Tesco - Benefits and Disadvantages of Expansion via Organic Growth vs Acquisition - Essay Example

?Critically evaluate the benefits and disadvantages of expansion via organic growth versus expansion via acquisition using real life case of Tesco toillustrate your answer. Expansion via acquisition has become one of the leading business expansion strategies worldwide, particularly for large size businesses. It is very true of the latest high trends, as per Reuters (2013, October 4), it is forcing disinterested companies to adopt “poison pill”, applied to put on hold undesired takeover -- the shareholder right plan in case an investor buys out more than 10% shares. This global business related news is encouraging in the context of financial downturn of the year 2008, still casting its shadow on the global growth of large businesses. Luypaert & Huyghebaert (2007) attempt a statistical analysis of the expansion via acquisition strategy becoming a trend, as in 2005 only, 29,585 acquisitions got materialised. Companies prefer to grow and expand through acquisitions rather than organically because it is the quicker way of growth relatively to internal growth as the aimed company is well positioned with its production, distribution and customer base. It also minimises the risk of investing for the increasing growth of the company. Otherwise also, expansion via acquisition could prove to be cost-efficient way out relatively to organic growth, especially when the replacement cost of assets is higher than the concurrent worth of the aimed assets. Another benefit of the expansion via acquisition is that in comparison to organic growth, it can be acquired by paying through the stock as well. It can be a way-out for companies facing cash-crunch or for those companies already deficient in debt power. Literature reveals that during flourishing stock market behaviour, bidding companies prefer to pay for the acquisition through stock. Irrespective of this fact, expansion via organic growth and via acquisitions is mutually inclusive investment decision for a firm; it can be an added advantage to choose any of the expansion methods rather than selecting a single alternative. Before taking a decision to go either for internal expansion or expansion via acquisition, thorough research needs to be made to gather industry impact and aggregate market variables for opting out external expansion. There might be the possibility that firm size may artificially hold the impact of industry concentration whereas the market-to-book ratio may reveal the comfort of bidding firms to reward aimed shareholders with stock if stock markets are flourishing. Industry features are crucial factors like the potential for economies of scale, industry concentration, sales growth and deregulation, and aggregate market variables, like historical volume of merger and acquisition, stock prices, GDP growth and the output spread (Luypaert & Huyghebaert, 2007). In a mutually inclusive relationship between internal growth and expansion via acquisition for making investment, a company may opt for growth via expansion additionally to organic or internal growth. Financially sound companies with enough investment possibilities would prefer to practice both options of growth for leveraging from competitive advantage as early as possible. In case, firms face cash crunch, they might prefer an alternative of the two. Strategies for both kinds of growth options need not to be necessarily related. Statistical research on the connection between external and internal growth is limited with complicated outcomes. Hay and Liu, as cited by Luypaert & Huyghebaert (2007) evaluate M&A in the UK across 1971–1989 and find that M&A and organic expansion are supportive to each other. On the opposite side, Dickerson et al., as cited by Luypaert & Huyghebaert (2007), employing data on UK listed companies in manufacturing during 1948–1970 and 1975–1990, note that the connection between organic growth and the possibility of expansion through acquisition is surely negative, which underscores that these growth strategies are to be used alternatively (Luypaert & Huyghebaert, 2007). Clarke (200) analyses the UK changing trends in retail competition, impacting local customer tastes in the grocery division. Including literature on the economic value of competition, it links vertical market strength and various retailers’ capacity to compete with other large players, turning out to be dynamic in competition. Robust retailing has changed the parameters of local customer alternatives. Nevertheless, there is a strong feeling that not enough statistical data is available on the UK grocery retailing competition. Research by Clarke (2000) somehow connects to the question of vertical expansion versus horizontal expansion for getting competitive advantage by big players, such as Tesco and Wal-Mart. Palmer (2005) evaluates the expansion of Tesco through a dataset of 62 thorough interviews with major executives, sell- and buy-side analysts and corporate advisers of major investment banks in the City of London to study the experiences of Tesco’s European expansion. His Tesco case study reveals many varied aspects of the firm’s global expansion experience. His study focuses on the “shocks” of the global retail marketplace and the insight that the size of the local market might become a hurdle to change and global learning experience. Indirectly, it means that organic expansion discourages business expansion through acquisition, which happens not slowly and steadily but through shocking uncertainties. Tesco has maintained its self-proclaimed strategy by behaving genuinely ‘flexible’, ‘local’ and ‘multi-format’. Tesco’s globalisation spree was strategically varied as per regional peculiarities. In Central Europe, it acquired competitors’ stores at low cost. In East Asia, it relied on collaboration methodology by entering into alliances with local retailers. This policy offered critical insights to Tesco over local political climate and institutional environment besides revealing the ‘local face’. This resulted in later acquisitions of bigger stakes (Wrigley, 2005). Considering past literature on internal growth versus expansion through acquisition, the present scenario of critical decision making by the Company management can throw better light on Tesco’s preference for internal or growth by acquisitions globally. In its fight back to regain the lost competitive edge, Tesco had on the competitors, it has laid its hands off the Value products to maintain updated line of products. Such internal shifting in product range, its content or packaging is seen as more than rebranding. Getting rid off the Value band, nevertheless, has been a contextual strategy to boost falling sales and market share in the past 18 months to Iceland, Asda, Sainsbury's and others (Wallop, 2012). Tesco wants to build strength through affordable quality range expected by customers, to be delivered to them via Everyday Value. Such a strategy to balance quality and price better than before is certainly a dynamic move to be appreciated. Irrespective of the internal growth through product updating and matching pricing and quality, Tesco has not been coping well on its core business in global market. It is sidelining the UK market interests to penetrate China and the US markets. David Gray, a retail analyst at Planet Retail, underscores an old issue of businesses planning overseas expansion: “Tesco went on an acquisition and diversification spree, but at the same time it under invested in existing stores in the UK and lost its focus on food”. Tesco’s UK operations had been auguring well in the past, helping to expand globally from the garnered market share of nearly 30% in the UK (Barford, 2012, p. 1). Tesco knows the importance of home market, therefore, it is investing in increased staff at store locations, refreshing them with reduced prices and better product range, hoping to achieve better results in terms of higher sales and increased revenue generation. It is fully aware as well of the important role of internal operations through increased communication with customers. Worried over its falling profits in the UK, Tesco is investing hugely (?1bn) on beautifying its stores to attract customers, distracted by the appreciative looks of competitor stores, as it wants to “put the heart and soul back into Tesco”, and to compensate the customers for taking “a little bit too much away from the shopper” in the past hard times (The Guardian, 18 April 2012, p. 1). Tesco has gained some success in boosting sales by cutting on price but relatively speaking, customer expectations have been high from Tesco to deliver on price and quality besides updated product range. Dotcom stores management also has pressurised Tesco to cut the new store opening spree by 40% to satisfy the online customers through Argos-style Click & Collect business for online shoppers. Changing shopping habits of the customers has also compelled Tesco to bring about a dynamic shift in product types and range. Analysts view Tesco’s cut-down in business expansion to pose no risk so far as it is the industry leader in opening new stores. At the same time, global business expanded in 12 countries has shown 18% growth at ?1.1bn, increasing overall margins for the group of 1.3% to ?3.8bn till 25 February 2012. Tesco plans to continue with the loss making US chain Fresh & Easy for future growth and the Tesco Bank, poised for growth. It is refurbishing its UK chain of 2,700 stores, where positives are outweighing the negatives only “slightly” (The Guardian, 2012). Tesco’s Fresh and Easy has turned out to be monetarily ‘Stale and Difficult’ due to management ego and poor risk appraisal by spending ?1.6bn (Pratley, 2012). Customers found flaw with the very name of the store that resembled the name of a deodorant. It could not create the shopping feel and environment due to its cold and unpleasant buildings, lacking the happening British food and general degrading quality of the food otherwise (Bateson, 2012). Global operations of Tesco are going haywire, with the European stores hit by eurozone crisis. In Korea, it is passing through financial losses amounting to ?100m due to the new laws reducing trading time of the day. Performance is not any better in China. Trade analysts are giving poor reviews, taking inputs from surveys, revealing the decreasing graph of shoppers from 35% in the last year to 29% only at Tesco. Customers are having issues with Tesco products on quality and price both (Finch and Walsh, 2012). Major happenings of the year 2013 for Tesco include its acquisition of Giraffe restaurants for ?48.6m in the UK market segment (BBC News, 13 March 2013) and making an exit from the Chinese supermarket business by deciding to merge its chain of 131 stores into joint venture with China Resources Enterprise (Neville, 9 August 2013). On both counts, it shows wisdom in the Company decisions, as there is no point bearing losses year-on in foreign operations and reinforcing innovation at home operations by acquiring Giraffe for better customer experience. Overall, the Tesco case study reveals that its management is following a policy of reducing global shocks where required and strengthening organic expansion through product innovation, local acquisitions, for better shopping experience, revamping store locations, offering better quality along with price-cut. In a way, it is moving ahead with a balance approach to avail the benefits of both modes of business expansion. 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