Mgt3140 Exam Tesco Mdx Version

8/17/2019 Mgt3140 Exam Tesco Mdx Version

1/12

1

Business School

MIDDLESEX UNIVERSITY

EXAMINATION PAPER

Academic Year 2015/2016

MGT3140

INTERNATIONAL BUSINESS STRATEGY

DR SHASHA ZHAO

Time allowed: 2 hours

Total number of questions: 4 in total

Instructions to candidates: Answer ANY TWO of the four questions.

Each question is worth a maximum of 50 marks. The

total (out of 100) will be converted to a percentage

after marking.

Materials provided: One given case study at the beginning of the exam

Equipment permitted: None

Total number of pages: 12

No books, paper or electronic devices are permitted to be brought into the examination room other than

those specified above.

Candidates are warned that credit cannot be given for work that is illegible


2/12

2

ATTEMPT ANY TWO QUESTIONS

Each question carries 50 marks.

1.

“To what extent would you argue that Porter’s Diamond is useful/not useful inexplaining the company’s internationalising decisions?” – [50%]

2. “Critically discuss to what extent the Resource Based View theory explains the

international strategy of the company during its early expansion years?” – [50%]

3. “Critically appraise any pros and cons of the company’s current strategic decisions

in organising their global value chain activities and propose useful suggestions to

improve/enhance current structural arrangement. Illustrate your answer with

reference to relevant international organisational theories.” - [50%]

4.

“What would you propose the company should do strategically in the next ten years if

they wish to continue their international expansion into the emerging market? What

do you foresee as the potential barriers to their expansion strategy and what do you

propose as the means to remove these barriers? Discuss and justify your answer by

making reference to the case and international business theories.” - [50%]


3/12

3

Retail Multinational Learning: A Case Study of Tesco- Written by Butel, L. PBS

Introduction

The company initially expanded into the geographically close markets of Ireland and France. Tesco's initial

international foray was in 1979 when they purchased 51 per cent of Albert Gubay's Three Guys operation for

GB£4 million in the neighbouring market of the Republic of Ireland. This expansion proved to be immature

given the structural capacity for expansion and the relative strength of the company within their domestic

market at the time of the initial international foray. This untimely venture abroad was summed up by one sell-

side analyst:

The perceived success (or otherwise) of their early venture abroad would have been considered insignificant to

the company's fortunes at home, and as a result, this largely undermined the company's (perceived) efforts in

the eyes of the financial markets as being a peripheral and/or even a distraction to the core UK business.

The continued realignment, focus and momentum of the company in the UK market provided the context in

which internationalisation had taken “a secondary position” in the company's corporate development agenda.

Tesco subsequently divested the Three Guys operations to the Dublin-based supermarket company H. Williams

in 1986. Towards the end of the 1980s, the company embarked on research efforts into possible international

growth options and these primarily centred on the US market, but also covered several European countries. The

company spent several years investigating the North American market during the late 1980s and early 1990s.

The product of this research effort was the company's move into the French market. Tesco's first foray into

mainland Europe with the acquisition of the medium-sized supermarket chain Catteau in December 1992 was

intended to be the company's springboard to international expansion and serve as a platform for European

growth in particular. The company's rationale at the time for acquiring a small regional chain was that they

were going to build Catteau into a national chain in France. Tesco acquired an effective 85 per cent holding,

leaving 15 per cent of the ownership in the hands of management as part of an incentive scheme. According to

the analysts’ research at the time, the company was attracted by Catteau's good record and high profitability.

Group turnover of the chain in 1991 was GB£340 million and over 80 per cent of this revenue came from

retailing (Catteau also had wholesaling and franchise activities). Management felt that Catteau's impressive net

profitability reflected the economies gained from a tight geographical clustering of stores and the strong

centralised cost controls, and as a result, the financial markets were largely supportive:

At the time the financial markets pointed out that Tesco had done all the classic right things – the lesson

learned from UK retailers’ forays overseas has been that it is vital to buy a successful business rather than a

“turnaround” situation and retain strong local management.

By the end of the middle of the 1990s, Tesco would begin to question the acquisition of Catteau, and later in

1997 would completely withdraw from France. For much of this early expansion, the company focused on

structurally mature markets, but with more recent expansion the company has been more disposed toward

emerging markets.


4/12

4

The third phase of the company's international expansion was in 1995, when management acquired the Global

supermarket chain in Hungary for GB£15 million. This did not represent a particularly expensive entry, and

indeed, this was reflected in the poor quality of the assets purchased – in total 43 small stores. The intention of

the company was not to trade the stores in the long-term, but rather to secure a foothold in the market and learn

from these businesses, while later building a larger hypermarket business based on their experiences. Using the

Hungarian acquisition as a foothold in eastern Europe, the company subsequently acquired Savia SA in Poland

for GB£8 million in late 1995, which was, again, a chain of 36 small supermarkets acquired for relatively little

financial consideration and designed to secure a foothold in the Polish market for Tesco from which to develop

a hypermarket business. In 1996 the company entered the Czech Republic and Slovakia through the acquisition

of Kmart for GB£77 million, acquiring a portfolio of 13 stores with an average selling space of 72,000 ft2.

Essentially the Kmart business geographically was an in-fill acquisition between Tesco's Polish and Hungarian

investments.

Tesco also re-entered the Irish market with the acquisition of ABF's Irish food retailing business for GB£630

million in 1997. Following the ABF acquisition, the company secured their position as the largest food retailer

in Ireland with 109 supermarkets and annual sales of GB£1.23billion. And in addition Tesco captured 17.5 per

cent of the market in Northern Ireland and 19.4 per cent in the Republic securing number one position in both

markets.

The initial move into Asia, and the Thailand market in particular, came in May 1998 with the purchase of a 75

per cent majority controlling stake in Lotus, a chain of 13 hypermarkets which cost GB£111 million for the

equity – assuming GB£89 million as their share of Lotus's debt. Lotus’ previous owner, Thai CP Group (a

major agricultural supplier in the region) retained a 17 per cent stake, with SHV Makro holding the remaining

8 per cent. Tesco subsequently entered South Korea. In March 1999, Tesco formed a joint venture with

Samsung, one of South Korea's largest conglomerates, into which the company invested GB£80 million in

cash. Later that year the company increased their share of the joint venture from 51 per cent to 81 per cent at a

cost of a further GB£30 million.

Tesco further developed operations in the region when they entered Malaysia in early 2002. In a similar

structure to the other Asian operations, the Malaysian operation, Tesco Stores (Malaysia) Sdn Bhd, was

established as a joint venture with a local company Sime Darby Behad. Tesco would own 70 per cent of the

equity, but the operation would be under local control. Tesco later entered Japan during July 2003.

Internal strategic processes

Market section experience. Tesco's internationalisation raises several questions regarding the nature of their

market selection decision experiences. Tesco's decision-making process highlights the contrasting motivational

structures that underpin the various paths towards international markets which eventually led to different

spatial behaviours. In qualitative terms, the interviewees highlighted a number of important characteristics of

Tesco's market selection decisions:

Retaining spatial focus is more important than capitalising on small-scale opportunities in diversemarkets.

Competition from local retailers in their chosen markets is virtually non-existent.

Dynamics for the international retailers are relatively level (which is not the case in Latin Americawhere Carrefour has operated for almost 20 years).


5/12

5

Capitalised on opportunistic events unfolding within the existing portfolio of international retailmarkets.

Tesco's expansion was spatially characterised as being largely regional in nature and less global oriented.

Cautiously, Tesco had decided to dominate the smaller central European markets that are unlikely to attract

much attention from the large retail multinational peers such as Carrefour and Wal-Mart who preferred to focuson the larger markets. The company incrementally entered markets rather than entering several markets at the

same time,. Acquisition-driven consolidation is opportunistic, particularly with businesses that are privately

owned. Organic store-by-store development allows for a much more strategic approach to internationalisation.

In turn, this would result in the management placing greater emphasis on store-by-store development that

allowed the company to become more strategic in terms of their selection of markets, procurement, distribution

and store locations. Based on this evidence, it was apparent that the nature of the market selection decisions

would be shaped by the mode of entry used and whether or not opportunities existed.

. Tesco used a combination of multinational entry mode strategies within one country. As previously discussed,

Tesco entered the central and eastern Europe by acquiring a relatively small chain of convenience stores inHungary, a supermarket business in Poland and a department store chain in the Czech Republic and Slovakia It

was certainly unusual for such a large public company to become involved in these operations, and even

competitors at the time questioned the logic of their approach. However, the use of “seed” acquisitions with a

view to develop knowledge of the market before expanding organically through store-by-store development

allowed Tesco to minimise their own human and financial capital in the face of potential economic and

political uncertainty. Some of these small stores would later be closed down and replaced by large

hypermarkets nearby. Although Tesco faced criticism and, indeed, pressure from the financial markets, there

are sometimes compelling reasons for retaining a small operating presence in a foreign market where

international competitors are already established. First, the small presence would facilitate the implementation

of an acquisition strategy by securing the necessary contacts and networks into foreign retailers and local

suppliers, especially considering the challenges associated with family owned and controlled chains. Second,

retaining a direct and small operating presence in a competitors’ major market would lead to important insights

into the competitive behavioural dynamics of competition that otherwise would not be possible without a direct

presence.

Indeed, after an initial period of understanding these store practices, management decided that the primary

development comprised the hypermarket format. The development of the new hypermarket format was

primarily driven through two pilot stores. Despite a relatively cautious approach to market selection, Tesco

rather ambitiously developed a completely new format in a distant market – a format, moreover, which had not

been tested in the domestic market. This approach allowed the company to experiment and radically depart

from their existing domestic supermarket format and extend the non-food merchandise content of their

international store operations. Tesco's entry mode experience did not mirror the experiences adopted by

manufacturing companies. In the broader international literature Chang's (1995) findings showed that when

Japanese electronics firms first acquired an international business, they did so in one in which they had a strong

competitive advantage in order to reduce the risk of failure. In stark contrast Tesco entered new markets by

acquiring relatively weak target firms or by launching into areas where they were less strong in terms of a

distinct competitive advantage. Tesco's initial forays into Ireland and Czechoslovakia clearly illustrate this

point. In Ireland, difficulty with post integration led to the realisation that these “turnaround” cases were

disproportionately demanding for management resources, and in the Czechoslovakia Tesco moved into non-

food merchandise lines by acquiring the Kmart department stores.

http://www.emeraldinsight.com/Insight/ViewContentServlet?Filename=Published/EmeraldFullTextArticle/Articles/0890330102.html#b14#b14http://www.emeraldinsight.com/Insight/ViewContentServlet?Filename=Published/EmeraldFullTextArticle/Articles/0890330102.html#b14#b14


6/12

6

What surfaced as a main theme from the findings was the intense learning process during international retail

divestments. The findings indicated that failure or partial failure during the internationalisation process had a

marked effect on the future trajectory of Tesco's international expansion. The strategic effect of Tesco's

divestment in France and Ireland has resulted in the firm now ensuring that they establish a strong market-

leading position in new markets. For example, Tesco's aggregate market share in Hungary and Poland is over

40 per cent. The advantages of a dominant market position for learning lie in the success that such a position

implies. A strong market position can obscure relatively small mistakes, whereas for small-scale operations

such mistakes might prove to be fatal.

The Catteau divestment experience resulted in an equally valuable learning process for Tesco. Sell-side

analysts suggested that Tesco delayed essential corporate divestment and reconfiguration even under intense

pressure when it emerged that the French operations were experiencing difficulties. The company found

themselves locked into the business through various exit clauses – out-manoeuvred by Catteau's management –

bidding competitors and the investment banks facilitating the completion of the divestment: Tesco have learned

that advisors can advise but that's all. Don't trust any investment bank. The management were misguided and

ill-advised with Catteau in France. There's no question that the management of Catteau are to blame.

International retailers should never trust anybody they are buying assets from.

It was clear that Tesco's management learned from this experience by improving the techniques to prevent the

commingling of the management lock-ins and sunk costs, which made divestments very difficult, in terms of

future acquisition due diligence processes. While the idea that continuous dissatisfaction from failure may

seem particularly useful to initiate learning (Butler et al., 1991; Barwise, 1997; Arino and de la Torre, 1998), it

remains difficult in practice. The acquisition of Catteau for Tesco and the subsequent years (i.e.1992-1997)

marked a continuous process of management dissatisfaction with the French operations. This dissatisfaction

generated negative press commentary, but also weakened management and investor confidence and visibly

undermined the strategic credibility of the company. The company's most high profile divestment had led to

management evaluating progressive store-by-store expansion not with a view of proactively developing an exit

strategy in the planning and due diligence phase of expansion as the following management viewpoint

suggests:

In central and eastern Europe the company divested approximately 20 small-scale stores while recouping the

initial investment. In the early phases of international development Tesco did not have a clear idea of the

corporate model in which to transfer their core competencies. Retaining the essence of the UK company's core

competencies was problematic given the local spatial nature of food retailing and the lack of awareness of the

Tesco brand name. Several analysts noted that when Tesco acquired Catteau in France they did not fully

understand how they would integrate and control the business. Whether or not they were trying to replicate

themselves focusing on corporate brand, format adoption and culture or using a financial holding company

structure.This led to indecision with the Catteau acquisition. For example, the company experimented with

integrating some brands under the Tesco brand but then decided to retain the local brand. These mistakes made

Tesco establish a clearer idea regarding how and why their international businesses would succeed or fail.

Tesco underwent a gradual withdrawal from a number of local tasks, while at the same time re-establishing

ownership of important central functions. Following their second entry into Ireland, the company had a much

clearer vision. Even though the Irish government insisted Tesco retain a regional headquarters, the company

were determined that they would adopt a more industrial corporate model. However, as several analysts

pointed out; To replicate and duplicate identity across the world puts more pressure on the business, tends to bemuch slower – replicating product offers, merchandising policies, staff training, culture. These early mistakes

http://www.emeraldinsight.com/Insight/ViewContentServlet?Filename=Published/EmeraldFullTextArticle/Articles/0890330102.html#b12#b12http://www.emeraldinsight.com/Insight/ViewContentServlet?Filename=Published/EmeraldFullTextArticle/Articles/0890330102.html#b8#b8http://www.emeraldinsight.com/Insight/ViewContentServlet?Filename=Published/EmeraldFullTextArticle/Articles/0890330102.html#b4#b4http://www.emeraldinsight.com/Insight/ViewContentServlet?Filename=Published/EmeraldFullTextArticle/Articles/0890330102.html#b4#b4http://www.emeraldinsight.com/Insight/ViewContentServlet?Filename=Published/EmeraldFullTextArticle/Articles/0890330102.html#b8#b8http://www.emeraldinsight.com/Insight/ViewContentServlet?Filename=Published/EmeraldFullTextArticle/Articles/0890330102.html#b12#b12


7/12

7

provided a firmer setting within which subsequent strategic decisions could be addressed more confidently.

Learning how to strike a sustainable balance between the two was an important lesson learned by Tesco.

Experience with learning structures and processes. Ascertaining whether a firm possesses intent to learn is an

important factor influencing their learning behaviour (Tsang, 1999). Intention relates to commitment. On the

surface it appears that Tesco possessed a learning intent, however, it is questionable whether this learning

genuinely went beyond the “official corporate line” at least in the early phases of internationalisation. When

management were asked to discuss the structures and processes through which the international learning was

disseminated back to the UK market, critically there appeared to be no planned, structured, nor systematic

mechanisms or formal processes for capitalising on this learning. The company's acquisition of Catteau in

France did not prove to be the platform from which to inspire experimentation abroad. Nevertheless, the next

phase of the company's expansion into central and eastern Europe coincided with the company's ambition to

broaden their non-food merchandise in the UK market. The impetus was then on the diffusion of what the

company had learned from developing a new format which accommodated non-food items in the overseas

markets. This had a catalysing effect. Over time, the company began to employ personnel whose sole

responsibility was to transfer the hypermarket format learning back to the UK from Central and Eastern

Europe. These learning agents represented a new dimension in the company's organisational structure, but there

were difficulties in this process as management highlighted:

Tesco learned particularly valuable lessons when faced with abrupt competitive shifts, to new circumstances,

and responses from other retail multinationals. Specifically, Tesco were faced with hard decisions centring on

whether they should participate in the consolidation process (as a consolidator or consolidatee), knowing that

the valuations placed on acquisition targets were over-priced, and there would be a distinct possibility of losing

strategic control. One sell-side analyst summed up the pressure: In going it alone, Tesco would be making a

huge strategic call. If wrong, the business would be seriously disadvantaged and would eventually lose their

independence. If right, their vision would be second to none, and management would be regarded as one of the

best in the world. Despite their relatively strong position against UK competition, the consequences of Tesco's

relatively weak position against much larger and more experienced international peers were profound:

acquisitions 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.

Tesco resisted such pressures and decided to pursue international expansion independently through organic

store-by-store expansion – albeit much more aggressively than had hitherto been the case (i.e. the developmentof 200 hypermarkets over four years). During what was rapidly emerging as one of the most intense periods of

retail merger-and acquisition-driven internationalisation, the growing sense of unease among analysts began to

surface about the long-term endurance of Tesco internationally. However, management held their nerve – the

speculative scenarios which had been envisaged in the early 2000s pointing towards a series of mergers and

acquisitions at both the global and local level failed to materialise. Instead, quite remarkably, the immediate

years following 2000 saw relatively little consolidation whatsoever. Through a series of competitive

adjustments including exploiting the benefits conferred by the scale of their UK operations, it seems that

Tesco's strategy paid off – and, importantly, deterred any hostile takeover bids. While the strategic effects of

this intense period are difficult to determine analysts suggested that this period of vulnerability for Tesco led to

a greater realisation of the strategic necessity of the company's international operations in ensuring the long-

http://www.emeraldinsight.com/Insight/ViewContentServlet?Filename=Published/EmeraldFullTextArticle/Articles/0890330102.html#b50#b50http://www.emeraldinsight.com/Insight/ViewContentServlet?Filename=Published/EmeraldFullTextArticle/Articles/0890330102.html#b50#b50


8/12

8

term future of the company.

At the local competitive spatial level, Tesco adjusted operational retailing aspects, sometimes with minor

modifications and at other times ensuring fundamental transformation of the format during the

internationalisation process. Both buy- and sell-side analysts believed that this international juncture was an

area where companies could learn and experiment at the extremities of the company: It will offer a company

which is open to change the opportunity to observe and adopt best practice and apply it throughout the totality

of their organisation. It will see Tesco competing directly with some of the best food retailers, notably the

French hypermarket operators. In central Europe and Asia, Tesco is competing directly with some of the best

food retailers in the world, notably Carrefour, Auchan, and Ahold. As a result, Tesco has to learn how to

merchandise non-food departments and how to hone their merchandising skills.

Faced with the inevitable prospect of different degrees of regulatory constrains in dissimilar international retail

markets, Tesco generated negative publicity and commentary in both the Irish and French markets. The

contrasting cultural nuances were particularly apparent in the different ways of conducting business concerning

the management of the planning process. In Ireland, in the context of an unclear planning policy frame, the

company attempted to impose a process that had been utilised in the UK:

Tesco underestimated how the planning process in Ireland worked at two levels. First, they underestimated the

extent of local networks and contacts in the property industry. They didn't have enough agents and advisors.

There was very much a local way of doing things, which relied on who you know as much as how much you

know. Second, there is a different decision-making process, slightly opaque series of planning policy guidance

and framework. There was no independent planning inspectorate, with a lot of years experience in determining

planning proposals for new stores.

When Tesco announced several proposals for new store development in Ireland and there was little guidance

with regard to planning, this led to several years of independent planning and formalised inquiries. Although

Tesco had been actively addressing the legitimate concerns of customers, suppliers and small retailers in these

markets, it is clear that the company failed, at least initially, to communicate and negate the concerns that the

local authorities and other stakeholders adequately. The strategic effect of this is difficult to determine in more

recent expansion, but with experience, rather than conceiving of regulation simply as fait accompli in

international markets and emerging markets in particular, Tesco embarked on a public relation campaign that

would attempt to influence important regulatory decisions in their favour. In marked contrast to the early phase

of development, Tesco noticeably changed by becoming proactive in enhancing their credibility and reputation

in new markets with national and local governments as well as providing new opportunities for local suppliers

to export produce. As a significant measure of the company's commitment to internationalisation, upon Tesco's

entry into the Irish food retail market, management were willing to enter into an agreement with the

government which meant that Tesco had to adhere to a number of promises and guarantees including operating

an autonomous head office, retaining existing employees and the sourcing of Irish products.

Internal regulatory experience. Tesco learned from the importance of involving major shareholders during the

internationalisation process. Tesco required the support and guidance of the financial institutions and, indeed,

this forced them to invent communications and governance processes in order to stay informed of institutional

investor concerns and perspectives. Arguably, Tesco's initial cautionary approach towards internationalisation

was attributable to the restraints placed on the company by their shareholders’ expectations. According to

management, at the time of Tesco's first high profile, albeit small international acquisition, the gist of the


9/12

9

financial analysts’ perceptions towards Tesco's internationalisation was that the capital markets inhibited or

constrained Tesco's international expansion: Tesco wanted to do a deal in France in the mid-1990s but were

prohibited at the time by the City. They wanted special dividends and share buy-back options and didn't want

to take the risk of them going abroad. Serious questions were being asked by the financial analysts concerning

the financial requirements and the pressures to sustain international growth. However, over time, the question

from the financial analysts then became how rapid Tesco should expand internationally rather than whether or

not they should actually internationalise. One sell-side analyst's report at the time succinctly put it:

The only question is the “haste” with which it is pursued and whether shareholders get a parallel sight of the

cash through the dividend. In the context of Catteau, Tesco seems to be taking it reasonably slowly; it certainly

is delivering a progressive pay out.

Tesco came under intense scrutiny and found themselves subject of speculation of takeover bids during the mid

to late 1990s. To combat this Tesco embarked upon a number of investor relations initiatives. Some, as

reported in the press at the time, interpreted Tesco's emphasis on overseas expansion as “a coded plea to re -rate

the shares and put it in a stronger position to take part in the international acquisition-driven consolidation

process” (Osborne, 1999), so that the company would not become increasingly marginalised in the acquisition-

driven consolidation process. That the whole UK food retail industry could be owned by foreign competition.

Unfortunately for Tesco, these efforts were interpreted as a one-off public relations (PR) exercise. The findings

tentatively suggest that a one-off PR campaign for its own stake, in the context of intense consolidation

pressures, will not be positively interpreted by the financial markets. Instead, it was interpreted as a coded plea

to re-rate the shares and put the retail multinational in a stronger position to take part in the international

acquisition-driven consolidation process, rather than an open and meaningful ongoing dialogue between the

financial institutions and Tesco. Tesco's message was not being effectively relayed to investors – in part,

because analysts were placing excessive weight on the company's past international (in)experience and this

obscured the prospects for prospective earning power from future international investments.

Another theme emerging from the interviews was that Tesco's management greatly underestimated the

management capital required for international expansion. A significant measure of the company's attitude

towards human resource capacity is reflected in the following statement by one advisor: ‘’.

Investment in human capital, whether at the managerial level or store level, to handle international expansion

constituted a significant lesson learned by Tesco. To achieve the necessary pace and scale of international

operations Tesco have had to invest significantly in human capital, not least because the scale of the

internationalisation programme significantly depleted the existing management resources. The strategic effect

of this under investment in human capital for Tesco was that they acquired a number of small-scale businesses

in Central and Eastern Europe as a substitute for their lack international experience and local knowledge. The

size of Tesco’s retail operations in their domestic market were a vital component in establishing successful

international operations. By virtue of this size, Tesco had greater availability of capital and human resources

for areas such as store management, site location analysts, marketing and financial personnel, supporting and

sustaining international operations. Reflecting on this issue one buy-side analyst made the following point: The

biggest lesson of all is a human resource lesson. Where do you get experienced international management?

While Carrefour and Ahold have considerable management depth and breadth, relatively new internationalists

have less human resources.

Also of increasing importance for the less experienced retail multinationals was the advisory support from

http://www.emeraldinsight.com/Insight/ViewContentServlet?Filename=Published/EmeraldFullTextArticle/Articles/0890330102.html#b35#b35http://www.emeraldinsight.com/Insight/ViewContentServlet?Filename=Published/EmeraldFullTextArticle/Articles/0890330102.html#b35#b35http://www.emeraldinsight.com/Insight/ViewContentServlet?Filename=Published/EmeraldFullTextArticle/Articles/0890330102.html#b35#b35


10/12

10

external firms such as investment banks, management and property consultants and even manufacturers. The

investment banking advisory support intensified when Tesco expanded via merger and acquisitions, making

possible a deepening of the knowledge transfer process, closely co-ordinating the activities with the investment

banks, and expanding the learning process outside the boundaries of the company. Investment banks can

therefore act as an agent for transferring knowledge regarding the dynamics in other international markets – in

effect accelerating the learning curve for a less experienced retail multinational. Investment banks can be

involved at any stage in the internationalisation process as one advisor explained:

These networks also extend beyond the financial institutions. One important dimension for sustaining the

company's aggressive expansion programme has been the close relationship with their largest supplier, Procter

and Gamble. For example, Tesco utilised Procter and Gamble to fund an international field trip so that the

executives got an insight into retailing practices in Asia.

Progressive international expansion is likely to result in the deterioration of the financial profile. From 1995

onwards, the conditions for international expansion were far more capital intensive. These costs were

principally driven by the rising valuation (acquisition multiples) placed on acquisition targets, which, during

the wave of acquisitions, broke decisively beyond historical ranges. On top of that, costs were exacerbated by

the increasing sophistication of in-store retail environments which, even within the emerging markets, required

additional levels of capital investment as well as broader, supporting investments in information technology

(IT) systems, distribution/logistics infrastructures and supply chain management. Developing markets have

attracted considerably more international competitors, resulting in a virtuous cycle of heavy capital investment

Additional external sources of financing were therefore often required to supplement international growth.

Tesco relied on external funding both in the form of debt and equity from the financial institutions. A key

factor for Tesco, however, was the size of their cash generating domestic markets, which allowed them to

invest with confidence in international emerging markets. In 2002, for example, Tesco financed the HIT

acquisition in Poland (estimated £386 million) from trading rather than incurring debt, benefiting from the cash

generating strength of their core UK business. Critical post-integration investments were also supported from

earnings from the UK business. Underlying Tesco's international programme was a relatively strong domestic

position, which was in stark contrast to their main rival in the UK, Sainsbury's. Sainsbury's international

expansion became more difficult in the face of opponents, who slowly undermined the company's international

aspirations with resounding attacks on their under performing core business. Many buy- and sell-side analysts

that have followed this line of reasoning:

On the back of poor domestic expansion, retail multinationals should not plan on any foreign acquisitions as

this will only accelerate the demise of the current domestic operations. To wield power across markets, a retail

multinational must have some measure of strength in their domestic market. In other words, retail

multinationals with under performing or insignificant positions in their domestic market will not have

sufficient financial or human resources to fully implement their international strategy.If you are struggling in

your domestic market, what credibility do you have that you can manage a business in another country.

The experiences of Tesco highlight some important lessons concerning international marketing and

communication issues. In the international retailing literature, Lord et al. (1989) have noted how multinational

retailer expansion can often be a PR disaster – sometimes confrontational and controversial; leading to conflict

with other retailers and suppliers, but also between the financial markets and the retail multinational (see also

Wrigley, 2000). It is clear from the case findings that Tesco suffered from negative publicity in a number of

http://www.emeraldinsight.com/Insight/ViewContentServlet?Filename=Published/EmeraldFullTextArticle/Articles/0890330102.html#b31#b31http://www.emeraldinsight.com/Insight/ViewContentServlet?Filename=Published/EmeraldFullTextArticle/Articles/0890330102.html#b58#b58http://www.emeraldinsight.com/Insight/ViewContentServlet?Filename=Published/EmeraldFullTextArticle/Articles/0890330102.html#b58#b58http://www.emeraldinsight.com/Insight/ViewContentServlet?Filename=Published/EmeraldFullTextArticle/Articles/0890330102.html#b31#b31


11/12

11

ways. At the investor-retailer level, Tesco's fiduciary responsibilities were often strained due to ineffectual and

disjointed marketing communication programmes. A lack of PR activity during the early phase of

internationalisation placed Tesco at a slight disadvantage, for their international peers wasted few opportunities

to play gently on some of the financial markets’ concerns regarding Tesco's international expansion. One sell-

side analyst made this point:

One of the biggest risks of international expansion is to the reputation of the retail multinational. When a

company's international reputation is questioned, valuation collapses, and as a consequence, management can't

make further acquisitions. Then management spend all of their time on the back foot trying to build credibility

rather than growing the international business. Serious questions were being asked of Tesco in this regard, but

management defended their position explaining that: PR skills play a part in the way some of these perceptions

get blown up. If pressed, we would say that the other retail multinationals are better at “talking up” their story

than Tesco, which tends to take the old fashioned view that the results should speak for themselves. Tesco

experienced a chain of PR mishap after mishap, which undermined consumer confidence and excessively

weakened their customer-friendly image in foreign markets notably in the Republic of Ireland. Perhaps within

a larger and culturally dissimilar market, Tesco may not have survived these mistakes in the face of larger and

well-established incumbents. Yet by the late 1990s, the company were forced to embark on an intensive PR

campaign. Analysts postulated that the main reason for the intensification in PR was a direct result of

management feeling more confident in making larger international profits than initially intended for the early

phase of their international expansion, or, as a direct result of the pressures surrounding the acquisition-driven

consolidation process, which could threaten the strategic credibility of the firm if Tesco remained unresponsive

to the consolidation pressures. What emerges from this evidence is the importance of an evolutionary

marketing strategy within different competitive contexts. Tesco's retail marketing mix decisions have been

characterised by trial-and-error behaviour where different possibilities are explored and thus the decisions

taken are largely evolutionary in different cultures. In addition, the company began experimenting with a new

type of hypermarket format that contained a larger element of non-food stock keeping units. Management

succinctly captured the essence of experimentation in a new market:

I think it's easier to develop new entrepreneurial formats in a new environment than it is in your existing

market where your business is successful. The biggest barrier to change is success. If you have a successful

business that does things in a particular way, stepping outside the box and doing something in a very different

way always appears high risk. Why take the back off a watch when it's ticking. When you don't have the watch,

the quality of your thinking will be much wider, management will challenge things much more in an apparently

risk environment with no baggage than you will in the UK. If you look at the development of our hypermarket

in the UK, it has been much more pedestrian in terms of small steps because it has been based around a highly

successful format that already exists. So why change? You actually need to be in an environment where you

can afford to change because you have nothing to lose.

As the above quotation suggests, retail innovation is facilitated by “shocks” or uncertainty in the international

investment process. The danger facing companies pursuing a progressive step-by-step development model is

that ideas may be inappropriately dismissed or overlooked simply because they did not work in the domestic

market and the success and size of the domestic operations creates a barrier to change and innovation. This

raises some issues associated with benefits of a more aggressive and ambitious international programme

undertaken by Tesco.

The capacity for cross-border sourcing is generally seen as one of the long-term “strategic” justifications for


12/12

12

cross-border consolidation in food retailing (Wrigley, 2002; Palmer, 2002a). Extracting longer-term synergies

and greater co-ordination across borders – including the move towards price harmonisation – was increasingly

being used as justification for international retail acquisitions. For Tesco, global sourcing was largely played

down. Instead, the company emphasised that the debate concerning sourcing efforts did not shift the emphasis

away from their core competencies, which were considered more important within the international landscape.

In principle, Tesco believed that a competitive advantage rests more on the outcomes of learning to improve

local merchandising methods, systems and processes than simply on a cost advantage in the distribution of

standardised goods. There have been a number of strategic outcomes. First, Tesco have deliberately strived to

occupy the top three position in all of their international markets. Tesco have performed less well and in some

instances exited the market where they could not reach a sufficiently critical size. For example, management

cited this as a reason for their divestment of Catteau in the French market. Second, Tesco's actual sourcing

efforts within the broader international context also shows several visible attempts by the company to

aggregate scale across multiple markets and establishing pan-regional presence in contiguous markets. Third,

attempts to re-organise their global sourcing activities practises by establishing buying centres in emerging

markets to develop the product range. Tesco has encouraged local food suppliers to develop retail brands,

under the Tesco own brand. On the one hand, this prohibited the degree of global sourcing efforts, but on the

other, it has substantially improved the overall diversity of the company's product mix which was increasingly

being exported into other international markets.

End of Case
http://www.emeraldinsight.com/Insight/ViewContentServlet?Filename=Published/EmeraldFullTextArticle/Articles/0890330102.html#b59#b59http://www.emeraldinsight.com/Insight/ViewContentServlet?Filename=Published/EmeraldFullTextArticle/Articles/0890330102.html#b37#b37http://www.emeraldinsight.com/Insight/ViewContentServlet?Filename=Published/EmeraldFullTextArticle/Articles/0890330102.html#b37#b37http://www.emeraldinsight.com/Insight/ViewContentServlet?Filename=Published/EmeraldFullTextArticle/Articles/0890330102.html#b59#b59

Documents

Mgt3140 Exam Tesco Mdx Version