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PART THREE INTERNATIONAL BUSINESS STRATEGIES

Polycentric predisposition The tendency of a multinational to tailor its strategic plan to meet the needs of the local culture

Regiocentric predisposition The tendency of a multinational to use a strategy that addresses both local and regional needs

Geocentric predisposition The tendency of a multinational to construct its strategic plan with a global view of operations

An MNE with a polycentric predisposition will tailor its strategic plan to meet the needs of the local culture. If the firm is doing business in more than one culture, the overall plan will be adapted to ref lect these individual needs. The basic mission of a polycentric MNE is to be accepted by the local culture and to blend into the country. Each subsidiary will decide which objectives to pursue, based on local needs. Profits will be put back into the country in the form of expansion and growth. An MNE with a regiocentric predisposition will be interested in obtaining both profit and public acceptance (a combination of the ethnocentric and polycentric approaches) and will use a strategy that allows it to address both local and regional needs. The company will be less focused on a particular country than on a geographic region. For example, an MNE doing business in the EU will be interested in all the member nations. An MNE with a geocentric predisposition will view operations on a global basis. The largest international corporations often use this approach. They produce global products with local variations and staff their offices with the best people they can find, regardless of country of origin. Multinationals, in the true meaning of the word, have a geocentric predisposition. However, it is possible for an MNE to have a polycentric or regiocentric predisposition if the company is moderately small or limits its operations to specific cultures or geographic regions. The predisposition of an MNE will greatly inf luence its strategic planning process. For example, some MNEs are more interested in short-term profit and/or growth and change their product and service portfolio to fit changing markets. Others focus on a longer-term strategy that develops core competences in specific brands or technologies that they can leverage over a longer period.3 Some are more interested in economies of scale and dominance through size that will allow them to compete on a price basis across the country or region, as opposed to developing a high degree of responsiveness to local demand and tailoring a product to these specific market niches. Some prefer to sell in countries where the cultures are similar to their own so that the same basic marketing orientation can be used throughout the regions. These orientations or predispositions greatly influence strategy. For an example of one approach to this, see the case International Business Strategy in Action: Tesco at home and abroad.

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INTERNATIONAL BUSINESS STRATEGY IN ACTION

Tesco at home and abroad The origins of Tesco can be traced back to when its founder, Jack ‘Slasher’ Cohen, began selling food from a cart in Hackney in 1919, gaining his nickname from his ‘stack ’em high, sell ’em cheap’ strategy. Since the opening of the first Tesco store in 1929, the company has flourished and generated approximately $78 billion in revenues and operates in eight countries across the globe, with 6,800 stores (including franchises) as of 2018. The UK is still the primary focus for the company, with 310,000 of its 440,000 employers working in Britain. Over the decades, the retailer has built up a dominant market share in its domestic market, peaking at over 30 per cent in 2007 but later slipping back to 28 per cent when German newcomers Aldi and Lidl expanded across the UK. Cost-cutting initiatives that had worked in the past, such as

the ‘Big Price Drop’ which led to profits of over US$5 billion in 2011/12, were no longer effective and in 2015, the firm reported a US$9 billion loss. Its internationalisation strategy was also producing mixed results.

Tesco in the US First, the US-based segment of the business, Fresh & Easy, which Tesco had established in 2007 under the leadership of Sir Terry Leahy, was failing to recoup the investment which the company had made. After six years in the market, the decision was made to withdraw from the US, leaving Tesco US$2.5 billion worse off. Observers pointed to a number of factors underlying its failure in the US market. One of the reasons was Tesco’s focus on mid-sized shopping centres,

Collinson, Simon, et al. International Business, 8th Edition, Pearson Education Limited, 2020. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/bham/detail.action?docID=6031375. Created from bham on 2021-01-05 11:44:50.

CHAPTER 8 MULTINATIONAL STRATEGY

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Tesco in Japan Tesco’s disappointing foray into the US market was not the first time it had called time on an international venture. Before this, in 2011, the firm announced that it was to exit the Japanese market and sell its stores to Aeon, a rival Japanese supermarket group. Having entered Japan in 2003 through the acquisition of C Two-Network convenience stores for about US$230 million, and despite having spent eight years trying to gain a foothold in the market, it had only managed to secure 1 per cent market share. In line with Clarke’s strategy of focusing solely on those regions where Tesco had the ability to become market leader, the company decided to exit Japan. Tesco’s lack of success in Japan was partly due to its inability to keep up with rapid changes in local customer tastes. The retailer did alter its business model to match the consumer behaviours in Japan, but not significantly enough. Costs are particularly high for stores in Japan. High rents coupled with a complex and expensive supply chain squeeze margins. The Japanese also have a strong preference for eating fresh foods that are locally sourced, making bulk buying difficult. The Financial Times once commented on this, observing in an article that there is a complete difference in the radishes eaten in Kyoto compared to those in Hokuriku. Finally, Tesco’s small start with only 129 stores meant it failed to compete and develop brand awareness effectively when up against firms like Aeon, with 1,900 stores.

Tesco in Korea In contrast to its performance in Japan, Tesco’s Korean business, Homeplus, was going from strength to strength. Homeplus, a joint venture with Samsung, had almost 1,000 stores and was servicing around 6 million customers every week. Market analysts attributed this success to local chief executive Lee Seung-han of Samsung, who had managed to integrate Tesco into the Korean model and thus avoid the

mistakes made by rivals Carrefour and Walmart. Korea was thriving, but all was not well on the home front.

Back in the UK Back in the UK, the Big Price Drop had been coined the Big Price Flop by the media as rather than creating savings for the customer, prices on the shelves had actually increased. Tesco’s large out of town supermarkets began to suffer as customer’s habits changed, with people choosing to make smaller, more regular purchases at high street convenience stores. Meanwhile, discount retailers Aldi and Lidl were revolutionising the supermarket industry and sparking a price war. The incumbents – Tesco, ASDA, Morrisons and Sainsbury’s – were losing ground, demonstrated by Aldi’s market share increasing to 7.6 per cent and Tesco’s reduction in market share to 27.4 per cent in 2018. In particular, 2014 had been a challenging year for Tesco as pre-tax profits tumbled by 92 per cent to only US$160 million, accounting irregularities were uncovered, and the firm’s credit rating was dropped to Baa2 by Moody’s. By January 2015, it had again been downgraded, this time to ‘junk’ status. In the face of such strong competition from its German rivals, Tesco slashed its 90,000-product range by 30 per cent in an attempt to follow the simpler model of its key competitors and cut costs, and announced the closure of 43 stores, but it seemed that nothing was going to rescue Tesco from this black hole. With debts of over US$30 billion as of February 2015, Tesco was reviewing its portfolio in an attempt to see if it could strengthen its balance sheet, and in September it announced the sale of its Korean business, Homeplus, for US$6 billion. Although this by no means fixed the problem of Tesco’s remaining debt, it opened up a number of options for restructuring and a new strategy. In 2017, Tesco announced its intention to merge with the UK’s largest food wholesaler, Booker Group, who own the Premier and Londis convenience store brands. Reported to cost around $4 billion, the deal was said to create the UK’s leading food business, selling to approximately 700,000 convenience stores, grocers and pubs, By merging with Booker Group, Tesco increased operations beyond its traditional food retailing business to incorporate the restaurant and takeaway business. This strategy was designed to increase Tesco’s scope, ensuring that whether customers decide to eat ‘in home’ or ‘out of home’, the firm still benefits. The announcement of Tesco to join forces with Booker Group clearly shows that Tesco are still keeping a close eye on competitors, both direct and indirect, and if given the choice Tesco will not sit back and wait for its dominant market position to be slowly eradicated by rivals. The UK’s supermarkets are continually at war and under pressure to engage in new strategy development in order to survive, as many customers have turned their back on large superstores, preferring to shop at convenience locations or online. Importantly, Tesco are not the first of the ‘Big Four’ to merge with organisations from other business segments, as Sainsbury acquired Argos

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whereas most American shoppers are used to larger-scale shopping centres. Tesco’s self-checkout machines did not work well with American customers and the company’s focus on its own-brand products meant there was not enough room to offer local shoppers their US favourites. Other details, like offering pre-packaged sandwiches instead of order in-store delis for shoppers to make custom-made sandwiches, which is the norm in US supermarkets, contributed to this failure. Retail analysts have also argued that despite Tesco conducting extensive research before entering the US market, the firm significantly underestimated the challenges. It failed to appreciate some key differences between the Americans and the British, just because they spoke the same language. The same observers note that this was not the case when Tesco entered new markets in Poland and China, where it appreciated the difference in shopping behaviours and adjusted its business model accordingly.

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Collinson, Simon, et al. International Business, 8th Edition, Pearson Education Limited, 2020. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/bham/detail.action?docID=6031375. Created from bham on 2021-01-05 11:44:50.

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PART THREE INTERNATIONAL BUSINESS STRATEGIES

and Morrisons negotiated a deal with Amazon, highlighting a diversification trend within the industry. Unfortunately, it doesn’t seem that Tesco are out of the woods just yet; as they have continually reduced the opening times of 24-hour stores across the UK and closed Tesco Direct in 2018. Also it appears that the firm is suffering the effects of Brexit, as it pulls beer brands such as Amstel, Sol and Kingfisher from its shelves reportedly due to the repercussions in terms of price negotiations. Nevertheless, Tesco appears to be in a far better position than it was a few years ago. There is no doubt that Tesco intends on remaining a key player in the supermarket industry. Sources: Denise Winterman, ‘Tesco: How one supermarket came to dominate’, BBC News, 9 September 2013; Kamal Ahmed, ‘Tesco posts record £6.4bn annual loss’, BBC News , 22 April 2015; Kamal Ahmed, ‘Tesco sells South Korea stores for £4bn’, BBC News , 7 September 2015; ‘Tesco timeline – the retail giant’s rise and fall’, Guardian , 23 April 2015; Nils Pratley, ‘Tesco’s big price drop flop?’, Guardian, 8 December 2011; Zoe Woods, ‘Tesco admits defeat and pulls out of Japan’, Guardian, 31 August 2011; Simon Goodley, ‘Tesco names 43 stores to

close in turnaround plan’, Guardian , 28 January 2015; Andrea Felsted, ‘Philip Clarke failed to build on Leahy legacy at Tesco’, Financial Times , 21 July 2014; Adam Jones, ‘Tesco announces retreat from Japan’, Financial Times , 31 August 2011; Scott Campbell, ‘Tesco credit rating cut again by Moody’s’, Telegraph, 16 June 2014; Lianna Brinded, ‘Tesco, Sainsbury’s, and Asda are being crushed by Aldi and Lidl’, Business Insider, 30 June 2015; https://www.statista.com/statistics/300656/grocery-market-share-in-great-britain-year-on-year-comparison/; https://www.ft.com/content/fd651c8e-1cbb-300d-ba69-8e69a0de508e; https://www.theguardian.com/business/2017/jan/27/tesco-booker-shopperstakeover-londis-budgens; https://www.telegraph.co.uk/business/2017/01/27/ food-suppliers-fear-fresh-pressure-tesco-swoops-booker/.

1 What were the advantages of Tesco adopting a joint venture in Korea? 2 What are the advantages of Tesco using an M&A to enter into Japan? 3 What are the potential reasons why Tesco struggled to expand to the United States and Japan?

STRATEGY FORMULATION Strategy formulation

Strategy formulation is the process of evaluating an enterprise’s external competitive

The process of evaluating the enterprise’s competitive environment and its internal strengths and weaknesses to position itself for better performance

environment (threats and opportunities) and internal assets, capabilities and competitive advantages (strengths and weaknesses). This typically begins with consideration of theexternal arena, since the MNE will first be interested in opportunities that can be exploited. Attention is then directed to the internal environment and the resources the organisation has available, or can develop, to take advantage of these opportunities.

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External environmental assessment The analysis of the external environment involves two activities: information gathering and information assessment. These steps help to answer two key questions: what is going on in the external environment; and how will these developments affect our company? One of Competitive intelligence the most common ways to do this is through competitive intelligence, which is the use of The gathering of external systematic techniques for obtaining and analysing public information about competitors. information on competitors and the competitive environ- These data are particularly useful in keeping MNEs alert to likely moves by the competition. ment as part of the decisionmaking process

Information gathering Information gathering is a critical phase of international strategic planning. Unfortunately, not all firms recognise this early enough. In the case of Harley-Davidson, the large US-based motorcycle manufacturer, it was not until the Japanese began dominating the motorcycle market that Harley realised its problem. A systematic analysis of the competition revealed that the major reason for Japanese success in the US market was the high quality of their products, a result of extremely efficient manufacturing techniques. Today, Harley is competitive again. It achieved renewed success because it rethought its basic business, reformulated company strategy, vastly improved product quality, and rededicated itself to its core business: heavyweight motorcycles. There are a number of ways in which MNEs conduct an environmental scan and forecast the future. Four of the most common methods are: (1) asking industry experts to discuss industry trends and make projections about the future; (2) using historical industry trends to forecast future developments; (3) asking knowledgeable managers to write scenarios describing what they foresee for the industry over the next two to three years; and (4) using

Collinson, Simon, et al. International Business, 8th Edition, Pearson Education Limited, 2020. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/bham/detail.action?docID=6031375. Created from bham on 2021-01-05 11:44:50....