Tesco Development

1 January 2017

Explain the three basic decisions that a firm contemplating foreign expansion must make: which markets to enter, when to enter, and on what scale. 2. Outline the advantages and disadvantages of the different modes that firms use to enter foreign markets. 3. Identify the factors that influence a firm’s choice of entry mode. 4. Evaluate the pros and cons of acquisitions versus greenfield ventures as an entry strategy. Chapter Summary This chapter focuses on the basic market entry decisions for firms.

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The six most common foreign entry strategies are discussed. These are: exporting, turnkey projects, licensing, franchising, establishing a joint venture with a host country firm, and setting up a wholly owned subsidiary in the host country. The advantages and disadvantages of each of these strategies are discussed. Opening Case: General Electric’s Joint Venture Summary The opening case explores General Electric’s change in strategy. For years, General Electric entered new markets using wholly owned operations that it built from the ground up. Today however, the company has moved to a joint venture approach.

Discussion of the case can revolve around the following questions. General Electric has traditionally followed a strategy of expanding into new markets using wholly owned greenfield ventures. More recently however, the company has shifted to a strategy of forming joint ventures with local companies. Explain why General Electric has made this strategic shift. ANSWER 1: General Electric has shifted away from its traditionally preferred method of entering new markets via wholly owned subsidiaries to entering new markets through joint ventures with local firms for a number of reasons.

Two key factors in the strategic shift are the lower risk and cost associated with joint ventures. The company also believes that by linking with local companies, it can gain invaluable knowledge of the local market. In addition, joint ventures have proved to be an easier route in some countries where local laws prohibit other types of entry methods.  What are the disadvantages of General Electric’s new strategy of using joint ventures to enter foreign markets?

Most students will probably focus on the fact that joint ventures, while offering firms the opportunity to share costs and risks, also imply that firms are sharing control. General Electric has run into some problems with its joint venture approach. For example, General Electric could not reach an agreement with potential British partner Smiths Group, and ended talks with the company. General Electric has also had to settle for minority stakes in some ventures when it would have preferred to have a majority position.

There are several different options open to a firm that wishes to enter a foreign market, including exporting, licensing or franchising to host country firms, setting up a joint venture with a host country firm, or setting up a wholly owned subsidiary in the host country to serve that market. Each of these options has its advantages and each has its disadvantages. C) The magnitude of the advantages and disadvantages associated with each entry mode are determined by a number of different factors, including transport costs and trade barriers, political and economic risks, and firm strategy.

The optimal choice of entry mode varies from situation to situation depending upon these various factors. Thus while it may make sense for some firms to serve a given market by exporting, other firms might serve the same market by setting up a wholly owned subsidiary in that market, or by utilizing some other entry mode. basic entry decisions A) There are three basic decisions that a firm contemplating foreign expansion must make: which markets to enter, when to enter those markets, and on what scale. Which Foreign Markets?

The choice between different foreign markets must be made on an assessment of their long run profit potential. This is a function of a large number of factors, many of which we have already considered in depth in earlier chapters. C) Other things being equal, the benefit-cost- risk tradeoff is likely to be most favorable in the case of politically stable developed and developing nations that have free market systems, and where there is not a dramatic upsurge in either inflation rates, or private sector debt.

It is likely to be least favorable in the case of politically unstable developing nations that operate with a mixed or command economy, or developing nations where speculative financial bubbles have led to excess borrowing. D) If an international business can offer a product that has not been widely available in a market and that satisfies an unmet need, the value of that product to consumers is likely to be much greater than if the international business simply offers the same type of product that indigenous competitors and other foreign entrants are already offering.

Management Focus: Tesco’s International Growth Strategy Summary This feature describes Tesco’s international expansion strategy. Tesco, the British grocer, has established operations in a number of foreign countries. Typically, the company seeks underdeveloped markets in developing nations where it can avoid the head-to-head competition that goes on in more crowded markets, and then enters those markets via joint ventures where the local partner provides knowledge of the market while Tesco provides retailing expertise.

Discussion of the feature can revolve around the following questions: Suggested Discussion Questions 1. Reflect on Tesco’s decision to expand internationally primarily through establishing operations in developing countries. What makes these countries attractive to Tesco? Discussion Points: When companies make the decision to expand into new markets, they must balance the benefits, costs, and risks of doing business in each market. In Tesco’s case, developing markets were attractive not only because of their size, but also because of the likely future wealth of customers.

To increase its chances for success, Tesco has focused on those markets where there are few capable indigenous competitors. Today, Tesco has more than 800 stores outside its home country of the United Kingdom, which generate ? 7. 6 in annually revenues. 2. Why does Tesco believe it is important to transfer its core capabilities to new ventures? How have the company’s partners helped it find success in foreign locations? Discussion Points: Tesco’s success in international markets is remarkable. In 2005, every one of the company’s foreign ventures was profitable.

The company attributes its success to the transfer of its core competencies to each location. At the same time, the company believes that local management is important, and so it hires locally, but provides oversight from the United Kingdom. Tesco also feels that its partners in Asia, and their deep knowledge of the local market have played a significant role in its success in the region. Teaching Tip: To learn more about Tesco’s international operations, go to {http://www. tescocorporate. com/home. htm}. Timing of Entry.

Once a set of attractive markets has been identified, it is important to consider the timing of entry. With regard to the timing of entry, we say that entry is early when an international business enters a foreign market before other foreign firms, and late when it enters after other international businesses have already established themselves in the market. F) There are several advantages frequently associated with entering a market early. These are commonly known as first mover advantages. One first mover advantage is the ability to pre-empt rivals and capture demand by establishing a strong brand name.

A second advantage is the ability to build up sales volume in that country and ride down the experience curve ahead of rivals. To the extent that this is possible, it gives the early entrant a cost advantage over later entrants. This cost advantage may enable the early entrant to respond to later entry by cutting prices below the (higher) cost structure of later entrants, thereby driving them out of the market. A third advantage is the ability of early entrants to create switching costs that tie customers into their products or services.

Such switching costs make it difficult for later entrants to win business. G) It is important to realize that there can also be disadvantages associated with entering a foreign market before other international businesses (these are often referred to as first mover disadvantages) H) Pioneering costs are costs that an early entrant has to bear that a later entrant can avoid. Pioneering costs arise when a business system in a foreign country is so different from that in a firm’s home market that the enterprise has to devote considerable time, effort and expense to learning the rules of the game.

Pioneering costs include the costs of business failure if the firm, due to its ignorance of the foreign environment, makes some major mistakes. Pioneering costs also include the costs of promoting and establishing a product offering, including then cost of educating customers. Scale of Entry and Strategic Commitments I) Another issue that an international business needs to consider when contemplating market entry is the scale of entry. Entering a market on a large scale involves the commitment of resources to that venture. The consequences of entering on a significant scale are associated with the alue of the resulting strategic commitments.

A strategic commitment is a decision that has a long term impact and is difficult to reverse. Deciding to enter a foreign market on a significant scale is a major strategic commitment. Significant strategic commitments are neither unambiguously good nor bad. Rather, they tend to change the competitive playing field and unleash a number of changes, some of which may be desirable and some of which will not be. J) Small-scale entry has the advantage of allowing a firm to learn about a foreign market while simultaneously limiting the firm’s exposure to that market.

It is important to realize that there are no “right” decisions here, just decisions that are associated with different levels of risk and reward. Management Focus: The Jollibee Phenomenon—A Philippine Multinational Summary This feature describes the remarkable success story of Jollibee. Jollibee, a fast food chain from the Philippines, not only stood its ground when McDonald’s invaded its market in 1981, but also managed to find the weaknesses in the larger company’s global strategy and capitalize on them. Jollibee, unlike McDonald’s, tailored its menu to the local market.

The company was able to build on this localization strategy as it expanded into neighboring Asian countries and the Middle East. Today, Jollibee has even managed to find success in the United States where it is being hailed as a strong niche player. Discussion of the feature can begin with the following questions: Suggested Discussion Questions 1. How would Christopher Bartlett and Sumantra Ghoshal view Jollibee’s performance to date? Discussion Points: Many students will probably suggest that Bartlett and Ghoshal would have a positive view of Jollibee’s performance so far.

Jollibee has managed to survive McDonald’s push into the Philippines, learn from the company, and even capitalize on gaps in McDonald’s strategy of having an essentially standardized marketing approach. Now, Jollibee has successfully entered McDonald’s home market, and become a niche player in the fast food industry, and is making plans to expand into India. 2. A key difference between McDonald’s global strategy and that of Jollibee is that McDonald’s sees its path to success as offering a fairly standardized menu everywhere whereas Jollibee views localization as its ticket to success.

In your opinion, would Jollibee have achieved its current position in the market if the company had standardized its menu like McDonald’s? Discussion Points: Most students will probably argue that Jollibee’s competitive advantage is that it offers fast food tailored to local tastes, and that if the company pursued a standardized approach it would have failed. Students might note that McDonald’s global success with this strategy is due in part to the fact that it is a symbol of America, and as such offers an American experience in other markets.

Because Jollibee does not have this type of global reputation, it must look for alternative ways to compete. Teaching Tip: It is worth visiting Jollibee’s web page to see the American influence on the company. Go to {http://www. jollibee. com. ph/} and click on “International” to explore some of the company’s foreign locations. entry modes A) These are six different ways to enter a foreign market – exporting, turnkey projects, licensing, franchising, establishing joint ventures with host country firms, or setting up a new wholly owned subsidiary in the host country. Each method has its advantages and disadvantages.

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