Tesco: Market Environment and Resource Capability Analysis - Essay Example

A. Market Environment analysis Liberalization has led the multinationals to invest in Asian countries as a variety of incentives are offered to invest in the region. The Asian nations are developing at a much accelerated rate and they possess enormous human and natural resources. The retail segment is one such area inn which the multinationals are concentrating. Retail shopping has changed the traditional shopping customs by introducing a western shopping culture through product variety and modern store formats. Retailing grocery is an intensely competitive, low-margin and high volume industry which has evolved over the years and is now dominated by chains utilizing the latest technology. The force driving the revolution is the changing consumer characteristics. Speed, convenience and fresh food – these are the benefits that consumers have been able to derive through shopping at retail supermarkets. Tesco is the biggest retailer in terms of market share and has ventured into several foreign markets. Tesco has two distinguishing features – it is UK’s largest retailer in terms of market share and the world’s biggest e-grocer (Yoruk & Radosevic, 2000). The market environment analysis of Tesco’s presence in China would demonstrate the strategic changes that Tesco may need to incorporate to attain maximum results. Since China has opened up for foreign direct investment in manufacturing and financial sectors, it has experienced tremendous growth in every sector. Social and economic reforms have led to rapid increase in consumer incomes and demand for products and services (Chan, 2005). In the first six months of 2004, the consumer retail sales of the nations were 2.5 trillion yaun. Two thirds of the total retails sales have come from the urban consumers which comprise of one-third of the total population. As the wholesale and retail services have been controlled by the state, it has been a barrier to the development of a nationwide market. The China’s central government decided to open its retail market to foreign investors in 1992 to accelerate the country’s tertiary industry growth and to create more job opportunities (Wong & Yu, 2002). This broadened the channels for foreign retail investors to tap into China’s 1.236 billion population. Change in the consumer pattern since reform is also responsible for the growth in the private sector (Chow & Tsang, 1994). Although super markets were introduced in China in 1981, there are apprehensions about its growth (Mai & Zhao, 2004). The Chinese consumers still prefer to shop in traditional markets rather than super markets for their food and food accounts for more than half of the total household expenditure. Research suggests that very small fraction of the Chinese population shops in supermarkets. Nevertheless the retail sector seems to be growing at the rate of seven percent a year in China which is faster than many developing countries. Supermarkets function on the self-service basis which enables economies of scale, efficiency and offer a wide range of products under one roof. When they opened in 1981 they mainly catered to the foreign tourists and the overseas Chinese. China’s enormous population and growth in consumer demand have led to creation of new market segments with distinctive profiles including the children. In 85 percent of the urban families, the average consumption of the children is equal to one-third of the family’s income. The children have enormous market potential as they have their own money to spend, to a large extent are responsible for their parents’ choice of consumer goods and they have all of their purchases done ahead of them (Chan, 2005). These characteristics and information can help design the right strategy for the Chinese market. Children learn about the products through parents or peers. Retailers from various nations already have presence in China. The major retailers include Carrefour (France), Wal-Mart (USA), Tesco (UK) and Metro AG (Germany) among many others. Foreign investors use a variety of modes to enter China. China is a very different market to compete and most retail stores are located in the bigger cities like Beijing and Shanghai because of low car ownership by the locals (Saimee, Yip & Luk, 2004). Carrefour has seventy-three hyper markets across twenty nice cities across China and Wal-Mart operates sixty-six (SD, 2007). The government policy wants to maintain control over the distribution and retail trade. The central authorities in Beijing have made the rules stringent and imposed penalties for non-compliance of these rules by the international retailers (Saimee, Yip & Luk, 2004). Tesco does not enjoy the first-mover advantages in China as Wal-Mart has already been operating for a long time. Based on this information, a PEST analysis and Porter’s five forces model, the competitive environment in China can be obtained. PEST analysis consists of political, economical, social and technological changes that can take place in China and how this would affect Tesco’s presence in China. Any changes to these could create a threats or opportunities for this enterprise. A PEST analysis of Tesco in China demonstrates that despite the reforms, the wholesale and retail services are controlled by the state which is detrimental to growth. Even though the government has liberalized to a large extent, certain rules have not been relaxed which are an impediment to growth. The environmental conditions in China are different from the developed countries. The political, legal, regulatory and cultural laws have to be strictly followed. Social and economic reforms have led to greater consumer demands and increased incomes. Technologically China is still not very open and internet governance is strong. Thus Tesco would not be able to gain much by offering online purchases. According to Porter five forces model (Table I), the competitive forces in the industry can be determined. This will help to identify the strategic moves that Tesco needs to make to position itself better. Table I Source: Francis, (2004). Customers have the bargaining power as there is enough competition but nevertheless they can be approached through the mass media or through parents and teachers which have a strong influence on the children. They are not well informed and rely on word-of-mouth publicity or peer influence. China offers the advantage of low labor costs and development costs while having a growing consumer market (SD, 2007). Most of the competitors have their shops in larger cities and in the city centers. Research further suggests that the multinationals are targeting the wealthiest consumers in China whereas the mass comprises of the middle and lower income group which reside in smaller towns or the rural areas. One of the main competitors – Carrefour – have introduced tanks of live bullfrogs, turtles and fish in the ‘‘fresh food’’ section, which gives the feel of shopping at the local hypermarket. The Chinese consumer feels comfortable in such an environment. China faces a shortage of skilled workers as the wages have risen faster than the country’s GDP. Various other offers have to be made to recruit and retain staff. Due to inadequate education, foreign investors have to spend extra on training and development. Carrefour has invested heavily on training the managers. Restrictions on ownership have been removed by the Chinese government and as a result, the foreign firms are buying out their joint venture partners. Government regulations do not prevent foreign investment in the retain sector as it is not considered a strategic sector (Jones, 2004). Retailers in China also face local competition as the local people are good at imitating hypermarkets. They are more competitive on prices and enjoy more government backing than the foreign retailers (Jones, 2004). Poor infrastructure leads to problems in distribution. Advertising costs are high and talented staff is difficult to retain. As of March 2007, the foreign retail chains are enhancing their strength, accelerating the pace of opening stores, and becoming bigger and stronger through integration and cooperation (Yuyang, 2007). This is view of the fact that new chains like BestBuy and ACE from USA have entered China in 2007. Even the domestic-funded retail supermarkets have accelerated pace. They have accumulated strength over the years and have become stronger. Hence threat from substitutes is high. B. Resource Capability Analysis To create competitive advantage firms need resources, capabilities and competencies. Understanding these creates the core competencies for a firm (Hales & Barker, 2003). Core competencies imply access to a wide variety of markets, contribution to the perceived customer benefits and it should be difficult for competitors to imitate. They are built through a continuous process of improvement and enhancement. These core competencies help in the creation of value chain. According to Porter, ‘every firm is a collection of activities that are performed to design, produce, market, deliver and support its product. All these activities can be represented using a value chain’. The porter’s model of value chain (Table II) describes generic activities undertaken by the firm to procure, transform and add value to the products and services delivered to the customer. Strategic decisions become clearer and it helps to exploit linkages with suppliers. Table II: Source: Hales & Barker, 2003 Tesco entered China through a 50 percent joint venture with Ting Hsin International, a firm that owns 25 hypermarkets in China. They have given their local stores a local name “Le Gou” which means happy shopping in Mandarin. It usually sends an expatriate as the manager in overseas locations but the service staff at the hypermarkets is local employees. The average education level in China is poor and hence Tesco has to invest substantially in training and development. Even then retention is a major issue in China in general. Tesco believes in putting its customers first in all aspects of the business including Loss Prevention and Security program (LP&S). Through this program they have made the stores a safe and friendly environment for the staff and the customers (Wong, 2006). They have employed technology to enhance the safety and security. They concentrate on communication and cultural issues but the managers are trained to have an adaptable approach. They cater to each country’s needs and provide a tailor-made framework while maintaining the organization’s core values and principles. They are also employing the RFID technology to track the goods in transition and stocks at each of their stores. Tesco sources its goods locally and not from the developed world to cater to the local market as well for its stores in other countries. This does not give it an edge over others because others like Wal-Mart are following the same practice. Inbound logistics – they apply the shrink management to understand the product flow – from when the products leave the factory for the warehouse and from the warehouse to the store and all the way to the shelf (Wong). They have the one-tag labeling which incorporates the barcode, product size, security element, designer look, price and brand. Gaining competitive advantage requires building on the proven principles of effective strategy (quoted by Porter, cited by Delaney-Klinger et al. 2003). Tesco did not try to attempt to build a new model of business but used existing assets to grow. Tesco has moved aggressively to improve SCM to balance customers’ demands with the need for profitable growth. This includes coordination within different functional levels, inventory management and cost control. Tesco is unable to offer fresh produce and fast food counters like Wal-Mart and Carrefour (China, 2007). Tesco has 39 hypermarkets while Wal-Mart has 56 and Carrefour has 70, as of 2005. Tesco does not rank amongst the top four retailers in China. Tesco lacks an efficient distribution system and cold-storage warehousing facility. The major retailers are moving away from central China on to second and three tier companies. Tesco has lived under the shadow of larger, high-profile international operators like Wal-Mart and Carrefour. Tesco lacks local experience and this is the reasons they have tied up with local hypermarkets. Their success in China largely depends on whether they can steer clear of the cultures and customs and supply what the Chinese are actually looking for (Wheatley, 2007). They supply ready-to-eat packed food but the microwave culture in China is yet to pick up. Most do not even own fridges and hence they prefer to buy small quantities of fresh food. Tesco lays great stress on food quality and safety and are unable to source their supplies from a reliable source. Value has been defined by Porter as ‘what buyers are willing to pay’. Firms create value for their customers either by lowering the costs or offering something different from the competitors (Bevan & Murphy, 2001). Customer’s value perception also depends upon the past association with the product or service. If the retailer can capture what creates value for their customer then they gain competitive advantage. This Tesco has been able to do through right merchandise and wide range of goods on offer. In order to gain edge over others and make a strong customer base, Tesco has been allowing live turtles to be displayed for sale and butchered at the supermarket (Paul, 2007). Customers are also allowed to take the live turtle home to butcher the way they want. Even though this is against their corporate values, they want to gain popularity and profit in China. This is also against Care for The Wild International and such similar organizations. The core competencies have to be exploited. To remain competitive, innovation in product and service offerings has become vital to attract consumers. C. Strategic Fit analysis Competition in the retail sector is tough and the main competitors for Tesco are Wal-Mart and Carrefour who have large expansion plans. They also have an edge as they make purchases from China for their global stores. China’s reforms have opened up the country for foreign investment and retail is not considered a strategic sector where restrictions are imposed. Besides, the local people duplicate hypermarkets with the support of the government. Multinationals are targeting the wealthiest consumers in China whereas the mass comprises of the middle and lower income group which reside in smaller towns or the rural areas. Tesco is in a difficult position and is struggling to survive despite registering sales. They have tried to give the local feel to their stores by having a Mandarin name and store front display suitable to the local taste. While they are unable to offer fresh produce, they are offering live turtles in an effort to please the customers. They also do not have local experience with the culture and customs, which is very essential for China. Within China itself, different regions follow different practices and customs. Understanding the local culture is of extreme importance in China to be able to do business successfully. Opportunities are plenty for the retailers and needs to be tapped. The average middle class Chinese still prefers to shop at the local stores as they want familiar surroundings. Besides, most super and hyper markets are located in the city center. Tesco should consider opening new outlets in the rural areas where full support from the local government is being provided. It may be possible to tap this market and exploit the potential so as not to restrict or target only the high income group. Chances are that this could boost sales even though the profit margins may be initially low. Setting up retail shops in the suburbs or small towns may be beneficial but it has to be given time. Demands should not be over-estimated as the rural class will gradually get educated. Tesco could consider opening branches in smaller towns but at market places. They should move inland into two tier and three tier cities where the construction and production costs are lower. The potential lies in the rural areas where government has been spending to modernize and improve the distribution system. Opportunities abound in the Pearl River Delta (PRD) and Yangtze River Delta (China, 2007). Focus should be from sales expansion to efficiency enhancement. Having better qualified staff would enhance the super market experience as the Chinese like someone to attend to them while they shop. Most of the shoppers are ignorant of the new products that come to the market and need plenty of information. This calls for local, educated staff to attend to them. Few Chinese own cars and most supermarkets are in city centre. Tesco can also consider offering shuttle bus services from main streets to the supermarket to boost sales. This would be an added value to the services, which none other has considered. Another interesting way that Tesco could add value to its services, is introducing online shopping for its customers in China. In UK and elsewhere, it has been the leader in this service and has its e-commerce in place. China has a large urban luxury customer base. China has more than 119 million internet users and by 2007 this was expected to increase to 178 million (China, 2007). There are more than 20 million online shoppers in the country and online shopping has increased by 35% between 2004 and 2005. The younger generation is computer savvy and the payment and credit system has matured. Online retailing presents a viable route to reach the Chinese consumers. E-commerce requires transparency, integrity of information, enforcement of contracts at a distance, reliability of payments and the recourse for frauds and errors. There are several drivers of e-commerce of which the most important ones according to Amit and Zott are transaction costs, lock-in and novelty. It thus becomes essential to analyze the issues and the drivers surrounding the development of the digital economy. Tesco already has its LP&S in place and can consider introducing online shopping for their customers. Amit and Zott (2000) contend that retailers can create new methods of producing, marketing and selling. Hence they can offer brand new value propositions. Being first to introduce something new gives competitive advantage but it depends heavily on the capabilities and the strategy of the firm. Tesco did not succeed merely being the first-mover in online business but it gained its market leading position by educating and empowering its customers to adapt the online channel (Tse, 2005). Relationship marketing has shifted the focus of the marketing exchange from transactions to relationships. A stable customer base is a core business asset (Rowley, 2006). Customer loyalty is essential to build relationships. This fact has been recognized by Tesco who introduced the Club Loyalty Cards in the UK. They can adopt the same approach in China and have the first mover advantages in this service offering. Thus to be able to make a strong base in China, Tesco has to change its strategy to fit the local culture and customs while employing certain techniques not yet introduced in China. This would fetch them both the middle class segment (through rural stores) and the upper class (through online shopping and loyalty cards). References: Amit, R., & Zott, C., (2000), Value Drivers of E-Commerce Business Models Bevan, J., & Murphy, R., (2001), The nature of value created by UK online grocery retailers, International Journal of Consumer Studies, 25, 4, December 2001, pp279–289 Chan, K., (2005), Store visits and information sources among urban Chinese children, Journal of consumer Marketing, 22/4 (2005) 178–188 China (2007), New consumer dynamics: the impact on modern retailing, 03 Jan 2008 Chow, C. 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