External Environment Analysis of Tesco PLC - Case Study Example

? The context of international business Contents Company overview 3 Identifying the company’s main drivers of accessing foreign markets using theories of FDI 4 External Environment Analysis 5 Political 5 Economic 6 Social 6 Technological 7 Key challenges and opportunities in Globalization 7 Company’s structure and control mechanisms 8 Marketing, Logistics and HRM issues 9 Logistics 10 Marketing 11 HRM Issues 12 International market entry modes 12 Recommendation 14 References 14 Company overview Tesco PLC is a multinational general merchandise and grocery retailer. The headquarters of the company is situated in Chest hunt, UK. It is largest retailer in U.K. and holds third position in global ranking just after first position holder, Wal-Mart and second position holder, Carrefour. Tesco has business operations in 14 countries including Europe, North America and Asia. The company was founded by Jack Cohen in the year 1919, the number of stores as on April 2012 happens to be 6,351 stores. (Burgemeister, 2003, p. 192). The total revenue of the company happens to be ?64.539 billion as on 2012. The total market share in U.K. is 30.2%. The major global competitors of the company are Walmart, Carrefour, Aldi, Royal Ahold and Metro. Identifying the company’s main drivers of accessing foreign markets using theories of FDI FDI stands for foreign direct investment. There are various theories of FDI like the product life cycle theory, internationalization and eclectic paradigm theory of the OLI frame-work. Among these the internationalization theory has been used to identify the key drives. The internationalization theory states that a company operating in a matured economy needs to expand the horizon beyond the local market to get competitive advantage and economies of scale. In the early 90s Tesco was lagging behind Sainsbury’s as the second largest retailer in the country and the operations of the country was subjected to the U.K. market only. But the global economic reforms couples with the drive to become a global major retailer urged Tesco to enter the global market. The first phase of internationalization begun as Tesco entered Hungary in 1994. Since then there has been no turning back, Of-course there has been certain problems in countries like France, but looking at the overall perspective the results speak for themselves. Today Tesco is largest retailer in U.K. and the third largest retailer in the world right after Wal-Mart and Carrefour. Mainly Tesco is a general merchandise and grocery retailer and operates as following the business to consumer framework. External Environment Analysis External or macro environmental factors are those that cannot be controlled by an organization and yet the modus operand of an organization gets severely affected by the changes or developments in the external environment. The main external environmental factors include political, economic, social and technological factors. However, the legal factors are also to be included. Bit, since most of the legal legislatures in a country are developed by the government itself the legal factors are hereby included in the political factors. Here it is to be added that Tesco entered in U.S. in the year 2007. Therefore the PEST analysis has been based on the external environmental situation in 2007 -2008 only (Henry, 2008, p. 89). Political United States has always been a politically stable country. And the governments in U.S. have always welcomed business investments from both local and international firms. Many specialists have tagged U.S. as a very stable political country irrespective of the political regime. Probably due to such attitude of the political leaders of the country the country has become one of the strongest economies in the world. As mentioned earlier as far the legislative system goes the country as mentioned has a business friendly legal environment welcoming investments. Legal and Regulatory reforms in the 1970s actually resulted in de-regulation in various sectors and enhanced competition and efficiency. However, in the mid and late 00’s the country had made strict environmental monitoring system to combat the lethal affects the global warming. However, the legal system in U.S. was set to become a lot stricter as it was on the verge of the 2008 global economic crisis. Economic The gross domestic product of the country by 2007-08 was almost $ 12, 120 trillion; thus becoming the second biggest economy just after the EU. The ever growing U.S. economy saw a dip after the 9/11 terrorist attacks. However, the things were about to get tougher for Tesco and other companies as the 2008 global economic recession was about to hit the country. The country along with other EU members is still looking to get over from the battering of the economic recession. Social The quickly increasing US population presented a threat of slow paced economic growth, increased taxes and quality labour shortages. In this way the force on the government healthcare and retirement systems went up. The U.S. had a highly diversified distribution income as only 1% of the whole population belonged to the upper class. Thus the poverty rates of the country were highest of all other developed countries. From a marketing and business perspective as the people of U.S. tended to be brand savvy. (Kotler, 2001, p. 25). As compared to the people U.K. who did not mind buying private label brand provided by the retail outlets the people in U.S. seemed to like big brand names. This is something Tesco had to watch out for. Hereby it is to be added that Tesco should watch out for the consumer psyche of the U.S. as many retailers including retail giant Mark and Spencer failed to make a mark in the country due to the failure of understanding the customer psyche. Technological U.S. has been a leader in getting used and application of technological factors. Rise of information technology and digital medium would one of the many opportunities that Tesco could utilize to make the overall business process a lot more robust. Key challenges and opportunities in Globalization In order to analyze the key challenges and opportunities in globalization SWOT analysis has been chosen. SWOT stand for strength, Weaknesses, Opportunities and Threats. Among these Strengths and Weaknesses are the internal factors where as opportunities and threats are the external factors. However, as per the requirement of the study only opportunity and threat are being discussed. Opening small convenience stores (which were named as “Fresh and Easy”) was a great opportunity for the English retail major. Because, it was the time when the U.S. consumers wee exhibiting a change in the grocery shopping habits. The consumers were looking to become a lot more conscious about health and were not exactly looking to drive by huge supermarkets like Safeway, Kroger or Supervalu. One of the main reasons was the economy of U.S. The fuel prices in the country massively and hence the shoppers were putting in a lot more focus on convenience factor. Also another opportunity that Tesco had was the technologic factors. U.S. has always been known for new innovative technology. (Brown, 2009, p. 209). This can actually help the company in terms of various business aspects such as customer analytics and supply chain management. Also as far as distribution system goes the company had the opportunity to reach the customers directly by through the internet. It is needless to say that today all the major firms are putting in a lot more effort on digital marketing and social media as the companies understand that digital medium is the next big thing. The presence of Walmart in U.S. happened to be the by far the biggest threat to be faced by Tesco. Walmart had been keeping close eye on the operations of Tesco. According to a Colum published in retail week in 2008 the CEO of Wal-Mart was found saying that the Fresh and Easy concept had great chances of success if executed well. However, in a mean to combat the strategies of Tesco Wal-Mart opened four pilot stores in the region of Phoenix in 2008 in the same area where Tesco started operating through the Fresh and Easy Stores. Hereby it is also need to be mentioned that Wal-Mart has been operating in U.S. for a long period of time and hence the company will have better understanding of the consumer psyche. The opening of pilot stores was actually a trigger movement by the company keeping the ‘convenience’ factor in mind. Also Wal-Mart had better in depth consumer data than Tesco. This actually meant that the company may be able to provide a better merchandise mix as compared to Tesco. Also it needs to be mentioned that Wal-Mart is an EDLP; i.e. Every Day Low price store. Therefore the presence of Wal-Mart may actually force Tesco to lower the prices. Also the threat of new entrants also possessed a formidable threat as the U.S. organized retail market happened to be a lucrative and attractive one. Add to that the sign of the economic downturn was also started to appear which eventually affected the Business Operations of all the firms including Tesco. Company’s structure and control mechanisms During the process of international expansion Tesco had been able to benefit from the innovation that emerged from the various international subsidiaries. The organizational structure of the company along with the operating skills have transformed as the company began to learn about operating in the hose economies including U.S. The has been able to transfer the business knowledge from U/K. to the various international operations by the means of intra firm control mechanism networks which included telecommunications as well as best practices of face to face communications. Various innovative practices between the international subsidiaries have been visible through the bottom up processes of the organizational learning. For example the retail skill in the hyper-market format which was originally developed in the central European operations of the country was transferred to the operations of the Asian Subsidiaries. (Kolb, 2008, p. 92). However, the company again had to make certain adjustments in the organizational structure and control mechanism as the country decided to enter a lot more matured economy in the form of U.S. as the company faced new challenges while entering the highly competitive U.S. retail market. To respond to the challenges the company the company decided to take a top down approach in contrast to the bottom up approach. This included the stores having totally self scanning check out operations, cost integrated manufacturing and distribution system and strategic focus on in-depth network structured coverage of the market which was dependent upon the smaller store formats. Marketing, Logistics and HRM issues In order to analyze the marketing, logistics and HRM issues of the company Porter’s Value Chain analysis has been used. Value chain can be defined as the relation between value added operations and the inter relation with the other supporting activities. Logistics Tesco would look to continue to demonstrate the overall cost leadership in the U.S. market also through the agile and lean inbound logistics. The company would look to use the financial resources, market insights and innovative through process to attain economies of scale that would help the company enjoys low bargaining power from the suppliers. In order to do so the company has to focus on upgrading the ordering systems. Tesco would look to achieve a formidable position in the offline and online food segments through developing effective and efficient outbound logistics system. The company has mainly focused upon developing dense network of widely spread fresh and easy convenience stores across the U.S. in order to gain maximum consumer exposure. Marketing Tesco has been able to enjoy high degree of consumer loyalty through club-cards and other schemes in the U.K. (Belch and Michael, 2005, p. 325). This is something the company would look to achieve through different loyalty schemes in the international market also. However, it would not be easy as the company would face steep competition in the U.S, market from Wal-Mart. The key to success would be positioning. Tesco should and as a matter of fact the company has already started to position itself a green and healthy business entity. Studies have revealed that people in U.S. are looking to become a lot more environment and health cautious and look to do business with companies that are a lot more greener in the operations and offerings. Also one more key factor is going to be consumer behaviour. People in U.S. are more inclined towards buying branded products as compared to buying private label brands. Therefore the consumer psyche is something the company may have to analyze. HRM Issues Most certainly the company has to rely on local talent a lot more as the local people would be able to understand the business issues a lot better. However, the senior managers of U.K. will also have a major role to play in making the local talents get familiarize with the company policies and procedures. However, this should be a two way process where the U.K. professional should look to gain the knowledge of the American Business environment and provide knowledge about the company history, policies and success stories. Also the company should consider about appointing local talent at key supervisory positions. International market entry modes When a firm decides to enter a new international market there are multiple strategic option that are available to the firm in the form of acquisition, joint venture, licensing, strategic alliances etc. Market entry strategy is of great importance as it may make or break the future of a firm in the international market (Churchill, 2009, p.211). On the October of 2006 Tesco had announced that the company is considering entering the U.S. retail market. On 2007, the company had set up the first ever store in U.S. However, the market entry strategy of Tesco was termed by many as a huge gamble as Tesco chose to walk a completely different path. Tesco PLC did have the ownership advantage in U.S. as far as product was concerned. Also another key strategic advantage of Tesco was the changing consumer behaviour of the people of U.S. as well as the shopping and eating behaviour of the people. Tesco shockingly for the first time decided to use the Green field strategy. Green Field strategy can be defined as an instance when a company decides to invest in the international market without taking the help of any middle man or any other firm so to speak. Tesco did go for a joint venture in France, but did not work out. Also the franchising or licensing is not ideal for a supermarket. Usually, Tesco goes for acquisition strategy which happened to be really successful in countries like Poland or Czech Republic. During the market expansion two of the main suppliers of the company 2 sister foods and wild rocket foods decided to come to U.S. The first store of the company was opened in California. However, it is to be mentioned that it was a gamble that did not pay off. Recommendation As mentioned earlier the green field marketing strategy adopted by Tesco was a gamble that did not work. Fresh and Easy has done well. As a matter of fact it has fallen well below the expected result. First of all analysts believed that Tesco’s entry to the U.S. market was risky in itself as there was the mighty presence of Wal-Mart. But still as the above SWOT and PEST analysis showed Tesco has the opportunity to succeed. But the company made one fundamental and detrimental mistake that turned out to be lethal one. The company chose a wrong mode of entry. Tesco should have gone for acquisition to lower the risk and gain relatively easy access to the U.K. market. Also the risk of entry got even bigger due to the global economic turmoil which happened right after one year of the entry of Tesco in 2008. On 2009 the retailers reported a trading loss of ?142m from fresh and easy. It proved to be a little bit too late as company now are looking to exit from the market. Overall Tesco has not been successful in the U.S. market despite of all the potentials mainly due to short-sightedness as despite early warning signs the company failed to see the upcoming recession. Also the company lacked direction as it chose a wrong mode of entry (Czinzota, Ronkainen, Moffett, Marinova & Marinov, 2009, pp. 423-429). References Belch, G and Michael, G. 2005. Advertising &Promotion-An Integrated marketing Communications Perspective. McGraw-Hill: UK. Brown, L. 2009. Marketing and Distribution Research. Ronald Press Company: US. Burgemeister, S. 2003. Market analysis. GRIN Verlag: DE. Churchill, G. 2009. Marketing Research. Cengage Learning: UK. Czinzota, M., Ronkainen, I., Moffett, M., Marinova, S. & Marinov, M. 2009. International business (European edition). John Wiley: UK. Henry, A. 2008. Understanding Strategic Management. Oxford University Press: UK. Kolb, B. 2008. Marketing Research: A Practical Approach. Sage: UK. Kotler, P. 2001. Marketing Management. Prentice Hall: UK. Read More