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This report seeks to analyse the different modes of entry into a foreign market available to an organisation, showing their relevant strengths and weaknesses. For the purpose of this, Tesco Plc. has been chosen, showing the various entry modes available to the organisation as it seeks to diversify into the Nigerian grocery market.
In an attempt to evaluate these entry modes, this report has been structured into three main parts: First, PESTLE and Porter's five forces as tools used to assess the attractiveness of a given market were analysed showing their strengths and weaknesses.
The second part of this report focuses on the value chain and SWOT analysis as analytical tools which can be used by an organisation to gauge its internal capabilities. Finally, the different entry modes available to Tesco such as; exporting, licencing, franchising, joint venture and wholly foreign owned enterprise (WFOE) were discussed and the most appropriate mode of entry recommended.
Strategy is a long term direction of an organisation (Johnson et al 2011). It is a long term plan of action designed to achieve a specific goal, directed towards the achievement of the set objectives of an organisation.
According to Jones and Hill 2010, strategy is a set of related actions that managers take to increase their company's performance. It shows the plans and actions carried out by managers in an organisation to improve its performance and gain a position of advantage over its competitors. Strategy shows the position of the organisation in relation to its external environment, the strategic choices and directions available to the organisation and the action plan on how to achieve the strategies in line with the organisations goal and objective.
Strategy is a design or plan for achieving a company's policy, goals and objectives; it is a design or plan that defines how policy is to be achieved (Davies 2000). Huff et al 2009, sees strategy as a purposeful attempt to achieve an objective. This shows that the strategic plan of an organisation is intended and directed towards the achievement of the objectives of the organisation.
Corporate Level StrategyThree levels of strategy exist in an organisation;
Business Level Strategy
Operational Level Strategy
Figure 1: Levels of strategy (Adapted from Johnson et al 2011)
The corporate level strategy is a strategy that affects the overall scope of the organisation, the business level strategy is a strategy made at the strategic business units in an organisation and such strategy does not affect the whole organisation. While the operational level strategy deals with the processes or people used in implementing both the corporate and business level strategies.
In an attempt to understand these concepts defined above, this report will address the market entry potentials and the different modes of entry available to Tesco in its bid to internationalise into the Nigerian grocery market, using relevant tools and framework. This report will be structured to address three different tasks: First the analytical tools used in gauging the attractiveness of a given market such as; PESTLE, Porter's five forces, Porter's Diamond, Scenarios, BCG matrix etc. Secondly, analytical tools such as Value chain, SWOT, Strategy canvas, Ansoff matrix, Value network etc. used to gauge the internal capabilities of an organisation, with emphasis laid on the value chain and SWOT analysis, will be assessed. Finally the different modes of entry available to Tesco, such as exporting, licensing, franchising, sales subsidiary, joint venture, wholly owned enterprise will be discussed in details in this report and the most appropriate mode of entry recommended for the organisation.
2.0 ANALYTICAL TOOLS USED TO GAUGE THE ATTRACTIVENESS OF A MARKET
A strategic decision maker has a range of analytical tools which could be used for this purpose, such as; PESTLE, Porter's Five Forces, Scenario Analysis, Porter's Diamond etc. these analytical tools helps the manager to assess the attractiveness of a given market in terms of cost, profitability, competition and other external factors which might influence the smooth operation of the organisation in the market.
Scenario Analysis: Scenario analysis helps strategic decision makers to manage and minimize relevant risk and it also helps them to address key uncertainties which might arise in future. A scenario may depict an explanation of how some future state evolves including the sequence of events, conditions or changes that precede or cause the future states to occur (Linneman et al, 1983).
Porter's Diamond: This tool proposes that the characteristics of the national environment influence the competitive advantages of a nation (Mann and Byun 2011). Four interrelated determinants of national advantage have been identified in the work of Dogl et al 2012, that influence competitive advantage of organisations such as; factor conditions, demand conditions, related and supporting industries and firm strategy, structure and rivalry.
In order to assess the attractiveness of a given market, emphasis will be laid by this report on the PESTLE and Porter's five forces, bringing out their relative strength and weaknesses.
2.1 PESTLE ANALSIS
Pestle analysis is in effect an audit of organisations external environmental influences with the purpose of using this information for strategic decision making (CIPD 2010). It is an important macro-environmental audit tool, which shows the various factors in an organisations external environment likely to affect the operation of the organisation. These factors includes; political, economic, social, technological, legislative and environmental.
Pestle analysis consists of carefully determining all these factors and finding out exactly in what way and to what extent these factors influence a certain organisation and it also provides the organisation with vital information about its environment; hence it is a mandatory analysis (Marketing Minefield 2012).
Figure 2: PESTLE Framework of an organisation (Adapted from Marketing Minefield)
Political: This represents the way through which the government and political situation of a country influence the performance of an organisation. Political forces can influence marketing decisions by setting the rules by which the business will be conducted (Jobber 2010). Some of the political factors which are likely to influence an organisation include;
Tax policy and reforms
Consumer protection laws
Government policies and rule of law
The political instability evidenced in Nigeria at present and other government policies and laws are likely challenges to Tesco's internationalisation strategy to Nigeria.
Economic: Prevalent economic conditions in a given country will pose a great challenge to the operations of an organisation. According to Kotler et al 2008, the economic also consists of factors that affect the consumer purchasing power and spending pattern. Some of these factors are;
Fluctuations in interest and exchange rate
Rate of economic growth
Cost of living
Income distribution, poor infrastructure and inflation in Nigeria are some of the factors Tesco should consider before moving into the Nigerian market.
Socio-cultural: Changes in the socio-cultural trends of a country such as the population growth rate, health, social attitudes, age distribution and cultural beliefs of the country can affect the operation of an organisation and therefore have a direct impact on the demand for the company's product.
Technological: The rate of technological advancement today will pose a challenge to an organisation. Rapid change in technology is a huge factor that will influence an organisation. Hence organisations have to be aware of the current technological trend of the environment in which they carry out their business. Some of the technological factors likely to influence an organisation are;
Internet and various information systems
Speed of technology transfer
Impact of emerging technologies.
Research and development
Legal: Laws such as, health and safety laws, consumer protection laws, licensing laws, competition and employment laws prevalent in any country will affect the smooth operation of organisations.
Environmental: These are laws or factors on the surrounding environment of an organisation which can influence the way the organisations operates. Factors such as environmental laws and regulations, waste disposal, energy consumption, geographic location are likely to affect an organisation.
2.2 STRENGTHS AND WEAKNESSES OF PESTLE ANALYSIS
It provides the organisation with a better understanding of the prevailing conditions in their business environment.
It helps organisations to detect or anticipate future problems and take necessary actions to avoid or cushion its effect.
Opens up available business opportunities for the organisation to exploit.
It encourages the development of strategic thinking within an organisation.
PESTLE analysis could be time consuming and expensive to carry out.
It does not take into consideration key players in the organisations industry such as the competitors (analysed by the five forces) which could be a great force to reckon.
The analysis needs to be reviewed on a regular basis for it to be effective.
Results of the analysis are often subjective and could be based on assumptions.
2.3 PORTER'S FIVE FORCES
Bargaining power of Suppliers
Bargaining power of Buyers
Threats of new EntrantsThe five forces framework helps to identify the attractiveness of an industry or sector in terms of the competitive forces (Johnson et al 2008). It offers a way of assessing the likely strength of competition in any given market (Blythe 2006).
Threats of Substitutes
Figure 3: Porter's Five Forces Model (Adapted).
The aim of the Porter's five forces analysis is to identify the nature, strength and impact of these competitive pressures so that individual forms can create strategies that defend them from their impact or influence them in their favour (Kippenberger 1998). It forms a useful starting point for undertaking a competitive analysis (Brassington and Pettitt 2006).
Threats of New Entrants: This refers to the possibility of new firms entering into the industry. New entrants into an industry have the potential of increasing the level of competition in such industry, thereby reducing its attractiveness. Some of the barriers of entry into an industry are;
Economies of scale
Government restrictions (Licensing)
The entry barrier in the Nigeria grocery market is low; hence this will not pose a challenge to Tesco moving into the country. Although there will be a strong retaliation from companies operating in the industry such as Shoprite and Spar.
Threats of Substitutes: substitutes are products or services with similar benefits or attributes to a company's product. This may exist when the demand of a company's product reduces due to a change in the price or performance of a substitute product. Determinants of threats of substitute include,
Price and performance of substitutes
Relative switching costs to substitute products.
Bargaining Power of Buyers: If the buyers have a high bargaining power, they can demand lower prices, product or service improvements and this will in turn affect the profit of the organisation. The most important determinant of buyer power is the size and the concentration of customers (Karagiannopoulos et al 2005).
Bargaining Power of Suppliers: The bargaining power of suppliers will definitely affect the attractiveness of a given market. If suppliers of a company's products possess high power, they tend to fix the prices of their products and might eat up the profits of the company. Suppliers tend to possess more powers when;
There few and concentrated suppliers
Switching cost is high
Suppliers provide a specialist or rare input.
The bargaining power of suppliers in the Nigeria market could be between medium to high and Tesco has to consider this before moving into the country. A backward integration of maybe an alliance with the suppliers will be a good strategy to adopt in order to avoid the effect of suppliers powers.
Competitive Rivalry: These are organisations in the same industry with similar products and services, also targeting the same customers. Threats from competitors are the most important challenge facing an organisation. The major competitors in the Nigerian grocery market which could pose a challenge to Tesco are, Shoprite, Spar and Mega Plaza. Tesco in order to avoid the effect of these competitors could be either cost focus by offering quality products at a reduced price or focus differentiation by targeting a different segment of the market.
2.4 STRENGTHS AND WEAKNESSES OF THE FIVE FORCES
The five forces shows the attractiveness of a given market
It provides a detailed analysis of the key players in the industry such as the suppliers, buyers and competitors.
It is a useful tool used in strategic planning in organisations.
It opens up the relevant threats in the company's industry such as the threats from competitors.
The model fails to consider other macro-environmental factors such as political, economic, legal etc. (like the PESTLE model) which might affect the operation of an organisation.
Porter's model does not pay much attention to non-market sources of change in an organisation (McGowan and Mahon 2000).
It does not consider the possibility of creating a new market.
2.5 COMPARISON OF THE PESTLE AND PORTER'S FIVE FORCES
From the discussions of both analytical tools, the PESTLE focuses more on the macro-environmental factors that can affect an organisations operation and fails to take note of the key players in the organisation's industry such as suppliers, buyers and competitors whose impact could also affect an organisation.
The five forces while trying to bridge the gap by analysing the organisations immediate environment, took into recognition the buyers, suppliers and competitors, which is an important player in the industry. However, it fails to have a broader view and consider other factors within the organisations external environment which can affect the operation of the organisation.
3.0 ANALYTICAL TOOLS USED TO GUAGE THE INTERNAL CAPABILITIES OF A COMPANY
Analytical tools such as the value chain, SWOT, value network, strategy canvas etc. are available for use by a strategic decision maker to assess the internal capabilities of a company moving into a new market.
However, for the purpose of this report, the SWOT analysis and the value chain will be used, showing their respective strengths and weaknesses.
3.1 POTER'S VALUE CHAIN
A value chain is an interrelated series of processes that produces a service or product to the satisfaction of the customers. It involves internal linkages between a firm's core processes, its supporting processes and its external linkages with the processes of its customers and suppliers (krajewski et al 2007). A value chain therefore refers to all those activities that support the process of value creation in an organisation. There are a lot of activities grouped into the primary and supporting activities that shows the internal capabilities of a firm as it creates value for the whole organisation.
Marketing and Sales
Figure 4: Porter's Value Chain (Adapted)
According to Kippenberger 1997, the value chain is designed to show the total value of a firm and consists of the firm's value activities aimed at improving its margin. The values chain evaluates each activity in the organisation and the way it creates or adds value to the whole organisation through its margin (profit). The way an organisation creates value through its activities creates a good position about the organisation in the minds of its customers. This suggests that if an organisation creates adequate value through its activities and its relationship with its customers, it will gain a competitive advantage over its competitors and increase its margin as well.
For Tesco to survive in the Nigeria grocery market, it is important that it understands and improve on its internal capabilities (resources and competences), thereby creating adequate value through its activities as this will give it a competitive advantage over its competitors. A company's competitive advantage largely depends on how it manages all its value creation activities in relation to competitors in the same industry.
Tesco can create value for it's through its activities by:
Offering unique product or service.
High quality and low-priced products (being cost focus).
Immediate response to the changing environment and customer needs.
Developing distinctive capabilities to meet the needs and demands of customers effectively.
3.2 STRENGTHS AND WEAKNESSES OF THE VALUE CHAIN
The value chain shows the activities and the processes involved in creating value in an organisation.
Information provided by the value chain forms a basis for an organisation to develop alternative strategies.
It enables an organisation to identify its internal capabilities, strengths and weaknesses.
Value chain helps the organisation to determine its value creation to customers; this will enable them to note areas of improvement.
It reveals an organisation's competitive position with competitors in the same industry.
It enables organisations to determine their strategic position and make good strategic decisions.
The value chain analysis is designed only for the organisations internal purposes.
Value chain activities of an organisation cannot exist individually; hence cooperation between the activities is required for the chain to function properly (Glaser 2008).
It focuses more on profit and how to increase the margin of the organisation.
3.3 SWOT ANALYSIS
DesirableA SWOT analysis is a structured approach to evaluating the strategic position of a business by identifying its strengths, weaknesses, opportunities and threats. It provides a simple method of synthesizing the results of the marketing audit (Jobber, 2010). A SWOT analysis of an organisation shows a summary of the organisation's traits or competences, which are its strengths and weaknesses, as well as the competitive factors it faces in its environment (opportunities and threats). A good SWOT analysis of an organisation will expose the opportunities available to the organisation as well as the threats which could pose a challenge to the smooth operation of the organisation. A proper understanding of the SWOT of an organisation will enable the organisation to convert its weaknesses into strength and the threats in its environment into opportunities.
Figure 5: SWOT Framework (Adapted from Novicevic et al 2004)
The SWOT analysis shows a summary of the firm's marketing situation which encompasses the findings form the internal and external strategic analysis that provides the back-end planning perspective of controllable and uncontrollable variables/events (Novicevic et al 2004). According to Duarte et al 2006, a SWOT analysis is a way to analyse the environment, allowing for the segregation of the environment into internal strengths and weakness and the external opportunities and threats as well as positive and negative environment.
For Tesco's internationalisation strategy, a SWOT analysis of the company should be properly carried out to assess its internal capabilities through its strengths and weaknesses, and its ability to survive in the environment by overcoming the threats and turning them into opportunities.
SWOT analysis of Tesco Plc. is shown below;
Strong brand image
Strong financial position
Good customer service
High reliance on the UK market
Exposed to macro-economic issues in some markets
Diversification into new markets
Increase international growth
Develop additional services
Strong and stiff competition
Political instability and government policies
Fluctuations in exchange rate
Figure 6: SWOT Analysis of Tesco
Tesco has to adopt the conversion and matching strategies in order to use its internal capabilities to overcome its weaknesses and threats in the environment. Hence, weaknesses can be converted to strengths, threats into opportunities and its strengths matched with the opportunities.
3.4 STRENGTHS AND WEAKNESSES OF THE SWOT ANALYSIS
SWOT analysis is used to assess an organisations competitiveness, capabilities and core competences.
It guides the organisation in setting objectives for strategic planning and decision making.
It exposes the opportunities available to an organisation as well as the threats.
It aids the organisation to take advantage of its strengths to address the weaknesses.
High dependence on external factors - relies on the PESTLE analysis and other environmental scanning models.
It does not provide solutions or offer alternative decisions to issues identified.
While SWOT is useful to profile and enumerate issues, it does not provide actual strategies to implement and take advantage of opportunities while leveraging strengths (Helms et al 2011).
3.5 COMPARISON OF THE VALUE CHAIN AND SWOT
The value chain focuses on the internal capabilities of the organisation as it strives to improve on its activities to create more value while satisfying the needs of its customers. It fails to analyse external threats to the organisation or opportunities which could be explored by the organisation. Also, the value chain seeks to improve the margin of the organisation through it activities, rather than evaluate the strengths and opportunities which could be of great help in improving the margin of the organisation.
SWOT analysis on the other hand, while trying to look at the internal capabilities of the organisation through its strengths and weaknesses, also considers the relevant threat and opportunities in the organisation's environment. This guides the organisation in setting its objectives for strategic planning and decision making. Hence, an understanding of the SWOT analysis is very essential for any organisation as this will form the basis upon which it creates value for itself.
4.0 INTERNATIONAL MARKET ENTRY MODES
There are several foreign market entry modes available to organisations seeking to internationalise into new markets. According to Sun, H. (1999), entry modes are seen as the forms of capital participation by an organisation in international enterprises and two basic entry modes exist; wholly owned subsidiary and joint venture. Internationalisation strategy of an organisation will involve great resource commitment; hence the mode of entry is a very important strategic decision to avoid failure. However, for Tesco's strategy to enter into the Nigerian market, the following entry modes are available to them; exporting, licencing, franchising, alliances, mergers and acquisition, sales subsidiary, joint venture and wholly foreign owned enterprise(WFOE).
According to Joynt, P and Welch, L. (1985), most organisations begin their international operations through exporting rather than other means of entry such as licensing or foreign direct investment. Exporting as a mode of entry into a foreign market involves the exportation of country's product into a foreign market. This could be driven by the need to extend customer base, increase profit, or due to limited growth potential in the home country. Exporting is particularly important in the exchange world system and it is largely used as a mode of entry into foreign markets for manufactured goods firm, especially those in the early stage of internationalisation (Khemakhem 2010). Exporting could be either direct, where the goods of an organisation is exported directly to a partner firm in the country or indirect through the use of intermediaries.
4.1.1 STRENGTHS AND WEAKNESSES OF EXPORTING
It is considered as the easiest, simplest and most used mode of entry.
Risk involved is minimal due to limited investment.
It creates an opportunity for the organisation to study the overseas market preferences before investing in the country.
Exporting helps an organisation to achieve economies of scale by manufacturing its products in one location and exporting to a larger market.
It is cost effective and improves the margin of an organisation.
Trade restrictions and laws in some countries could pose a huge challenge to exporting.
Transportation cost and distribution channel problems.
Stiff competition from indigenous firms.
Export licenses and custom laws may vary in different locations.
This is a form of contractual agreement whereby the licensor grants access to property rights which could be patents, trademark or know-how to the licensee in exchange for some form of payment. According to Okoroafo (1992), licensing is seen as direct investment royalties, license fees and other fees for the sale of intangible property rights including patents, industrial processes, trademarks, copyrights, designs, know-how, techniques etc.
4.2.1 STRENGTHS AND WEAKNESSES OF LICIENCING
Licensing creates an opportunity for future investment into a given market.
It enables expansion with limited direct exposure to risk and low investment.
It creates rapid entry into a foreign market.
Creates access to new markets not easily accessible by exports or other modes of entry.
It maximizes return from an investment.
There is limited control due to the contractual agreement.
Difficulty in identifying what to licence.
Terminating the agreement might be difficult till the expiration of the contractual duration.
Licensing can create competition as the foreign partner might become a competitor.
Franchising is a special form of licencing in which the franchiser makes a total marketing program such as brand name, logo, products or method of operation, available to the franchisee for a fee (Gillespie et al 2004). Franchising is often used for indirect entry into a foreign market and most local service firms get the exclusive right to a marketing concept, which may also include right to a certain operational mode (Gronroos 1999). In franchising, the franchisee obtains the right to sell the franchisors product or use his brand name or logo for business purposes, this method has been adopted by organisations in recent times and it's mostly seen in the fast food industries.
4.3.1 STRENGTHS AND WEAKNESSES OF FRANCHISING
Franchising encourages rapid growth and expansion.
It involves a low cost of investment with minimal risk.
Franchisor can tap on the franchisees wealth of experience, financial and managerial capabilities.
Franchising improves brand development.
There might be cases of the franchisee giving the brand a bad reputation.
Control restrictions on how the business would be run by the franchise agreement.
There might be reduced margins or profit if the franchisee fails to manage the business efficiently.
Difficulties experienced by the franchisee may directly affect the franchisor.
4.4 JOINT VENTURE
Joint venture is a form of strategic alliance where two or more organisations pull resources together to create a separate legal entity. It is seen as a contractual agreement and a mode of entry into the foreign market, whereby a foreign firm brings in its wealth of experience and expertise to create a business with an indigenous organisation. Joint venture allows the firms to pull and combine their resources together for the purpose of creating a new entity. The parties involved share the risk, expenses and profits from the venture together. According to Davis et al 1996, joint venture provides a vehicle for the cooperation between organisations with different but complementary strategies.
4.4.1 STRENGTHS AND WEAKNESSES OF JOINT VENTURE
It creates access to organisations into foreign market and increases their distribution network.
Inherent risk involved in the business, operating expenses and losses is shared between the two organisations.
Joint venture pulls resources, expertise, core competencies and capabilities from different organisation to create a new entity.
It creates synergy, sharing of skills, technology and experience between the organisations involved.
It gives competitive strength to the new organisation and creates a stronger defence against competitors.
There might be conflict of interest between the organisations.
Problem of control and management of the new venture.
Profit is shared between the organisations involved in the venture.
Cultural differences, economic and political systems in the foreign environment might pose a challenge to the venture.
4.5 WHOLLY OWNED FOREIGN ENTERPRISE
This is a mode of foreign market entry where an organisation creates its own enterprise in another country. For instance, Tesco moving into the Nigerian grocery market and open new Tesco stores. This mode of entry is different from the others because the organisation has sole ownership and management of the new enterprise. A wholly owned enterprise is seen as a permanent enterprise in the host country wholly owned by the entrant, where profits and responsibilities are assigned exclusively to the entrant (Chen and Messner 2011).
Wholly owned enterprise can be achieved through two main modes; it could be through mergers and acquisition, whereby the foreign organisation merges or fully acquires a local organisation. This mode of entry might be considered easier but is likely to face restrictions due to government regulations and there is also risk of paying too much for the acquisition. The second mode of entry can be through greenfield entry; here the organisation starts from the scratch to create a new organisation using its internal capabilities, resources and competences. This method is often difficult as it requires large capital for set up and the inherent risk level is high when compared with acquisition.
4.5.1 STRENGTHS AND WEAKNESSES OF WOFE
The organisation has greater control over its operations.
Stronger commitment as management of the new enterprise is the sole responsibility of the organisation.
It helps the organisation to achieve location economies and increase its customer base.
WOFE requires high capital for its set up.
The risk level is also high and this is borne by the organisation alone.
Economic, political and cultural issues in the host country might affect the organisation.
Intense competition from local players in the industry would be expected.
4.6 ENTRY MODE FOR TESCO TO NIGERIA
For Tesco's internationalisation strategy, the appropriate mode of entry is through the wholly owned foreign enterprise (WOFE). This mode of entry is considered most appropriate given the fact that the grocery market and departmental stores in Nigeria is not yet saturated. Also the key players in the industry such as Shoprite, Spar and Mega Plaza might not give Tesco the opportunity to explore other modes of entry. A wholly owned enterprise will give Tesco a better chance to stand out in the market and compete favourable with the local firms. According to Park and Sternquist 2008, this mode of entry allows for greater involvement, control and returns than franchise, although franchise is beneficial because it reduces the investment requirements and risk for the franchisor.
A wholly owned store established by Tesco in Nigeria will give the company full control of the operations of the business unlike the other entry modes. It also requires the highest commitment of the company's resources and yields a high return on investment. However, it exposes the company to the highest level of business risk (Ekeledo and Sivakumar 2004).
According to Sterling 2003, strategy often fails because of the market conditions they were intended to exploit change before the strategy takes hold. Hence, the choice of a market entry mode is an important strategic decision facing an organisation with an internationalisation strategy. This report has addressed the different market entry modes available to any organisation seeking to diversify into a foreign market, bringing out the strength and weaknesses of each of them.
In the light of current trends in the Nigerian grocery market, the wholly owned enterprise is seen as the most suitable form of entry into the market for Tesco. This will give Tesco the opportunity to create its own organisation using its capabilities and resources and be able to stand out in the face of intense retaliation and competition from indigenous firms.
The attractiveness of a given market has also been assessed using the PESTLE and Porter's five forces. Both tools have its unique characteristics and are useful for assessing a market. As the PESTLE deals with the macro-environmental factors that might affect and organisation, the five forces gives an analysis of the organisations immediate environment in relation to the competitive forces facing the organisation. Therefore, both tools are recommended for any organisation seeking to assess the attractiveness of a given market because it gives a better understanding of the macro-environment and the industry as well. The value chain and SWOT are also useful tools used to gauge the internal capabilities of an organisation, with the SWOT showing the strategic position of an organisation while the value chain shows the activities that creates value for the organisation.
These tools analysed in this report has its different strengths and limitations, however they are all good analytical tools which could be used for various strategic purposes and decision making.