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Theoretical Analysis of Internal Emergence of Tesco

3330 words (13 pages) Business Assignment

4th Nov 2020 Business Assignment Reference this

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Introduction

The emergence of international service companies stems from several global economic trends. Firstly, manufacturers have moved to low-cost countries seeking to reduce their labour costs. Therefore, it was inevitable for service providers to follow manufacturers moving to the global market. Secondly, it was easier to expand their business territories overseas with technological development, making boundaries of states less important. Thirdly, a saturation of the domestic market made the industrial environments competitive, leading firms to explore new markets. Lastly, Firms improve profitability and growth by expanding their business to other countries. (Zahra and Garvis, 2000, Frazer Winsted, 1998). The retail industry is a good example to analyse considering their successful settlement in the global market. Tesco, which was founded in 1919 by Jack Cohen, was chosen as an example case in this essay because Tesco is the largest retailer in the UK, and they have innovated and developed their core competence leading to successful internationalisation. (Palmer, 2005, Muller, 2002) This essay will demonstrate the emergence of Tesco as an international service provider by considering the following frameworks and theories showing important factors of international business view: (1) Value Chain Analysis (2) Porter’s diamond model (3) Entry Mode (4) Resource Base View

Analysis 1 – Value Chain Analysis

Companies should procure competitive advantages in foreign markets which are typically unfavourable to foreign entrepreneurs, which means they will be encountering various disadvantages from unfamiliar markets. (Johnson et al, 2008). According to Michael E. Porter (1985, p. 8), reducing costs and making differentiation are elementary means to secure comparative advantages. Value Chain Analysis (VCA) is analysing each firm’s activity from production to sales to find out which activity can be more efficiently improved. It provides companies insight to enhance strengths. (Kaplinsky, 2000) VCA can be appropriately applied to the Tesco’s case. Tesco developed both the primary and support activities and achieved not only cost reduction but also differentiation.

Firstly, in Primary activities, Tesco changed the inbound logistics system from Direct to Store Delivery (DSD) to the centralisation of distribution. (Smith and Sparks, 2004) Through selected distribution centres and integrated systems, Tesco slimmed-down its inventories and enhanced efficiency. (Kaplinsky, 2000) Moreover, Tesco improved operation and sales activity by opening the first self-service store and superstore in the mid-90s.  As a marketing promotion, they introduced Green Stamp Saving scheme in 1963. (S4RB, 2017)

Secondly, in support activities, Tesco adapted a composition distribution system which distributes temperature-controlled products using special vehicles and warehouses so that customers could get fresh products. (Smith and Sparks, 2004) In addition, Tesco made training courses for human resource management and established an integrated internet-based data exchange system (Tesco Information Exchange - TIE); therefore, they could check stocks and sales in time. In regard to the relationship with suppliers, Tesco built a cross-functional style that could collaborate various functions instead of traditional ways contacting each supplier. (Johnson et al., 2008, Smith and Sparks, 2004, Rogers et al., 2005) These attempts reduced the level of stock, increased productivity and operational efficiency as well as supply chain profitability. (Smith and Sparks, 2004)

As discussed, VCA can be used to better understand Tesco’s case. Therefore, companies providing service can apply VCA to develop their value chain activities for competitive advantages.  

Analysis 2 – Porter’s diamond model

In the mid-1990s, Tesco started their business in Central and Eastern European (CEE) countries: Hungary, Czech Republic, and Slovakia, considering the fact that CEE countries had locational advantage to the UK retailers with the full potential of growing economy. (Rogers et al., 2005, Tatoglu et al., 2003) Hamm et al. (2012, p. 3) stated “between 1989 and 1991, the Soviet empire disintegrated. Western-trained neoliberal economists provided the blueprint for constructing capitalism amid the ruins of state socialism. They advocated shock therapy: rapid privatization, liberalization of prices and trade, and fiscal and monetary austerity”. As the figure below indicates (Graph 1), the GDP of CEE countries implementing shock therapy increased by 2000. (Hamm et al., 2012)

Graph 1. Trends in Post-Communist Growth, 1990 to 2000, cited in Hamm et al., 2012, p3

Porter’s diamond model consists of four determinants, factor conditions; demand conditions; related and supporting industries; firm strategy, structure, and rivalry. Michael E. Porter (1993, p8) stated, “These determinants create the national environment in which companies are born and learn how to compete.”     The model provides firms with the perception of competitive advantages of specific nations they intend to expand their business. (Porter, 1993) As an example, below is Porter’s diamond model demonstrating what comparative advantages Hungary had, and how it could be beneficial to Tesco.

  1. Factor conditions: Hungary lacked business-friendly infrastructure and labour cost was relatively low.
  2. Demand condition: High demand existed from CEE countries opening their closed markets. Moreover, most consumers expected differentiated products at a low price.
  3. Related supplier or support industries: Established supply chains working for domestic retailers existed.
  4. Firm strategy, Structure, and Rivalry: Hungary’s organizational structures was hierarchical. In addition, hypermarkets or dominating retailers did not exist.

Tesco invested in building business facilities and relationships with existing suppliers in Hungary. Tesco became a hypermarket leader based on market share in Central Europe by 2002, and they did the most successful business in Hungary. (Rogers et al., 2005, Tesco, 2002, Ireland, 2013, Frazer Winsted, 1998, Passport to trade, no date)

In essence, Tesco’s case was analysed by Porter's diamond model to demonstrate that it is useful to find out competitive advantages of nations. It seems that service firms can also utilize it to know what activities should be located in specific countries.

Analysis 3 – Entry Mode

Entry mode illustrates various thoughts and actions that firms undertake when entering into new markets. Firms need to decide prudently, since each type of entry mode has both advantages and disadvantages. (Figure 1) (Hill and Hernández-Requejo, 2008, Pan and David, 2000) Tesco selected an acquisition mode in which they took over less competitive firms than them so that they not only could start business fast and learn the market gradually, but also access local operating systems easily.

Cited in Pan and David, 2000, p538

To begin with, Tesco initially expanded business in the geographically close nations. They acquired Three Guys chain in the Republic of Ireland in 1979, then they entered France, acquiring Catteau, which was a medium-sized supermarket chain, in 1992. (Palmer, 2005)

Secondly, Tesco focused on entering into emerging markets of CEE countries and Asia. With experience from previous acquisitions, their team had gone to various locations and investigated firms to discover whether those firms had synergies with Tesco’s business model. (Rogers et al., 2005) In 1994, Tesco launched in Hungary by purchasing a substantial amount ofshares of Global and in the same way, they entered into the Czech Republic and Slovakia respectively. Similarly, Tesco firstly entered the Asian market with the acquisition of Lotus in Thailand in 1998. (Griffith, 2002) As shown by the table below,(Table 1) Tesco aggressively expanded its territory.

Source is not disclosed, Cited in Palmer, 2015, p29

Tesco's aggressive internationalisation from 1979 to 2003 cause an increase in growth and sales. For instance, Tesco had over 700 stores in the foreign markets and international sales accounted for 24.5%(£10.5bn) of total sales in 2006. (Tesco, 2006, BBC News, 2006)

Source is Tesco 2006 annual report, Cited in BBC News, 2006

In short, given the fact that Tesco incrementally expanded business through acquisition, Tesco’s case can be explained by one of Entry mode implying various ways to enter foreign markets.

(Penrose and Pitelis, 2009, Wernerfelt, 1984, Hill and Hernández-Requejo, 2008, Child, 2002, Ackerman, 2019)

Analysis 4 – Resource-Based View

Resource-Based View (RBV) theory claims that companies must not only have core competences that others cannot easily imitate but also utilise them in various markets to their benefit. The core competences can be divided into tangible and intangible resources. (Penrose and Pitelis, 2009, Wernerfelt, 1984) Having firm-specific resources leads entrepreneurs to have competitive advantages, enabling them to compete in the host market. Below RBV analysis shows what valuable assets Tesco had and how Tesco exploited them to survive in a foreign market. (Hill and Hernández-Requejo, 2008)

First, tangible resources. In 1996, Tesco became the largest retailer in the UK. Thus, they had numerous stores with great operating systems; moreover, they were available to attract competent human resources and had powerful cash flow. In terms of intangible resources, they had a reputation as a mass retailer, providing various products at a low price, which gave them a vast network and negotiating power with large suppliers such as Procter and Gamble. Additionally, they innovated by launching their own brand, Tesco Value in 1993. For these reasons, Tesco had economies of scale, operating skills, high cash flow and a strong reputation as their resources. (Child, 2002, Johnson et al., 2008, Palmer, 2005, Ackerman, 2019)

Second, Tesco seemed to aware of the importance of capabilities to exploit their resources to operate internationally. David Reid, Tesco's former vice-chairman stated that

The real key is your capabilities. … We rely on our operational skills and operational efficiency. That includes the traditional retailing capabilities—replenishment, own label, innovation. (Child 2002, p. 137)

He also mentioned that their strong cash flow enabled them to become the fastest-growing international retailer. (Child 2002, p. 139) Meanwhile, Tesco utilised competent local employees who knew the host market well. As an example, Tesco translated labels to local language and planned promotions considering local customs and holidays. Furthermore, Tesco was willing to work with domestic providers, and Tesco’s experienced skills and efficiency made it relatively easier. (Griffith, 2002, Child, 2002) The chairman of consultancy Interbrand, Rita Clifton said "They have adapted their store formats very well and have been very good at working with local management," (BBC News 2006) These attempts lead Tesco to settle down in foreign markets successfully.

In brief, Tesco’s case analysed by RBV indicates that identifying core competences and adequately utilising them in foreign markets is essential for successful international expansion.

Conclusion 

To conclude, this essay theoretically analysed the appearance of Tesco as an international service firm. The main purpose of expanding business to foreign markets is to grow and raise profit (Zahra and Garvis, 2000), and Tesco successfully operated in international markets. Based on theories and frameworks used in this essay, Tesco’s case shows the following: (1) Value Chain Analysis can be used for service companies to identify value chain activities and improve competitive advantages. (2) Porter's diamond model seems effective for service providers to point out competitive advantages of nations. (3) Entry Mode shows service firms diverse ways to enter foreign markets. (4) Resource-Based View enables companies providing service recognition of their core competences, and the importance of the capability to utilise the resources in foreign markets. In a global world, global expansion and resulting competition is inevitable. Firms providing service should carefully analyse their value and choose a country with comparative advantages for successful international business.

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