How Do Companies Use Global Strategies to Gain Competitive Advantage - Essay Example

? How do companies use global strategies to gain competitive advantage Table of Contents Introduction 3 Thesis 4 Analysis 4 Different Market Entry Strategies to Gain Competitive Advantage 9 Example 11 Antithesis 11 Conclusion 14 References 16 Bibliography 17 Introduction Globalization can be defined as the process through which a company looks to enter an international market. Through the process of globalization a company looks to expand the market share and business by making the products available to the international customers. The very basic principles of domestic and international are the same. However, when it comes to development and application of business strategies there tend to visible difference between global and local business strategies. During the process of domestic marketing a company looks to focus only on local customers. Although the risk factor for companies operating on local basis is a lot less as compared to those operating on international business; but the local companies a lot more vulnerable to the environmental constraints (e.g. economic fluctuation of a country) as compared to an international company. As compared to domestic marketing international marketing is a lot more risky and complex as the companies have to watch out for environmental factors of countries whose conditions could be alien nature to the firms. However, with high risks comes the probability of high return (Brown, 2009, p. 209). With the emergence of global financial and trading bodies like international monetary fund and world trade organization the scope of globalization has also increased; especially for western companies including North American and European firms. Add to that Globalization can also be used by the companies to gain competitive advantage. Firms operating in matured economies like USA and (or) U.K. get very little scope of growth. Also the global economy has become more turbulent in nature. Hence in order to combat the fluctuating economies and to gain competitive advantage companies are looking to expand the businesses across global boundaries to reach resources that can be used to develop innovative new products. Globalization also provides opportunity to the companies to target and generate demand among a new set of customers and thus gain competitive advantage. There are various firms which used to operate on local basis and the performance f such firms used to be pretty subdued. But those companies entered the international market only to gain competitive advantage and became major multinational companies. The present study has been conducted in order to analyze how companies use the global strategy to gain competitive advantage. Also the essential success factors of firms to succeed in the international business have been discussed. Add to that it has also been discussed that how companies can fail in the international market due to lack of planning and vision. The firms at the focal point of discussion happen to be the largest retailer in U.K. and the second largest retailer in the world Tesco (Henry, 2008, p. 89). Thesis How companies can use globalization strategy to gain competitive advantage? Analysis Global strategy can be defined as the strategic guide of a company to globalization. On the other competitive advantage can be defined as various ways via which a company can get the extra edge over the competitors. An ideal global strategy of a company should address issues such as the extent of presence in the global market, different strategies that can be adopted to develop strong global presence, the probable barriers to entry into the global markets, different modes of entry into the global market as well as the probable targeted international markets. Academic research on the global strategies came of age during 1980s. This included various research work done by Christopher Bartlett, Michael Porter and Sumantra Ghoshal (Kolb, 2008, p. 92). There are various factors that influence a firm to go global. However, one of the most important of the factors is the drive to get competitive edge over the other competitors. This can be explained by using the example of Tesco PLC. Tesco PLC is a multinational grocery and general merchandise retailer. The company was founded by Jack Cohen in 1919. As on the early 90’s the company was mainly operating in the U.K. market only. Hereby it needs to be mentioned that Tesco was operating in an already matured economy and retail market. The company was lagging behind U.K. retailers Sainsbury’s and it was the second largest retailer in the country. However the drive to get competitive advantage coupled with the global economic reforms and liberalizations urged Tesco to expand the boundaries beyond U.K. and enter the global retail market. In its effort to become a multinational company Tesco entered Hungary in the year 1994. Belch and Michael, 2005, p. 325). Since then the results speak for themselves and as a matter of fact there has been no turning back for Tesco. Today Tesco has retail operations in 14 countries in North America, Europe and Asia. The total revenue of the company as on 2012 happened to be ?64.539 billion. Today Tesco is the largest retailer in the U.K. and has overtaken Sainsbury’s. It holds 30% of the market share in U.K. According to a research conducted by Deloitte Tesco also happens to be third largest retailer in the world just after Wal-mart and Carrefour. Source: Deloitte Touche Tohmatsu Limited and STORES Media Position Retailer Name 1 Walmart 2 Carrefour 3 Tesco 4 Metro 5 Kroger 6 Schwarz 7 Costco 8 Home Depot 9 Walgreen Co. 10 Aldi Source: Deloitte Touche Tohmatsu Limited and STORES Media There are a number of factors that can influence a company to go for globalization and gain competitive advantage. These factors include pull as well as push factors. While explaining the factors influencing the globalization strategy of a company the market entry of Tesco in to China has been considered. As discussed before prior to the globalization strategy Tesco was operating in the U.K market only. The U.K. retail market was already a saturated one which major competitors like Aldi, Sainsbury’s, Morrisons, etc. There was steep competition and the market provided very little opportunity for growth. Such circumstances may have prompted Tesco to expand the business beyond the local boundaries. Another reason could be relative strong position of Tesco which prompted to invest in to the Chinese market. This probably happens to be prime reason for entering into the Chinese retail market. Over the years China has evolved as one of the most emerging economies in the nation. During the early 80’s China has a very much closed-economic policy and there was very little encouragement for the international firms to make investment. However, things started to change as the Chinese government started to focus a lot more on the educational policies of the country which increased the number of skilled workers and reduced the gap the between the life style of urban and rural societies. However, the educational reforms created a sudden burst of unemployment as there a classic case where the supply of manpower was a lot more than the demand (Kotler, 2001, p. 25). Hence, in order to produce jobs for the workers the Chinese government finally decided to enter the WTO agreement as on September 2001, China became an official member of WTO. This meant that the country had to follow the WTO regulations and commit to liberalization of the regime. This was the beginning of the emergence of China as an emerging economy. The WTO entry and revised trade regulations of the country encouraged many companies to enter the country including major retailers. As on 2009, the country had 35 retailers out of the top 50 retailers in the world. The ministry of commerce provided approval to more than 1000 retailers to operate in China with contractual FDI of $1.9 billion as on 2005. Due to new revised economic policies the country saw a rise in the GDP also. The GDP in 2009 happened to be 335,353 million Yuan which happened to be a 7% increase than the previous year. Another major factor was the per capita increase in the net income of the rural households of the country which was 5153 Yuan in 2009. There happened to be a solid 8.5% increase as compared to the previous year. Due to the per capita income rise there was an increase in the disposable income of the people which happened to be 17,175 Yuan with an increase of 9.8% than the previous year. All these factors made china a very attractive market to invest in. The labour prices in South East Asia always have been low as compared to the western countries. This also provided Tesco to produce quality products at a low cost. Due to the global expansion Tesco has to produce a lot more products as the company has to cater to global audiences. This means that the company has to produce a lot more products. Although the total cost of production due to this would have increased, but the per-unit cost of production would have gone down and thus the company would have been able to enjoy economies of scale. Economies of scale provided a competitive advantage to the company as it can act as a potential barriers to entry. Different Market Entry Strategies to Gain Competitive Advantage While making entry to an international market another very important thing to be considered is the mode of entry. Often the type of entry chosen by a company can make or break the future of a company in the international market. There various modes of entry than can be chosen by a company to make entry into the international market. In this section of the study different modes of entry into the international market would be discussed. While using exporting as a strategy to enter the international market the companies produce the goods in the home country and then try to make the goods available to the target foreign market. There are mainly three types exporting such as direct export, indirect export and piggybacking. Indirect export is mainly used by firms when it has minimum amount of resources. It is the process of selling products to an export intermediary. The intermediary will in-turn makes the products available to the foreign market. In case of direct exporting the firms look to reach to the customers directly. Direct exporting is a lot more complex than in-direct one. In case of piggybacking or complementary exporting the firm looks to use the distribution network of another company to make the products available to the targeted foreign country. The company having established distribution network is called carrier and the firm using the network is called rider. International licensing can be used by companies having competitive manufacturing process, marketing expertise and technical knowledge to enter the international market. Licensing agreements usually last for 15-20 years. By using licensing the company can get rapid market penetration and reduce environmental risks. However, sometimes the company may lack control over the licenser and has to rely on the licenser for product quality and consistency. International franchising is mainly visible in service sector such as health care, food chains and educational business. In case of service sector transfer of IPR is needed for a long period of time. In case of franchising exercise the domestic firm is known as the franchiser which provides IPR to the international firm known as franchisee. The franchiser gets a management fee. Franchising agreement usually lasts for five to ten years. The meaning of strategic alliance is the collaboration and co-operation between two firms in order to achieve a common strategic goal. Strategic alliance with competitors may result in the use of strengths of the competitors. Also the market risks are shared by the two firms. However there may be existence of differences and conflicts. Also the companies may end up providing important and resources to present partners who may become future competitors. When a company looks take complete control over the market it looks to go for equity in participation and joint ventures. In joint ventures two or more companies look to gain competitive advantage over the competitors by coming together. It is a part of the internal- external growth. Joint ventures provide access to international market with high tariff barriers. The foreign firm gets access to the strengths of the local firms such as the distribution network. It also reduces economic and political risks. However, one of the major cons can be the opportunistic behaviour of a partner firm can lead to the high rate of tariff dissolution. Example While entering into China Tesco had to choose a strategy by which the company can reduce the social, political and economic risk. On the other hand the company has to gain knowledge about the consumer behaviour o China. Hence the company chose joint venture as a strategy. With an objective to make substantial presence in China, Tesco entered China in 2004 through a joint venture. The company signed a 51%-49% joint venture agreement with local company Shanghai Hymall Commercial Retail Group. Eventually the sakes increased up to 90%-10% in 2007 Burgemeister, 2003, p. 192). Antithesis So far one has seen one side of the coin. Now it is time to look at the other side of the coin; i.e. instances where a company has done reasonably well. Now in order to have a look at the other side of the coin the same company in the form of Tesco would be used. Tesco entered U.S. in the year 2007. While entering the U.S. market, Tesco had a lot of things going in the favour. The political condition as always in the country was quite stable. The political parties were also inclined towards business investments. Economically however, the situation was a little different as U.S. and the global economy was on the verge of a major economic crisis due the debacle in the mortgage crisis in the real estate business. Also technologically the country provided a lot of opportunity in the form of the rise in the info technology, communication and the rise of digital medium. Socially the consumers of U.S. were exhibiting a change in the consumer behaviour. The consumers were looking to become a lot more conscious. Also unlike before, the consumers did not like to go for a long drive to buy products from super markets like Kroger, Supervalu, etc. Rather the consumers were focusing a lot more on the convenience factor. Hence, to match the consumer demand Tesco decided to build convenience stores named as Fresh and easy. However there was one major threat in the form of the presence of the retail giant Wal-Mart. Wal-Mart had been keeping a very close eye on the operations of Tesco. As a matter of fact the CEO of Wal-Mart once found quoted that the plan of Tesco to open Fresh and Easy stores would have great chances of success. Wal-Mart also opened pilot stores in Phoenix in 2008. It was the same area from where Tesco had been operating. Here needs to be mentioned that Wal-Mart operates on EDLP, i.e. every day low price basis. Here it is to be said the choice of Tesco to enter U.S. was termed as many as a gamble due to several factors. The retail market of U.S. was already a matured and competitive one. The largest retailer of the world in the form of Wal-Mart was dug in good. Also the danger of the recession was at large. All these made the entry to U.S. a major gamble. But actually the main reason of failure of Tesco in US was not external, bit internal. Despite of the threats and risks Tesco had a lot of opportunity to good in the U.S. one of the key strategies for success was going to be choice of market entry. The company had multiple options in the form of JV, Strategic Alliance, Franchising, etc. Among these Franchising and Licensing was not ideal for supermarkets hence those two were out of the card. Usually while entering the market Tesco goes for acquisition. It had gone for joint venture in France, but unfortunately thing did not fall in to part. Hence the experts felt that Tesco would acquire a local firm. This would minimize the risk and provide much required customer insights also. But shockingly Tesco went for a green field strategy. Green field strategy is such an instance where company enters the international market without taking the help of any other local firm or middleman so to speak. The gamble did not pay off. The plethora of risks got even bigger as recession crept in. On 2009 the company reported that the performance of the Fresh and Easy stores is far below expectation and the company had incurred trading loss of ?142m. This case is a classic example how despite of all the potentials Tesco failed due to one major mistake of choosing a seemingly in-appropriate mode of entry. Of course there was existence of other threats. But obviously the main reason was the choice of entry to U.S. There is very little doubt that there are various advantages of a global strategy. However, amidst the advantages there are some disadvantages also. While entering the global market the company may find difference in the need, wants and demands patterns of the consumers for products. The company may also find differences in the response of the customers to the different elements of the marketing mix. There can also be dissimilarities in the development of products and branding. The external environmental factors including the political, economic, social, technological, legal factors can also be a bit too complex to understand. There can also be disparities in the institutional facilities such as the infrastructure. The company may find differences in the various administrative process and procedures (Czinzota, Ronkainen, Moffett, Marinova & Marinov, 2009, pp. 423-429). Also the company can find it difficult to place and position the product in the minds of the international consumers as compared to the local consumers (Churchill, 2009, p.211). Conclusion In the modern day business environment globalization is inevitable. Companies look to go beyond the domestic borders to enter new markets and target new customers. There is very little doubt that entering new foreign markets are extremely risky. But with high risks the company gets the opportunity of high return. One of the main objectives of entering the global markets is to gain competitive advantage overt the competitors. One classic advantage of this has been Tesco as the firm used to be 2nd best retailer in U.K. But as the company decided to enter global markets, Tesco not only became the largest retailer in U.K. but also the third largest retailer in the world. However, there are some issues that a company should keep in mind while entering a global market. One of the major issues is the choice of market entry strategy. While Tesco went for a joint venture which seemed to be quite fruitful for China; the same company decided to go alone and use Greenfield strategy to enter U.S. which unlike China happened to be a matured economy. Also it had presence of Wal-Mart. And unlike china Tesco failed to make the same impact. Although there were other external factors but the major issues for failure was internal. Hence to conclude it can be said that despite of all the benefits of globalization a company should concentrate on developing appropriate strategy and execution of it to gain competitive advantages. References 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. Brown, L. 2009. Marketing and Distribution Research. Ronald Press Company: US. Belch, G and Michael, G.2005. Advertising &Promotion-An Integrated marketing Communications Perspective. McGraw-Hill: UK. Kotler, P. 2001. Marketing Management. Prentice Hall: UK. Burgemeister, S. 2003. Market analysis. GRIN Verlag: DE. Churchill, G. 2009. Marketing Research. Cengage Learning: UK. Bibliography Nargundkar, R. 2010. Marketing Research. Tata McGraw Hills Private Limited: India. Bhattacharya, S.2009. 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