Why Do Companies Go Global?

Tesco’s international strategy Globalisation progressed significantly in the past decade, facilitated by modern communication, transportation and improved legal infrastructure as well as the political choice to consciously open markets to international trade and finance. Included in this wave were the efforts of companies to broaden the geographic reach of their products. Today multinational enterprises own or control production or service facilities outside the country in which they are based.

Although a company can achieve MNE status through the level of control that for example Nike exercises over its manufacturers without actually owning them, most companies become multinationals because of some form of foreign direct investment (FDI) that spreads their geographic activities. Tesco is a global grocery and general merchandise retailer headquartered in Cheshunt, United Kingdom. It is the third-largest retailer in the world measured by revenues (after Wal-Mart and Carrefour) and the second-largest measured by profits (after Wal-Mart).

It has stores in 14 countries across Asia, Europe and North America and is the grocery market leader in the UK (where it has a market share of around 30%), Malaysia, the Republic of Ireland and Thailand. The company was founded in 1919 by Sir Jack Cohen as a group of market stalls. The Tesco name first appeared in 1924, after Cohen purchased a shipment of tea from T. E. Stockwell and combined those initials with the first two letters of his surname, and the first Tesco store opened in 1929 in Burnt Oak, Middlesex.

The business expanded rapidly, and by 1939 there were over 100 Tesco stores across the country. Originally a UK-focused grocery retailer, since the early 1990s Tesco has increasingly diversified geographically and into areas such as the retailing of books, clothing, electronics, furniture, petrol and software; financial services; telecoms and internet services; DVD rental; and music downloads.

The internationalisation of a retailer such as Tesco is a special case: It does not have a single, physical product that could be exported, but retailers typically sell many products by many manufacturers and provide the shopper with an experience, hence retailing contains a major, intangible service component. While consumer tastes in areas such as electronic goods and clothing converge, different cultures still maintain their distinct ethnic preferences in certain product categories; food for example remains a largely local product.

Tesco has evolved an international strategy based on six elements: • Be flexible – each market is unique and requires a different approach • Act local – local customers, local cultures, local supply chains and local regulations require a tailored offer delivered by local staff – less than 100 of Tesco’s International team are ex-pats • Keep focus – to be the leading local brand is a long term effort and takes decades, not just a few years • Be multi-format – no single format can reach the whole of the market.

A whole spectrum from convenience to hypermarkets is essential and you need to take a discounter approach throughout • Develop capability – developing skill in people, processes and systems and being able to share this skill between markets will improve the chances of success in challenging markets • Build brands – brands enable the building of important lasting relationships with customers Dunning’s elective paradigm (1981) integrates several theoretical frameworks into three sets of factors or ‘conditions’ to explain the ‘why’, ‘where’ and ‘how’ of the internationalisation of production: Ownership factors, Location factors and Internalization factors (OLI). Ownership advantages are company assets used to obtain market power linking to Hymer’s firm specific advantages (FSA) and the core competences or resource-based school of corporate strategy. These advantages can be asset-based or transaction-based. These are difficult to identify but could be Tesco. com’s in-store picking method, Tesco’s lean supply chain management, and its use of loyalty card data, which for example Tesco plans to introduce in South Korea soon. Location advantages describe how attractive a foreign country is to a retailer, and these factors are usually grouped as push or pull factors.

While push factors make the home market less rewarding, pull factors make a foreign market attractive. Cultural proximity and Geographic proximity facilitate entering a new market, because it reduces uncertainty. For example most companies seem to first expand into similar markets. Tesco’s first expansion was into central Europe, then Ireland (after a failed attempt in 1979) and then into East Asia. Market Size: Saturation of the home market is a major motive for expansion into other markets, and it is not by chance that European companies (e. g. Carrefour, Ahold, M;S, Tesco, Sainsbury’s) internationalised earlier than American companies (so far only Wal-Mart has built up a significant overseas store net ork) which have much more scope for expansion in the US market and where it remains easier for longer to grow by building another store in an unexploited region in the home market. Competitors’ moves: According to Wrigley (2000), Carrefour, one of the first internationalisation movers, was able to achieve exceptionally high returns “on 6 invested capital in the 25 to 30 per cent range” (ibid, p. 305) in emerging markets (Brazil, Poland) where it didn’t face competition from western-style large-store retailers. The opportunities in the emerging markets in the form of prime locations, especially larger ones, are limited, or a retailer could have built up scale and trust which would be more difficult to overcome by late-movers.

Hence, Carrefour enjoyed a first mover advantage and catching the growing middle class effect. So once competitors are acting, only a quick response could prevent them from establishing themselves rapidly. Walmart’s acquisition of ASDA in 1999 could have accelerated Tesco’s international expansion because Tesco was expecting competition to intensify. Low cost land and labour: The decision of selecting a market may depend on the availability of suitable acquisition targets and the condition of potential sellers as it does on the attractiveness of the market. For the retail sector the availability of skilled, culturally aware management might also be a factor.

The Asian crisis of 1997 seemed to rather facilitated the expansion, and offer more opportunities to acquire assets cheaply. Dunning acknowledges that, “it is not possible to formulate a single operationally testable theory that can explain all forms of foreign-owned production. ” (Dunning, 1992, p. 86, quoted in Johnson and Turner, 2003) Because Dunning’s eclectic paradigm merely establishes conditions which, if met, indicate that an expansion abroad through FDI is appropriate, there are aspects of strategy that are not necessarily captured by the eclectic framework, or require more attention such as entry mode and style. Local Responsiveness: Global vs.

Multinational The two major strategic alternatives available for international retail expansion are global and multinational strategies. Global retailers replicate a standard format throughout the world. Multinational retailers adapt their retail offering. IKEA, Gap and Benetton for example penetrate all international markets with the same products. Tesco has lived up to its self-declared strategy and so far has acted truly ‘flexible’, ‘local’ and ‘multi format’. Tesco’s Internationalisation Tesco has varied its entry method in each region. In newly created markets in central Europe Tesco acquired stores from competitors (Kmart) and the state at low cost.

In East Asia it follows a partnership approach whereby it enters new markets through joint ventures with local retailers. This gives it initial scale and access to knowledge of local political and institutional conditions, as well as a ‘local face’. Such partnerships are often followed by the acquisition of larger stakes. Initial investments were rather small to minimize the risk. Tesco has entered its first and culturally most proximate markets with a fairly unchanged retail model (‘global’) but adopted a local strategy when it entered the East Asian markets (‘multinational’). In Thailand, where transportation is expensive but labour is relatively cheap, Tesco adapted its logistics to this situation.

It has developed small format skill, which also circumvent trading hours regulations. It has developed a low cost ‘value’ format for up-country expansion – a hypermarket format surrounded by leased space for local fresh fruit and vegetable vendors – which provides a vehicle for entry into neighbouring economics. Tesco’s first ever hypermarket was built in Asia, not in the UK. Tesco’s expansion into the US is considered to take place under a different brand name. And while Palmer (2005, p. 35) describes the 1990s as “one of the most intense periods of retail merger and acquisition driven internationalisation” Tesco took its time and entered markets sequentially rather than simultaneously.

Several competitors had to withdraw from markets (Carrefour: Slovakia/Czechoslovakia, Wal-Mart: Germany, Kmart: Czecheslovakia/Singapore), and even though not all of Tesco’s market entries were successful (Tesco had to divest its Catteau acquisition in France, 1990, Taiwan store 9swap with Carrefour, 2005), today it can show a handful of market-share leaderships in significant markets. Using a multinational strategy means that expansion will be slower than that of global retailers, but the advantage of this method is a greater learning effect each country mastered gives the retailer a broader knowledge base. On each occasion Tesco’s strategy matched the conditions of the environment.

Tesco stands for an ‘intelligently federal’ method of international expansion (and this includes several other European retailers, such as Carrefour and Aldi) while (the only) US retailer Wal-Mart adopted an ‘aggressively industrial’ model. What are the drawbacks? Just like Tesco’s expansion into non-food, international expansion diverts management attention away from the still competitive UK retail market. There are more balls to juggle. And international expansion carries significant risk, due to Tesco’s relatively weak position against its much larger and more experienced international peers: • Acquisition outside the UK may prove highly dilutive The size of possible acquisitions are effectively reduced • A merger with a large European retailer would leave Tesco as the junior partner and • Tesco is more vulnerable to an aggressive bid In addition to these risks, Tesco has to keeps its secrets internal (loyalty card, online) to maintain its ownership advantages. At the same time Tesco must make sure to maintain 10their customer focused culture despite international acquisitions and to find the right mix between global operations that allow standardisation and multinational (local) adaptation that are required in each market – globalise where possible, localise where necessary. Lesan Cristina Popescu Antonia Group 935