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Since the 90s, the world economy has become increasingly integrated and connected within the countries; the advance diffusion of information technology have imply the fast downgrading of the "distance". Thus, gross trade, Foreign Direct Investment (FDI), capital flows and even technology transfers have risen significantly and this has led to the globalization of the world today. One of the main reasons of fastened globalization process is the existence of Multinational Enterprise (MNE).
1.1 What is MNE?
Multinational enterprise is business entities that operate in more than a country. Typical MNE functions with a headquarters that is based in one host country, while other subsidiaries are based in other countries (Tatum, 2010). These operations outside of the company's home country may be linked to the parent by merger, operated as autonomy, or have considerable autonomy (Eldridge, 2010). Moreover, MNE is better at adapting to economic and political shifts; and this also opens the door for diversification, which makes the company capable at expanding the business without holding back (Tatum, 2010).
Dunning (1993) suggests that MNE is a firm that "engages in foreign direct investment and owns or controls value-adding activities in more than one county" (as cited in Wall, Minocha and Rees, 2010). While the major strategic planning still take place at the headquarters, considerable latitude will still be given to the subsidiaries to enable them to operate in harmony with one another (Wall, Minocha and Rees, 2010).
1.2 Tesco as MNE
Tesco, founded in 1919 by Jack Cohen is one of the most successful retailers today. The company is expanding the business word widely and has entered many countries in the process of globalization. Tesco is a general merchandising retailer, operating more than 4,000 stores worldwide today. In UK alone, Tesco has such a huge business with over 2,200 stores with various formats i.e., Tesco Express, Tesco Metro, Tesco Superstores, Tesco Extra and Tesco Homeplus. Besides, Tesco also operates in the rest of the world ever since they begin to seek for new opportunities during the mid-90s. They operate 2,026 stores in 13 markets which are in Europe, Asia, North America and they had successfully entered the Indian market last year. With the flexible and multi-formats approaches, as well as a well-established and consistent unique strategy for growth, Tesco is generating total revenue of £56,910 millions in the year 2009/10.
1.3 What is Globalization?
WiseGEEK (2010) define the term "globalization" as a trend toward countries joining together economically, through education, society and politics. It is a process of interaction and integration, driven by international trade and investment aided by information technology (Valley, S., unknown). Black (2002) propose that globalization is a process by which the whole world becomes a single market where by the goods, services, capital and labor are traded on a worldwide basis (as cited in Wall, Minocha & Rees, 2010). It is agreed by Wall, Minocha & Rees (2010) that at least three elements are commonly involved in globalization, which are:
Shrinking space. The lives of all individuals are increasingly interconnected by events worldwide.
Shrinking time. With the advance information technology and communication, events occurring in one place have almost instantaneous impacts worldwide.
Disappearing borders. Regional trading blocs such as EU, NAFTA and supranational bodies such as IMF, WTO are increasingly overriding the national policy making in economic and business affairs.
This report is mainly the analysis of the Tesco's operation at China and home country.
2.1 Pest analysis
There is a growing concern that Tesco is getting out of control and driving out the competition. The entry into Indian market has been opposed by the political party as new store developments are often seen as destroying other jobs in retail sector. In the developing countries like India, traditional stores play an important role in the daily life and will be forced to end the business up when they have no power to fight against retailer giants like Tesco. Reuters (2008) mentioned that even large local groups such as Reliance Retail, one of the most valuable firms has protest about the job losses.
Nevertheless, China has welcome Tesco's entry into the country when an agreement was signed to set up a premeditated series of joint ventures for development of shopping malls. Addition of another ten countries into the European Union (EU) which took place in 2004 has provided Tesco a platform to expand its retail network. Retailing industry is not considered to be a prestigious industry and is not limited to growth in the land of China. In addition, China governments are shutting down the traditional street markets and converting them into supermarkets. They are to expand the retail networks of chain supermarkets into more China's provinces.
In year 2009, Europe is in heavy recession due to credit crunch, this has particularly hit the economy level badly. In fact, the unemployment rate was so high and it adversely affects the demand for goods. However, food is always the last thing that customers will cut back on. Thus, the recession gives grocery retailers like Tesco an opportunity to earn more when customers chose to spend their meal at home instead of outside.
China's economy is growing strong today and the expected GDP remain unshaken even at the financial crisis. The domestic demand is still increasing as consumption will rise further due to overall wages growth. Besides, China is still dependent on agriculture industry today and since most of the fresh product could be obtained from China, it is essential to find local suppliers able to provide goods. This indirectly encourage the growth of other industry and provides even more job opportunity for the public.
Hypermarkets are likely to opening up more and more smaller stores i.e. Tesco Express, to fight against the traditional retailers. Under the law and regulation of UK, opening of any new out-of-town hypermarkets is restricted and therefore, this opens up a new opportunity for Tesco to develop their business. Euromonitor (as cited in Moreau, R., 2004), comments that the hypermarkets are already putting up a decent fight against mixed retailers and non-food specialists by expanding their range of products. The old trend of which hypermarkets are only selling food products is dying out. This has encouraged Tesco to expand the business to non-food products too.
However, there may be a danger in bringing the foreign format of supermarket into China due to the big cultural difference. Indeed, customers have moved towards 'one-stop' or 'bulk' shopping due to socio-cultural changes. For example, the decline in home meal preparation in the society today causes Tesco to focus more on added-value products and services. Not only that, Tesco is adapting product mix to accommodate the increased in awareness of health issues, such as more demand for organic foods.
There has been increased pressure on many big companies to acknowledge their responsibility to the society, and act in a way which benefits the society overall. According to Office for National Statistic (2010), percentage of consumers in UK using reusable bags has risen and the total number of plastic bags used has decline.
Besides, Tesco has taken a step further by adding carbon footprint data on dairy products, potatoes, and aiming to expand it to non-food items. This would definitely increase the consumers' awareness towards the need to preserve and protect the earth. In China, the government has abolished plastic bags and due to the international pressure, China has become sensitive to the issue of pollution (Shipeng and Harrison, 2008).
In the recent years, online shopping has developed so much and provides various advantages for niche customers i.e. goods are readily available, services can be more personalized to each customer and. Subscriptions to the internet have grown more than 50% and it has been estimated that the internet is being used by 70% of the population in UK (Office for National Statistics, 2010).
Besides, loyalty program launched by Tesco a few years back through information technology discourage customers from switching brands by tracking their purchasing details. Besides, Tesco stores also utilize technologies like wireless devices, electronic shelf labelling and self checkout machine to make shopping more enjoyable for customers. The increased number of internet users at the world today will ease Tesco to become even more successful in terms of gaining market share through it.
2.2 Porter 5 forces
Threats of substitutes
Tesco is operating in a market where there are many substitutes present. Non-food products could be substituted easily as Tesco is becoming more dependent on the revenues generated from them.
Bargaining power of buyers
Tesco's loyalty card - Clubcard, one of the retention strategies that: meeting the customer needs, customizing services, ensure low prices and larger variety of choices, constant flow of in-store promotions enable Tesco to retain the customers. The market is more disciplined, where supermarkets have disciplined approach to price setting.
Bargaining power of suppliers
Tesco has overwhelming advantage over the small retailer - they could dictate the price they pay the supplier. This consolidates further leading positions for the hypermarkets in negotiating better prices from suppliers where smaller chain are unable to match. If the supplier does not follow the price given by Tesco, they will eventually left with a much smaller market for their production.
Threats of new entrants
Tesco has built its power due to operating efficiency and major marketing mix expenditure.
High cost of entry due to the need to set up distribution channels (Jones, 2004). They will not be able to locate cheap and reliable suppliers.
Rival among competitors
Tesco are accruing large amount of customer information that can be used to communicate with its customers. The market has fostered an accelerated level of development, resulting in a situation where retailers have to innovative in building up their market share. Tesco has responded by refocusing on price and value, whilst also reinforcing the added value elements of the products.
3.0 Impact of Globalization
Globalization provides opportunities and challenges. It acknowledges the greater movement of goods, people and ideas due to increased economic integration which in turn is propelled by increased trade and investment. The increased global income and reduced investment barriers has led to an increased foreign direct investment which has accelerated development in many countries. Indeed, the increased foreign direct investment will undoubtedly encourage the growth and development in the country, as well as providing more job opportunities for the people.
In fact, when the government and local people are welcoming the presence of MNE, it will stimulate a further expansion of the company. Tesco, who has landed on China recently has provided numerous job opportunities; and this has encourage Tesco to open more stores in the future. Tesco who has formed its 50:50 partnership with Ting Hsin International Group are continuing growing the business at three major cities, namely Shanghai, Beijing and Guangzhou.
5 years Financial Summary
Rest of Europe
The table above shows the revenue generated by Tesco in the recent years. It can be seen that through business expansion to overseas, the company are making more and more profits each year. In UK alone, from year 2006-2010, the revenue increased for 28.6%. Whereas in the rest of Europe, the increment achieved an amazing rate of 70.8%. While in Asia, the revenue almost doubled in the year 2010, compared to the year 2006, reaching an increased rate of 93.1%. Although there is a disparity between the revenue generated in UK with others, the increment of revenues generated from other parts of the world has show that Tesco is indeed performing well at the international platform.
Technology has change the way the world communicates, learns and does business today. It creates immense transformation in the way a company organizes production, trade goods, invest capital and develop new products and processes. Instantaneous communication among the far-distanced operations of MNE, new materials are revolutionizing sectors, altered pattern of productivity and employment and the improved transportation are the major result of such technological advancement.
However, MNE has to understand the current state of science of technology of the place they are operating, to understand the needs of the market place and then to create technologies that best meet the market needs. Technology is a major-environment variable which has influenced the development of many Tesco products. Each country where Tesco are operating has different technologies installed to suit in the local favor. Tesco stores in the UK utilize the following technologies:
Self check-out machine
Radio frequency identification (RFID)
These technologies have greatly improved the operation of Tesco in many countries. It saves time for Tesco to focus more on customer service, as well as saving more cost in a longer run. This will then enable Tesco to reduce the product prices to attract more customers and generating more revenue. Technology revolution brings a huge impact on production methods, type of products, labor markets and also on the importance of manufacturing to the economy.
However, every country's background differs from one another. The education level in China is relatively lower compared to UK; this is why Tesco has not install the self check-out machine in China. If it were to be installed, Tesco has to spend a large amount of money on this and educate the public on how to use it. Not to mention the culture of different country is not the same too. For example, some countries tend to rely more on others; where they would be reluctant to changes.
Moreover, the social impact where virtually all tasks will be accomplished more efficiently and effectively, causing much job elimination even as new ones are created. This can be particular in developing countries, as most of the residents are still relying on the traditional occupation and such advancement would destroy their life. Tesco, today are facing criticism from everywhere as it is seen as over-grown business. When Tesco has landed on a country, it basically will gain the market share very soon and this also force the traditional retailers out of the competition.
3.3 Business ethics
Ethics are as much as the integral part of business and commerce as they are of other specialised functions such as financing. Every business action affects people or relationships between people such that an alternative action or would affect them differently (Wall, Minocha and Rees, 2010). Indeed, the current business world press two thing which is the global competitiveness and the other is a list of alleged wrongdoings by business leaders in virtually all countries. Beyer and Nino (as cited in Wall, Minocha and Rees, 2010) propose the following implication:
Reaching the top of the business rank seems to be every company's objective. Such objectives encourage peoples to pursue the organizational goals relentlessly with little or no concern for their effects on others.
Lacking of commonality of mutually accepted values, difference in cultures will cause operation dissonance in the operation. One will pass the problem to another when wouldn't want to bear the responsibility. Moreover, a failure to react intelligently could possibly cause the company a big loss.
Management of subsidiaries are normally from the national of parent company. They are too, stressed out under time pressures without the support of the corporate community. Hence, they could easily fall into bribery and corruption in the country they are operating. Even such matter should not be overlooked as it could easily ruin the image and reputation that Tesco has built over the years.
As Tesco grows even bigger in some countries, inevitably it will face some criticism from political parties or consumer activists. The entry into Indian market has been opposed by the political party as new store developments are often seen as destroying other jobs in retail sector. In the developing countries like India, traditional stores play an important role in the daily life and will be forced to end the business up when they have no power to fight against retailer giants like Tesco. This will eventually ruin the name and reputation of Tesco and will create a bad image for the company.
3.4 Political risk
The political climate in different countries varies enormously and for a company like Tesco who would like to expand its business, a far detailed analysis need to be carried out. Zonis and Wilkin (2000) agreed that political risk can be defined as uncertainty that stems, in whole or in part, from the exercise of power by governmental or non-governmental actors (as cited in Wall, Minocha and Rees, 2010). In fact, the political risk may arise unexpectedly, causing a huge interruption of the business operation severely. Thus, the investigation of the system of government, foreign capital controls and diplomatic tensions are vital.
Campaigns against foreign goods
Loss of sales
More attention and work need to be done to improve the public image
Higher operating costs resulting lower profits
Currency depreciation / amortization
Reduced value of repatriated earnings
Changed in taxation
Lower after-tax profits
Mandatory labor benefits legislation
Increased operating costs
Table showing the possible impacts of political risk a company might face.
4.0 Strategy to strengthen the position on global market
In December 1992, Tesco entered France by acquiring Catteau supermarkets, which is operated under the Cedico brand. However, the company has failed to sustain itself in the competitive market, facing fears competition from France retailers such as Carrefour. Tesco realized that business strategies which are successful at UK would not be necessarily workable at other countries. It might only be a success under certain circumstances, such as a business strategy involving the local flavor.
4.1 International Human Resource Management (IHRM)
Operating in the global market, Tesco has to emphasize the importance of its IHRM as every country has different background and story. Boxhall (1992) once defines IHRM as being concerned with the human resource problems of MNE in foreign subsidiaries (as cited in Wall, Minocha and Rees, 2010). Indeed, there are four approaches for the MNE to conduct their policies.
All key positions in the host country subsidiary are filled by the nationals of the parent company. This approach enables the company to have to maximum control over the subsidiary.
Host countries are recruited to manage the subsidiaries in their own country. This allows the MNE to take a lower profile in sensitive economic and political situations and helps in avoiding intercultural management problems.
Utilises the best people for all the key jobs throughout organization. Nationality and geographical factors are not to be considered in this approach.
Here the MNE divides the operations into geographic regions. Staffs are constantly moved from one particular region to another.
Tesco could apply the polycentric approach in its IHRM strategies to maximise the operation efficiency. Tesco is operating in countries with different background, and in order to manage a dispersed and diverse workforce responsively, they need to be sensitive to local conditions. With a polycentric approach, the recruitment, training and process will be more in line with local culture. Wall, Minocha and Rees (2010) suggested that in a cross-cultural context, not only the personality of staffs is vital, but also the real cultural difference and approaches between team members.
For example, the culture clashes between the West and the East differ from various aspects. Hofstede (unknown) has suggested another possible impact of national cultural difference on international business, the power distance. When Tesco are entering a new market with different degrees of power distance, misunderstandings can easily arise. Sending a junior team to a country with small power distance is no wrong, but in the other way round, sending the team to a large power distance country may seems to be insulting the country.
In fact, Brett et al. (2006) and Snow et al. (1996) suggest that the development of healthy group process must take into account of the following:
The degree of similarity among the cultural norms of the individuals on the team
The extent to which such norms are shown in the group
Level of fluency in the common language
Communication styles and expectations
Management style of the team leader
In China, relationships, also known as "guanxi" in Chinese represents a vital connection between one another. "Guanxi" refers to the establishment of a connection between independent individuals to enable a bilateral flow of personal or social transactions (Wall, Minocha and Rees, 2010). However, for westerners, "guanxi" can appear to resemble nepotism. In order to become successful in China, Tesco has to learn the effective ways of cultivating "guanxi", such as tendering rewards, nurturing long-term mutual benefits, cultivating personal relationships and cultivating trust.
4.2 Analyse the politics
Political risk is a very sophisticated matter in regards of globalization process. Zonis and Wilkin (2000) suggest that a business may break down the 'drivers' of political risks into 3 separate categories where Tesco should not overlook these when operating in the China market.
Those risk which is outside the control of the firm. For example, the political instability and weak public policy. However, Tesco can try to access accurately the probability of occurrence and potential impacts before entering the market.
Those risks involve factors which are specific to the company itself. Examples might include the extent to which internal incentive structures are aligned with corporate objectives.
Factors which are broadly related to company relationships such as relationships with home-country, host-country, regional and local authorities, national and supranational institutions, local communities and so on. Unlike the external drivers, Tesco could actually influence these factors by its own actions; for example, given the importance of cultural differences between the West and the East, Tesco might invest substantial resources in fostering the relationships.
After all, the most important factors to succeed in a global market are flexible in each market, be local to the community, focus on the customers, use multi formats in different unique country or market, develop capability in terms of skill and build brands that is long-lasting in terms of customer relationships. Tesco has to carefully examine each factor which will post a threat to the company itself. These factors are indeed vital in providing a stable base for them to become success in the globalization process. Without understanding fully each potential impact and strategies to overcome it, Tesco would definitely face a lot of hardships in expanding the business to every corner of the world.
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