities joined forces “because Japan, at the time, had strict regulations regarding foreign companies to set up wholly-owned subsidiaries in that particular region” (p. 649). To negotiate this obstacle, the two companies formed a joint venture to market xerographic products, manufactured by Fuji but licensed by Xerox. While it was meant to be a temporary fix to a political issue in the corporate arena, the two sides quickly realized that this formation could break down international barriers, making it easier to sell their products worldwide, without the hassle of government regulations. However, even as they were knee-deep in distribution and profits in Asia, they were having difficulties penetrating the US market, as most of their products were of little value to Americans. Still yet, the joint venture allowed them to assess the cultural climate in the US, as far as what consumers were looking for and what could benefit them. What they found besides what to manufacture, was that this business formation allowed for local responsiveness. At the time, this was a revolutionary concept; however, the companies were ahead of the curve and could see that this application would allow them to customize their products to meet the needs of specific regions, which would then allow them to overtake their competition, fill their pipelines with future clients, and increase profit margins for both entities. IV. Recommendations So how Carrefour simultaneously retain its existing client base, create a presence in developing world economies without government interference, increase its profit margins, and alleviate the pressures of cost reduction while performing such fetes? Through the market entry mode of a joint venture, more specifically, strategic alliance, Carrefour can enjoy some shared resources and expenses, while gaining economies of distribution through local responsiveness. Strategic alliances are legal mutual agreements between potential or realized competitors for the purposes of recapitalization through expansion and increased market exposure. This form of entry into a given market is certainly advantageous for companies that are seeking to globalize operations, as strategic alliances will allow entities domiciled in a certain country to collaborate with a company that is headquartered in a region that they’re targeting, pool their technical, financial, and human resources, and engage in local responsiveness in a much more meaningful way. However, partner selection in this scenario is everything. If a company were to select a partner that doesn’t appear to share the organization’s vision, then the whole point of entering into a joint venture is lost on ignorance and hastiness. When selecting a partner, companies must obtain as much information as necessary on the potential partner by gathering data about the partner from knowledgeable third parties and getting to know the other company’s policy, culture, objectives, and vision as much as possible. This approach would be very beneficial for Carrefour as it seeks out new terrain to establish business and eventually turn a profit. Historically, the company has expanded into foreign territory through acquisitions, which has not proven to be a financially healthy tactic for this enterprise. Mead wrote (2004) that acquisitions typically fail for several reasons, in that “while businesses can swiftly execute an agreement without a lot of risk, acquisitions drive up the price of an outfit, which means most companies overpay for the entities that they are overtaking” (p. 337). For Carrefour, in particular, this is critical. These transactions are costing the organization more money than is necessary, which leaves less capital for it moving forward. Moreover, culture clashes usually erupt amongst the acquiring and acquired companies, as every company has its own way of conducting business. This loss of synergy is also quite costly because it starts eroding the necessary human resources keep the operations afloat. Therefore, a strategic alliance would be suitable for Carrefour. It can expand at reduced costs; it can share costs and technology with the aligned company; it can facilitate the point and time of entry into its market, which cannot always get accomplished with other forms of partnerships. What is paramount about this methodology, though, is the fact that it would allow Carrefour to engage in local responsiveness, which will enable it to meet local demands in a given region and grow its consumer base. The company that it chooses with which to collaborate will be able to bring value to the relationship by sharing knowledge of customers’ tastes and needs with it, thereby triggering the company to think about how it wants to do business and customize its product line to meet the wants and needs of its consumers. Carrefour clearly has a vision to move forward with their campaign to become the global leader in retail; however, its past actions have had a negative impact on its ability to globally expand in a financially sound manner. Acquisitions have choked streams of revenue, as it has more than likely overpaid for firms that it has intended to bring into the corporate family. Moreover, it doesn’t have the knowledge base of regions in which it wants to expand, beyond that the locations shopped were in developing countries that were experiencing growing economies. Clearly, more substantial information is necessitated to make an informed decision about where, when, and how to enter a market. To that, it can be said that a strategic alliance would greatly behoove Carrefour. The company wouldn’t needlessly put more money into a firm that it is trying to obtain and it can share knowledge, human and natural resources, and capital with the partnering company. References Hill, Charles, W.L. (2005). International business: Competing in the global marketplace. Boston, MA: McGraw-Hill Irwin. Mead, Richard. (2004). International management: Cross-cultural dimensions. Malden, MA: Blackwell Publishing. Read More