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Tesco PLC Expansion into Germany Using International Market Servicing Strategy

Table of Contents

  • Aims and objective.
  • Tesco Plc.
  • Tesco Corporate Social Responsibility.
  • Market Selection.
  • German Market.
  • Porters 5 Forces: Competitive Environment.
  • Strengths/Weakness Opportunities/Threats.
  • Market Philosophy.
  • Foreign Market Servicing Strategy.
  • Brownfield Mode of Entry.
  • Recommendations.
  • Risks.
  • Conclusion.

Aims and Objective

The report’s main objective is to define the correct entry mode for TESCO PLC and adapt the existing features to support the current foreign market strategy (FMSS) when the company wants to expand its presence in Germany. The report includes the Corporate Social Responsibility response of the organization. By using the FMSS Tesco’s entry will be facilitated and that will create a competitive advantage against the German competitors.

Tesco Plc

Tesco PLC, the company was founded in the year 1919, by Jack Cohen (Tesco, 2011). The first store of the company has opened in Edgware, North London. The company’s main business was grocery, but as they started to offer their products in the following sectors, the company made a large portfolio..

  • Home Electronics
  • Clothes and Home-wear
  • Entertainment e.g. Television, Mobile communications
  • Pharmaceuticals
  • Finance / Credit cards
  • Insurance.

Tesco PLC Expansion into Germany Using International Market Servicing Strategy

Tesco has the core competency in strategic pricing. We can sell their goods to all classes of people using the strategic pricing plan. Their strategic pricing plan includes branded products, premium private level, budget private level and private level. (Verdict 2009, p.159) Tesco developed the online shop in the year 2007 which is a revolution in the sector. The customers can purchase the goods through online. The company has gained competitive advantage and ever since 2007 they have remained in that way. The company mainly operates in Asia and Eastern Europe, where it dominates the market. The organization is operating in more than 13 countries. Tesco’s main competitors are Wal-Mart and Tesco.

Retail and, more specifically, the food market are dominated by low price competition and are focused on brands at the private level (own brand products). (Sadler, J 2006, p.25). But in the European Union the levels of competitive pricing is controlled by the regulatory bodies that control the levels of market price. (Sadler, J 2006, p.26). As the business is in the U.S. now. We comply with regulatory bodies ‘ laws, so it won’t be hard for the company to grow its market in a new EU. state. The organization only has to maintain different laws in the country along with the limited consequences of vertical integration.

Tesco Corporate Social Responsibility

The company took an accommodating stance when approaching CSR. Some social and voluntary programs were organized by Tesco; they meet the ethical and legal requirements. (Griffin, R. Pustay, M 2009, p.158). The business follows the European Union’s follow-up CSR. The Lisbon Agenda was implemented by the organization which aims to create better jobs and social cohesion that would ensure economic growth for the country in question, (European Citizens Consultations 2009). The companies have to maintain the environment properly as per the P.E.S.T. analysis of the E.U. Tesco’s main focus is to maintain and improve environmentally friendly and recycled supplies; build job availability and maintain good relationships and support for the farmers who supply them.

Market Selection

Western Europe, as it is present in 13 countries like Asia and Eastern Europe, can be a strategically positive move for Tesco. The author concluded that the western part of Europe is the businessman’s most desirable part of the world, as there are many wealthy customers (Griffin, R. Pustay, M 2009, p.54). A short list of top 4 most appropriate countries can be drawn after considering the countries and the specific markets of Western Europe.

Market Attractiveness vs. Business Risk Analysis Matrix

Tesco PLC Expansion into Germany Using International Market Servicing Strategy

It can be said that France is the most attractive market as the market attractiveness and business risk matrix suggests. It has been stated by Griffin and Pustay that Germany is the most suitable market to enter as the GDP of Germany was $2.9 trillion, the third largest economy of the world and a major player in the international business (2009, p.54).

German Market

The German retail market is an oligopolistic market with few dominant market players. The top five market players account for 87% of the market share alone:

Tesco PLC Expansion into Germany Using International Market Servicing Strategy

Information for the pie chart was collected from (Mintel. 2011)

The private level products and heavy discounts dominate the German market. The German consumers like to buy the home goods or the pharmaceutical products from the stores and the fresh meats and vegetables from the markets. There is a tough competition from the local companies for the company like Tesco (Landler, M. 2006). The cut throat discounters dominate the market as the value and price is favoured over the quality of the products. The German consumers favour to buy the organic products which are fresh. Current market leaders of the German retail industry offer organic products of wide range at low prices which is fresh. As per the rule of the regulatory body no company can sell the product at a cost less than the cost price so that the suppliers can earn a good percentage.

Porters 5 Forces: Competitive Environment

An adaptation of Porters 5 forces, in conjunction with the Competitive Environment of the German Grocery and retail market helps with analysis and strategic choices behind Tesco’s foreign market servicing strategy.

Tesco PLC Expansion into Germany Using International Market Servicing Strategy

As the industry is dominated by few large companies so the threat of new entrants are low here. The existing laws create barriers for entering the large multinational companies also restrict the Greenfield strategies (which shall be discussed in full later on in the report). So the most appropriate way to enter in the market is the strategic alliance or a joint venture with an existing weaker organization of the country.

Tesco need to be price conscious as well as they have to offer high quality products at competitive prices. The switching cost in the country is low so the buyer power is moderate. The German consumers prefer quality and convince when there are marginal price differences.

The threat of the substitutes is lower in the retail industry. The threat is high for the everyday essentials but for the other products the threat is not high as the consumers sought the products from the supermarkets. If the products are getting overpriced or the quality decrease only then the demand of that product can decrease.

The suppliers are an important factor as the German consumers like fresh organic products, and many different suppliers are there, so they have a little negotiation power. As per the rule of the European Regulatory bodies there is not such competitive pricing for the suppliers. For entering into the market Tesco should find the best suppliers who can provide best quality product. Thus the company can maintain the corporate social responsibility as well as they fulfils the Lisbon agenda of the European Union (mentioned previously in the E.U. PEST analysis report). Good supplier relations can create jobs in the communities. The activities of Tesco can improve the supplier relations, as well as create good reputations in the community as they are supporting the local agriculture and create jobs for the community.

The rivalry among the existing competitors in German market creates the barriers for a new entrant like Tesco. If Tesco enter the market despite of this situation and the industry growth is low and the market growth of Tesco is high then it would be the competitive advantage of Tesco.

Strengths/Weakness Opportunities/Threats

Strengths

Weaknesses

  •  “Britain’s biggest discounter” (Tesco plc. (2010). Talking Tesco). The core competency of Tesco.
  • The organic local foods at reasonable prices (Tesco plc. (2010). Talking Tesco) can meet the need of the German consumers.
  • The reputation of Tesco which is global.
  • German customers dislike hypermarkets selling everyday goods as well as grocery stores and Tesco relies on the UK. The success of the market and non-food products. This policy faces difficulties in achieving success in the United States. (Datamonitor 2004)
  • • German shoppers like mostly local products; they don’t like buying foreign items that are a Tesco weakness.

Opportunities

Threats

  • Tesco should establish a strategic alliance with Germany’s current weak local competitor. If they enter the market along with a local competitor that would be easy for them to build trust in the Germans (Datamonitor. 2007). As the German used to like the local product than the foreign one it will be the opportunity for Tesco if they enter the market collaborating with the local company. They have to act local (Tesco plc. (2010). International Strategy). They should collaborate with the local suppliers, creating a good reputation in the local community, as a result the CSR activity will be maintained as per the Lisbon agenda.
  • The strict rules and the regulations about zoning make it tough for the foreign companies to enter in Germany (see appendix 2).
  • The maximum working hour in Germany is 80 hour/week when it is allowed 168 hours/week in U.K (Knorr, A. Arndt, A 2003) (see appendix 2).
  • The core competence of Tesco is service when the German consumers like to value the price over the service offered by the company (Hamal, G. Prahalad, C (1996) p. 253).
  • The major retail chain like Wal-Mart remained unsuccessful when they expand their retail chain in Germany; they have incurred loss (Landler, M. 2006). (See appendix 3 for full information). So it is a huge risk for Tesco to expand their presence in Germany.

Market Philosophy

The analysis of the strengths, weakness, opportunities and threats reveals that TESCO is most vulnerable in the aspect of its multi domestic strategy. According to a research conducted by Griffin & Pustay (2009), this strategy is the most effective when there are cultural differences between the different markets that are being catered by the organization. The strategy is most appropriate for international expansion in which there are significant differences in consumer behaviour. This strategy allows firms to adopt region specific product mix and adopt strategies that can be best suited to meet the local tastes and preferences of the consumers (Griffin, R. Pustay, M (2009).

Foreign Market Servicing Strategy

The analysis of the external environment as revealed by the SWOT analysis and the Porter’s five forces model shows that international expansion is considerably difficult in the German markets. This is primarily attributed to the external environment prevailing in the market especially the political environment in Germany that has policies that do not create conducive business environment for foreign multinational firms in the retail industry. However multinational firms can look forward to leveraging the marketing opportunities by undertaking strategic alliances as a medium for market entry. In case of TESCO an alliance with Rewe as a local partner can very well help generate competitive advantage in the market.

A comprehensive alliance occurs when two organizations having their individual core competencies come together and undertake a strategic tie up in which both the organizations use their individual core competencies in an attempt to supplement the missing competencies in each other. In this case a comprehensive alliance with Rewe can help bring TESCO to shed its foreign tag and Rewe can look forward towards gaining from the operational and other strategic expertise and knowledge base of TESCO and help create a mutually beneficial relationship to bring about competitive advantage in the market.

The following figure illustrates the OLI framework for the strategic comprehensive alliance between TESCO and Rewe that can be used in the German retail market.

Figure 1: The OLI Paradigm

Tesco PLC Expansion into Germany Using International Market Servicing Strategy

The analysis for the external market also reveals that a brownfield mode of entry would be most suitable for the alliance between TESCO and Rewe for generating advantage in the German markets.

Brownfield Mode of Entry

TESCO would use the Brownfield mode of entry for its expansion into Germany. This mode of entry as stated by Griffin and Pustay (2009, p.625) envisages a foreign organization purchasing existing assets or units in the host nation market. The appendix 7 states how this mode of entry would help TESCO gain advantages from the market.

The main advantage of this strategy for TESCO would be that it would be able to access readymade resources with considerable skills that would help the company gain advantage in the market. Grant (2005, p.174) in his research has stated that tacit knowledge is gained through experience. In this regard having a trained local pool of human resources can help TESCO in creating better relationship with its suppliers that have considerable high power in the market. It would also help make a better connect with the local culture and sentiments of the target market audience.

However as stated by Johnson, Scholes and Whittington (2009, p.224) this strategy also has pitfalls in this strategy includes incurring a high element of risk in exposure to high priced assets that also includes exposing to macroeconomic risks that are prevalent in the nation.

The above stated strategy does not creating any substantial capacity in the nation. In addition to this the brown field approach is also in tune with TESCO’s CSR policies. The aspect of reducing air pollution has been very serious in Germany. TESCO with its policy of becoming a zero polluting company by the year 2050 can help make it successful in the market and also gain considerable competitive edge in the German retail consumer market. This strategy is the best for the organization as it helps in giving better control over the external environmental aspects and integrating its business while consistently generating a positive cash flow t fund operations and maintain sustainability. Hamel and Prahlad have stated that these types of strategic alliances between organizations can help companies bring up their core competence and amalgamate it to generate competitive edge in the market.

Recommendations

The analysis of the market conditions of the German markets shows that there is an essential need for TESCO to analyse the consumer behaviour of the target market audience and make a better connect with the local consumers so as to generate competitive advantage.

It has been observed that the German consumers are not comfortable shopping in hypermarkets. Rewe has a number of small concept stress (refer appendix 4) that are comparable to TESCO’s express stores.  TESCO should use the brand name of Nahkauf and should also effectively analyse the local culture and sentiments of the individuals. Keeping the brand name would help make a better connect with the German consumers who are very sensitive about their culture and would also help TESCO shed its tag of being a foreign player.  It also needs to modify its product assortment so as to include greater private label and organic food items in order to become successful in the market.

The use of the Nahkauf brand would help TESCO to make a better connect with the consumers as they are already familiar with the brand. It would also help Rewe to gain business expertise including access to financial and other resources and expertise of TESCO.

Another formidable challenge before the organization lies in creating a management structure. This is because the two organizations have different culture and business management style. Hence creating a common platform should involve creating a co-ordination committee as stated by Griffin and Pustay that would help generate better and faster decision making within the organization. The committee should include equal representation from both the organizations in order to make decisions pertaining to operational and small matters without involving the top management of both the organizations. This form of coordination would help in a better symbiotic association and would be mutually beneficial for both the organizations. Following the success of the alliance TESCO would have the option of moving out to the alliance on its own or purchasing the local brand after gaining a formidable positioning among the German consumers.

Risks

One very important element of risk in case of comprehensive alliances between organizations involves maintain a good balance of power in the merged entity. Therefore in order to remain successful it is necessary to ensure that both the organizations have an equal balance of power or else any shift may hamper the interests of the other partner. In this case Rewe can just move out of the alliance and use the learning’s from its association with TESCO to generate its own advantage. It would also be risky if the entry of a new brand such as TESCO is not communicated due to the use of local brand name in the market. Hence it is important that TESCO uses an effective promotional strategy so as to make its presence felt among the target market audience and to ensure that its brand image does not get shadowed or diluted.

Conclusion

In order to successfully enter the lucrative German market, it is very essential for TESCO to use the multi domestic approach and have a strategic alliance with Rewe. It should also stock greater organic, fresh farm products and private label brands from the home market and provide goods at lower prices if it wants to successfully establish itself in the market. Effective CSR polices in compliance with the Lisbon Agenda as well as strong relationships with local suppliers must be initiated to generate a good presence in the market.

The Brownfield mode of entry must also be used as it would help gain initial advantage and would also help promote CSR activities in the market.

The Porter’s (1998) five force model analysis along with the SWOT analysis (Henry, 2008, p.69) has helped in analysing the internal and the external environment for TESCO in the German market. It also reflects on how this analysis can be used in generating strategic capabilities (Johnson, Scholes and Whittington, 2009, p81). Ferrell and Hartline (2008, p.119) slam the SWOT analysis as a wasteful academic tools for just clarifying and creating information in accordance with the eclectic paradigm of Dunning’s proposed in 1993 for the FMSS strategy feasibility.

TESCO must develop a strategy that would help generate a symbiotic relationship with its local partner. It should look forward to backward integration as a strategy to control, the bargaining power of suppliers. It should also ensure compliance with the Companies Act 1973 with its various provisions so as to prevent any legal issues from getting emerged (Companies Act, 2010).

The Brownfield strategy of entry is the best strategy of TESCO to rapidly gain advantage in the market and gaining a first mover advantage. The analysis of the Porter’s Five Forces model also reveals high inter-firm rivalry in the retail industry. Johnson, Scholes and Whittington (2009, p.175) state that a good acquisition would help promote consolidation in the market and reduce inter firm rivalry and would also help ensure CSR practices. However the challenge for the organization lies in managing cultural issues and to replicate its core competencies in the German market and gain long term sustainable competitive advantage.

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