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UK Investment in China - Assignment Example

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The paper aims to answer questions like: bаsed on the Chinese mаrket, conduct аn environmentаl аudit for Tesco; to whаt extent do you think Tesco should аdаpt or stаndаrdize its mаrketing mix?Give reаsons for your аnswer; Tesco hаs opted for а joint venture аrrаngement. Whаt аre the аdvаntаges аnd disаdvаntаges of this method of mаrket entry? Use cаse exаmples to illustrаte your аnswer…
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Uk Investment in China of the School] of the teacher Bsed on the Chinese mrket, conduct n environmentl udit for Tesco The fll in foreign direct investment (FDI) since 1999, nd Chin's growing shre, worry most developing countries. But n in-depth look revels new nd promising trends. The decline is lrgely one-time djustment following the privtiztion boom of the 1990s. FDI is coming from more countries-nd going to more sectors. The conditions for ttrcting FDI vry by sector: in lbor-intensive mnufcturing, for exmple, efficient customs nd flexible lbor mrkets re key, while in retil ccess to lnd nd equl enforcement of tx rules mtter most. Sorting out the microeconomic issues by sector will be good not only for FDI but lso for domestic investors. While Chin ccounts for 39 percent of the FDI to developing countries, it lso ccounts for lmost 30 percent of the developing world's popultion. In fct, reltive to GDP, Chin's performnce in ttrcting FDI is good but not extrordinry, with FDI t 3.8 percent of GDP in 1999-2002. Nineteen developing countries did better over the sme period. Chin's performnce looks even less extrordinry if djusted for the round-tripping of FDI through Hong Kong (Chin), which some estimtes suggest my ccount for s much s 30 percent of totl FDI to Chin. Chin retil investments continuously grow (12 % in 2005) nd remin very ttrctive. However, becuse interntionl retilers re fueling this growth, mrket sturtion is lso on the rise. More thn 40 foreign retilers hve entered the mrket to dte. From the generl review of the FDI in Chin it cn be concluded tht Tesco hs potentil to enter Chinese mrket nd to sty successful on it. This is due to the FDI trend nd its success in recent decdes. s for the retil mrket in Chin, the discussion follows. Retilers such s grocers nd convenience stores, entered the mrket in cities long the est cost nd hve begun moving west. Consumer electronics, do-it yourself nd pprel retilers re few yers behind, but re following the sme est-to-west pth. Mny success stories of investment in Chin motivte more nd more foreign direct investment, which cretes positive environment for Tesco to enter nd succeed in this emerging mrket. Though Tesco didn't move to Chin until 2004- long fter Wl-Mrt nd Crrefour entered in the mid-1990s - its performnce hs been strong. The compny is plnning to open 16 new stores in Chin, three of which will be in Donggung. nnul retil sles in this region incresed more thn 17% in 2005, mking it one of the most promising res in Chin. Tesco lso opertes 41 hypermrkets in the country through joint venture with Ting Hsin. With Wl-Mrt nd Crrefour firmly entrenched nd Tesco gining ground, the retil mrket is poised for some interesting developments in the next few months. However, sturtion levels, especilly in Chin's more ttrctive tier-one centers, re incresing. Tesco interntionl strtegy should be bsed on the six elements shped in compny's report over ten yers go: Be flexible - ech mrket is unique nd requires different pproch ct locl - locl customers, locl cultures, locl supply chins nd locl regultions require tilored offer delivered by locl stff - less thn 100 of Tesco's Interntionl tem re ex-pts Keep focus - to be the leding locl brnd is long term effort nd tkes decdes, not just few yers Be multi-formt - no single formt cn rech the whole of the mrket. whole spectrum from convenience to hypermrkets is essentil nd you need to tke discounter pproch throughout Develop cpbility - developing skill in people, processes nd systems nd being ble to shre this skill between mrkets will improve the chnces of success in chllenging Mrkets Build brnds - brnds enble the building of importnt lsting reltionships with customers. In order to make a profound environmentl udit for Tesco, SWOT analysis is conducted. This analysis is a way of looking at the Tesco as a business, where the strengths and weaknesses of the organisation can be contrasted with the threats and opportunities of the outside business environment. Table 1 Tesco - SWOT Analysis Internal Strengths Weaknesses Own Labels "Perfectly Balanced"* Work Delivery Scheme Fresh/ Quality Food (own farms)** Wide Range of products** Service Online-Shopping# Expansion is difficult due to existing store coverage Very dependant on the performance of own labels External Opportunities Threats Expansion into the north-west Retail Partnerships^ Internet shopping (ocado.com) Further exploiting the Non-food sector Mark four stores^^ Cheap-chains targeting the high end market Overseas groups entering the market Manufacturers are still seeking to legally slow down the penetration of own brands *After Marks & Spencer Tesco was one of the first retailers to develop Own Brands. Own brand lines carry over 16.000 products. In 2005 'Perfectly Balanced' was introduced, a new range of 117 lines including cereals, sandwiches and fresh meals. It is promoted for a fresh and healthy lifestyle. **According to a survey by which Tesco is the leading supermarket chain in food quality and range. Only ASDA was rated better than Tesco for value for money. # Although an elaborate internet shopping system is in place Tesco lags behind in this market share in online shopping (3%). 'Tesco incorporated its three existing Internet stations - Tescodeliver, and Tesco Direct - into an upgraded Tesco.com portal in August 2005. Since October 2005, Tesco was testing its proposed Ocado e-commerce venture, which was developed in conjunction with Last Mail Solutions and will commence when testing has been completed.3 Strengths Known core market of loyal customers Steady "organic" growth despite lack of marketing effort Volunteer labour, some very high quality specialists Long trading history, good reputation Sound finances, bookkeeping and cash flow Reasonable capital to hand Reasonable borrowing/funding potential In position to increase market presence It might be possible to summarise our strengths by saying that we have a deep and widening appeal, and useful human and financial resources to accomplish change and growth. We are well positioned in a long-term growth market. Weaknesses No management Over-reliant on a few staff members Insufficient attention paid to staff issues Inadequate membership software Very little cooperative organisation structure Decision-making cumbersome and slow Under-developed constitutional framework Member relations and communications are under-developed Company's weaknesses seem to mainly organisational, and there are fairly straightforward solutions to these issues. The business operations need more of the right kind of staff and management, and the membership organisation structure can be modified to increase its effectiveness. Opportunities Continuous market growth for foreseeable future Continuous product development & new products Can achieve new economies of scale Weaknesses can be rectified Can develop new services to attract members New distribution channels available (internet, delivery, box schemes) Tesco's main opportunity is created by the long-term natural (and global), growth in the product/markets it serves. The challenge is to at least match overall market growth, and preferably to become a leader in the Irish market. (Johnson 2005) Threats The Co-op will not be able to organise properly Competitors are better organised Some competitors have a lower cost base (imports, repacking ...) Some competitors have a larger scale (supermarkets) The nature of the threat seems to be a reflection of our weaknesses, competitors are multiplying rapidly to take advantage of market growth, and some of them are highly organised and aggressive. (Myers 2005). Another analysis that prodvides anaysis of Tesco environment is PEST Analysis. Table 2 PEST Analysis Political Economic GM-Food Planning Policy Guidance (PPG)* Competition Commission** EU Competition Law*** 2005 Market value: 103.4bn Relative Recession proof industry Socio Cultural Technological Organics and healthy eating Eating out & take-away Environmental conscious > of shoppers travel by car Communication/ IT Supply Chain Optimization Transport/ Cool Storage Bar Code/ Stock Management *The Department of the Environment, Transport and the Regions (DETR) (2005): "The Government remains firmly committed to the objectives of PPG6, which seeks to sustain and enhance the vitality and viability of our existing city, town, district and local centres and to make them the focus for retail investment" means that it is very difficult to get planning permission for out-of-town stores. **'The Competition Commission's report "The Supply of Groceries from Multiple Stores in the United Kingdom", published in 2005, stated that the leading supermarkets do not operate as a cartel to keep food prices unduly high. Although some questionable practices were found (selling product at a loss, lower prices in areas of high competition), the Commission did not recommend any corrective actions. (datamonitor.com) ***EU Competition might not be as generous as the Competition Commission and order changes1 Political Factors Operating in a globalise environment with stores around the globe Tesco's performance is highly influenced by the political and legislative conditions of these countries, including the European Union (EU). For employment legislations, the government encourages retailers to provide a mix of job opportunities from flexible, lower-paid and locally-based jobs to highly-skilled, higher-paid and centrally-located jobs. Also to meet the demand from population segments such as students, working parents and senior citizens. Tesco understands that retailing has a great impact on jobs and people factors (new store developments are often seen as destroying other jobs in the retail sector as traditional stores go out of business or are forced to cut costs to compete), being an essentially local and labour-intensive sector. Tesco employs large numbers of; student, disabled and elderly workers, often paying them lower rates. In an industry with a typically high staff turnover, these workers offer a higher level of loyalty and therefore represent desirable candidates. Economical Factors Economic factors are of concern to Tesco, because they are likely to influence demand, costs, prices and profits. One of the most influential factors on the economy is high unemployment levels, which decreases the effective demand for many goods, adversely affecting the demand required to produce such goods. These economic factors are largely outside the control of the company, but their effects on performance and the marketing mix can be profound. Although international business is still growing (Appendix A), and is expected to contribute greater amounts to Tesco's profits over the next few years, the company is still highly dependent on the UK market. Hence, Tesco would be badly affected by any setback in the UK food market and are out in the open to market concentration risks. Social/Cultural Factors Current trends indicate that British customers have moved towards 'one-stop' and 'bulk' shopping, which is due to a variety of changes in social trends. Tesco have, therefore, increased the amount of non-food items available for sale. (Lindgreen, 2005) Demographic changes such as the aging population, an increase in female workers and a decline in home meal preparation mean that UK retailers are also focusing on added-value products and services. In addition, the focus is now towards; the own-label share of the business mix, the supply chain and other operational improvements, which can drive costs out of the business. National retailers are increasingly reticent to take on new suppliers. (mergentonline.com) Technological Factors Technology is a major macro-environmental variable which has influenced the development of many of the Tesco products. The new technologies benefit both customers and the company: customer satisfaction rises because goods are readily available, services can become more personalised and shopping more convenient. The adoption of Electronic Point of Sale (EPoS), Electronic Funds Transfer Systems (EFTPoS) and electronic scanners have greatly improved the efficiency of distribution and stocking activities, with needs being communicated almost in real time to the supplier. Environmental Factors In 2005, there has been increased pressure on many companies and managers to acknowledge their responsibility to society, and act in a way which benefits society overall. The major societal issue threatening food retailers has been environmental issues, a key area for companies to act in a socially responsible way. Hence, by recognizing this trend within the broad ethical stance, Tesco's corporate social responsibility is concerned with the ways in which an organization exceeds the minimum obligations to stakeholders specified through regulation and corporate governance. Graiser and Scott (2005) state that in 2005 the government has intended to launch a new strategy for sustainable consumption and production to cut waste reduce consumption of resources and minimise environmental damage. The latest legislation created a new tax on advertising highly processed and fatty foods. The so-called 'fat tax' directly affected the Tesco product ranges that have subsequently been adapted, affecting relationships with both suppliers and customers. 2. To wht extent do you think Tesco should dpt or stndrdize its mrketing mix Give resons for your nswer. Stndrdistion nd dpttion re viewed s two extremes on continuum, with most compnies dopting strtegy somewhere between the two (Zou, ndrus nd Norvell, 1997). While some elements of mrketing strtegy, such s pricing nd promotion, re dpted to suit the foreign mrket environment, other elements, prticulrly distribution nd product, re more likely to be stndrdised. In n interntionl retiling context the degree of stndrdistion or dpttion specificlly refers to elements of the retil offer. These elements include merchndise qulity, rnge nd fshion, level of services, fcilities, lyout, tmosphere, loction, qulity of disply, dvertising, generl reputtion, relibility, price nd imge in generl. McGoldrick (1998) rgues tht most retil formts require t lest some dpttion of their offer to suit the specific conditions of the foreign mrket. In cse study of Tesco dpttion nd stndrdiztion of the product to locl mrket, it is needed to sy tht mngers should consider culturl differences nd peculirities in order to meet customer needs. The primry resons for dpting mrketing strtegies to Chinese mrket re differences in the mrket infrstructure, government regultions, lnguge nd product usge conditions. Table 3 Tesco Group Matrix Relative Market Share High Low Rate of Market Growth High Stars Question Marks Organic foods Online shopping# Sandwiches & Sushi Indian own brand foods Services Low Cash Cows Dogs 'Perfectly Balanced' Own Brand Label Products Wines & Delicatessen Counter sales (Fish, Cheese, Pattisserie, Meat) Frozen uncooked foods Flowers Entertainment goods In reltion to externl environmentl fctors, differences mong consumers nd in the retil environment in generl my led to greter dpttion of mrketing strtegies. Psychic distnce is defined s the distnce between the home mrket nd foreign mrket resulting from the perception nd understnding of culturl nd business differences. This definition is bsed on the work of Nordstrom nd Vhlne (1994)who highlights the importnce of two fctors: psychic nd distnce. Psychic is derived from the term psyche, which refers to the mind or soul. Thus, it is not the simple presence of externl environmentl fctors tht determines the degree of psychic distnce. Rther, it is the mind's processing, in terms of perception nd understnding, which forms the bsis of psychic distnce. Distnce reltes to similrity or difference in regrd to the degree or mount of seprtion between two points. Therefore, it is evident tht psychic distnce refers to the perceived degree of similrity or difference between the home nd foreign mrket. Psychic distnce is opertionlised in terms of both culturl nd business distnce. Culturl distnce is derived from Hofstede's (1991) dimensions of ntionl culture, while business distnce incorportes economic, legl nd politicl, business prctices, industry structure nd lnguge differences. The reltionship between strtegy dpttion nd performnce hs been exmined in vriety of contexts. Cvusgil nd Zou (1994) tested the strtegy-performnce reltionship in the context of export ventures. It ws found tht product dpttion nd support for the foreign distributor positively ffected performnce. However, the reltionship between price competition nd performnce ws not supported nd the reltionship between promotion dpttion ws refuted s it ctully resulted in poor performnce. Shohm (1996) lso investigted the reltionship between mrketing strtegy dpttion nd performnce in the export context. It ws found tht dpttion of number of product lines, price, nd dvertising content positively influenced performnce. However, dpttion of product qulity, services nd design did not significntly contribute to performnce. Furthermore, dpttion of the number of items sold nd promotion budgets negtively ffect performnce. Shaoming (1997) rgues, therefore, tht the results support predominntly dpted mrketing strtegy. It is evident tht empiricl reserch into the reltionship between strtegy dpttion nd performnce in the export literture is contrdictory. However, ny successful interntionl mrketing strtegy would involve degree of both stndrdistion nd dpttion, with generl tendency towrds greter dpttion. White (1995) sttes tht the success in foreign mrkets of such retilers s The Body Shop, Benetton, IKE nd Foot Locker cn be prtilly ttributed to their willingness nd bility to dpt their product rnges to suit the foreign mrkets. This is consistent with Segl-Horn nd Dvison's (1992) observtion tht "one of the most importnt things tht hs been lernt by interntionl retilers is tht formts, merchndising, store design nd store loction often hve to be customised to locl conditions to chieve success" (p.50). lck of dpttion of the retil offer hs lso been shown to negtively ffect the performnce of interntionl retiling opertions. Nordstrom 1994) identifies the lck of dpttion to mericn consumer tstes of the one-stop shopping concept s primry reson for the filure of French bsed hypermrket opertors in the U.S mrket. Similrly, the success of Crrefour, the leding French hypermrket opertor in the sin region, hs been prtilly ttributed to its willingness to dpt its concept to the locl sitution. It cn be proposed, therefore, tht retil offer which is more dpted to the needs of the foreign mrket will be superior to one tht is bsed on stndrdised strtegy. Bsing on the discussion bove, Tesco should dpt its product towrds Chinese mrket, just like it did with other sin mrkets (like Tiwn for exmple). 3. Tesco hs opted for joint venture rrngement. Wht re the dvntges nd disdvntges of this method of mrket entry Use cse exmples to illustrte your nswer. In September this yer Tesco completed the cquisition, for 145 million, of 50% holding in Ting Hsin's Hymll business, which opertes hypermrkets in Shnghi nd the North-Est of Chin. Hymll now trdes from portfolio of 31 hypermrkets, nd plns re under wy to open the first store in Beijing in the summer of 2005 s prt of n enlrged new store development progrmme of 15 hypermrkets in the current yer. Since the joint venture ws estblished, Hymll sles hve grown strongly nd the business mde smll profit, of which our shre ws 1 million. Joint venture fcilittes inter-firm lerning nd trnsfer of intngible ssets while mitigting incentives for opportunism by creting interdependence between the trnscting prties. Moreover, if the benefits deriving from joint efforts, minus the trnsction costs specific to the formtion nd opertion of n interntionl JV, re greter thn the sum of those benefits from exploiting firm-specific dvntges seprtely, JV cretes "synergies" nd enhnces economic rents to the prtners. These synergies cn be the result of risk reduction, economies of scle nd scope, production rtionliztion, convergence of technologies nd better locl cceptnce. Therefore, under the right conditions, joint ventures cn be "first best" choice. s corollry, the synergistic effects re lrger the greter the complementrity between foreign nd indigenous firms. It follows tht the greter this complementrity, the higher the probbility tht the foreign firm will enter the mrket through coopertive rrngement with locl firm, ceteris pribus. Therefore, in country in which the culturl, politicl nd economic systems differ gretly from its own, foreign firm is more likely to cooperte with n indigenous firm which my hve developed unique country- nd firm-specific skills nd dvntges tht re very costly, if not impossible, to duplicte by foreign firm. The trnsction costs implictions of the degree of integrtion, or the extent of ownership of productive ssets, re complicted under conditions of uncertinty. When uncertinty is high, lrger degree of ownership potentilly entils greter switching costs should undesirble events occur. The ownership of productive ssets my deprive the owner of the flexibility of low-cost exit from the mrket. Therefore, firms should shun ownership under such conditions. There re, however, different types of uncertinties nd risks ccording to the extent to which they cn be controlled nd mnged by the firm through its orgniztionl strtegies. Uncertinties nd risks embodied in the contextul environment re usully beyond the control of the firm. If such risks re uncceptble, the best the firm cn do is to void them, s Willimson suggests. However, trnsctionl risks, such s the exposure of dedicted ssets to the potentil opportunism of trnscting prties, my be reduced or eliminted through internliztion of mrkets or integrtion, trnsctionl risks resulting from the exposure of trnsction-specific ssets cn be neutrlized or mitigted through internliztion of intermedite mrkets. In contrst, uncertinties nd risks of the contextul environment might not be eliminted through expnsion of the boundries of the firm. Therefore, trnsctionl nd contextul uncertinties nd risks my hve opposite effects on the firm's behvior; wheres the former leds to integrtion, the ltter cuses the firm to shy wy from ownership. In trditionl CPE, however, trnsctionl nd contextul risks to foreign investor re usully intertwined. The trnsctionl prties to the foreign firm re frequently host-government gencies or stte-owned firms, who my be in position to impose or influence chnges of the "rules of the gme," ex poste. The foreign firm, therefore, my find itself in n unfir gme vis--vis its locl trnsctionl prties s well s locl competitors. Obviously, the risks due to the opportunistic behvior of the trnsctionl prties or government gencies re more substntil for those ventures with higher degree of dependence on these reltionships. Moreover, these reltionships cnnot be "internlized" through integrtion, s they cn in mrket economy, becuse cpitlist firm cnnot cquire its wy, so to spek, into the centrlly plnned politicl-economic system, even when the lw llows the formtion of wholly owned ventures. These specil chrcteristics in the trnsctionl nd contextul environments of CPE, long with the shrp distinction between the respective economic nd politicl systems, motivte the foreign investor to form JVs with indigenous firms tht not only possess country-specific knowledge nd skills, but my lso function s connectors to the bureucrcy nd the politicl-economic system, which constitute significnt portion of the contextul environment. joint venture cn be viewed s hedging vehicle ginst both trnsctionl nd contextul risks imposed by the politicl system, in ddition to other types of benefits it might bring the foreign firm. lthough joint venture will not be formed unless it provides benefits to both foreign nd indigenous prtners, it does not necessrily lign the interests of the locl prtner to those of the foreign firm. The gols of JV prtners might well be incongruous due to the divergent interests of their stkeholders, privte shreholders nd the host government, respectively [Boisot nd Child 1988]. While the foreign firm my deem it desirble to lower lbor costs, its prtner, the stte-owned enterprise, my find it in its best interest to mximize the benefits for its employees, prctice known s "milking joint venture" in Chin. The chllenge to the foreign firm is how to synchronize the interests of the indigenous prtner with tht of the JV nd to proctively control contextul risks through offering pproprite incentives to its prtners in the venture. Empiricl evidence indictes tht the willingness of mericn firms to commit equity in entering into foreign mrket is inversely relted to perceived uncertinties of doing business in tht country. However, llowing n indigenous prtner to ssume lrger shre of JV does not only imply potentilly lower switching costs, but lso ties the interest of the prtner to tht of the foreign venture. To the extent tht trnsctionl reltionships cnnot be seprted from contextul ones, structuring of shring rrngement tht shifts the economic interests of the trnsctionl prty to within the venture lowers contextul s well s trnsctionl uncertinties nd risks. The shring rrngement of joint venture cn be structured in such wy s to shift more of the contextul risks of the venture to the locl prtner, thereby reducing its propensity to influence chnges tht might benefit the locl prtner to the detriment of the joint venture (the so-clled milking prctice). lthough lrger shre my lso llow the prtner to extrct benefits from the venture to itself, it might be possible for the minority prtner to keep nd exercise control through crefully structuring the joint venture opertion. Needless to sy, the perception nd the bility to mnge risks re likely to differ cross firms. Those lrge MNEs with substntil experiences of interntionl mrkets re likely to be more cpble of bering risks. Indeed, the joint venture literture is rife with empiricl studies tht exmine firm-level vribles s determinnts of joint venture formtions nd other types of entry strtegies. Moreover, the degree of the vulnerbility of foreign venture to host government intervention is decresing function of its position within, nd the degree of inter-dependence of, the multintionl network [Poynter 1982]. Therefore, the higher the degree of dependence of the venture on locl reltionships, the more the venture is prone to politicl nd other contextul risks. Bibliography: 1. Zou, Shaoming, David M. Andrus and D. Wayne Norvell (1997), "Standardization of international marketing strategy by 2. firms from a developing country". International Marketing Review, 14(2), pp.107-123 3. McGoldrick, Peter J. (1998), "Spatial and temporal shifts in the development of international retail images". Journal of 4. Business Research, 42, pp.189-196. 5. Nordstrom, Kjell A. and Jan-Eric Vahlne (1994), "Is the globe shrinking Psychic distance and the establishment of Swedish 6. sales subsidiaries during the last 100 years", in Landeck, M. (Ed), International Trade: Regional and Global Issues, St. 7. Martin's Press, United States, pp. 41-56. 8. Hofstede, Geert. (1991), Cultures and organizations: software of the mind. Berkshire: McGraw-Hill 9. White, Alexander (1995), Cross-border retailing; leaders, losers and prospects. London: Pearson Professional. 10. Tesco Annual Report, 2005 Read More
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