Strategic Alliance of Tesco - Assignment Example

? Strategic Alliance of Tesco Table of Contents Table of Contents 2 0 Introduction 3 2.0The benefits arising out of the international strategic alliance 4 2.1Supply and distribution channel 4 2.2 Launch of products under own brand name 4 2.3Using the preinstalled distribution centres and outlets 5 2.4 Removal of cultural differences 5 2.5 Achieving economy of scale 5 2.6 Choosing the right strategic partner 6 Reference 8 1.0 Introduction Tesco has presence is 14 different countries. This gives Tesco the ability to diversify the risk arising from one market to be spread across 14 different markets. Tesco’s diversified portfolio enables it to outsource both raw material as well as distribution of the final products effectively. Tesco’s move to diversify into 14 international markets happened long before other retail giants could have realized its real potential (Burton, 1995). So by the time the other European retail giants realized the real benefit associated with international diversification, Tesco has already established in more than 6 international markets. Diversification itself did not stop the very problem for which Tesco decided diversify in the first place itself. The problem is depleting revenue margin in almost 70% of the international markets where Tesco has operational base. Tesco realized that the mere diversification is not going to solve the problem of decreasing level of profits from the international markets (Collinson, 1999). It quickly came up with the idea to form strategic alliance with retail giants in the international markets like Asia. Asian countries like India and China represents an untapped market segment. It is known that the propensity to buy in China is the highest among the Asian countries. Tesco realized that without the help of any local partner, it will not be able to gain the knowledge about the local demographics of these regions. Tesco’s main aim is to use the knowledge of the local demographics to improve its customer relations with the customers. The local retailers have enormous knowledge about the demographic characteristics of the land. Tesco will benefit by utilizing the knowledge of the local retailers. 2.0The benefits arising out of the international strategic alliance 2.1Supply and distribution channel Presently there are more than 3000 local retailers in China. The local retailers range from medium to small scale enterprises. Apart from these there are about 5 big retailers who have considerable influence over the local markets. Through the use of these local retailers Tesco can gain an upper hand in the supply and the distribution channel. Tesco can use the supply and distribution chgannel of the local retailers to procure the raw materials and supply the products. This leads to cost cutting (Soh P. H., 2003). If Tesco is not utilizing the supply and distribution networks of the local retailers then it will take months before Tesco can finally realize what works and what does not work in the supply and distribution channel. 2.2 Launch of products under own brand name The local retailers have set up outlets in the posh areas where the buying propensity of the local people is comparatively more than the other regions. The strategic alliance equips Tesco with the ability to utilize the same outlet to sell the Tesco products or can even partner up with the local retailers to sell combined products. Tesco can also set up its own outlet and sell the Tesco brand products or the local products. In United Kingdom Tesco is a home grown brand where the people have some perception of the brand value. So when new products are launched under the brand name Tesco, customers can easily identify the products with the brand image of Tesco. While in Asian countries the scenario is a bit different. The customers don’t a have very strong perception about the brand Tesco (Youssef and Hansen, 1994). If Tesco decides to produce and sell products under its own brand name, it is not known for sure, what the results might be. Through strategic alliance Tesco can overcome this uncertainty in a step by step process. 2.3Using the preinstalled distribution centres and outlets Tesco can partner with the local retailers for a short period of time and open outlets. These outlets should sell products under a unique brand name instead of the local brand name or the Tesco brand name. Since the strategic partnerships is already enabling Tesco to use the pre installed infrastructure of purchase and distribution channel, so the product prices can be lowered enough to attract customers (Barkema et al. 1996). As the strategic partnerships near the end, Tesco will start experiment in the market under a different brand name. This brand name will start teaching the brand value of Tesco through cheap pricing at the same time good quality. 2.4 Removal of cultural differences Strategic alliances also help to decrease the cultural indifferences. If Tesco starts entering the Asian markets with the products straight away under its own brand name, there may not be significant buyer for the products. The cultural indifference between Tesco and other retailers can create a difference in perception among the customer minds. This cultural indifference can be removed through strategic alliance. The idea of strategic alliance is like a person who wants to open an account in a premium bank but must be introduced by someone whom the bank already knows and trusts (Doz, 1996). The new customer is introduced by someone who is known both to the bank as well as to the new customer. The person takes the new customer in confidence and helps in the introductory process. The idea of strategic alliance is more or less the same here. Through strategic alliance Tesco can bridge the gap of cultural difference. This will help Tesco to market the product within considerably shorter time period. 2.5 Achieving economy of scale The most significant benefit of strategic alliance is perhaps the economy of scale. There are various ways through which economy of scale can be achieved. It can either a complete case of outsourcing through a strategic partner or can be a joint venture with a strategic partner where the costs as well as the profits are shared or can be merger with a local retailer (Kogut, 1988). Strategic alliance simply means the alliance between 2 or more entities that is bound to create synergy. This synergy is utilized by all the entities involved in the strategic alliance. An agreement where Tesco and local retailers come to an understanding that Tesco will supply the local retailers with the technological know-how on how to modernize the distribution channel or how to modernize the distribution channel in return that 60% of all the cost of such technological set up will be borne by the local retailers is also a kind of strategic alliance. Another kind of strategic alliance can be where all the operations are outsourced, starting from procurement of raw materials, processing of the raw materials, packaging of the final products and finally the distribution of the raw materials (Tomkins, 2001). This gives Tesco enough opportunity to concentrate on the core activities like customer relation management. So there is economy of scale on one hand and on the other hand Tesco’s ability to divert its full attention in the core activities likes marketing and customer relationship management. 2.6 Choosing the right strategic partner The diversifications into the international markets are not without its added risks. There are various kinds of risks like the political risk, economical risk, labour union risk and the exchange risk. All of these risks cannot be reduced or decreased at the same time. These kinds of risks can be avoided if the right strategic alliance is forged with the right partner. Depending on the country or the region of expansion, the strategic partner can be chosen who can give the two fold advantage of reduced financial risk as well as increased economy of scale. So Tesco should be extremely careful in choosing the right strategic partner. If Tesco is considering expanding into China, then the job of choosing the right strategic partner becomes even more important. This is because of the reason that China is witnessing one of the worst financial crisis (Doz, 1996). The sovereign debt of the country is almost at 200% of the GDP. There are huge numbers of job cuts and the current inflation rate is witnessing the quickest rate of increase. So the strategy is to choose a competitive and active market participant who has enough leverage to help Tesco reach economy in the quickest possible time (Soh, 2003). The choice of the strategic partner should also be based on a sound financial condition of the company. If the strategic partner contains huge amount of debt burden then the company can face chances of bankruptcy and may become insolvent. Reference Barkema, H. G., John H. J. B., and Johannes M. P., 1996. Foreign Entry, Cultural Barriers, and Learning. Strategic management journal, 17(2), p. 151-166. Burton, J., 1995. Partnership with the Japanese: threat or opportunity for the European businesses, European management journal, Vol 13, No. 3, September, pp. 304-15. Collinson, S., 1999. Knowledge Management Capabilities for Steel Makers: A British-Japanese Corporate Alliance for Organizational Learning. Technology analysis and strategic management, 11(3),p.337-358. Doz, Y. L., 1996. The Evolution of Cooperation in Strategic Alliances: Initial Conditions or Learning Processes, Strategic management journal, 17(Summer), p.55-83. Inkpen, A. C., 1998. Learning and Knowledge Acquisition Through International Strategic Alliances, Academy of management executive, 12(4), p.69-80. Kogut, B., 1988. Joint Ventures: Theoretical and Empirical Perspectives. Strategic management journal, 9 (4), p.319-332. Soh P. H., 2003. The role of networking alliances in information acquisition and its implications for new product performance, Journal of business venturing, Vol. 18(6), pp. 727-744. Tomkins, C., 2001. Interdependencies, trust and information in relationships, alliances and Networks, Accounting, organizations and society, Vol. 26, pp. 161-191. Youssef, W., and Hansen, M., 1994. Consequences of strategic alliances between international airlines: The case of Swissair and SAS, Transportation research part a: policy and practice, Vol. 28(5), pp. 415-431. Read More