Taxing Corporate Income - Essay Example

? Strategic Management Assignment Table of Contents Table of Contents 2 Context of the Study 4 Global Retail Industry 4 Format 4 Merchandising 5 Online Shopping 5 Porter Five Force Analysis 6 Supplier Power 7 Buyer Power 7 Availability of Substitute 7 CAGE Framework 8 George Yip Model 11 Government Globalization Driver 11 Cost Globalization Driver 12 Market Globalization Driver 13 Competitive Globalization Driver 15 Country Development 16 Industry Trend 16 PESTLE 17 Political 17 Economical 17 Social 17 Technological 17 Environment 18 Legal 18 Porter’s Diamond Model 18 19 Reference 20 Context of the Study Retail industry has been selected in order to analyze competitive rivalry within the industry and effect of globalization in strategic management. This study will use three strategic models such as CAGE framework, PESTEL, Porter’s Five Force, George Yip model and Porter’s Diamond model to understand key strategic dynamics of global retail industry. Global Retail Industry Global economy is decelerating due to various reasons such as Euro zone crisis and economic recession started in the year 2008 (Deloitte, 2012). Retailers such as Marks & Spencer, John Lewis, Target, Wal-Mart, Kohl and others are struggling to maintain sales growth while other retail players such as Nordstrom, Saks and Neiman Marcus have recorded same store sales growth of 12% last year. Global retailers are facing following trends to change the dynamics of business operation. Format Retailers are using online channel to increase market penetration and offer product in accordance with demand of customers. Wal-Mart has recently closed their Marketside (grocery store) due to poor return on investment. Wal-Mart has planned to open scalable retail version in order to fulfil demand of space constrained and low population market. The initiative is known as Wal-Mart Express. IKEA has launched their country specific retail format way back in the year 2000. IKEA provides full home solution in order to fulfil multidimensionality of demand. Walgreen has added food section and medicine segment in their retail format with an intention to diversify product offering. UK based departmental store chain John Lewis has implemented online sales channel in order to offer products to time constrained customer. Merchandising Customers are becoming more demanding due to hypercompetitive nature of the market. Retailers have shifted their focus from selling merchandises to offering product associated with customer trait such as right quality, right price and superior service. Retailers are changing their offering in accordance to local culture and taste. In the changed market dynamics retailers need three things. These three things are explained in the following section. Proper market research on taste and preference of local customers Developing analytics engine such as demand forecasting, store clustering, campaign tracking, price mapping and basic assortment planning Technology integration such as Enterprise Resource Planning (ERP), RFID (Radio Frequency Identity) is needed in order to create a effective value chain Online Shopping Study conducted by KPMG shows that digital presence (social media, mobile, web traffic) of retail network has increased manifold in recent years. 40 % of retailers are banking on social networking sites for increasing online presence while remaining 60% still believe that web trafficking is the best way to improve online presence. Global report suggests that online retailing is showing a growth potential of 15% while offline trade channels are growing at a rate of 7% for last two years (Grannis, 2012). Porter Five Force Analysis Threat of New Entrants Global retail industry is passing through a crucial period due to following reasons: Market is becoming saturated in developed countries due to presence of many competitors. Market of developing countries is becoming attractive due to various schemes offered by respective governments. For example, Chinese government has opened up the economy for foreign retailers by decreasing corporate tax rate Latin American market is going through turbulent phase due to intra country rivalry which ultimately increases chance factor for retailers European countries (read seventeen countries such as Spain, Greece, Italy and others) are suffering from sovereign debt crisis (Lynn, 2010, pp. 93-110). Mentioned financial crisis has decreased purchase power parity of customers and as a result bottom line of many retailers has dampened. Independent retailers are failing to match steps with departmental stores in terms of competitive advantage, technology usage and resource deployment hence their number is decreasing day by day. Vertical integration of value chain and centralized buying pattern of large scale retailers give them competitive advantage over small scale independent store owners. Big players such as Wal-Mart and Marks & Spencer emphasize on step wise cost cutting in the value chain with an intention of achieving overall cost advantage in contrast to competitors. It is tough for new entrants to compete with big retailers due to above mentioned reasons hence it can be inferred that entry barrier is high for the industry. Supplier Power Study shows that retailers always try to exploit relationship with suppliers. Big players such as Wal-Mart, Target, Walgreen, Marks & Spencer place high quality standard for their suppliers in order to decrease supplier power. Availability of suppliers has decreased switching cost for retailers. Presence of middle men in the value chain has increased the threat for suppliers and also decreased profit margin for retailers. It can be inferred that supplier power is low in the industry. Buyer Power Buyer power is moderate in retail industry due to following reasons. Demand of particular customer segment decides product storage strategy for particular retailer. Retailers in developing market are losing the battle to individual retailers because they offer without interest credit to customers and home delivery facilities. Same cannot be said for developed economies because concept of ‘Kirana Store’ is not present there. On the whole it can be said that buyer power is moderate. Availability of Substitute Retailers do not specialize in one particular product or services rather they maintain repertoire of various merchandises. Online sales channel has emerged as substitute for brick and mortar retail channel. Online retail channel is showing a growth potential of more than 10% hence in near future it can become a strong substitute of offline retail channel. Brick and Mortar retailers have started adopting online sales channel in order to decrease advantage for e-business companies. Hence it can be inferred that threat of substitute is moderate. Competition Retail industry is hypercompetitive due to presence of various players such as Target, Wal-Mart, Marks & Spencer, Walgreen, Zara, IKEA and many others. Foreign retailers face threat from local players in domestic market. Retailers use dynamic pricing model in order to gain competitive advantage. Evolution of e-business companies such as eBay, Amazon has increased the competition index for existing retailers. Global retail industry is facing challenge in order to maintain ever changing customer loyalty. It can be inferred that market competition in global retail industry is high. CAGE Framework Pankaj Ghemawat has argued that companies need to adopt internationalization strategy in accordance to need of the market (Ghemawat, 2004). The research scholar has pointed out that distance can be bifurcated in to four dimensions such as cultural, administrative, geographic, and economic. Categories mentioned by Ghemawat are the starting point of measuring national idiosyncrasies (Grant, 2010, p. 388). The CAGE framework for retail industry can be explained in the following manner. Cultural Distance Political Distance Geographic Distance Economic Distance Distance between two countries European retailers (IKEA, Marks & Spencer) appoint local staff in order to avoid language barrier in countries like China, India and other South Asian countries) USA based retailers such as Wal-Mart has changed their operational plan in accordance to norm of Communist party of China. Political hostility in India (read controversy on FDI) has delayed the entry of American and European retailers in the country. Global retailers face geographic distance in terms of lack of communication link, lack of transport and others in countries like Brazil, Peru and African nations. Per capita income of USA is more than $45,000 while PPP of Nepal is only $1200. Such unequal distribution of wealth has created barriers for global retailers. They are unable to decide unified pricing strategy for all countries hence they cannot increase penetration in countries with low purchasing power parity (Madura, 2008, pp. 230-234). Distance for Industry Wal-Mart failed in Germany due to their inability to match steps with cultural diversification and cross border interaction in the country (Ghemawat, 2007, pp. 40-43). Although cost cutting strategy was successful for Wal-Mart in North America but the strategy was unable to bring any productive result for Wal-Mart in Germany. Finnish People’s Democratic league and Finnish Communist party have created entry barriers for North American retailers (Tornudd, 1986, p. 118). Stringent Environmental law of Australia has created entry barriers for many global retailers. Geographical distances create entry barriers for retailers selling fragile and perishable items. Food retailers face challenge of maintaining freshness of the product in China due to huge geographical distance. Demand for Retail products in Hong Kong is much higher in comparison to United Kingdom. Hong Kong is one of the dense populated country in the world hence demand for particular retail merchandise often exceeds supply. Retailers need to think about economies of scale in order to maintain equilibrium between demand and supply in dense populated countries (Van Weele, 2009, p. 373). George Yip Model In 1992, George Yip has proposed a four dimensional model in order to measure global competitiveness of particular industry. The model is complemented by following drivers. Cost Globalization Driver Government Globalization Driver Market Globalization Driver Competitive Globalization Driver Government Globalization Driver Government norms of particular countries motivate global retailers to make entry in particular country. Many of the South Asian countries allow only 51% of foreign direct investment in retailing while many of the European countries have allowed 100% FDI in retailing. Corporate tax rate plays crucial role in deciding market attractiveness quotient for foreign players. Research report suggests that government planning reform in United Kingdom has changed the market structure of retail industry. The concept of independent retailers has become insignificant over the course of time. Retailers need to pay at least (30-32) % corporate tax to government of the country. This huge tax rate is burden for independent retailers due to their limited financial resources. Institutional characteristics United Kingdom planning system allows foreign retailers to expand their operation. Large domestic retail players such as John Lewis, Marks & Spencer, Sainsbury and others used corporate tax policy of government to create entry barrier for new players. Cost Globalization Driver Wal-Mart uses low cost strategy for increasing market penetration in both developed and developing countries. Operating expense for Wal-Mart is 32% cheaper as compared to other retail players. Goldman Sachs has pointed out that the company has achieved advantage of cost of goods sold or COGS in comparison to other retail players such as Target, K-Mart, Tesco and others. Wal-Mart follows Cost Orientation strategy (mitigating cost in each step of value chain) with an intention to achieve cost advantage. They sell large volume of products by maintaining lowest possible profit margin in order to earn revenue. Maintaining lower sales margin helps the company to sell merchandises at EDLP or every day low price. Wal-Mart sells merchandises at EDLP or every day low price while their retained earnings are at almost 10% lower than other retail players. They have adopted geographical pricing model in accordance to demand of consumers belong to various regions. The uses the conceptual CAGE framework proposed by Pankaj Ghemawat in order to decide suitable pricing strategy for particular market. CAGE framework helped Wal-Mart not only to compete against domestic retailers but earn competitive advantage also. Global retailers outsource their value chain operation to developing countries such as China and India in order to achieve cost advantage. Report prepared by A. C Nielsen shows that value chain maintenance cost is 40% lower in India and China in comparison to North American and European countries. Market Globalization Driver Study conducted by Goldman Sachs shows that retail sales in Brazil, Russia, India and China or simply BRIC are growing for last five years. The growth of retail industry in BRIC is complemented by both organic and inorganic sustainability. The BRIC is contributing more than 50 % retail consumption of the world for last two years. Penetration of retail merchandises is higher for BRIC in comparison to USA or Europe. Market penetration of retail merchandises in BRIC can be understood with help of following diagram. (Source: Goldman Sachs, 2009) Study conducted by Goldman Sachs also shows that the retail market will grow at a rate of more than 17.5% for next three years hence this is a high time for global retailers to create a sustainable entry strategy to BRIC countries. Online retail is growing at a phenomenal pace in South Asian market due to entry of many local e-business companies. Multidimensionality of customer demand has increased the scope for foreign retailers to enter South and South East Asian market. The report also shows that market demand for food and perishable goods is growing at a steady pace of 7% for last three years in BRIC countries. Rise of income per capita in BRIC countries is increasing and it can be understood from the following diagram. (Source: Goldman Sachs, 2009) The above mentioned situation is showing market growth driver for BRIC countries and global retailers can explore above mentioned opportunities in order to achieve sustainable future growth. Competitive Globalization Driver Porter’s Five Force analysis shows that retail industry is hypercompetitive due to presence of multiple players. Retail sector employs more than 15% of total global workforce and the sector contributes almost 8-17% of global GDP. ICT enabled distribution network has enabled retailers to design a more ‘buyer driven’ value chain network. Retailers compete with each other in terms of optimal inventory management, cost efficient value chain and economies of scale. Wal-Mart and other big players can outdo their competitors in the field of technological innovation. Big players are using Radio Frequency Identity or RFID, vendor management software in order to decrease COGS and achieve competitive advantage over competitors. Following diagram will explain how retailers have decreased inventory holding cost over the course of time. (Source: Wrigley and Lowe, 2010) In Europe, the market is becoming saturated day by day due to presence of many players. Retail players are competing in the field of grocery market in order gain competitive edge in Euro zone. The concentration of grocery retail in Europe is shown in the following diagram. (Source: Wrigley and Lowe, 2010) Country Development The study has selected UK retail industry in order to continue further analysis. Industry Trend Various fashion groups such as ASDA, NEXT and others have entered in retail industry of the country with an intention of making it more competitive. Famous retail players maintain high profit margin while local players such as John Lewis try to maintain low profit margin due to variability in value chain cost. Departmental store chain such as ASDA, Marks & Spencer and Tesco try to maintain high profit margin due to low unit sales volume. Study conducted by AC Nielsen shows that industry variance is almost 15% for retail sector in the country. Brick and mortar retail stores are facing competition from e business companies such as Amazon, eBay, Boutiques.com and others. Many customers of the country prefer to shop from company owned independent retail shop therefore they do not like to visit departmental store chains (Wang, Bell, and Padmanabhan, 2009). Retailers in the country offer various sales promotion techniques like additional gift on every repeat purchase, price discount and loyalty cards with the intention of retaining customers. Mark & Spencer has established expanded distribution network in order to create trade barriers for new entrants. PESTLE Political Government of United Kingdom provides support to foreign players for investing and diversifying their business in the country. In this situation, foreign departmental stores are entering in the country with the help of FDI or Foreign Direct Investment hence local retail players will face market competition from foreign players in upcoming years (Chakrabarti, Subramanian, Meka, and Sudershan, 2012). Economical British Government has already decreased corporate tax rate from previous 30% to 28% (Auerbach, Devereux, and Simpson, 2008). Global retail players will surely get benefitted by such corporate tax policy. Social British people are habituated with global trends in terms of dressing, buying behaviour and lifestyle. They prefer to live healthy life style hence they prefer to purchase exercise kits, low calorie food items. Global retail companies have the opportunity to attract young people by doing category extension in fitness products. Technological Online retail sales in United Kingdom has increased manifold in recent years hence departmental stores are reshaping their business model in order to fulfil demand of customers. Retail players need to expand online distribution network in order to maintain future growth. Environment The UK is complemented by distinctive islands. Environmental aspects of retailing depend on seasonal variability. Retailers need to change sale promotion strategy in accordance to customer requirement for particular season. In winter customers prefer to purchase leather and Christmas products while in spring season they prefer to purchase light and colourful cloths. Legal Consumer protection act in United Kingdom is very much cooperative to customers. Office of Fair Trading investigates trade malpractice acted by grocery, food and garment retailer’s hence global players planning to enter in United Kingdom retail industry need to focus on providing quality services to customers. Government of United Kingdom has planned to conduct investigation on profit earnings ratio of big retail players. Upmarket retailers need to decide strategy after careful observation of UK government policy. Porter’s Diamond Model Global retail players need to use porter’s diamond model in order to explore opportunity in United Kingdom (Walker, 2003, p. 177). Reference Auerbach, A. J., Devereux, M. P. and Simpson, H., 2008. Taxing Corporate Income. [pdf] Available at: [Accessed 19 November 2012]. Chakrabarti, R., Subramanian, K., Meka, S. and Sudershan, K., 2012. Infrastructure and FDI: Evidence from district-level data in India. [pdf] Available at: [Accessed 19 November 2012]. Deloitte., 2012. Switching Channels Global Powers of Retailing 2012. [online] Available at: [Accessed 19 November 2012]. Ghemawat, P., 2004. Distance Still Matters. [pdf] Available at: [Accessed 19 November 2012]. Ghemawat, P., 2007. Redefining Global Strategy: Crossing Borders in a World Where Differences Still Matter. Harvard: Harvard Business Press. Goldman Sachs., 2009. The BRICs as Drivers of Global Consumption. [pdf] Available at: [Accessed 19 November 2012]. Grannis., 2012. KPMG Global Retail Director discusses industry trends for 2012. [online] Available at: [Accessed 19 November 2012]. Grant, R. M., 2010. Contemporary Strategy Analysis. Hoboken, New Jersey: John Wiley & Sons. Lynn, M., 2010. Bust: Greece, the Euro and the Sovereign Debt Crisis. Hoboken, New Jersey: John Wiley & Sons. Madura, J., 2008. International Financial Management. Stamford, Connecticut: Cengage Learning EMEA. Tornudd, K., 1986. Finland and the International Norms of Human Rights. Boston: Martinus Nijhoff Publishers. Van Weele, A. J., 2009. Purchasing and Supply Chain Management: Analysis, Strategy, Planning and Practice. Stamford, Connecticut: Cengage Learning EMEA. Walker, G., 2003. Modern competitive strategy. New York City: McGraw-Hill International. Wang, Y., Bell, D.R. and Padmanabhan, V., 2009. Manufacturer-Owned Retail Stores. [online] Available at: [Accessed 19 November 2012]. Wrigley, N. and Lowe, M., 2010. The Globalization of Trade in Retail Services. [pdf] Available at: [Accessed 19 November 2012]. Read More