Strategic Reaction to Address Pressure from Foreign Competitors in the UK Market - Tesco - Case Study Example

Strategic Reaction to Address Pressure from Foreign Competitors in the UK Market: Case of Tesco Name Subject & Code Instructor Institution Date Assignment Task: In an industry that is domestically focused and unlikely to globalise its business, consider that due to the liberalisation of the UK market, this industry is coming under intensive competitive pressure from foreign entrants to the UK market. What strategic reaction would you employ to help meet pressures from foreign competitors in the UK market? Abstract While the UK retail industry is domestically focused, the UK market is liberalised. This is making the industry to witness come under intensive competitive pressures from foreign entrants. This report examines the strategic responses that Tesco should employ to meet pressures from foreign competitors in the UK market. This report examines the various offensive and defensive strategies that a company can use to counter pressures from foreign competitors in the UK market. It is established that Tesco faces competition from firms like Sainsbury, Walmart, Asda and Morrisons that are already established in the UK market. There is also a possibility of more foreign firms entering the market, as it is still profitable and unsaturated. Tesco will need to use both pre-entry defensive and post-entry defensive strategies to effectively counteract both the foreign entrants that have already entered into the market and those that seek to enter into the market. Pre-entry defensive strategies will enable Tesco to convince foreign entrants who seek to enter the UK market that the market entry is likely to be unprofitable or difficult for them. In this respect, Tesco should use various strategies like continuous improvement, signalling, fortifying, and defending, and expansion of capacity, and covering all bases. Post-entry defensive strategies will enable Tesco protect its competitive position in the local market from new entrants that have already set up shot. Accordingly, Tesco should use various strategies like defending Position before a new entrant establishes itself locally, introducing fighting brands, and engaging in cross-parry. Table of Contents Abstract 2 Table of Contents 3 1.0 Introduction 4 2.0 Brief Description of Tesco 4 3.0 External Factors Affecting Tesco 5 3.1 PEST Analysis 5 3.1.1 Political and Legislative Factors 5 3.1.2 Economic factors 6 3.1.3 Social factor 6 3.1.4 Technological and environmental factors 7 3.2 Porter’s Five Forces Analysis 7 3.2.1 Threat of New Entrants 7 3.2.2 Bargaining Power of Suppliers 7 3.2.3 Bargaining Power of Customers 8 3.2.4 Threat of Substitutes 8 3.2.5 Bargaining Power of Competitors 8 4.0 Analysis 8 4.1Recommended Defensive Strategies 9 4.1.2 Pre-Entry Defensive Strategies 11 4.2.1 Post-Entry Defensive Strategies 13 5.0 Conclusion 19 6.0 References 22 1.0 Introduction International markets provide dynamic arena for a firm with an affinity for growth to expansion or to reposition itself in other segments in an industry. As such companies try to advance their positions they take part in competitive battles as well as espouse offensive strategies (Verhof et al. 2001; Alaeddinoglu e al. 2009). When offensive and defensive strategies are used effectively to counteract foreign entrants, they may enable a company to realize an improved competitiveness, increased market share as well as improved profitability (Yannopoulos 2011). The UK retail industry is domestically focused and not likely to globalise its business. However, as the UK market is liberalised, the industry has recently come under intensive competitive pressures from foreign entrants such as Wal-Mart (Denton 2016). This report examines the strategic responses that Tesco should employ to meet pressures from foreign competitors in the UK market. This report examines the various offensive and defensive strategies that a company can use to counter pressures from foreign competitors in the UK market. 2.0 Brief Description of Tesco Started in 1924, Tesco is a leading retailer in the United Kingdom, yet presently operates nearly 2490 retail stores and employs some 350,000 workers across its global chains in Poland, Slovakia, Hungary, Thailand, South Korea, and Japan (Tesco 2015). Annually, Tesco’s profits surpass £3 billion (CorporateWatch 2014). The company is headquartered in Hertfordshire, UK. It is currently a market leader and operates under the brands like SuperStore, Metro, Homeplus, Express, and One Stop retail stores (DataMonitor 2004). However, the company has gradually been losing its market share to new foreign entrants who have sought entry into the UK market. Examples of the entrants include Wal-Mart, Asda and Sainsbury. However, Tesco has still managed to maintain its leadership in the market by maintaining its market share of 30 percent (International Markets Bureau 2011). 3.0 External Factors Affecting Tesco 3.1 PEST Analysis 3.1.1 Political and Legislative Factors A number of political and legislative factors are a concern to Tesco. In the UK, the competition policy consists of measures intended to check against restrictive or selfish business practices. It safeguards against cartels, controls mergers and acquisitions, as well as checks against a firm that abuses its dominant position in the market. Overall, it seeks to ensure healthy competition in the industry (Denton 2016). The UK competition policy is grouped into market behaviour, market performance, as well as market structure. In general, competition policies that apply to Tesco include antitrust & cartels, which ensure that businesses are prevented from forming unhealthy alliances. On the other hand, market liberalization also makes sure that the UK market environment maintains a free market. Antitrust and cartels regulations affect Tesco by ensuring it does not enter into unhealthy merger or charge discriminatory prices. Market liberalization laws (as stipulated by Competition Act 1998), ensure that Tesco can operate in competitive markets because of a likely entry of foreign entrants. The Competition Act 1998 makes sure that Tesco would not enter into anti-competitive agreements just to distort competition in the market (Denton 2016). 3.1.2 Economic factors Economic factors like competition from firms like Sainsbury, Walmart, Asda and Morrisons tend to affect Tesco’s prices, profits, and costs. Studies have showed that Asda is fast replacing Tesco as a price leader (See figure 1). Figure 1: Retailers’ market share in the UK (International Markets Bureau 2011) 3.1.3 Social factor Demographic factors such as UK’s fast aging population may lead to a decline in the sale of products that the Baby boomer generation previously used. Additionally, there is a growing base of health conscious consumers in the UK market, which implies that companies that enter the UK market or seek to strengthen their market share must concentrate on added-value commodities (CorporateWatch 2014). 3.1.4 Technological and environmental factors Because of a growth in the popularity of online shopping, it implies that companies that enter the UK market or seek to strengthen their market share would need to engage in online retailing and marketing. As regards environmental factors, studies of the UK market are showing that more locally consumers have become eco-conscious (International Markets Bureau 2011). Hence, companies that enter the UK market or seek to strengthen their market share must cater to the needs of new eco-conscious consumer segment, by providing eco-friendly products. 3.2 Porter’s Five Forces Analysis 3.2.1 Threat of New Entrants The retail market in the UK is currently dominated by a small number of competitors, such as Tesco, Wal-Mart, Sainsbury, and Asda. Most of these companies tend to build their power by improving their operating efficiency and customer service. The UK retail market is highly competitive and contains well-established firms, making it difficult for new entrants to enter because of the high capital expenditure involved to put up stiff competition (CorporateWatch 2014). 3.2.2 Bargaining Power of Suppliers The suppliers based in the UK face a constant threat from the growth in the ability of large retailers like Tesco, Wal-Mart, and Asda to individually source for materials from abroad. Hence, suppliers have low bargaining power. 3.2.3 Bargaining Power of Customers UK consumers are fast becoming increasingly aware of the issues that surround fairer trade. They are also becoming more eco-conscious. Additionally, a large number of retailers shows that customer have a higher bargaining power. An increase in retailer concentration and the fact that the purchasing power of the retailing industry concentrates in a comparatively few number of consumers implies that consumers have a high bargaining power (CorporateWatch 2014). 3.2.4 Threat of Substitutes The UK retail market has a high threat of substitutes, as customers can easily switch to an alternative brand because of the many accessible retailers. 3.2.5 Bargaining Power of Competitors The UK market is highly competitive market and is as a result hastens a level of development, leading to a condition where UK grocery retailers need to be innovative so as to uphold and fortify their market share. Competitors tend to have a high bargaining power. 4.0 Analysis Competition compels Tesco to relentlessly employ defensive and offensive strategies to address competition from foreign competitors. The company currently experience pressures as well as perceives an opportunity for entry of new foreign entrants into the UK retail industry. Therefore, Tesco needs to advance its competitive position in an industry. Yannopoulos (2011) argues that in many case competitive shifts by one business have perceptible impacts on its competitors and, therefore may attract retaliation or an effort to counteract the move. Tesco will need to rise to the occasion to counter competition from foreign entrants in the industry by counterattacking when they increase expenditure on advertising, cut prices, increase innovation or introduce new brands. They may also decide to accommodate a new entrant in the market by doing nothing. Tesco would ultimately realize growth when it grabs greater level of market share compared to the competitors’ rivals or when they create a new market. In such instances, Dawar and Frost (1999) advice that an incumbent firm has to be well-prepared for counter attacks by seeking an expansion of their business. At this juncture, the objective of the incumbents is to seek defence for its market share and reinforce its position by making it more difficult for companies to seek entry into the market. The already existing firms in the market may as well attack while attempting to seek an entry into a new market. Tesco will need to use a number of defensive and offensive strategies to counteract foreign entrants, which may enable a company to realize an improved competitiveness, increased market share as well as improved profitability. 4.1Recommended Defensive Strategies Due to a new rivalry, Tesco will need to use defensive strategies to counter pressure from foreign entrants into the market. Rapp (n.d.) argues that the key principle of defensive strategy is seeking tactics that can be used to render a likely attack unattractive as well as to put off potential competitors from attacking the company. Tesco would need to influence the expectations of the foreign entrants who are yet to enter the industry regarding the profitability of the industry and to make them believe that the industry y has an extremely low return on their investment that it would not guarantee profits once another investment is made in that industry. According to Dawar and Frost (1999), defensive strategies tend to be effective when they happen before the new entrant invests in the industry, or when the entrant enters the industry just before the entry barriers are erected. This is because the entrant would find it difficult to enter or seek a long-term investment in the industry. Because of this reason, Tesco would need to pursue a timely action to put off the new entrant from deciding to make significant commitment, as after it has made the commitment, it becomes trickier to discourage the new entrant from leaving the industry particularly when it has come up with strategies to counter the old players in the industry, as well as when there are high exit barriers. However, once an attack from the foreign entrant begins, Tesco may have to decrease its intensity and likelihood for harm. To ensure this, it may have to direct the attack to an area where it views is less vulnerable, or in an area that is not attractive to the attacker. Alternatively, the company should come up with actions intended to make the life of the foreign entrant to be difficult once it has entered the UK industry. In using such a tactic, Yannopoulos (2011) argues that foreign entrant ma become convinced that it had made unrealistic and overambitious calculations and that since its initial experiences in the industry are adverse in nature, it should discontinue seeking further entry or long-term commitment to the industry. Dawar and Frost (1999) comment that business strategists have over the years come up with varied strategies for defensive marketing to safeguard their positions in the market, maintain their market share and increase their profitability. In respect to foreign companies that are seeking an entry into the UK market, Tesco will need to use two types of strategies: Pre-entry defensive strategies and post-entry defensive strategies. 4.1.2 Pre-Entry Defensive Strategies Pre-entry defensive strategies are strategies used by companies that intend to convince foreign entrants that the market entry is likely to be unprofitable or difficult for them. These strategies vary from continuous improvement, signalling, fortifying, and defending, and expansion of capacity, and covering all bases. 4.1.2.1 Signalling According to Yannopoulos (2011), companies usually rely on signalling while seeking to publicize their intent to pursue an action. The existing companies can make announcements through press releases, newspapers, as well as trade journals. These proclamations serve varied objectives that are not automatically mutually exclusive. Tesco may signal retailers that are yet to enter the UK market that it is committed to the industry and as a result anticipate or deterrence to foreign entrants. To defend the domestic industry, it may keep the potential foreign entrants out of the local market by threatening to retaliate. According to Yannopoulos (2011), when the apparent possibility of retaliation and the extent of its severity are high, the foreign entrants would be less likely to enter the industry. Companies may initially announce their capacity to retaliate rigorously based on how they initially responded to a past attack. This would signal their dedication to protect their market share. Alternatively, a local company may proclaim its intent to undersell its rivals. In one example, a Canadian electronics firm called Future Shop made a public statement that it would not be destabilized by competitors as well as that it was willing to counter their prices. The company used the announcement to threaten that it would take an action if a rival made a certain move. 4.1.2.2 Fortifying and defending Yannopoulos (2011) explains that the strategy of fortifying and defending is intended to create barriers to entry for the foreign entrants. It is intended to lower the entrant’s incentive to attack. Lee and Irene (2007) explain that ordinarily, a firm would frequently decided to seek an entry into an industry when it sufficiently understands that the existing companies are sustainably earning high profits. In which case, since Tesco still earns high profits in the industry, the foreign entrants are bound to be highly motivated to enter. Therefore, Tesco may reduce the entrant’s incentive to attack by reducing their profit expectations. IT should raise the barriers to entry for foreign entrants. An erection of barriers often encumbers foreign entrants to enter the local market as they tend to incur costs that the incumbent firms did not bear. According to Yannopoulos (2011), the common barriers to entry that the local company may use includes product differentiation, economies of scale, cost reductions, and access to raw materials. He added that industries that have considerable barriers to entry make entry relatively difficult for new entrants. 4.1.2.3 Covering all bases This strategy is also referred as product proliferation. It consists of an introduction of new products to make sure that there is a complete product line as well as to ensure that gaps existing in the market are filled. It entails introducing numerous varieties of a product as regards types and models of a product. For instance, by carrying full product lines, a local firm gets to block foreign entrants from accessing the industry. Tesco, while rushing to expand rapidly and keep competitors out of the market, may apply this strategy. Once Tesco succeeds in flooding the market, it prevents the possibility of being outflanked by the new rivals from abroad. Additionally, it provides a means for tying up distribution channels. However, Yannopoulos (2011) warns that a local company that seeks to cover all bases may face some challenges. For instance, they may lack the necessary resources to provide a full product line. Additionally, product proliferation is likely to trigger the firm to narrowly spread off its resources, which may only work to violate the principle of concentrating forces at the most decisive point. Additionally, when a local company covers too many markets, which makes it to overextend itself, the company would be left susceptible to attacks from the new entrant since it would create an easy target for attack (Nogueira et al. 2015). 4.1.2.4 Continuous Improvement This strategy demands the local firms relentlessly improve costs, and quality or their products, or to improve their distribution channels and manufacturing processes. The decision to select an area worth improving is contingent on a company’s value proposition. As a result, as Tesco pursues low cost strategies, it tends to incessantly find means to decrease costs by leveraging the advantages of economies of scale, reducing costs of production and introducing new methods of production that cut on waste. As it also uses a differentiated strategy, it should seek to maintain its competitive advantage using innovative methods, and improving quality of its customer service. For a company that uses, Yannopoulos (2011) explains that continuous improvement strategy seeks to improve its innovative capacity and to improve its marketing mix. The idea of innovating products entails producing products that are of superior attributes. 4.2.1 Post-Entry Defensive Strategies They are actions taken that the incumbent companies take in order to protect their competitive position in the local market from new entrants that have already set up shot. The relevant activities comprise defending position before the new entrants become more established, introduction of new brands to counter new brands sold by the new entrant and an implementation of cross-parry strategies. 4.2.1.1 Defending Position before a new entrant establishes itself locally When a foreign firm makes an entry into a local firm, its primary objective is to ensure that it becomes get established in the local market segment. For instance, it may seek to strengthen its position, before it starts gradual expansion into other markets. Yannopoulos (2011) advises that unpopular brands are particularly at risk when they make an entry into the market when they break the rules of the game using fundamentally new products or prices. In his view, foreign entrants who enter a local market with fundamentally new products tend to originate from markets that are not related to the market they seek to invade. He further observed that the existing company should defend its position when its opponent that has only just entered the market is vulnerable and small-sized, instead of waiting until they pose significant competitive threat. For a local company like Tesco that is already a market leader, Wen-Cheng et al. (2011) advises that it should send a clear message to the new foreign entrant that any aggressive strategy like cutting prices or seeking further entry into the core segments is unacceptable and that it will attract more painstaking retaliation. For this reasons, a new entrant into the UK market would understand that such tactics are beneficial and would almost certainly make them worse off. To minimise losses, Golder and Tellis (1993) explain that such counter-attacks tend to be narrow, yet also entail strictly the market segment of the incumbent firm. In such instance, Tesco would need to protect itself by espousing and improving its technology, launching attacks on the reputation of the upstart, and hiring a number of people from the new entrant. Microsoft used this strategy in 1995 while strengthening itself against a new entrant called Borland Delphi, which was a new entrant in the industry that could rapidly develop visual computer language in a more advanced manner than Microsoft’s Visual Basic language. Once Borland International came up with its Delphi computer language, some business strategist anticipated a downfall of Visual Basic, which was the computer language that had prevailed in the industry for some tome. While the advance nature of the Delphi programming modes motivated many programmers to change, it could not displace Microsoft in the market. Once Microsoft sensed that its market position was under threat, it went on a counter-offensive by signing up a number of Borland Delphi's best software engineers. It also invested in advancing its Visual Basic to neutralize Delphi’s biggest point of sale. Microsoft also engaged in marketing strategies that indirectly criticized Borland Delphi as a non-starter. Ultimately, Microsoft maintained its market share and forced Borland Delphi out of the market. 4.2.1.2 Introduction of fighting brands Tesco should also consider introducing fighting brands to fight the new entrant’s brand. According to Yannopoulos (2011), companies that already exist in the market may introduce fighting brands to destabilize any possibility of the competitor’s brand potential to threaten its market position. They consist of characteristically low-cost variety of the existing company’s first-rate brands that are promoted as being equal in quality to the new entrant’s brand yet being sold more cheaply. For Tesco, a decision to introduce a fighting brand can be an attractive strategy as it would assist in fighting off a price-cutting product that a the new entrant has brought to the market and which may threaten the core brand of the UK company, while simultaneously protecting its premium image and profitability. The strategy was successfully used by Heublein to protect defend its brand of vodka called Smirnoff. A new competitor had entered the market and posed as a potential threat to Smirnoff vodka, which until then was Heublein’s major brand. To protect the Smirnoff vodka, Heublein introduced a new brand that sold at a low cost than the competitor’s brand, was also promoted to be an equal to the new entrant’s new brand. On the other hand, Heublein increased the price of Smirnoff vodka and claimed that it was the highest quality vodka in the market. The strategy allowed Heublein to battle the new entrant yet also did not jeopardize its Smirnoff vodka’s image and productivity. The fighting brands may also consist of secret weapons that are devised to cause confusion to a new rival in the market (Verhof et al. 2001). Similar to other fighting brands, Renko et al. (2011) argues that they are intended to defend the premium brand as well as to check the new rival against making any inroad against it. According to Yannopoulos (2011), firms that utilize fighting brands as a secret weapon tend to keep their distance yet also manage to hide their relations to them. In this case, they may use a name of a defunct company or new company they have acquired with a singular intent of creating fighter brands. However, there are some risks linked to fighter brands, including that of cannibalization since the fighter brand may appropriate sales away from the incumbent firm’s major brands. Similarly, the production and adverting cost of the fighting brand may be relatively high, hence eating on the firm’s profitability (Srivastava et al. 2013). A case in point is a scenario where British Airways launched a fighting brand by introduced a new discount airline service called “Go” while hoping that it would fight EasyJet. However, “Go” came with a number of risks, including higher costs as it has to recognize union contracts. It became unsustainable for British Airways, forcing the company to sell it off. 4.2.1.3 Engaging in cross-parry The extent of multimarket contact between them may affect the force of rivalry as well as the degree of retaliation between them. Yannopoulos (2011) explains that companies that are forced to interact in many markets tend to be less motivated to engage in aggressive competition due to the likelihood of retaliation across varied markets. In contrast, the new rivals may be motivated to cooperate as they stand to benefit when they permit their rivals to gain greater dominance in some markets in return for the same treatment in the market where they dominate. In situations of low multimarket contact, companies may be encouraged to seek an entry into the market segment of a rival firm so as to acquire the capacity to take part in multi market retaliation in case they are subject to an attack. In such cases, Yannopoulos (2011) advised that companies should prefer staying in a defined market so as to sustain an imminent danger of multi market retaliation. Additionally, with the increase of a multimarket contact, a company may steer clear of seeking an entry into a new market that has already been occupied. The idea is that this would make sure that it does not provoke any multi-market retaliation. Yannopoulos (2011) argues that a cross-parry strategy is particularly effective when an existing company that is confronted by a new entrant in one specific location decides to confront the competitor in a different location. When Tesco is under attack in a one core market, rather than retaliate at the point of attack, it gets to confront the new entrant by counter-attacking its core strength area. By engaging in this strategy, Tesco would defend its market gets to divert attention from its core strength area yet also attacks the new entrant at a point that hurts more severely. According to Renko et al. (2011), the objective of using this strategy is that it helps prevent any possibility of engaging the its main products in a price war, which may reduce its profit margins as well as eternally blemish the image of the premium brand. The strategy is also suitable for sending a signal to the new competitor that it would experience a greater level of suffering compared to the incumbent firm. For example, how should a firm that enjoys a large market share and great profitability react when a rival has lowered its price while attempting to grab the market share? A possible reaction may be to engage a counter-attack to confront the new entrant with the same or even more reduction of price for a brand. However, such a move has a potential to be relatively costly for the market share of an incumbent firm. The reason for this is because it would imply that the incumbent firm lowers its profit margin significantly mere to recover the small market share it is likely to lose to a new entrant (He 2012). However, when a foreign entrant has to operate in a different market segment that is significant for its business, rather than its competitor, it may as well decided to attack the new entrant ensuring price reduction in the associated market segment. For instance, in a car tire industry, Goodyear’s responded to a challenge by Michelin by employing the cross-parry defensive strategy. Michelin relied on its strong reputation in Europe as its selling point. It increased its market share in North America by substantially reducing car tire prices. The company’s management was convinced that engaging in such a pricing strategy has a potential to attract new customers. The management had also expected that Goodyear would not act in response because of the substantial cost involved because of Goodyear’s prevailing market share. This was right as Goodyear failed to match the low price Michelin had initiated. However, Michelin did not anticipate that Goodyear would act in response to the lowered prices in other markets. Goodyear has a potential to counterattack by cutting prices in the North American market, and by providing dealers superior profit margins. The strategy failed as Michelin managed merely a small segment of its global business and it clearly had the littler from retaliation by Goodyear. Conversely, Goodyear was exposed to a risk of losing more as it had to reduce its profit margin, since it would realize reduced sales in its core market. Goodyear responded by lowering its prices in Michelin’s market hub in Europe where Michelin made realize huge profit margin. By reducing prices of its tires in Europe, Goodyear triggered significant losses, which compelled Michelin to reinstate it initial prices to the initial level in its North American market once it had realized a considerable profit reduction without even increasing its market share considerably. The move by Goodyear hampered the Michelin’s tempo of expansion. Ultimately, it was forced to mull over the cost of increasing market share in the North American market. 5.0 Conclusion Tesco faces competition from firms like Sainsbury, Walmart, Asda and Morrisons that are already established in the UK market. There is also a possibility of more foreign firms entering the market, as it is still profitable and unsaturated. UK has competition policies such as antitrust & cartels, which make sure that Tesco is prevented from forming unhealthy alliances. On the other hand, market liberalization also make sure that any foreign firm may enter the market. Tesco will need to use both pre-entry defensive and post-entry defensive strategies to effectively counteract both the foreign entrants that have already entered into the market and those that seek to enter into the market. This will enable the company to realize an improved competitiveness, increased market share as well as improved profitability. The company should use pre-entry defensive strategies to convince foreign entrants who seek to enter the UK market that the market entry is likely to be unprofitable or difficult for them. Examples of these strategies Tesco will need to use include continuous improvement, signalling, fortifying, and defending, and expansion of capacity, and covering all bases. Tesco should also use post-entry defensive strategies to protect their competitive position in the local market from new entrants that have already set up shot. This includes defending Position before a new entrant establishes itself locally, introducing fighting brands, and engaging in cross-parry. Tesco would need to influence the expectations of the foreign entrants who are yet to enter the industry regarding the profitability of the industry and to make them believe that the industry y has an extremely low return on their investment that it would not guarantee profits once another investment is made in that industry. Tesco should defend its position before a new entrant establishes itself locally. It should improve its technology, launching attacks on the reputation of the new entrants, and hire a number of people from the new and old rivals. For Tesco, a decision to introduce a fighting brand can be an attractive strategy as it would assist in fighting off a price-cutting product that a the new entrant has brought to the market and which may threaten the core brand of the UK company, while simultaneously protecting its premium image and profitability. Regarding engaging in cross-parry, rather than retaliate at the point of attack, it gets to confront the new entrant by counter-attacking its core strength area. By engaging in this strategy, Tesco would defend its market gets to divert attention from its core strength area yet also attacks the new entrant at a point that hurts more severely. 6.0 References Alaeddinoglu. F & Can, A 2009, “Developing international market entry strategies for cultural tourism of Turkey,” International Journal of Human Sciences, vol 6 no 1, pp.509-527. 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