Literature Review on Internationalization
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Internationalization can be described as “the process of increasing involvement in international operations”. (Welch and Luostarinen, 1988). It deals with how the firm adapts operations like strategy, structure, resources etc. to perfectly fit the international environments. The firms objective to internationalize their processes is to have a prominent global existence keeping them shoulder to shoulder with their competitors. International retailing is commonly believed to concern retail operations owned by a single company in more than one country. According to Gilbert:
“International retailing is the process of transferring retail operations, concept, management expertise, technology and /or buying function across national borders”.
Therefore international retailing is not the transfer of concepts to new environments but it is the establishment of operations in new markets. A concept can be internationalized without an international transferring organization but international retailing requires physical presence. Their influence is experienced both in the marketplace and within the supply chain, exercise their buying power and influence the development of suppliers within the markets they establish operations. The increase in size of retail operations has resulted in the international expansion on a large scale
Most leading retailers in different sectors have multiplied their foreign sales in the last two decades, but this growth is always accompanied by challenges in fields such as internationalization strategy, market selection and operations. Thus the change from emergent to planned activities (Dawson 2006), complex decisions (Goldman 2001; Sternquist 1997) and culturally influenced performance (Evans/Mavondo 2002) is particularly relevant in firms' practice. Reasons for increase in retail internationalization can be credited to (1) attractiveness of foreign market (2) entrepreneurial ambitions, and (3) limited growth opportunities in home market (McGoldrick 2002; Alexander 1995a). Evidence suggests, out of 30 largest retailers, one in two retailers have already suffered failures in foreign countries (Alexander/Quinn/Cairns 2005; Burt/Dawson/Sparks 2004b). Many researchers examine in detail how retail internationalization can be managed successfully. These studies emphasize the development of explanatory concepts for the internationalization of retail firms, majority of them analyze internationalization on a conceptual basis. Thus they develop explanatory concepts on a theoretical and often a case study oriented basis in order to analyze the mechanisms on retail internationalization. Researchers have identified specific characteristics of retail firms' internationalization which they extensively use as benchmark to base their theories of internationalization upon (Appendix 1).
There are several extant models that explain the internationalization of retailing and each of these models approach the internationalization process from a different perspective although the benchmarks are consistent with all the theories. The roots of most of these internationalization theories describing the internationalization process lies in industrial organization. In addition most of them were developed in the 1970's and 1980's. Researchers tested and provoked these theories every now and then, especially the Uppsala model of Johanson and Vahlne but were seldom able to replace them. Often researchers come up with further ideas about improvements and development to the existing models. Let us look at the most preferred internationalization models although these are not the complete set of models which are available but each of them considers different aspects of the internationalization process.
In this research The Uppsala model (Appendix 2) and the Strategic Choices (Appendix 3) build the base of the conceptual framework. We would use these models to analyze the internationalization strategies of the three companies which are Royal Ahold (Appendix 4), Delhaize (Appendix 5) and Carrefour (Appendix 6) in the US market. We would then use these findings to categorize the companies according to the Treadgold's (1988) typology of transnational retailing (Appendix 7) which is based on entry, operating strategy and geographical presence of international retailers. The Eclectic paradigm and Transaction cost analysis only consider the cost side of internationalization and deciding about entering a new market on the basis of cost and benefits is improper. Also financial data is not being considered so Eclectic paradigm or the TCA as the conceptual framework would not be appropriate. The Industrial Network approach assumes company as a part of a network with long lasting relationship with business partners. The existence of networks is already considered in Uppsala model. Taking into account too many factors and the complexity of Retail internationalization model prevents it from being a basic framework. Also, seeing the internationalization process as an innovation does not seem enough. Uppsala model sees the internationalization process as an evolutionary process the Innovation model is considered to be very close to Uppsala model so the innovation model is left out.
Summing up, our framework consists of Uppsala model and Strategic choice model which very well complement each other so the analysis can give a good overview of the internationalization process of the company.
Began as a family firm in 1887 and went public in 1948, Ahold's operations in food retail business spread across Europe and United States of America. It was not until 1970's when Royal Ahold's management realized that for the company to grow limiting its operations to Netherlands would not help as it dominated the retail grocery market in that country. At the end of 2009 Ahold operated 2,909 stores, excluding the joint ventures with ICA and JMR with a net increase of 12 stores. The first store outside The Netherlands was opened in 1976 as they opened supermarkets in Spain post which Ahold did an acquisition in US of a company named Bi-Lo a South Carolina based food chain. Other US holdings included acquisitions of five additional food retail chains which operated over 1600 stores.
Let us consider the Uppsala model of internationalization to analyze these strategies. Uppsala model consists of two different parts, we will start our analysis with the stage model which sees the internationalization process as a stepwise process through four stages. The importance of psychic distance is also stressed. Ahold's expansion can be considered to be quick and consistent. Ahold focused on internationalization in a new country directly with a sales subsidiary enforcing its expansion strategy by the means of acquisitions as engine of growth. Referring to the Stage model this is the third out of four stages. Ahold, therefore starts and stays in the third stage of the model although it had few differences in operations when compared to any other company which internationalizes by opening sales subsidiary in the host country. Ahold emphasized in local controls, as the company refers to its global operating strategy as being ‘multi- local, multi- format, and multi- channel'. It does not use Ahold as a brand name instead utilizes 26 brands derived from the local market. The company also adjusts its retail outlet formats to suit the local conditions. It relies on the knowhow of local management to determine their own product assortment, pricing policies, and store formats. This is how the company builds upon its strength of being able to integrate the different acquisitions and act as a unit. The strong domestic presence also gave Ahold a great boost in being able to make such successful acquisitions. The reason why it stays in the third stage is because the ranges of products are quite standardized with very few adaptations made once in a while. Thus we can say that the stages of stage model do not apply to the internationalization of Royal Ahold.
The psychic distance variable is also very important in the stage model. This is the point where a company looks into the PEST analysis of the host market and figure out if they have enough opportunities available. The psychic distance factor did not play a major role in the internationalization of Royal Ahold. Psychic distance indicates that differences in culture, language, education, business practices and industrial development that can influence business. As we can see from the facts that the expansion process did not really start within Europe or in countries close to Netherlands. The major expansion took place in the United States which is very lucid from the fact that 56% of Ahold's worldwide sales came from the United States. In case of Ahold it is clear that the Push and Pull (Appendix 8) factors along with the opportunities played a more important role than the psychic distance variable. Since establishing a common global brand was not a strategy of expansion and it believed that the easiest way to expand is to purchase existing grocery chains in foreign countries, availability of such brands were more important than the psychic differences between nations. United States had a huge market in the food retailing sector which could have been acquired and Ahold used the profits earned in the domestic market to take over these companies. The same strategy was later used for expansion in Europe as well.
The second part of the Uppsala model is the Internationalization process model. It explains the process of internationalization as a cycle that the firm continuously repeats. The described cycle contains market knowledge, commitment decisions, current activities and market commitment. We know that the internationalization strategy of Ahold was through acquisitions apart from a few locations where it went for joint ventures, it becomes clearer that Ahold conducted a thorough analysis of factors such as demographics, employment, purchasing power and purchasing behavior. Along with these factors Ahold also analysed the company's position in the market before the acquisition. It had few predefined criteria (Appendix 9) to select the company which would be acquired. As acquisitions involve high costs these factors play a major role in getting profits back. Ahold collects market knowledge not only before going to the new location but also while doing business in the host country which can be shown by the fact that Ahold focuses on their product repositioning programs throughout its operating areas and keeps changing formats of stores to suit the needs. This knowledge acts very beneficial in solving further problems which might arise specific to the host country. Like most of the multinational firms Ahold also bases its future decisions on the newly gained knowledge. Uppsala model clearly corresponds with Ahold's strategy.
Another accordance between then International process model and Ahold's strategy is the correlation between increase of knowledge and the increase of commitment. Being in the food retailing sector the knowledge Ahold gathers while being in a new country helps it with the other stores to be opened in that host country and any other country where it aims to internationalize as it also helps it gain better understanding of the sector. This can be seen from the fact that when the US Federal trade commission blocked the acquisition of Pathmark chain in 1999 then Ahold diversified into wholesale food service industry and acquired US foodservice and PYA/Monarch in 2000. This can be referred as the gain of knowledge about different markets in the world which led to increase in commitment and opening of new stores. We can hereby ascertain that the cycle described in the internationalization process model characterizes the strategy followed by Ahold. The relation from market knowledge to commitment decisions, then to current activities and finally to market commitment can be found in most parts of Ahold's strategy.
A company deciding to internationalize will need to figure out what strategy to adopt while entering a market. There are two dimensions given to these strategies, pressure for cost reduction and pressure for local responsiveness known as the strategic choice model. When Ahold decided to expand into United States it was venturing out in a market which was more competitive that its home market with many competitors since the food and grocery items are not very unique offerings. The only way to compete in this market was to ensure that it offers the best price. In order to achieve this goal and grow at a maintained pace Ahold is forced to keep its cost at minimum and still ensure good quality and better service. One of the strategies which Ahold has been using to achieve this is by increasing the range of private label (Appendix) products so that consumer has a wider selection of price levels to choose from.
Values norms and even regulations in different countries lead to different tastes, various social backgrounds and different climate seems to boost such differences. To match to such changes successfully makes a company market leader. Most of the products in the food retailing sector are standardized although there still are some differences and these differences need to be addressed. With Ahold there was not too much pressure of local responsiveness, the reasons could be the sector it was operating in and the fact that it had made acquisitions of local food chains that were very much self dependent on taking decisions on the store format, prices or the product assortment. Being local, the pressure of local responsiveness was taken care of very well. Ahold also gathered and analyzed detailed customer data to deepen their understanding of customer behavior. Having a clear understanding of consumer trends and customer needs enables them to see changing patterns, respond to them and develop targeted strategies. All these factors clearly point out that Ahold followed the Global strategy when it entered the US market.
Following is a diagrammatic representation of Treadgold's classification system:
Ahold can be categorized as high cost high control strategy as it entered the US market by making acquisitions rather than going for joint ventures or franchising. It can further be classified as aggressive internationalist as it maintained high control over its operations and expanded into a completely different market than its domestic market right at the initial stages of its expansion. All these strategies acted in favor of Ahold until the scam hit its operations in 2003 where it lost quite a lot of its market share.
Carrefour is known as the largest retailer in Europe, second largest in the world, and one of the world leaders in distribution, Carrefour has over 11 thousand stores in the world. In more than 30 countries and areas such as Europe, Asia and South America, Carrefour's networks related to various retail businesses include supermarkets, hypermarkets, discount stores, convenience stores, on-line stores and electronic commerce. Now days 2 million customers are served by 4,20,000 employees of Carrefour all over the world.
Throughout the 1960's and 1970's Carrefour's rapid growth was because of the fact that the firm was able to get two new construction permits per year. As more firms entered the retail market the competition for permits became fierce as many firms fought for authorization to build in attractive locations. To overcome this limitation of 2 stores per year and expand at a rapid pace Carrefour offered to share its retailing knowhow, trademark and consumer goodwill with potential partners both in France and elsewhere in Europe, either in exchange for an ownership interest in stores under construction or franchise fees. Because of increasing competition between Carrefour's wholly owned stores and its franchised stores and the failure of some franchisees to operate according to strict company policies, franchise agreements were discontinued in January 1973.These agreements were turned into joint ventures or dissolved completely. The stores in US were wholly owned stores which were opened in 1988 and 1992 respectively. Thus we can say that as per the stage model of the Uppsala Model Carrefour also falls in the third stage and stays in the third stage.
The importance of psychic distance can be seen in the operations of Carrefour as the expansion of Carrefour started among European countries before it hit the Latin American countries. From the diagram below we can see the why Carrefour is considered to be the leader in Europe and how well it expanded over the countries where the psychic difference was not much.
But when it went on to expand in the US the psychic distance played a major role and the techniques which made this company a market leader in Europe failed and led to the closure of the US stores. The difference in the business practices which led to the local labor union picketing over wages, benefits and work rules was considered as a major reason of the downfall of Carrefour in the US market.
The internationalization process model can be better related to the failure of Carrefour in the US market. The model differentiates between state aspects and change aspects. The state aspects are market knowledge and market commitment and the change aspects are current business activities and commitment decisions. The failure in US can be directly related to the fact that Carrefour did not know about the opportunities and threats in the market and enough information was not gathered about the market before entering it so no alternatives were considered, if they faced challenges. When it opened a 31000 sq. mt. store in suburban Philadelphia it did not realize that the US had a more mature market than any of the European countries where it had expanded and there were many competitors with the hypermarket concept. Carrefour needed more advertising and promotional activities to beat the competitors. Carrefour could not really understand the consumer behavior and the scant promotional activities did not attract many customers. If they had gathered more knowledge about the market they could have figured out that in a market like US, supermarkets, hard discount stores and convenience store networks would have been a better option than hypermarkets. Carrefour did not think about long term effects of their business activities and followed the pattern of establishing huge hypermarkets where clerks on roller skates and 60 checkout lanes welcomed the customers. Carrefour should have supplemented the network of hypermarket stores which were already present in the US market by installing other formats so they could have offered the customers something new like wide range of sales spaces and product lines to suit their lifestyles. Expanding through multiple formats would also have sped up penetration into the country by profiting from complementarities of various formats. Thus we can say that Carrefour's strategy did not very well connect with the Uppsala model.
France's Carrefour can be categorized as a retailer which uses a global strategy as far as the strategic choice model is concerned, instead of using a standard store model Carrefour adapts its stores and products to local tastes although it does this majorly by changing the look and feel of stores and this has reduced the number of major mistakes made by Carrefour. US was one of the mistakes as Carrefour was not able to completely adapt itself according to the market and went on following the same standardized model as in the European countries. As of to reduce the price of products, Carrefour emphasizes the private label products and carry a huge assortment of such products. They also aim for the hard discount stores which sells products at a lower price attracting customers. Carrefour failed on both the aspects when it entered the US market, its competitors who had a better established supply chains were able to offer cheaper products and as its operations in US were only hypermarkets and it could not sell products at the price of discount stores.
Looking at Carrefour's expansion strategy as per the Treadgold's typology we would put it into the category of world powers as it exercises low cost low control (franchising) and medium cost medium control (joint ventures) strategies to expand. Because of this low cost entry mode they establish a presence in high number of markets. Although they did not follow this strategy when entering US and suffered failure, joint ventures could have given them a better understanding of the market operations.
Delhaize Group is a Belgian international food retailer with activities in six countries (United States, Belgium, Greece, Romania, Indonesia, Luxembourg) on three continents. Founded in Belgium in 1867 Delhaize Group is listed on Euronext Brussels and on the New York Stock Exchange. At the end of 2008, Delhaize Group's sales network consisted of 2 673 stores. In 2008, Delhaize Group posted EUR 19.0 billion in revenues and net profit of EUR 467 million. Delhaize Group employs approximately 141 000 people.
Delhaize "Le Lion" SA is also the United States' sixth-largest supermarket group through its publicly listed Delhaize America subsidiary. Indeed, Delhaize America accounts for some 75 percent of the company's sales and operates under various store banners and formats, including nearly 1,200 Food Lion stores in the United States. It all started on a similar note as Ahold, when in 1974-75 the public authorities enacted the first drastic laws intended to restrict the spread of large surface stores known as the “padlock law”. This was the time when the expansion was directed towards the United States market by acquisition of a share in the Food Town Stores chain, which was operating 22 supermarkets in North and South Carolina. In 1996 Food town store which was now known as food lion acquired Kash n' Karry chain located mainly in the Tampa/Saint-Petersburg, Florida market, operating approximately 100 supermarkets. . Boosting the company's U.S. presence was the July 2000 completion of its acquisition of Hannaford Bros., a $3.3 billion chain operating in Delhaize's own core market of the eastern U.S. regions. Following that acquisition, Delhaize moved to acquire full control of Delhaize America, then listed that company separately on the New York Stock Exchange. All these factors clearly prove the point the Delhaize went on its expansion by making acquisitions in the US market and it also was involved in opening of few new stores and referring it to Uppsala stage model Delhaize also falls into the third stage of the model.
As for the importance of psychic distance in the expansion of Delhaize, it did not play a major role. The Push and Pull factors were again more important and also the amount of knowledge that the company had gained about the US market was major force behind its expansion in the US. Although later on before moving on to any other country Delhaize expanded in Greece and Romania which were closer in the terms of psychic distance, but the expansion in US can be credited to the market knowledge gained.
As mentioned above that the company had gained knowledge about the US market and hence went on acquiring stores in US, this falls very well in accordance with the internationalization process of the Uppsala model. Market knowledge refers to all the information the firm has. Following the World War I, the company sent representatives to the United States, where grocers were steadily introducing new innovations in areas such as store designs, displays, and service which kept them up to date with the developments in the US market and they also learnt the positives which they could apply to the domestic market. This knowledge helped them understand, what would be expected out of them when they enter the US market. Looking at the strategies of the US retailers Delhaize could figure out the opportunities where they could excel and capture the market. The sending of representatives also points out the market commitment as Delhaize was ready to invest to learn new techniques, strategies which could be transferred to other international markets and also at the domestic markets. This increase in knowledge also led to the increase in commitment of Delhaize in the US market, the Food town chain stores which had 22 supermarkets when Delhaize acquired it, 10 years later it had 226 stores in 1983. Once they had better knowledge of the market they also opened the first Cub Foods shop in Atlanta, offering a range of nearly 35 000 food products sold at very competitive prices 24 hours a day, 7 days a week. This shows that Delhaize's operations could be very well explained by the internationalization process of the Uppsala Model.
As for the strategic choice model looking at Delhaize's strategy The Group is committed to offering to its customers a locally differentiated shopping experience, to delivering superior value and to maintaining high social, environmental and ethical standards. With Delhaize being the 6th largest retailer in the US, it has quite a lot of competitors to face, and being competitive with the prices is the only way to do so. We can hereby suggest that Delhaize also follows a Global strategy as it offers locally differentiated products but has more pressure in terms of the cost of the products.
According to the Treadgold's typology, the operations of Delhaize put it into the cluster of emboldened internationalists as the retailers in this group continue to exercise high control and therefore incur high entry cost but through the longevity of their international expansion have begun to move into markets which are remote both culturally and geographically. This can be also seen from the expansion of Delhaize, as it had its operations basically in Europe and US markets and only in 1997 it expanded into Asia, where it set up its operations in Indonesia. So it takes quite a lot of time before it makes a move to go into a foreign market and tries to settle down well in that market before moving on to next.
Based on the arguments presented above using the data which was collected from different secondary sources, the theories of internationalization that were used, define the internationalization process of the three companies very well. We could easily relate their operations and strategies to these theories but to capture the internationalization of firms on any particular theoretical framework is really difficult. Jones (2001) argued that achieving a better understanding of internationalization depends on accommodating a wide range of theories in the research framework and generating richer data by focusing on homogenous set of firms. Dunning (2001) asserts that there is no single theory of internationalization that can encompass all kinds of industries, for the simple reason that motivations to internationalize vary a great deal. In our case the industries being from the same sector it was possible to use the same theories for each of them. The theories selected very well covered major aspects of internationalization of these firms. Theories are said to be a way to explain reality and we have used the selected theories to analyze the strategies of the companies selected. Although companies do not really read theoretical models and apply them to their operations but the companies internationalization process were very well characterized through the three models we selected. With the Uppsala model focusing on the different stages if the expansion and the process in which the operations are carried out, the strategic choice model focusing on the importance of local responsiveness and cost responsiveness. Using the Treadgold's typology we were able to categorize each of the three companies based on their overall operations. The companies were very appropriately recognized by their strategies and the common trend came out to be that companies in the Food retailing sector follow a global strategy where the pressure of local responsiveness is taken care of automatically since the stores and its operations are managed by local managers and the pressure of cost responsiveness is more because this is the only way one company tries to exceed over other i.e. by offering products at minimum price. The Treadgold's typology very appropriately gave the type of internationalist each of these companies is, which defined its mode of expansion. But the financial crisis has had a toll on the retailing sector and many new trends came up because of the crisis. People are more watchful when spending money. Therefore current trends indicate that the importance of grocery shops in food retailing grew in 2009 as people returned to nearby smaller stores – although prices are higher, the amount spent at a time is definitely less. Comparatively when visiting hypermarkets shoppers tend to spend more than planned. Impulse shopping in small groceries is reduced due to the narrow product assortment. The number of groceries is, however, shrinking in all countries in the region. Due to the financial crisis discounters have become more popular. Traditional outlets, the grocery stores have lost market share, their importance is declining and have become more of a place for everyday shopping. In nutshell we can say that a holistic model which includes not just once theory of internationalization can be used to explain the internationalization process of different companies although there would be some external factors which also would be needed to be considered.
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