Tesco's International Business Development Strategy
Business development strategy plays a major role in ensuring the long-term health of the company, as is determines the opportunities for and the execution of entry into new markets (including both geographic and product-based markets.) One example of an international company undergoing significant current business development, particularly internationally, is that of Tesco Plc, a United Kingdom based supermarket chain that has in recent decades expanded into the European, North American, and Asian markets with success. All facets of the company operation have been affected by this expansion, including business structure, corporate culture, organizational structures, and the financial status of the company. Tesco's most recent expansion, into the United States (California) in late 2007, provides an excellent opportunity to examine its business development and international expansion strategies in detail and to analyse the strengths, weaknesses, and potential success or failure of these business strategies.
Jack Cohen founded Tesco Plc (TSCO.L) in 1919. After expanding into every available market in the United Kingdom, including developing new store formats for small areas (Tesco Metro) and a superstore format (Tesco Extra), new product lines such as electronics and home goods, and an environmentally-aware range of foods, the company began to expand internationally (Tesco, 2008). The first expansion was in 1995, when Tesco opened a store in Hungary (Tesco, 2008). Poland, the Czech Republic, Slovakia, Northern Ireland, the Republic of Ireland, Taiwan, Thailand, and South Korea followed this initial expansion in the 1990s. Today, Tesco serves a total of twelve international markets, plus all areas of the United Kingdom.
Tesco's financial performance has demonstrated strong growth over the last seven years, although growth was not as strong as expected last year due to extraordinary charges totalling £35 million, resulting from the 2005 tunnel collapse in Gerrards Cross. Tesco saw a profit in 2007 of £1,881,000,000, which is significant, particularly for a low-margin vertical industry such as the grocery market (Tesco, 2008). Earnings per share (EPS) for the company were 23.84p in 2007, compared to 20.07p in 2006, demonstrating strong growth within the market.
Organizational structure refers to the way in which people and jobs are arranged within the organization in order to assist the organization in meeting its goals and performing its tasks (Hofstede & Hofstede 2005: 252). Typical organizational structures include hierarchal structures, strategic business units and simple structures; however, the type of organizational structure chosen will vary not only depending on the industry and the company, but the host country in which the company was founded (Hofstede & Hofstede, 251). Organizational structure is one of the critical determinants of success in a global organization, according to Hofstede & Hofstede (2005: 253); however, it can also be one of the most difficult areas of the business development strategy to navigate.
Tesco has chosen to pursue a strategic business unit (SBU) across all of its business areas in order to maximize the degree of competitiveness within the individual market areas. According to Mockler (2002: 49), The SBU would cover… the strategic foundation; size and scope of the operation; strategic thrust; the kinds of products or services sold and delivered; service quality and image; product/service brand identification and image; breadth of the product/service line; functions performed by the company; distribution outlets; customer market served; geographic market served; ownership; and financial targets.
Tesco operates using four strategic business units - Core UK, which handles United Kingdom grocery operations, International, which handles international holdings, Non-Food, which handles sales of electronics, home goods and other non-food items sold in Tesco Extra and other stores, and Retailing Services, which manages financial services, the Tesco.com web site, and Tesco Telecoms services (Tesco, 2008).
A focus on the International strategic business unit, currently the focus of a lot of business development and change, provides insight into the company use of the SBU as a whole. According to Tesco, the International group operates in eleven markets (twelve, due to the market entry into the United States late last year), with one hundred thousand employees, serving fifteen million in customers across its market areas. The company states that the 2007 results saw £11 billion in sales and £560 million in profits, and that over half the group's footprint space is outside the United Kingdom (Tesco 2008). The stated strategy of Tesco's International SBU includes elements of flexibility, local operations including customers, cultures, supply chains and regulations, focus on a few countries, multi-format offerings in order to meet the needs of the local market, capability in people, processes and systems, and brand-building to create lasting customer relationships (Tesco 2008). All of these elements can be seen in Tesco's expansion into the United States in late 2007.
The International strategic business unit allows Tesco to tailor its market entry and offerings to the individual market area. The most recent international expansion Tesco undertook was into the United States, beginning with a small number of stores in Hemet and Riverside, California late in 2007 (Hirsh, 2008). The company intends to open up to forty-eight stores in the same area by the end of 2009, and then consider expansion into other areas of the United States. This most recent expansion provides insight into the use of the strategic business unit for development of international markets. Most noticeably, Tesco has tailored their product offerings and branding to the local market and culture.
All aspects of the store's marketing and design were custom-tailored to the market region in which they were opening. The name, Fresh and Easy, was intended to take advantage of Californian culture and values. Their product offerings within the store, with a strong emphasis on fresh fruits and vegetables, natural and organic foods, were intended to not only appeal to the tastes of the local culture but also to fill a gap in the current supermarket offerings within the region. The locations, which are primarily urban, small footprint locations in city centres and underserved neighbourhoods, are intended to not only take advantage of the chance to enter an underserved market but also to fit the market needs of the surrounding areas and to integrate seamlessly into the neighbourhoods. These alterations to the core product (a small supermarket along the lines of a Tesco Express) have allowed for a successful entry into the Californian market, as Tesco have adapted to the local culture rather than attempting to import an unaltered product into an area. Tesco's successful adaptation of their business practices to the new market has spurred reaction from their competitors, who almost immediately began improving their own fresh foods offerings and acquiring space for their own small footprint, in-city format stores in order to compete.
The strategic business unit organizational structure provides Tesco with flexibility to expand its operations in many different directions - it can expand its electronics line in the Non-Food SBU without disturbing the policies, practices or resources devoted to the International or Core UK SBUs, which allows it a large degree of flexibility and customisation capability within the organization. It also allows the company to be successful internationally, as it can choose its market entry strategy to account for the needs of the new market, rather than simply mimicking the existing competitors or using the home country marketing, branding and business operation techniques. Tesco has been exceptionally successful at international business development, as is the market leader in five of its twelve international market areas (Tesco 2008).
Tesco's Corporate Culture
Corporate culture is one of the main determinants of success or failure in a business development practice, because it largely determines how flexible, accepting of change and innovative a company tends to be. Fairfield-Sonn (2001: 36) provided a four-layer model of corporate culture that included cultural artefacts, cultural history, core ideology and core values that helps to quantify and describe the corporate culture of an organization. Thus, Tesco's corporate culture can be determined from its corporate responsibility statements, which describe its core values and core ideologies as well as some aspects of cultural artefacts.
Tesco's stated core priorities include:
Ensuring community, corporate responsibility and sustainability are at the heart of our business.
Being a good neighbour and being responsible, fair and honest.
Considering our social, economic and environmental impact as we make our decisions. (Tesco, 2008)
These values have had a significant impact on the way in which Tesco does business, as well as its financial performance. For example, its expansion into California was designed to be not only profitable, but also socially responsible. As in the United Kingdom, American inner cities have a food supply problem wherein there are few large supermarkets and the smaller supermarkets do not have an adequate supply of fresh foods, including fruits, vegetables and proteins. Because supermarkets are reluctant to build in the inner cities and many residents do not have transportation outside the area, inner city residents do not enjoy an appropriate diet, and suffer health consequences as a result (Wankel & Stoner 2007: 224). Tesco's corporate culture priorities allowed the company to consider opening stores in areas where native supermarkets were reluctant to go, and to provide services to the area that the local providers either couldn't or didn't consider. Thus, they opened stores in underserved regions, not only allowing them to express their core ideals, but also providing an opportunity to enter an almost untapped market. Although native retailers have scrambled to enter the markets in which Tesco is now providing services in the United States, Tesco will continue to have the advantage in terms of the markets it has already entered; it also has a corporate culture that encourages the expansion and service of these areas.
Another area in which the company's business development practices have both impacted and been impacted by the corporate culture is the introduction of lines of natural, organic and free-range foods to its stores beginning in the 1990s, and continuing into its development of the Nature's Choice sustainable production lines over the past few years. These lines, which include organic fruits, vegetables, meats and other proteins, dairy products, free-range eggs and other responsibly produced goods, has increased its importance in recent years to the company's bottom line due to growing awareness of environmental factors by customers. The provision of lifestyle ranges like those above is one of the core strategies of the Core UK strategic business unit (Tesco 2008), as it provides the opportunity to reach the greatest number of customers, particularly those who believe that the way in which food was produced is as important as the food itself. However, this provision is also mandated by the company's corporate culture's core ideals, particularly those of environmental responsibility and awareness. These ideals entered the corporate culture in the mid-1990s, at about the same time as the first environmentally aware lifestyle product range (that of free-range eggs) was introduced. Whether the shift in corporate culture inspired the change in development strategy or whether the shift in development strategy inspired the shift in corporate culture truly is a chicken and egg question!
Risk Assessment and Management
According to Rainey (2006: 138), risk management is one of the critical success factors for strategic business development, as well as being one of the reasons corporations are motivated to pursue it. Risk assessment includes evaluating and determining the potential for loss due to failure of the business development practice (Koller 2005). One typical means of evaluating risk in international business is the PEST (Political, Economic, Social and Technological) framework; this framework describes the potential for loss due to each of these macro environmental factors. Loss includes both financial loss and physical threats to the organization's people and capital investments.
Tesco has undertaken a conservative business development strategy, in line with a conservative risk assessment. For example, it does not enter many new markets at once, but instead enters a single market and develops the market thoroughly before moving on to the next. In its expansion into California, it opened only a few stores in a concentrated geographic region, rather than spreading the stores out diffusely or entering a number of different states. This allows it to not only perfect its business model for the region before moving into other areas, but also to limit its exposure to loss in the event that its expansion is unsuccessful. This conservative strategy is appropriate, due to the high complexity of Tesco's business lines and the generally low profitability levels of the grocery industry.
Tesco's development activities have had significant impact on its financial performance, as well. One example of the impact of its development activities on its financial performance is the contribution of its Non-Food strategic business unit, which focuses on sales of electronics, consumer goods, home goods and clothing rather than foods (Tesco 2008). The non-food SBU handles sales from Tesco Extra, Homeplus, Tesco Direct, as well as non-food sales from its food stores (which are handled by the Core UK business unit). Like the food offerings of the Core UK unit, the Non-Food offerings come in a large number of lines, including Tesco Finest, Tesco Value, Florence and Fred (a private-label clothing line that has gained attention in fashion publications), and other lines as well as external brands and products (Tesco 2008). According to Tesco (2008) business within the non-food strategic business unit is growing at a rate faster than that of the core operation, making it a successful exercise in business development that has not only expanded the range and clarified the operations of the company but has also improved the bottom line. This type of business development, in which a market or industry outside the core strengths of the company is pursued, is often risky; however, according to Grant (2005) this growth outside core competencies is required if a business is to continue to flourish financially; otherwise, the company will eventually exhaust its market and will not longer have access to the required growth rates to sustain its growth. The choice of expansion into the non-food area was a good choice for Tesco; it is a complementary range of goods that can be marketed in existing facilities (as well as, is now the case, having devoted marketing channels), as well as being a higher margin market and offering a wider range of potential expansion opportunities. For example, Tesco's recent venture into DVD marketing has opened a completely new market and put them in competition for electronic entertainment as well as their durable goods lines. This type of expansion not only improves the bottom line, but also creates greater flexibility and market reactiveness.
Future Prospects and Challenges
In order for business development to continue to be successful, it must be sustained. Currently, Tesco has a number of business development areas in which it could focus. The growth of the non-food business unit holds great promise, as it could take advantage of the growing demand for these products. However, this business unit's effectiveness may be compromised by current economic conditions. Sales of non-food products are largely driven by consumer confidence ratings, which are currently at a low. This means that the sale of large durable goods and luxury items, in particular, may be considerably depressed as consumers try not to make unnecessary purchases due to economic anxieties. Thus, continued development in the non-food strategic business unit may be counterproductive until the economic outlook improves. Before undergoing any further development in this area, a careful risk assessment should be undertaken.
A more successful area of business development may be the Core UK's development of environmentally aware and ethical food ranges. The public awareness of the environmental impact of their food is increasing, aided by campaigns by individuals like Jamie Oliver and Prince Charles raising the awareness of the importance of food quality and food sustainability. A growing awareness of the need for ethical treatment of animals is also a major feature of modern UK society, and should be taken into account. Natural and organic ranges, including not only foods but also cleaning products and personal hygiene products, are becoming exponentially more popular in today's society. This represents significant opportunity for Tesco to continue their development of these lifestyle ranges, particularly if they can reduce the costs of production and sale in order to make the goods more affordable to individuals who currently from purchase traditional ranges due to financial restrictions. Many people would be wiling to pay a small premium for these goods, but cannot afford the 50% or greater premium currently on them. Tesco's Nature's Choice range has already begun to explore ways to reduce the costs of ethically and responsibly produced foodstuffs; this development could continue to be enhanced as a way of capturing more of the market for them.
Finally, Tesco has an opportunity in the International market to increase its market penetration in the United States and the rest of North America by following its current strategy of entering underserved markets. This strategy has proven successful to this point, and will likely continue to be successful due to American food retailers' reluctance to enter these areas. However, if further expansion into the United States is pursued it must be strictly governed by risk assessments that take into account the difficulty of creating a transport and supply chain network across regions; this could rapidly decrease the financial benefit gained by Tesco from these additional stores and reduce the effectiveness of the development activity. Thus, development should be concentrated in urban areas and should take place using a cluster-spread approach, rather than placing stores indiscriminately. One benefit of this approach is that food sales are often not significantly affected by economic downturns, unlike non-food goods. If Tesco can tap into the underserved market for fresh foods in the American inner cities and continue to provide reasonably priced and quality goods to these markets, they will continue to reap the rewards of this development activity even through economic downturns.
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