International Strategy of B&Q - Case Study Example

International Strategy of B&Q: The European Expansion The annals of business history report that for every successful market entry, about four entries fail. Inexperienced start-ups suffer some of these disappointments, but so do many sophisticated corporations (Horn et. al., 2005). Therefore, the choice of entry mode constitutes one of the most critical decisions for international strategy success. It affects all the future decisions and operations of the firm in the new country market. Consequently, the present paper focuses on analyzing the process of internationalization and the choice of entry decisions made by B&Q. 1. The Company Nowadays, B&Q is the UK's leading DIY and garden centre retailer, offering over 45,000 inspirational home improvement and garden products for the homemaker, occasional to serious DIY'er, and trade professionals B&Q is the number one DIY retailer in Europe and the third largest in the world, with more than 60 stores opened internationally, including B&Q Beijing, which is now the largest B&Q store in the world. B&Q is the biggest home improvement retailer in the UK, with 14.8% of the repair, maintenance and improvement market share (includes DIY and builders merchant sales). B&Q aims for a sustainable approach to both development sites and store design. In seeking to secure new sites for development, B&Q works within national and local planning policy guidelines. 2. Internationalization Process of B&Q Based on literature a firm has to make two initial decisions for facing internationalization process, i.e. equity and non-equity entry modes (See figure 1). Entry mode is an institutional arrangement that makes possible the entry of firm's products, technology, human skills, management or other resources into a foreign country (Root 1994). On this level, the key issues when making a decision on entry modes are those that refer to the macro-level factors of the target country, such as country-risk, cultural differences or potential for growth (Pan and Tse, 2000). The influence of these factors on the choice of entry mode will show up in the commitment of resources that the firm is willing to undertake in the international market and the strategic flexibility they wish to maintain in order to face up to unforeseen changes in the environment (Pan and Tse, 2000). On the second level of analysis, managers would do well to evaluate the different modes of entry, taking into consideration the degree of control they wish to exercise over international activities. The factors that should be analyzed at this level are related to micro-level characteristics such as those that determine the risk of dissemination or improper appropriation of assets and the firm's strategy. Both factors will determine the degree of control the firm should exercise on international operations in order to maintain its competitive advantage and favour coordination between units that are geographically widespread (Harzing, 2002; Pan and Tse, 2000). Figure 1: Two-level model of analysis for the choice of entry modes Source: Pan and Tse (2000) In the specific case of B&Q, its process of internationalization is clearly dominated by the equity entry modes (degree of control) such as Greenfield, mergers and acquisitions. We have to understand acquisition as the purchase of a stock in an already existing company in an amount sufficient to confirm control. A firm can acquire a foreign company for many of several reasons: product diversification, the acquisition of specific assets, the sourcing of raw materials, or other products for sale outside the host country or financial diversification (Root 1994). A Greenfield investment is a start up investment in new facilities. Such an investment can be wholly owned or a joined venture. The first ownership is a 100% in this alternative. It is usually complex, needs negotiations and takes a lot of time (Hitt et al. 2003). Merger is the process when two or more company joint to become one entity through a purchase acquisition or a pulling of interests (See Table 1). B&Q started its process of international expansion in Europe in 1982 through an acquisition of a Scottish DIY chain Dodge City (See figure 2). After that in 1998 the second step in its internationalization process was the acquisition of the NOMI, Poland's leading DIY retailer. The same year B&Q merged with Castorama, the French number one in DIY. As a result of this merger B&Q penetrated not only the French, but also the Italian market. In 2002 B&Q opened its first store in Ireland. Table 1: Characteristics of Acquisition and Greenfield modes of entry Advantages Disadvantages Risks Resources Commitment Rapidity Control Acquisition A good method for a firm to gain market specific experience quickly Costs, multiple risks, exceedingly complex international negotiations, and problems of merging the new firm into the acquiring firm A high risk alternative Acquisitions provide a resource that is scarce in the target country and is not available in the open market An acquisition means often a high financial commitment Offers a rapid access to the new markets Experience a lower level of control from headquarters and they usually have closer relationship with target country Greenfield Makes possible to generate high return and allows a high level of control Often complex establishing process and potential high costs Very high financial and political risks Needs greatest contribution of know-how of the international market entry alternatives Large financial and managerial commitment Establishing new wholly owned subsidiary takes a lot of time Maintains control over the technology, marketing, and distribution of its products Source: Krkkinen (2006) It is relevant to note that as a part of the parent company Kingfisher B&Q has also market positions in Spain and Germany, through Brico Depot and Hornbach respectively. Figure 2: European Expansion of B&Q 3. Determinants of entry mode As supported by B&Q information and the extant research, the determinants of entry mode are associated to environmental variables (Kogut and Singh, 1988; Brouthers, 2002), transaction-specific variables (Anderson and Gatignon, 1986, Buckley and Casson, 1998), strategic variables (Hill et. al, 1990; Harzing, 2002) and some industry-specific characteristics (Erramilli and Rao, 1993) influence the entry mode decision. The explanations offered by these different approaches are not exclusive. Indeed, in the majority of cases they complement each other and allow the analysis of the choice of entry mode to be enriched. At the same time, the complexity of the decision as to what method of entry to employ, caused by the numerous pressures and competitive conditions faced by B&Q in their internationalization, calls for the adoption of eclectic frameworks which, in one way, allow for this diversification to take place and in another, simplify the decision. Environmental context A number of exogenous environmental variables impact upon B&Q choice of entry mode. This environmental context helped it to define profit potential and/or the risks associated with a specific market entry. It includes investment risks associated with different host country economic, legal, political and cultural systems, as well as market attractiveness (Agarwal and Ramaswami, 1992; Brouthers, 2002) Market potential Countries characterized by a high market potential can absorb additional productive capacity and, therefore, provide opportunities for companies to achieve economies of scale and efficiency in their activities. However, in static markets, firms are reluctant to undertake large resource commitments as potential sales are not high enough to absorb a large investment (Agarwal and Ramaswami, 1992). Cultural distance Perception of a great cultural distance between the country of origin and the target country, in terms of culture, economic systems and business practices, favours the use of modes that involve less commitment of resources (Johanson and Vahlne, 1977). Setting up in an environment with a culture that is very different and unfamiliar to the investing firm, increases the difficulty of arriving at a judgement on how staff should behave and on how to quantify the necessary inputs, as well what results to expect. Under these circumstances, the cost of acquiring information on the new environment and therefore, integration costs, increase considerably (Root, 1987). Country risk A highly volatile environment, in terms of frequent changes of government, repatriation of profits, control of activities abroad, resulted in B&Q wanting to minimize exposure to risk via the use of entry methods that offer the necessary flexibility to make modifications in the face of changes in environmental conditions (Madhok, 1997). Moreover, by reducing resource commitment in volatile, risky environments, B&Q minimized the possibility of losing financial resources in cases where they are adversely affected, or are forced to cease their activity by unforeseen events (Hill et al., 1990). Transaction-specific variables The importance of transaction cost for B&Q's choice of entry mode has been relevant in its process of internationalization. Under the assumption of opportunistic behaviour and bounded rationality by economic agents, market imperfections increase the associated costs of transacting with a partner, which results in a preference for internalizing the transaction within the firms' own boundaries. Transaction Cost Theory stresses the efficiency of using high control modes when in the presence of intangible/ tacit assets (Erramilli and Rao, 1993). Marketing assets The brand name, reputation, marketing skills or the firm's sales force are intangible variables extremely important for international firms. These assets are especially vulnerable to problems related to divulging or misuse of information by third parties. The development of an important brand or sales force is based on investment on the part of the firm over a long period of time and is often associated with the firm's culture, systems and routines. The less control, the more exposed the firm will be to possible hostile or opportunistic actions undertaken by its partner. Therefore, given that the process of creation and maintenance of product differentiation requires time and the transfer of commercial capabilities to third parties would become the subject of possible misuse that could damage a firm's reputation and prestige, firms prefer to have a high degree of control over the international operations, that is the lately strategy of B&Q for developing its brand abroad. Tacit know-how The nature of the know-how being transferred has been a major determinant of foreign entry decisions for B&Q. This know-how is often tacit in nature. It may be embodied in more than technological blueprints. It may also be embedded in the human capital of the firm and in informal operating procedures or routines (Nelson and Winter, 1982). When know-how needed to sell or manufacture new products is tacit, it is more likely to be transferred within the firm than in the market because firms are more efficient mechanism for the transfer of this know-how. This is due to the complexity in transferring such assets without including the firm's members or the organisation itself. The difficulties and costs involved in transferring tacit know-how provide incentives for firms to use high control modes of entry to foreign markets. High control facilitates the intra-organisational transfer of tacit know-how by utilising its human capital, drawing upon its organisational memory, and using existing organisational routines to structure the transfer problem (Hill et al. 1990). When know-how is tacit in nature, the transaction cost of transferring this know-how by full control modes are lower relative to those costs incurred through the use of shared control modes. Type of international strategy B&Q is intending to follow a global strategy. It is recommendable when the tastes and preferences of customers are homogeneous among nations and, therefore, there are interconnections between markets and even more when it is possible to attain substantial economies of scale on a global level. The global strategy can be visualized in the web page it has. 4. Conclusion The purpose of the work was to delineate the internationalization strategy and process taken by B&Q. The firm has mainly faced its international strategy through equity modes. It has focused in Acquisitions in Scotland and Poland, Merger in France and Greenfield in Ireland. Furthermore, B&Q had some factors to control in his worldwide extension such as cultural distance and country risk for environmental aspects; as well as marketing assets and tacit knowledge for transaction specific variables. It is worth to note that other relevant factor for supporting B&Q international process is its philosophy, which involves passion for customers, quality, long-term relationships and perseverance. References Agarwal, S. and Ramaswami, S.N. (1992) "Choice of Foreign Market Entry Mode: Impact of Ownership, Location and Internalization Factors", Journal of International Business Studies, 23 (1): 1-27. Anderson, E. and Gatignon, H. (1986) "Modes of foreign entry: a transaction cost analysis and propositions", Journal of International Business Studies, 17 (3): 1-26. B&Q (2006). Retrieved from: http://www.diy.com/diy/ Brouthers, K.D. (2002) "Institutional, cultural and transaction cost influences on entry mode choice and performance", Journal of International Business Studies, 33 (2): 203-221. Buckley, P.J. and Casson, M.C. (1998) "Analyzing foreign market entry strategies: extending the Internalization Approach", Journal of International Business Studies, 29 (3): 539-562. 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