International retailers frequently emphasise the cognitive aspects of the retail internationalisation process. Examples of this abound but include Tesco's utilisation of embedded research teams within Japanese families to monitor consumption behaviour prior to their acquisition of the Japanese C Two chain in 2003. Within the international retail literature, however, there has been limited detailed empirical or conceptual research on international retail learning (Clarke and Rimmer, 1997). Thus, although learning has played an important role in shaping the way retail companies behave in practice, comparatively few studies actually address international retail learning. An absence of detailed empirical or conceptual research on international retail learning is therefore a major gap in our understanding of the whole internationalisation process. It is contended that important insights and valuable lessons have been learned by retailers from their own successful international forays as well as the visible success of other companies in the international marketplace. Not all international retail operations have been successful however, and the difficult and highly contested process of scaling back of retailing operations to remedy mistakes may also result in an equally valuable learning process for international retailers (see Palmer 2000, 2002a, b).
A number of researchers have called for research to re‐examine the ways in which retailer internationalisation has been conceptualised (Dawson, 2001; Howard and Dragun, 2002). The recent critiques of Wrigley (2000), Burt and Sparks (2001) and Burt et al. (2002) suggest that the existing conceptualisations neither adequately capture the multiplicity and difficulties in the retail internationalisation process, nor sufficiently explain the variety of approaches to internationalisation being used by retailers. Various explanations of the retail internationalisation process are emerging, but one viable and promising line of enquiry is the area of international retail learning. Notable in this respect is Clarke and Rimmer's (1997) analysis of Daimaru's (a Japanese department store) investment in a new outlet in Melbourne, Australia, which provided an initial step towards understanding the cognitive aspects of the international retail investment process. Indeed, this research has drawn a number of important lessons learned from retail market entry and development.
Despite the value of this initial research, and although the international retail learning process itself and the outcomes are occasionally referred to in the literature (see Treadgold, 1991; Alexander and Myers, 2000; Evans et al., 2000; Vida, 2000; Dawson, 2001; Arnold, 2002), its conceptualisation and analysis remains largely under‐theorised and under‐developed. What is required, according to Clarke and Rimmer (1997), is a research approach that explores “the way in which a retail firm reflects on individual decisions it has made, and how this might influence their perceptions and actions”. From this perspective, it is critical to understand international retail experiences through reflection and analysis, and to identify what has been learned from the internationalisation process. Furthermore, while some researchers in the field have indicated that experience is important for many aspects of market entry and development (Treadgold, 1991; Williams, 1991a, b; Evans et al., 2000; Doherty, 2000) it is clear that these studies do not provide detailed empirical or conceptual understanding of this complex learning phenomenon. For example, this work does not directly deal with the questions: What are the components of this experience? What lessons can be drawn from this experience? How does this experience shape or inform the decision‐making process of the international retailer? It would therefore appear that the international retail literature is less developed in considering what retailers have learned from their experience of internationalising store operations. This paper aims to probe these issues by providing a more extended debate and considered analysis of the concept of international retail learning within the context of Tesco's internationalisation process.
It should be noted that it is outside the scope of this paper to present a review of the international retail literature (see the excellent reviews by Alexander (1997); Alexander and Myers (2000); and Burt et al. (2003)). This would increase the length of the paper substantially while the theoretical background on international retail learning has previously been laid out in detail elsewhere (see Palmer and Quinn, 2005). In this paper, the discussion will mainly pertain to the empirical case study findings of Tesco. The paper begins by briefly positioning the case findings by way of a conceptual framework put forward by Palmer and Quinn (2005) on international retail learning. More detailed discussion of this framework can be found in Palmer and Quinn (2005). Following this, an overview of the methodology is put forward. The main part of the paper presents the case findings of Tesco and the paper will conclude with a discussion of the key findings.
International retail learning framework
Palmer and Quinn's (2005) recent work provides a useful conceptual framework for examining the studies to date on international retail learning. Drawing on the broader management literature on organisational learning and international retailing, Palmer and Quinn (2005) synthesised the various components of international retail learning (see Figure 1). The broad components of Figure 1 frame a series of research questions for studying international retail learning and these include:
What do retail internationalists identify as the most important lessons learned from their experience of internationalising retail operations?
To what degree has this knowledge been absorbed by the internationalising retail company?
What is the locus of international retail learning diffusion or transfer?
What are the outcomes from the lessons learned and how do these shape the future decision‐making and learning behaviour of the retailer?
This study employed an interpretative, qualitative methodology to examine the international retail learning. The single case approach has been an increasingly popular methodology within the retail internationalisation literature of late, and it has enabled various authors to provide some very important new insights into the subject area (Sparks, 1995; Shackleton, 1996a, b; Clarke and Rimmer, 1997; Wrigley, 2000). Furthermore, field research that involves investigating the views and opinions of organisations directly and indirectly involved in the decision‐making process is receiving increasing support within the literature (Shackleton, 1996a, b; Sparks, 1996; Palmer, 2002a, b; Palmer and Quinn, 2003). These authors have highlighted the limitations of relying solely on the views of the case company under investigation and have highlighted the insights into the retailer internationalisation process that can derive from surveying a diverse variety of organisations and stakeholders involved in the process. Stakeholder parties in the retail internationalisation process should therefore not be underestimated. Indeed it may be argued that a strong interdependence exists between investment banks and firms with respect to advising retail executives on strategy, structure, and international retail operations. Eliciting the views of investment bankers would therefore allow the research to gain access to the tacit knowledge and practical know‐how gathered through years of experience through the direct interaction with the company via research, consulting and advisory services utilised by retail executives. Multiple and independent sources of evidence, including market research reports, company profiles, financial statements and so on were also used to corroborate the interview data and, by so doing, develop convergent lines of inquiry (Yin, 1994).
The case of Tesco was chosen for three reasons. First, the transformation underway in Britain's largest retailer has been profound, while its growth has been one of most consistent amongst its international peers (1995‐2002), with estimated sales rising to €45.9 billion in 2003. Indicative of the scale of its international ambitions, Tesco unveiled one of the most radical and ambitious internationalisation programmes that that would involve the development of 200 hypermarkets in Europe and Asia, generating GB£10 billion sales per annum by 2004 and which, in proportional terms, would be equivalent to that of UK‐based food retailers, ASDA and J. Sainsbury sales combined. This strategy, however, has been overshadowed by Wal‐Mart's $10.6 billion takeover of ASDA in the UK and has gone largely unnoticed in the academic literature. Second, despite the scale and growth of Tesco's internationalisation, the focus of many researchers has been on the international activity of US retailer, Wal‐Mart (Arnold and Fernie, 2000; Palmer, 2000; Burt and Sparks, 2001; Hallsworth and Clarke, 2001; Fernie and Arnold, 2002), or Sainsbury's capital investment in the US market (Shackleton, 1996a, b, 1998; Wrigley, 1997a, b, 1998; Muskett, 2000). Only modest attention has been attributed to Tesco in the academic literature (see Palmer, 2002b for a recent example). Tesco's success abroad therefore remains an under‐emphasised case within the contemporary academic literature. Third, internationalisation has been a major aspect of the strategy of Tesco over the years. Significantly though, not all of Tesco's international operations have been successful and this has resulted in some form of divestment. It is argued that divestment is a highly visible case of where learning is likely to have taken place.
A total of 62 interviews were undertaken during 1999 and 2000 with the leading food sector buy‐ and sell‐side analysts, and international retail merger and acquisition specialists (i.e. those within the corporate strategy unit in the corporate finance division of investment banks) and senior executives of the retailer under investigation. In planning the interviews, particular attention was given to the danger of the interviewees presenting biased views and opinions (see Palmer and Sparks (2004) for a wider discussion of the limitations of this method). This research used “convergent in‐depth interviewing” (Dick, 1990 cited in Carson et al., 2001). In short, it is an in‐depth interviewing method that allows the researcher to develop, clarify, verify and refine the core issues of the interview protocol. It consists of a number of interviews in which the procedure is both structured and unstructured. During the early stages the content of the interview is unstructured and flexible during which the interviewee tells a story about key events or episodes and what they have learned about their experiences from these events. The process used in the interview then becomes more structured as the interviewer converges in specific issues of the research problem and to disprove the emerging explanations of the data (Carson et al., 2001). The length of the interviews typically varied from half‐an‐hour to three‐and‐half‐hours. Rather than concentrating on one or two aspects of the dimensions of Tesco's international learning, the interview protocol explored learning initially from a broad perspective. In line with the arguments put forward by other researchers (Hallsworth, 1992; Clarke and Hallsworth, 1994; Clarke and Rimmer, 1997; Burt and Sparks, 2001, Dawson, 2001) a broader perspective may be necessary so that these parameters can be used to raise a new set of more detailed priorities for research on international retail learning. That is to say, each lesson is not necessarily an end in itself, but an entry point for a wider discussion. Data collection and analysis were simultaneous. Analysing data involved categorising and triangulating the evidence from the multiple perspectives, and the presentation of findings largely followed the most recent interview protocol. However, it should be noted that the analysis of learning is not easily defined in terms of beginning or end points and this research identified extreme situations and critical incidents which were transparently observable for data collection. Moreover, Tesco's experiences were not assessed by any quantitative measurement of the amount of learning occurred, but rather by reference to the content of these experiences and the impacts that such learning had on the outcome or trajectory of international expansion.
The paper now reports the findings from the in‐depth interviews. The key themes from the findings are discussed in the sections that follow. Excerpts from the in‐depth interviews are used throughout the findings section in order to illuminate and contextualise relevant themes. For confidentiality reasons, the identities of respondents will not be disclosed during the remainder of this paper. This case study will be largely formatted in the same way as the dimensions outlined in the framework. The data gathered for this case study focus on Tesco's European operations. While Tesco's investment activities in Asia are strategically important, it is argued that the most insightful aspects of the company's international investment and divestment activities occurred in the European market. The findings proceed with an initial overview of the case company's international developments. The main body of findings follows this, and directly examines the lessons learned by Tesco from the internationalisation of retail operations and their impact on the future trajectory of international operations.
Tesco's international background
This section provides an overview of the markets chosen by Tesco. The company initially expanded into the geographically close markets of Ireland and France. Tesco's initial international foray was in 1979 when they purchased 51 per cent of Albert Gubay's Three Guys operation for GB£4 million in the neighbouring market of the Republic of Ireland. This expansion proved to be immature given the structural capacity for expansion and the relative strength of the company within their domestic market at the time of the initial international foray. This untimely venture abroad was summed up by one sell‐side analyst:
The perceived success (or otherwise) of their early venture abroad would have been considered insignificant to the company's fortunes at home, and as a result, this largely undermined the company's (perceived) efforts in the eyes of the financial markets as being a peripheral and/or even a distraction to the core UK business.
The continued realignment, focus and momentum of the company in the UK market provided the context in which internationalisation had taken “a secondary position” in the company's corporate development agenda. Tesco subsequently divested the Three Guys operations to the Dublin‐based supermarket company H. Williams in 1986. Towards the end of the 1980s, the company embarked on research efforts into possible international growth options and these primarily centred on the US market, but also covered several European countries. The company spent several years investigating the North American market during the late 1980s and early 1990s.
The product of this research effort was the company's move into the French market. Tesco's first foray into mainland Europe with the acquisition of the medium‐sized supermarket chain Catteau in December 1992 was intended to be the company's springboard to international expansion and serve as a platform for European growth in particular. The company's rationale at the time for acquiring a small regional chain was that they were going to build Catteau into a national chain in France. Tesco acquired an effective 85 per cent holding, leaving 15 per cent of the ownership in the hands of management as part of an incentive scheme. According to the analysts’ research at the time, the company was attracted by Catteau's good record and high profitability. Group turnover of the chain in 1991 was GB£340 million and over 80 per cent of this revenue came from retailing (Catteau also had wholesaling and franchise activities). Management felt that Catteau's impressive net profitability reflected the economies gained from a tight geographical clustering of stores and the strong centralised cost controls, and as a result, the financial markets were largely supportive:
At the time the financial markets pointed out that Tesco had done all the classic right things – the lesson learned from UK retailers’ forays overseas has been that it is vital to buy a successful business rather than a “turnaround” situation and retain strong local management.
By the end of the middle of the 1990s, Tesco would begin to question the acquisition of Catteau, and later in 1997 would completely withdraw from France. For much of this early expansion, the company focused on structurally mature markets, but with more recent expansion the company has been more disposed toward emerging markets (see Table I).
The third phase of the company's international expansion was in 1995, when management acquired the Global supermarket chain in Hungary for GB£15 million. This did not represent a particularly expensive entry, and indeed, this was reflected in the poor quality of the assets purchased – in total 43 small stores. The intention of the company was not to trade the stores in the long‐term, but rather to secure a foothold in the market and learn from these businesses, while later building a larger hypermarket business based on their experiences. Using the Hungarian acquisition as a foothold in eastern Europe, the company subsequently acquired Savia SA in Poland for GB£8 million in late 1995, which was, again, a chain of 36 small supermarkets acquired for relatively little financial consideration and designed to secure a foothold in the Polish market for Tesco from which to develop a hypermarket business. In 1996 the company entered the Czech Republic and Slovakia through the acquisition of Kmart for GB£77 million, acquiring a portfolio of 13 stores with an average selling space of 72,000 ft2. Essentially the Kmart business geographically was an in‐fill acquisition between Tesco's Polish and Hungarian investments.
Tesco also re‐entered the Irish market with the acquisition of ABF's Irish food retailing business for GB£630 million in 1997. Following the ABF acquisition, the company secured their position as the largest food retailer in Ireland with 109 supermarkets and annual sales of GB£1.23billion. And in addition Tesco captured 17.5 per cent of the market in Northern Ireland and 19.4 per cent in the Republic securing number one position in both markets.
The initial move into Asia, and the Thailand market in particular, came in May 1998 with the purchase of a 75 per cent majority controlling stake in Lotus, a chain of 13 hypermarkets which cost GB£111 million for the equity – assuming GB£89 million as their share of Lotus's debt. Lotus’ previous owner, Thai CP Group (a major agricultural supplier in the region) retained a 17 per cent stake, with SHV Makro holding the remaining 8 per cent. Tesco subsequently entered South Korea. In March 1999, Tesco formed a joint venture with Samsung, one of South Korea's largest conglomerates, into which the company invested GB£80 million in cash. Later that year the company increased their share of the joint venture from 51 per cent to 81 per cent at a cost of a further GB£30 million.
Tesco further developed operations in the region when they entered Malaysia in early 2002. In a similar structure to the other Asian operations, the Malaysian operation, Tesco Stores (Malaysia) Sdn Bhd, was established as a joint venture with a local company Sime Darby Behad. Tesco would own 70 per cent of the equity, but the operation would be under local control. Tesco later entered Japan during July 2003.
Dimensions of Tesco's international retail experience
This section provides an overview of the various dimensions of Tesco's international retail experience emerging from the in‐depth interviews. Important lessons learned are extracted from the company's international retail experiences.
Internal strategic processes
Market selection experience. Tesco's internationalisation raises several questions regarding the nature of their market selection decision experiences. Tesco's decision‐making process highlights the contrasting motivational structures that underpin the various paths towards international markets which eventually led to different spatial behaviours. In qualitative terms, the interviewees highlighted a number of important characteristics of Tesco's market selection decisions:
Retaining spatial focus is more important than capitalising on small‐scale opportunities in diverse markets.
Competition from local retailers in their chosen markets is virtually non‐existent.
Dynamics for the international retailers are relatively level (which is not the case in Latin America where Carrefour has operated for almost 20 years).
Capitalised on opportunistic events unfolding within the existing portfolio of international retail markets.
What is important to us is not the number of countries we are present in but rather that we attain, and/or sustain number one or two position in each of these countries. The aim is to balance the global scale that comes from Tesco with the local strength of being a market leader. Market position gives you market share, which in turn gives you scale, which in theory, should allow you to have the lowest cost base, best buyers, best offers to customers, therefore the best revenues, earnings and dividend growth. That is why retail multinationals aim for leadership in markets and strong regional presence. It's a virtual circle.
The importance of due diligence processes in foreign markets and/or target's operations is repeatedly inferred from the company's executives and the corporate advisors. During the interviews, the company's management suggested that initial phase of expansion via international acquisitions placed too much emphasis on opportunism:
Organic growth is, in your hands, acquisition‐driven, consolidation is not. Acquisition‐driven consolidation is opportunistic, particularly with businesses that are privately owned. It's not something that is easily predictable. We are not blind to acquisition opportunities, but the nature of the opportunities and when they present themselves is anybody's guess. Organic store‐by‐store development allows for a much more strategic approach to internationalisation.
In turn, this would result in the management placing greater emphasis on store‐by‐store development that allowed the company to become more strategic in terms of their selection of markets, procurement, distribution and store locations. Based on this evidence, it was apparent that the nature of the market selection decisions would be shaped by the mode of entry used and whether or not opportunities existed.
Entry mode experience. Tesco used a combination of multinational entry mode strategies within one country. As previously discussed, Tesco entered the central and eastern Europe by acquiring a relatively small chain of convenience stores in Hungary, a supermarket business in Poland and a department store chain in the Czech Republic and Slovakia (see Table II). It was certainly unusual for such a large public company to become involved in these operations, and even competitors at the time questioned the logic of their approach. However, the use of “seed acquisitions” with a view to develop knowledge of the market before expanding organically through store‐by‐store development allowed Tesco to minimise their own human and financial capital in the face of potential economic and political uncertainty. Some of these small stores would later be closed down and replaced by large hypermarkets nearby. Although Tesco faced criticism and, indeed, pressure from the financial markets, there are sometimes compelling reasons for retaining a small operating presence in a foreign market where international competitors are already established. First, the small presence would facilitate the implementation of an acquisition strategy by securing the necessary contacts and networks into foreign retailers and local suppliers, especially considering the challenges associated with family owned and controlled chains. Second, retaining a direct and small operating presence in a competitors’ major market would lead to important insights into the competitive behavioural dynamics of competition that otherwise would not be possible without a direct presence. During the interviews, management made this point:
The reality is that you are not going to learn everything until you either open a store or purchase a chain in the new market.
Small experiential or pilot stores were an integral part of initial learning phase of expansion, while later might be seen as surplus to requirements to international expansion, and consequently divested.
Indeed, after an initial period of understanding these store practices, management decided that the primary development comprised the hypermarket format. The development of the new hypermarket format was primarily driven through two pilot stores. Despite a relatively cautious approach to market selection, Tesco rather ambitiously developed a completely new format in a distant market – a format, moreover, which had not been tested in the domestic market. This approach allowed the company to experiment and radically depart from their existing domestic supermarket format and extend the non‐food merchandise content of their international store operations. Tesco's entry mode experience did not mirror the experiences adopted by manufacturing companies. In the broader international literature Chang's (1995) findings showed that when Japanese electronic firms first acquired an international business, they did so in one in which they had a strong competitive advantage in order to reduce the risk of failure. In stark contrast Tesco entered new markets by acquiring relatively weak target firms or by launching into areas where they were less strong in terms of a distinct competitive advantage. Tesco's initial forays into Ireland and Czechoslovakia clearly illustrate this point. In Ireland, difficulty with post integration led to the realisation that these “turnaround” cases were disproportionately demanding for management resources, and in the Czechoslovakia Tesco moved into non‐food merchandise lines by acquiring the Kmart department stores.
Divestment experience. What surfaced as a main theme from the findings was the intense learning process during international retail divestments. The findings indicated that failure or partial failure during the internationalisation process had a marked effect on the future trajectory of Tesco's international expansion. The strategic effect of Tesco's divestment in France and Ireland has resulted in the firm now ensuring that they establish a strong market‐leading position in new markets. For example, Tesco's aggregate market share in Hungary and Poland is over 40 per cent. The advantages of a dominant market position for learning lie in the success that such a position implies. A strong market position can obscure relatively small mistakes, whereas for small‐scale operations such mistakes might prove to be fatal.
The Catteau divestment experience resulted in an equally valuable learning process for Tesco. Sell‐side analysts suggested that Tesco delayed essential corporate divestment and reconfiguration even under intense pressure when it emerged that the French operations were experiencing difficulties. The company found themselves locked into the business through various exit clauses – out‐manoeuvred by Catteau's management – bidding competitors and the investment banks facilitating the completion of the divestment:
Tesco have learned that advisors can advise but that's all. Don't trust any investment bank. The management were misguided and ill‐advised with Catteau in France. There's no question that the management of Catteau are to blame. International retailers should never trust anybody they are buying assets from.
It was clear that Tesco's management learned from this experience by improving the techniques to prevent the commingling of the management lock‐ins and sunk costs, which made divestments very difficult, in terms of future acquisition due diligence processes. While the idea that continuous dissatisfaction from failure may seem particularly useful to initiate learning (Butler et al., 1991; Barwise, 1997; Arino and de la Torre, 1998), it remains difficult in practice. The acquisition of Catteau for Tesco and the subsequent years (i.e.1992‐1997) marked a continuous process of management dissatisfaction with the French operations. This dissatisfaction generated negative press commentary, but also weakened management and investor confidence and visibly undermined the strategic credibility of the company. The company's most high profile divestment had led to management evaluating progressive store‐by‐store expansion not with a view of proactively developing an exit strategy in the planning and due diligence phase of expansion as the following management viewpoint suggests:
… but with a view to our investment being underpinned by assets. Now that comes back to my point about the long‐term liability of assets. If you are in a market where the currency devalues and the asset value diminishes in this unstable environment – that is a due diligence mistake. Rather retail multinationals must invest in assets which are underpinned by asset value rather than nebulous goodwill in the context of organic growth.
In central and eastern Europe the company divested approximately 20 small‐scale stores while recouping the initial investment. Again, by way of illustration, management commented:
If you acquire good assets, then you can exit without losing money. Now that may seem an obvious thing to say but in our desire to generate pace in our development programme we allow that to let us compromise on the quality of assets that we are providing. We would never build a second rate store in a second rate location. I think we have benefited from the fact we acquired small store operations internationally. This has helped us understand more about the market and given us a step on the ladder. Some have argued that it was chaos, but we feel it has helped us on the people side in particular. Moving forward I think it's less important because we have the experience.
Contrary to what is commonly emphasised in the literature, learning does not need to be exclusively related to difficulties or problems, it may also refer to what has gone right in a firm. For example, in later years success of the new hypermarket concept has played an important role for the continuity of the learning processes of Tesco's internationalisation process.
Locus of control experience. In the early phases of international development Tesco did not have a clear idea of the corporate model in which to transfer their core competencies. Retaining the essence of the UK company's core competencies was problematic given the local spatial nature of food retailing and the lack of awareness of the Tesco brand name. Several analysts noted that when Tesco acquired Catteau in France they did not fully understand how they would integrate and control the business. Put differently, whether or not they were trying to replicate themselves focusing on corporate brand, format adoption and culture or using a financial holding company structure. One sell‐side analyst stated that:
The life cycle argument is that initially there is logic being a holding company. However, eventually the company will have to add value. Tesco were caught in the middle and unsure which worked best. This was compounded by the view that the cycle for international retailers was getting shorter with emphasis of adding value immediately after the acquisition.
This led to indecision with the Catteau acquisition. For example, the company experimented with integrating some brands under the Tesco brand but then decided to retain the local brand. These mistakes made Tesco establish a clearer idea regarding how and why their international businesses would succeed or fail. Tesco underwent a gradual withdrawal from a number of local tasks, while at the same time re‐establishing ownership of important central functions. Following their second entry into Ireland, the company had a much clearer vision. Even though the Irish government insisted Tesco retain a regional headquarters, the company were determined that they would adopt a more industrial corporate model. However, as several analysts pointed out:
To replicate and duplicate identity across the world puts more pressure on the business, tends to be much slower – replicating product offers, merchandising policies, staff training, culture, etc.
These early mistakes provided a firmer setting within which subsequent strategic decisions could be addressed more confidently. Learning how to strike a sustainable balance between the two was an important lesson learned by Tesco.
Experience with learning structures and processes. Ascertaining whether a firm possesses an intent to learn is an important factor influencing their learning behaviour (Tsang, 1999). Intention relates to commitment. On the surface it appears that Tesco possessed a learning intent, however, it is questionable whether this learning genuinely went beyond the “official corporate line” at least in the early phases of internationalisation. When management were asked to discuss the structures and processes through which the international learning was disseminated back to the UK market, critically there appeared to be no planned, structured, nor systematic mechanisms or formal processes for capitalising on this learning. The company's acquisition of Catteau in France did not prove to be the platform from which to inspire experimentation abroad. Nevertheless, the next phase of the company's expansion into central and eastern Europe coincided with the company's ambition to broaden their non‐food merchandise in the UK market. The impetus was then on the diffusion of what the company had learned from developing a new format which accommodated non‐food items in the overseas markets. This had a catalysing effect. Over time, the company began to employ personnel whose sole responsibility was to transfer the hypermarket format learnings back to the UK from central and eastern Europe. These learning agents represented a new dimension in the company's organisational structure, but there were difficulties in this process as management highlighted:
The learning challenge following on from this is how do management then transfer those learnings to the home market and explain to the headquarters that they don't know everything, there is a better way of doing it. A new product, process – that is culturally incredibly difficult to implement. This is extremely difficult to understand and teach the domestic market.
According to the sell‐side analysts, these problems were much more acute in the aggressively industrial approach adopted by Tesco than the looser federal approach which emphasises the role of the international firm as a “vehicle” for investment.
External strategic processes
With regard to what had been learned by Tesco from the external strategic processes, a number of key themes emerged from the in‐depth interviews.
Competitor orientation experience. At the corporate level, the findings suggest that Tesco learned particularly valuable lessons when faced with abrupt competitive shifts, to new circumstances, and responses from other retail multinationals. Specifically, Tesco were faced with hard decisions centring on whether they should participate in the consolidation process (as a consolidator or consolidatee), knowing that the valuations placed on acquisition targets were over‐priced, and there would be a distinct possibility of losing strategic control. One sell‐side analyst summed up the pressure:
In going it alone, Tesco would be making a huge strategic call. If wrong, the business would be seriously disadvantaged and would eventually lose their independence. If right, their vision would be second to none, and management would be regarded as one of the best in the world.
Despite their relatively strong position against UK competition, the consequences of Tesco's relatively weak position against much larger and more experienced international peers were profound:
acquisitions outside the UK may prove highly dilutive;
the size of possible acquisitions are effectively reduced;
a merger with a large European retailer would leave Tesco as the junior partner; and
Tesco is more vulnerable to an aggressive bid.
At the local competitive spatial level, Tesco adjusted operational retailing aspects, sometimes with minor modifications and at other times ensuring fundamental transformation of the format during the internationalisation process. Both buy‐ and sell‐side analysts believed that this international juncture was an area where companies could learn and experiment at the extremities of the company:
It will offer a company which is open to change the opportunity to observe and adopt best practice and apply it throughout the totality of their organisation. It will see Tesco competing directly with some of the best food retailers, notably the French hypermarket operators.
In central Europe and Asia, Tesco is competing directly with some of the best food retailers in the world, notably Carrefour, Auchan, and Ahold. As a result, Tesco is having to learn how to merchandise non‐food departments and how to hone their merchandising skills.
The above quotations serve to draw out how much of the learning takes place as the expansion unfolds and the competitive situation evolves rather than simply with prior market knowledge. In other words, as the company faces novel situations and makes small mistakes through trial‐and‐error expanding, management form more realistic perceptions of the foreign market. The need for learning‐by‐doing at the local spatial level indicates that learning from the internationalisation process will often be a gradual, reiterative process (Alexander, 1997).
External regulatory experience. Faced with the inevitable prospect of different degrees of regulatory constrains in dissimilar international retail markets, Tesco generated negative publicity and commentary in both the Irish and French markets. The contrasting cultural nuances were particularly apparent in the different ways of conducting business concerning the management of the planning process. In Ireland, in the context of an unclear planning policy frame, the company attempted to impose a process that had been utilised in the UK:
They [Tesco] underestimated how the planning process in Ireland worked at two levels. First, they underestimated the extent of local networks and contacts in the property industry. They didn't have enough agents and advisors. There was very much a local way of doing things, which relied on who you know as much as how much you know. Second, there is a different decision‐making process, slightly opaque series of planning policy guidance and framework. There was no independent planning inspectorate, with a lot of years experience in determining planning proposals for new stores.
When Tesco announced several proposals for new store development in Ireland and there was little guidance with regard to planning, this led to several years of independent planning and formalised inquiries. Although Tesco had been actively addressing the legitimate concerns of customers, suppliers and small retailers in these markets, it is clear that the company failed, at least initially, to communicate and negate the concerns that the local authorities and other stakeholders adequately. The strategic effect of this is difficult to determine in more recent expansion, but with experience, rather than conceiving of regulation simply as fait accompli in international markets and emerging markets in particular, Tesco embarked on a public relation campaign that would attempt to influence important regulatory decisions in their favour. In marked contrast to the early phase of development, Tesco noticeably changed by becoming proactive in enhancing their credibility and reputation in new markets with national and local governments as well as providing new opportunities for local suppliers to export produce. As a significant measure of the company's commitment to internationalisation, upon Tesco's entry into the Irish food retail market, management were willing to enter into an agreement with the government which meant that Tesco had to adhere to a number of promises and guarantees including operating an autonomous head office, retaining existing employees and the sourcing of Irish products.
Internal regulatory experience. Tesco learned from the importance of involving major shareholders during the internationalisation process. Tesco required the support and guidance of the financial institutions and, indeed, this forced them to invent communications and governance processes in order to stay informed of institutional investor concerns and perspectives. Arguably, Tesco's initial cautionary approach towards internationalisation was attributable to the restraints placed on the company by their shareholders’ expectations. According to management, at the time of Tesco's first high profile, albeit small international acquisition, the gist of the financial analysts’ perceptions towards Tesco's internationalisation was that the capital markets inhibited or constrained Tesco's international expansion:
Tesco wanted to do a deal in France in the mid‐1990s but were prohibited at the time by the City. They wanted special dividends and share buy‐back options and didn't want to take the risk of them going abroad.
Serious questions were being asked by the financial analysts concerning the financial requirements and the pressures to sustain international growth. However, over time, the question from the financial analysts then became how rapid Tesco should expand internationally rather than whether or not they should actually internationalise. One sell‐side analyst's report at the time succinctly put it:
The only question is the “haste” with which it is pursued and whether shareholders get a parallel sight of the cash through the dividend. In the context of Catteau, Tesco seems to be taking it reasonably slowly; it certainly is delivering a progressive pay out.
As previously discussed, Tesco came under intense scrutiny and found themselves subject of speculation of takeover bids during the mid to late 1990s. To combat this Tesco embarked upon a number of investor relations initiatives. Some, as reported in the press at the time, interpreted Tesco's emphasis on overseas expansion as “a coded plea to re‐rate the shares and put it in a stronger position to take part in the international acquisition‐driven consolidation process” (Osborne, 1999), so that the company would not become increasingly marginalised in the acquisition‐driven consolidation process. Management were obviously concerned about the company's valuation during this period relative to their international peers and deputy chairman David Reid (cited in Riera, 2000) suggested as much:
People should be concerned if share prices are lower over here, as there is a possibility that the whole UK food retail industry could be owned by foreign competition.
Unfortunately for Tesco, these efforts were interpreted as a one‐off public relations (PR) exercise. The findings tentatively suggest that a one‐off PR campaign for its own stake, in the context of intense consolidation pressures, will not be positively interpreted by the financial markets. Instead, it was interpreted as a coded plea to re‐rate the shares and put the retail multinational in a stronger position to take part in the international acquisition‐driven consolidation process, rather than an open and meaningful ongoing dialogue between the financial institutions and Tesco. Tesco's message was not being effectively relayed to investors – in part, because analysts were placing excessive weight on the company's past international (in)experience and this obscured the prospects for prospective earning power from future international investments.
Internal operational functions
Human capital experience. Another theme emerging from the interviews was that Tesco's management greatly underestimated the management capital required for international expansion. A significant measure of the company's attitude towards human resource capacity is reflected in the following statement by one advisor:
Probably every retailer that I have worked with within Europe on an international project has underestimated the amount of time that is required from senior people in the business to make a relatively small venture in a new market work. Retailers must be prepared to commit senior management, or director levels … often two years into the new venture they will become very frustrated that the venture hasn't grown into the third leg of the business. They must put their best people behind internationalisation and allow them to “champion” this expansion and drive it forward.
Investment in human capital, whether at the managerial level or store level, to handle international expansion constituted a significant lesson learned by Tesco. To achieve the necessary pace and scale of international operations Tesco have had to invest significantly in human capital, not least because the scale of the internationalisation programme significantly depleted the existing management resources. The strategic effect of this under investment in human capital for Tesco was that they acquired a number of small‐scale businesses in Central and Eastern Europe as a substitute for their lack international experience and local knowledge. The size of Tesco’s retail operations in their domestic market were a vital component in establishing successful international operations. By virtue of this size, Tesco had greater availability of capital and human resources for areas such as store management, site location analysts, marketing and financial personnel, supporting and sustaining international operations. Reflecting on this issue one buy‐side analyst made the following point:
The biggest lesson of all is a human resource lesson. Where do you get experienced international management? While Carrefour and Ahold have considerable management depth and breadth, relatively new internationalists have less human resources.
Also of increasing importance for the less experienced retail multinationals was the advisory support from external firms such as investment banks, management and property consultants and even manufacturers. The investment banking advisory support intensified when Tesco expanded via merger and acquisitions, making possible a deepening of the knowledge transfer process, closely co‐ordinating the activities with the investment banks, and expanding the learning process outside the boundaries of the company. Investment banks can therefore act as an agent for transferring knowledge regarding the dynamics in other international markets – in effect accelerating the learning curve for a less experienced retail multinational. Investment banks can be involved at any stage in the internationalisation process as one advisor explained:
We are not retailers but we can provide comprehensive information, which facilitates the retailers’ learning and helps to narrow down the potential options.
These networks also extend beyond the financial institutions. One important dimension for sustaining the company's aggressive expansion programme has been the close relationship with their largest supplier, Procter and Gamble. For example, Tesco utilised Procter and Gamble to fund an international field trip so that the executives got an insight into retailing practices in Asia.
Financial capital experience. Progressive international expansion is likely to result in the deterioration of the financial profile. From 1995 onwards, the conditions for international expansion were far more capital intensive. These costs were principally driven by the rising valuation (acquisition multiples) placed on acquisition targets, which, during the wave of acquisitions, broke decisively beyond historical ranges. On top of that, costs were exacerbated by the increasing sophistication of in‐store retail environments which, even within the emerging markets, required additional levels of capital investment as well as broader, supporting investments in information technology (IT) systems, distribution/logistics infrastructures and supply chain management. Developing markets have attracted considerably more international competitors, resulting in a virtuous cycle of heavy capital investment. One sell‐side analyst commented that for Tesco:
[…] the Polish market is developing at such a pace that in order to win custom, the in‐store environment needs to be highly sophisticated from the outset – especially in the highly competitive cities such as Warsaw.
Additional external sources of financing were therefore often required to supplement international growth. Tesco relied on external funding both in the form of debt and equity from the financial institutions. A key factor for Tesco, however, was the size of their cash generating domestic markets, which allowed them to invest with confidence in international emerging markets. In 2002, for example, Tesco financed the HIT acquisition in Poland (estimated £386 million) from trading rather than incurring debt, benefiting from the cash generating strength of their core UK business. Critical post‐integration investments were also supported from earnings from the UK business. Underlying Tesco's international programme was a relatively strong domestic position, which was in stark contrast to their main rival in the UK, Sainsbury's. Sainsbury's international expansion became more difficult in the face of opponents, who slowly undermined the company's international aspirations with resounding attacks on their under performing core business. Many buy‐ and sell‐side analysts that have followed this line of reasoning:
On the back of poor domestic expansion, retail multinationals should not plan on any foreign acquisitions as this will only accelerate the demise of the current domestic operations. To wield power across markets, a retail multinational must have some measure of strength in their domestic market. In other words, retail multinationals with under performing or insignificant positions in their domestic market will not have sufficient financial or human resources to fully implement their international strategy.
If you are struggling in your domestic market, what credibility do you have that you can manage a business in another country?
At the Global Institute of Grocery Distribution conference in early 2000, Tesco's management stressed that they would not make the same mistakes as Sainsbury's in their domestic and international operations. It is clear that management learned a considerable amount from Sainsbury internationalisation process, and briefly pointed to Sainsbury's under investment in the domestic market.
Marketing and communications. The experiences of Tesco highlight some important lessons concerning international marketing and communication issues. In the international retailing literature, Lord et al. (1989) have noted how multinational retailer expansion can often be a PR disaster – sometimes confrontational and controversial; leading to conflict with other retailers and suppliers, but also between the financial markets and the retail multinational (see also Wrigley, 2000). It is clear from the case findings that Tesco suffered from negative publicity in a number of ways. At the investor‐retailer level, Tesco's fiduciary responsibilities were often strained due to ineffectual and disjointed marketing communication programmes. A lack of PR activity during the early phase of internationalisation placed Tesco at a slight disadvantage, for their international peers wasted few opportunities to play gently on some of the financial markets’ concerns regarding Tesco's international expansion. One sell‐side analyst made this point:
One of the biggest risks of international expansion is to the reputation of the retail multinational. When a company's international reputation is questioned, valuation collapses, and as a consequence, management can't make further acquisitions. Then management spend all of their time on the back foot trying to build credibility rather than growing the international business.
Serious questions were being asked of Tesco in this regard, but management defended their position explaining that:
PR skills play a part in the way some of these perceptions get blown up. If pressed, we would say that the other retail multinationals are better at “talking up” their story than Tesco, which tends to take the old fashioned view that the results should speak for themselves.
Tesco experienced a chain of PR mishap after mishap, which undermined consumer confidence and excessively weakened their customer‐friendly image in foreign markets notably in the Republic of Ireland. Perhaps within a larger and culturally dissimilar market, Tesco may not have survived these mistakes in the face of larger and well‐established incumbents. Yet by the late 1990s, the company were forced to embark on an intensive PR campaign. Analysts postulated that the main reason for the intensification in PR was a direct result of management feeling more confident in making larger international profits than initially intended for the early phase of their international expansion, or, as a direct result of the pressures surrounding the acquisition‐driven consolidation process, which could threaten the strategic credibility of the firm if Tesco remained unresponsive to the consolidation pressures. What emerges from this evidence is the importance of an evolutionary marketing strategy within different competitive contexts. Tesco's retail marketing mix decisions have been characterised by trial‐and‐error behaviour where different possibilities are explored and thus the decisions taken are largely evolutionary in different cultures. In addition, the company began experimenting with a new type of hypermarket format that contained a larger element of non‐food stock keeping units. Management succinctly captured the essence of experimentation in a new market:
I think it's easier to develop new entrepreneurial formats in a new environment than it is in your existing market where your business is successful. The biggest barrier to change is success. If you have a successful business that does things in a particular way, stepping outside the box and doing something in a very different way always appears high risk. Why take the back off a watch when it's ticking. When you don't have the watch, the quality of your thinking will be much wider, management will challenge things much more in an apparently risk environment with no baggage than you will in the UK. If you look at the development of our hypermarket in the UK, it has been much more pedestrian in terms of small steps because it has been based around a highly successful format that already exists. So why change? You actually need to be in an environment where you can afford to change because you have nothing to lose.
As the above quotation suggests, retail innovation is facilitated by “shocks” or uncertainty in the international investment process. The danger facing companies pursuing a progressive step‐by‐step development model is that ideas may be inappropriately dismissed or overlooked simply because they did not work in the domestic market and the success and size of the domestic operations creates a barrier to change and innovation. This raises some issues associated with the benefits of a more aggressive and ambitious international programme undertaken by Tesco.
Global sourcing and supply chain experience. The capacity for cross‐border sourcing is generally seen as one of the long‐term “strategic” justifications for cross‐border consolidation in food retailing (Wrigley, 2002; Palmer, 2002a). Extracting longer‐term synergies and greater co‐ordination across borders – including the move towards price harmonisation – was increasingly being used as justification for international retail acquisitions. For Tesco, global sourcing was largely played down. Instead, the company emphasised that the debate concerning sourcing efforts did not shift the emphasis away from their core competencies, which were considered more important within the international landscape. In principle, Tesco believed that a competitive advantage rests more on the outcomes of learning to improve local merchandising methods, systems and processes than simply on a cost advantage in the distribution of standardised goods. There have been a number of strategic outcomes. First, Tesco have deliberately strived to occupy the top three position in all of their international markets. Tesco have performed less well and in some instances exited the market where they could not reach a sufficiently critical size. For example, management cited this as a reason for their divestment of Catteau in the French market. Second, Tesco's actual sourcing efforts within the broader international context also shows several visible attempts by the company to aggregate scale across multiple markets and establishing pan‐regional presence in contiguous markets. Third, attempts to re‐organise their global sourcing activities practises by establishing buying centres in emerging markets to develop the product range. Tesco has encouraged local food suppliers to develop retail brands, under the Tesco own brand. On the one hand, this prohibited the degree of global sourcing efforts, but on the other, it has substantially improved the overall diversity of the company's product mix which was increasingly being exported into other international markets.
As Tesco accumulates knowledge while internationalising, important insights and lessons have been learned from stimuli internal and external to the company. By reflecting on these different learning experiences, particularly when contextualised within detailed single case‐level research, various dimensions of retailer internationalisation have emerged. In spatial terms, it appears that Tesco concentrated their efforts with more experience on dissimilar markets in key regions or clusters aiming to achieve a market leading position. One explanation for this activity may be that as Tesco accumulated more experience they recognised the importance of local and regional scale economies for achieving profitability. In other words, retaining spatial focus was therefore more important than capitalising on opportunities in diverse markets. The decision of selecting a particular market may depend as much on the availability of suitable acquisition targets and the conditions of potential sellers as it does on the attractiveness of the market (Dawson, 2001). For Tesco, market selection was thus entangled with entry mode choice. Evidently, acquisition‐driven expansion had been a form of “postrationalised opportunism” where both management and the financial institutions partisan to the acquisition rationalise the acquisition after it is accepted by the other company. Market selection decisions mirrored this opportunistically‐driven behaviour. In this respect, the main lesson that Tesco had learned is that they must be in a position to quickly take advantage of unexpected events (threats or opportunities). How Tesco dealt with unexpected successes, miscalculations, mistakes and serendipity was of critical importance to the international operations succeeding. The preceding evidence of Tesco also suggests that acquisitions have proved to be an important prism for learning. On several occasions Tesco used small‐scale, nothing‐to‐lose acquisitions to minimise their own human and financial capital in the face of potential economic and political uncertainty in developing markets and to accumulate local market knowledge. These acquisitions have provided Tesco with invaluable experiential opportunities to be “surprised” by the marketplace and so to learn. The case evidence revealed that a willingness to experiment and feedback input on the results from local store managers and expatriate managers is a meaningful lesson.
The case of Tesco also indicates that the internationalisation process of retail multinationals is not always a progressive and straightforward process (Alexander and Quinn, 2002; Burt et al., 2002, 2003; Mellahi et al., 2002). The findings add new insights into the complexity of the international retail divestment process. It appears that Tesco had learned rather valuable lessons from their own divestment experiences, while other retailers’ international market withdrawals provided an opportunity to observe overt behaviour. From the Catteau experience, Tesco became locked into an inappropriate acquisition through various acquisition‐related contractual (earn‐out) clauses with Catteau's management which in turn prohibited a swift and timely exit. A lack of experience as an internationalist was visible in the Republic of Ireland when faced with the task rejuvenating, re‐branding and re‐launching relatively weak store operations as well. While it is true that such operations offer undeniable opportunities to improve the operations, Tesco later recognised that, in reality, these “turnaround” acquisitions were disproportionately demanding of critical management's time and resources.
Apart from underestimating the level of effort required for these “turnaround” operations, Tesco painfully learned from employing an inappropriate corporate model in the French market. Alexander and Myers (2000) have remarked that the differences between ethnocentric (centralised) and geocentric (decentralised) operating structures will impact the international learning process. Tesco viewed their early international moves abroad as a business extension and a redirection of free cash flow – effectively limiting organisational learning opportunities. From the mid‐1990s onwards however, publicly‐listed retailers had come under intense pressure from their shareholders to demonstrate where and how value could be added to the international operations. This had a catalysing effect. A lack of clarity in this respect would have severely undermined the strategic credibility of the retail multinational and inevitably placed financial cost of capital restrictions (Palmer, 2002a). Tesco were initially unclear and less confident about the most appropriate corporate model with which to proceed. Effectively, Tesco passed through a number of iterations of organisational structure before finally adopting a hybrid structure between centralised and decentralised operations, before ultimately adopting an aggressively industrial model. Perhaps more importantly, the initial experiences of Tesco's control capabilities have proved that it is impossible successfully to adopt both corporate models simultaneously.
What is clear from an analysis of the findings regarding learning structures and processes is that an organisational‐led learning multinational goes beyond the “official corporate line” that executives may use to justify minority entry positions or failures in new markets and deliberately establishes systematic internal learning processes to support international learning. Within the context of international retail expansion in Europe, Alexander (1997) suggested that retailers have lacked systematic internal processes to support their decisions with respect to appropriate host market strategies. The present study would largely support his findings at least as far as the development of internal learning structures is concerned. It is proposed that innovations and continuous improvements are more successfully absorbed by the proactive formalisation and development of internal learning mechanisms. The formalisation and development processes for learning were seemingly rather fortuitous insofar as market expansion into eastern Europe coincided with their ambition to broaden the non‐food merchandise in the UK. The impetus was then on the diffusion of what the company had learned from developing a new format which accommodated non‐food items in the overseas markets.
By considering Tesco's competitive behavioural dynamics within the context of the strategic international moves it was apparent that retail multinationals are frequently engaged in exchange of threats at the corporate spatial level. At the corporate level, learning takes place at a much faster pace, often precipitated by a catalysing event in the retail environment which could fundamentally alter the strategic authority of the company and ultimately investors’ evaluation of the company's worth. An illustration of a catalysing event was Wal‐Mart's entry into Germany which dramatically changed the status quo and the structural competitive dynamics for European retailers and Tesco in particular (see Palmer, 2000; Arnold and Fernie, 2000; Burt and Sparks, 2001; Fernie and Arnold, 2002). At the local spatial level, intense competitive rivalry for securing regional market share also existed. At this interface, retailers learned from each other, particularly with respect to competitive responses from in‐store and supply‐chain initiatives. It is proposed that much of this learning takes place as the expansion unfolds and the competitive situation evolves. This learning‐by‐doing activity indicates that learning at the local spatial level will be a gradual and reiterative process. Experience has taught Tesco to adjust to the deregulatory/regulatory related spatial pressures, but also covertly shape rather than respond to regulatory frameworks to obtain their desired spatial outcomes in international markets. A regulatory lesson, particularly in emerging markets, was the importance of investment in developing and maintaining good political relationships, while embarking on PR campaigns to facilitate the expansion efforts in new markets among stakeholders.
It is evident from the findings that from the mid‐1990s onwards, publicly‐listed retailers have come under intense pressure from their shareholders to internationalise. On the institutional front, the findings appear to suggest that shareholders insist that retail multinationals deliver not just instant sales growth from their foreign ventures but also substantial cross‐border synergies and thus more profits. By definition, these synergies can only flow through an industrial or “global category killer” model (see Wrigley, 2002). It is concluded, therefore, that those employing a federal structure model will realise the economic benefits of internationalisation immediately, while the industrially aggressive multinationals will take longer to realise tangible cross‐border economies, although such synergies will be higher in the long‐term. Higher integration risks therefore exist and serious miscalculations or mistakes may weaken the retail multinational's confidence and generate negative press commentary which, in turn, may eventually undermine the strategic credibility of the expansion efforts elsewhere.
A lack of experience and of familiarity with conditions in foreign markets created considerable strain on Tesco's human capital resources. This situation is somewhat different from the large fast‐moving consumer goods (fmcg) manufacturers such as Procter and Gamble and Unilever where the management ethos has grown up as a function, or by virtue of being international companies and overseas posts became important in the long run rather than a stepping stone back to a more senior position at home. Within Tesco, the international division was very much a tradition of a ‘stepping stone’ to a more senior position in the home market. Thus, while Tesco invested large amounts of financial capital in their international operations, management underestimated the requirement of human resources. The established international retail literature does not emphasise the importance of the human capital issue in the implementation of an international retail strategy. The current findings make a significant contribution to the established literature in that they illustrate that an international retailing financial‐human capital gap may exist during the retail internationalisation process. That is, for Tesco the process of reaching the necessary pace and scale of international operations, together with the desire to outmanoeuvre competitors, resulted in a medium‐term oversupply (or overhang) in the financial capital employed and a shortfall in the human resources employed. The immediate effect of this “gap” was immense pressure on the firm's recruitment processes. The strategic effect of this under investment in human resources is subsequent investments in “management accretive” acquisitions where the retail multinational immediately acquires strong management thereby reducing demands on managers in the domestic business.
The findings of this study also highlight some important lessons concerning international marketing and communication‐related issues. The findings suggest that at both the investor‐retailer and the consumer‐retailer interface, relationships were often strained due to ineffectual and disjointed marketing communications efforts. Surprisingly there was a conspicuous lack of action addressing negative rumours and this ineffectual and disjointed communication undermined both investor and consumer confidence. The strategic effect of this was that Tesco's credibility was undermined and that, as a consequence, they encountered difficulties at later stages in the development process in terms of either seeking further commitment from investors or planning permission for new investment from government regulators. The findings illustrated that customers can be easily alienated by changes in fasciae, assortments, store layouts or pricing following the post integration period (Shackleton, 1996a, b, 1998). During this critical period, the retail multinational may unintentionally disenfranchise customers that may make it more difficult to achieve post‐integration synergies, and even weaken comparable sales performance.
The present study identified fundamental movements of Tesco to reduce the price differential between markets of sourced merchandise in their favour during the retail internationalisation process. The findings suggest that the financial institutions and other investors believed that there were global‐scale advantages and disadvantages. Even under duress from the financial institutions, Tesco assumptions on global scale were similar to both Jackson's (1976) and Williams's (1992) studies who felt that local know‐how could alleviate deficiencies of a lack of scale and any other competitive sourcing‐related disadvantages. However, it should be noted that investment bankers may be over optimistic in estimating the power asymmetries, while management may play down the scale of this activity for disclosure reasons. Therefore, in attempting to ascertain the reality, it is possible to assume that the de facto power rests somewhere between these standpoints. It is concluded that it is equally important to have scale at the local and global level. In this regard, Tesco could draw financially on their domestic operations and other international cash generative retail operations while their costs were still being borne out in new markets but results had not been obtained. The present study also found that stronger local and global retailer‐supplier partnerships were increasingly critical for Tesco operating across different markets where distribution and logistics vary considerably from market‐to‐market. The findings suggest that initially the manufacturers realigned and re‐organised their organisational structures in order to support their leading brands fully. The impact of Tesco's internationalisation has dramatically altered the retailer‐supplier dynamics in strengthening and weakening relationships, and recovering and terminating relationships in other circumstances.
There has been a marked acceleration in the scale of international investment during the 1990s and as the process of internationalisation gathers pace, it is vitally important to understand what retailers have learned from their experiences. The aim of the paper was to provide an expository overview of one company's experiences of internationalisation, however it is anticipated that the findings arising from the study will help to develop understanding of the subject area in general. It has been shown that the concept of “learning” provides an important conceptual framework and a new perspective for reinterpreting, re‐evaluating and refining the existing literature on retailer internationalisation. Such learning accounts necessarily are richer and deeper but less elegant than success‐failure dichotomies. The preceding case study of Tesco illustrates a number of different dimensions of the company's international experience. Many important lessons have been learned by Tesco during the course of their internationalisation process, enhancing the adaptability and responsiveness of the company. Tesco has undoubtedly experienced several “shocks” in the marketplace – and as result the company was much more vigilant and willing to experiment, learn and react to the unexpected during later phases of expansion. How far Tesco could, or would, apply the lessons learned from their experiences for future expansion is largely dependent on the company's capacity to identify the sources of international learning in different contexts, absorb and institutionalise this knowledge. In some circumstances, it has also been shown that the company did not learn from their experience, even with the benefit of hindsight.
Figure 1 A framework of international retail learning
Internationalization Strategies for Global Companies: A Case Study of Arla Foods, Denmark
SMC University, Switzerland
- *Corresponding Author:
- Robert Azuayi
SMC University, Switzerland
Tel: 0045713 20792
Received Date: August 19, 2016; Accepted Date: September 22, 2016; Published Date: September 29, 2016
Citation: Azuayi R (2016) Internationalization Strategies for Global Companies: A Case Study of Arla Foods, Denmark. J Account Mark 5: 191. doi:10.4172/2168-9601.1000191
Copyright: © 2016 Azuayi R. This is an open-access article distributed under the terms of the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original author and source are credited.
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Entry mode is a highly meaningful choice for all companies that are thinking of expanding their company to emerging least developed and even developed markets. Most of the literature works that has been done concerning internationalization and entry mode focus more on the service companies. This study, however, seeks to find out some of the entry strategies that can be used by food companies. There are numerous reasons why companies consider going into international. There are those who find it appropriate when the domestic industry is too competitive; there are those who take this direction with the aim of expanding their business and many other reasons. The study aims at giving a critical analysis of market entry strategies that can be used by Arla Foods to enter into international market. The study explores multiple entry modes as well as various entry theories from the previous work. The analysis is done to find out whether the international market, particularly, the least developed countries in Asia are viable for Arla Food Company, Denmark. From the secondary data, the market has a fair share of weaknesses, but it is very viable from the opportunities it has. The entry mode that is found to be the best for Arla to enter into the market is export. Export is considered effective because it has very low risk and does not require substantial funds.
Globalization; Internationalization; Franchising; Direct export; Greenfield investment; Adaptation; Licensing
Internalization has been of great interest to nearly every company. There is no single and universally accepted definition of internationalization but from an economics point of view, it is defined as the process where business gets more involved in the international markets. In the contemporary world, businesses begin their operations domestically but must draw up a long-term plan on how the business will be going international. Internationalization phenomenon has significantly changed the landscape for most business resulting to a very dynamic market situation with severe competition for the companies. The reason behind going for international market varies from one company to another. However, most firms pursue internationalization because domestic market has become inadequate because of the economies of scale and multiple opportunities that are available in the foreign markets . Most successful executives will always want to try another market after any successful one.
Internationalization has been one of the strategies being used by most executives to reduce the cost of operations . Businesses with overhead costs can have the excess cost cut down in countries that have relatively deflated currencies as well as low cost of living. Most business in the United States finds it relatively cheaper operating in countries that have free trade arrangement with U.S. One way in which internationalization help companies reduce the cost of doing is business is through reduced labor costs. Companies that are interested in going international usually look for those markets that have a low cost of leaving as that makes it cheaper hiring employees in such countries. There are those companies that consider going international when in the financial crisis. Executives of companies that are experiencing a financial crisis in the domestic market will formulate the budget and go for the foreign markets. Institutions are commonly defined as humanly made constraints the give economic, social interactions and political shape. The institution can also be looked at as a wide range of structures that widely affect contract enforcement, protection of investors, economic outcome, property rights, and even political system.
Institutions play a very crucial role in the market economy. The main aim of institutions is to ensure that there is effective functioning of the market mechanism. This sees to it that those firms that take part in the market can carry out their transactions without suffering undue loss or being exposed to risk. Some of the reason behind the popularity of internationalization among current companies include opening up of trade borders by most countries across the world, elimination of trade barriers among many others. Companies are no longer secure staying in the domestic market and therefore most companies tend to go for internationalization to be able to spread their risks. Internationalization has become much easier due to the communication and technological advancement. Communication and technological advancement are vital in ensuring that foreign businesses are properly and timely operated without experiencing problems. Internationalization is achieved through very different ways . There are those companies that take part through exporting their products to foreign countries and continue to strengthen their home market. Some adopt a highly aggressive approach which includes acquiring firms, coming up with alliances, embrace joint venture or just establish their subsidiary. All these entry strategies differ in regards to the risk associated with each, control, level of resource commitment and return on investment that internationalization promises.
There are many entry modes that companies can use to join foreign markets but all these modes can be categorized in two broad modes. The first mode is the non-equity mode, which comprises of export and contractual agreements. The second mode is referred to equity mode of entry, which is known to include wholly owned subsidies and joint ventures. From all the available market entry, the one that offers the lowest risk level and the lowest market control is the export and import . The one with the highest risk level but highest market control is considered to be expected return on investment. The expected return on investment is majorly connected with a direct investment such as acquisition as well as Greenfield investments. Export and importing is the most common strategy that most firms use to pursue internationalization. Export is known as the process of selling services and goods to countries other than the domestic one . The company can directly be involved in the export or use an agent.
The other strategy that is equally popular is licensing. International licensing firms are known to give out licensee patent rights, copyrights, trademark rights, or even know-how on processes and products. Licensee does a production of licensor’s products, marketing it within the assigned territory and payment of licensor’s fee together with sales-related royalties in return . This strategy is mostly welcome by foreign public authorities as it is the way through which technology is leaked into the country.
Another strategy which is more like licensing is franchising. The only difference between licensing and franchising is the fact that franchising is more directly involved in development as well as control of the activities that take place in the market . The strategy is defined as the system where semi-independent business owners, commonly known as franchisees, pay a small fee and royalties to their parent company, referred to as (franchiser). This is done because of the right offered of being identified with the trademark. With the trademark, a firm is allowed to sell products and services besides being able to use the business format and system. This mode of entry offers numerous rights and resources. It has both advantages and disadvantages that companies intended to pursue internationalization need to analyze first. There is the other strategy that companies use to enter foreign markets and that is joint ventures. Unlike licensing strategy, the foreign joint venture has equity position as well as management of the business in the international firm . What takes place in the joint venture is the formation of a partnership between home country and the host company, which always results in the development of the third firm. In most cases international firm gets much better control over operations as well as access to the local market knowledge, which is not possible with companies that have gone for licensing strategy. Strategic alliance mode of entry is more of cooperative agreements that are done by different firms . Most of the companies that consider strategic alliance as the best mode of entry are companies that deal in Technology innovation. The primary objective of the strategic alliance is to exchange technology.
Finally, there is the direct investment. This is an arrangement that involves 100 percent ownership. This can be achieved through the direct acquisition of the host market. It can also be realized through owning facilities, and this is known as Greenfield investment. This research provides extensive analysis of internationalization, entry strategies, factors affecting the choice of strategy and Arla Food’s entry strategy to Nepal.
The study is guided by four primary objectives, which include:
- Critically analyze the internationalization strategies.
- Collect and analyze data on dairy market internationally
- Critically, discuss and identify the most appropriate entry strategy for Arla Food.
- Recommend the optimal strategy to Arla Foods in the international market.
From economic perspective, Internationalization has widely been defined as a process that used to increase involvement of business activities in an internationalization. In the contemporary world, there is increased level of pursuit of business related activities across national borders. The company and international environment are conglomerates that depict particular situations and conditions. This is an extraordinary diversity that is clearly reflected by internationalization. Internationalization has been promoted by the existence of comparative advantages among countries across the world. Internationalization involves designing product such a way that it conforms to the needs of international users. Regardless of the size of an enterprise, business development across the world is more of a condition of existence for business strategy and companies and has to respond to the globalization demands. There is increased freedom of action which is a characteristic of evolution of contemporary society. Through the increased freedoms of trade actions across borders, businesses get a wide field of functional integration overseas.
Internationalization has been embraced by firms of different sizes across the world it has been facilitated by multiple factors some of which include removal of trade barriers among trading countries. There are equally multiple advantages that accrue from internationalization of a business one of which includes accessing less saturated markets. Just like many firms find more appropriate to go international, Arla Foods, which is a dairy firm, has equally considered internationalization a beneficial strategy. Arla Foods has been successful in many countries and is even more inspired to access more international markets.
According to Daszkiewicz and Wach, emerging markets is known to be those markets that provide the most promising environment for doing business in future for highly competitive companies in the world. Emerging markets are majorly in countries with lower economic development that is expressible in gross domestic product per capita. It is found in countries that are undergoing transitional economy where democratic society is being promoted and the government attempts to create an environment that promotes trade for both external and internal investors. For nearly more than two decades, emerging markets have generated a more successful investment opportunities across the world. Economies such as Asia, Eastern Europe, and Latin America started growing at a much faster pace to the extent that it surpassed most developed countries. In the contemporary world, emerging markets provides a more different investment scheme as they have become great players in the world’s economy. Emerging markets unlike Western countries, are highly resourced, have young work force, and very strong balance sheets. Emerging markets currently represents 86 percent of the population in the world, about 75 percent of the land mass and resources, and forms the worlds GDP of 50 percent. Emerging markets are known to be of different sizes and forms. Most of these emerging markets will eventually ascend to developed market status like Korea and Taiwan. Economies such as Nepal are one of those economies that have the greatest potential of being very resourceful for internationalization. The country had constitutional reformation in 2015, which is a positive thing towards making a country viable for trade, and there are efforts the government is taking to make the market promising for trade. Nepal therefore remains to be one of the emerging markets and that explains why Arla Food finds it the best market for its internationalization strategy despite the most recent earth quark that led to massive destruction.
Least developed country
Least developed countries are those countries with the lowest indicators of socio economic development as well as Human Development Index in the world. Classification of least developed country based on poverty level with General National income of US $1035. Countries with very weak human resource as regard to nutrition, education, health and level of literacy. Finally a country falls under least developed when it is economically vulnerable such instability in exports of goods and services. Nepal is one of the countries that are regarded to be least developed and it provides one of the most interesting case study. The country is geographically located in a land locked area with an extended open border with India which is a large neighbour. Nepal has made remarkable beginning when it comes to implementation of market oriented reform as well as promoting FDI. However, it still has serious steps to enjoy from the integration of the global economy through the promotion of FDI. This makes the country the most attractive market for Arla Food products despite the disadvantage of the country’s geography in attracting FDI. There is much focus on the best ways to enhance trade in least developed countries. High costs and complexity of doing business in least developed countries is currently the focus of the world to enhance capacity of countries such as Nepal. This make Nepal market be of interest to companies such as Arla Food as it will be doing well soon.
Reasons for entering international markets
Internationalization is more of an expansion of business from its home market into foreign markets. The decision to internationalize is one of the strategic decisions that have a fundamental effect on any firm and all its internal and external operations. It equally affects the management of the company. In the current world, the rate at which companies operate outside their domestic market has significantly increased. Even though internationalization has become a very popular thing amongst many companies around the world, it is highly important for every company to consider their motives for going international . There are multiple reasons why companies consider going international. The most common reason for going international is the need for pursuing potential abroad and the desire to diversify risk. Most companies consider expanding their product line in the foreign market when launching a new product. Companies like Coca-Cola had only to introduce bottled water after going to nearly every country in the world. In most cases domestic competition grows so fierce to the extent that companies consider foreign markets so attracting. It explains why Ford which was second after General Motors in United States market became internationalized much faster compared to General Motors. Most of the Chinese firms are considering internationalization due to intense competition in china’s market. The other good reason for going to a foreign market is to avoid the risk that comes with operating in a single market . Most firms go international with an aim of diversifying risk. With an alternative market in a foreign land can be greatly of help in offsetting negative results various uncertainties such as economic downturns or political intolerance. Starbuck’s is a good example of companies that enjoyed the advantages of going international during U.S. recession, which significantly devastated sales within the home market . Foreign market covered company loses through the overwhelming performance overseas.
Many other companies consider going international to achieve a different growth rate. Different markets have different growth rate and most companies in slow-growth countries will always consider internationalization with an aim of going to countries with faster growth rate. Companies operating in the food industry have varied growth rate from one market to another. The variations come when some countries experience maturity in say food production. Such companies will; look for countries whose markets are still at the advancing stage. Besides major reasons that attribute to profitability, companies equally consider going international not to gain financially but to gain knowledge . There are so many firms that have entered the international market to find out what need to be changed from the existing product to make it acceptable globally. Government incentives also promote internationalization. There are those companies that consider going overseas not for growth, not because of competition in the domestic market but because the government gives them incentives to export some of the local products. Through government incentives, most companies have managed to access markets that they would have not accessed . So many countries such as the United States provide its companies with a wealth of help to start the business of exporting products to foreign countries.
It can be seen the companies have varied reasons for pursuing internationalization. Therefore, every company that decides to go overseas have a specific objective that it place to accomplish. This, therefore, means that most businesses would always adopt different modes of entry in specific markets . Since there are numerous reasons for going international, there can never be a right or wrong mode of entry. All the many modes of entry are either right or wrong depending on the reason why the company is going international. There are multiple and different theories that surround entry methods to international markets.
Theories and model of international market entry
Earlier studies of international business were majorly focused on economic theories that were done in the early 1930s. Internalization theories were however introduced in the around 1960s and 1970s. So many theories have been developed to help in the understanding of internationalization.
Eclectic paradigm: The first theory in this study is the eclectic paradigm. The eclectic paradigm was proposed by Dunning, and it is more of a synthesis of most of the theories on international production. It describes the extent, form and pattern of international production and is centered on the connection of the ownership-specific advantages of organizations that are thinking of producing products in foreign markets . The theory is based on internalizing cross-border markets for products as well as the attractions of a foreign market for the production .
This theory focuses more on analyzing reason behind the decision of the firm about its location, ownership, and internationalization advantages . Advantages that come from ownership are unique to a specific firm that gives it the capabilities of exploiting opportunities in the foreign land. Internationalization advantages are considered to be the gains that come from the domestic markets that allow the firm to remain advantageous in external market and all the costs that come by joining the new market. Finally, advantages accrue from the location are more accurate to a country from where the firm originates.
According to the eclectic paradigm, a business that considers pursuing internationalization are competitive and have ownership advantages as regard to their competitors both in the domestic market and the international market. Such competitive and ownership advantages can be exploited by locating the firm in countries that possess location advantages. There is an argument that international network easily controlled by international business because of the international advantages . The international advantages originate from the firm’s ability to appropriate full return on what it owns as well as from the coordination of complementary assets usage. It is a transactional failure that results in internationalization advantages. The eclectic paradigm theory is developed from very valuable points, which makes it a very important theory in the study of internationalization.
Eclectic paradigm focuses more on the advantages that accrue from the geographical location of the country targeted by the company pursuing internationalization . Looking at Nepal, it can be seen that the country does not enjoy location advantage as that is the greatest undoing for the country. The country is located in a land locked area which makes it very difficult to have a direct way to the country by external investors. It therefore means that eclectic paradigm theory will not be most appropriate for determining market entry for Arla Food in Nepal.
Institutional based view: Institutions are commonly defined as humanly made constraints the give economic, social interactions and political shape. The institution can also be looked like a wide range of structures that widely affect contract enforcement, protection of investors, economic outcome, property rights, and even political system . Three major categories of institutions include cognitive, regulative, and normative. A legal or regulative aspect of institutions usually assumes the form of regulations and laws. These are meant to offer guidance on all actions and perspectives of the business organizations through threats of sanctions. Normative which is also known as a social aspect of the institution will always take the form of rules of thrum, specific operating procedures, educational standards, and occupational standards . This institution aspect coordinates actions and perspectives of the firm or an organization through professionalization or social obligation. Cognitive, which is also known as the cultural aspects, is comprised of signs, gestures, symbols, and even gesture.
Institutions play a very crucial role in the market economy. The main aim of institutions is to ensure that there is effective functioning of the market mechanism. This sees to it that those firms that take part in the market can carry out their transactions without suffering undue loss or being exposed to risk. Institutions include legal framework and process of enforcement, regulatory regimes, property rights, and information systems. These institutions will only remain valuable when they allow for voluntary exchange reinforcement market mechanism that is highly effective . Institutions will, on the contrary, referred to as “weak” when they undermine smooth exchange in the market. In welldeveloped economies, the role of institutions is mostly invisible. On the contrary, the absence of these institutions in developing markets will be very noticeable. Institutional differences are more important for small and medium size entrepreneurs that operate in numerous institutional contexts. According to the formal rules, the establishment of a range of entry choices is permissible. According to Andersen, Ahmad, and Chan , this decision on entry choices can be affected by informal rules. It, therefore, means that equity stake that investors in the foreign land are supposed to hold can be limited by legal restrictions. There are informal norms that may promote norms such as taking of bribery from the foreign investor which will give locally owned firms an advantage . Since there is so much cost involved in all process, investors must come up with a strategy that will enable them to overcome the limitations.
Nepal has significantly improved as regard to development of policies that promote trade both domestically and even from external investors. The newly enacted constitution is considered the first step towards the promotion of trade . Institutional view is crucial for the current study as it defines crucial institutions that can directly affect Arla Food’s operation in its intended market, Nepal. Institutions such as government are likely to determine how successful the business will be based on the rules and regulations it makes. This view remains very instrumental to the present study and determination of the entry method can be best achieved through the proper understanding of institutional theory in internationalization.
Uppsala model theory: Uppsala Model theory is an internationalization theory that is based on Swedish study manufacturing firms that pursue foreign markets . The assertion by Uppsala is that internationalization is more of a slow incremental process. It is the situation where being without the market knowledge and uncertainty is transformed into an experiential learning process. This leads to a notable gradual increase in various activities as regard to direct investment and foreign sales. The theory is derived from behavioral theory . The strength of Uppsala is principled on the knowledge on how best business can be conducted in the foreign market. Without that knowledge the company intending to go international will not be able to realize the dream. Most of the firms that use Uppsala theory are mostly successful in entering a new market through psychic and geographic distance. There is a tremendous role being played by cultural differences and socio-cultural factors when a company is entering a foreign market. While in overseas, the way of life, government, as well as organizations will not be the same as that in the domestic market of the entering firm . The knowledge needed for the success of internationalization include general or objective knowledge. This knowledge is usually taught either in class or during seminars. There is also the experiment knowledge that is commonly learnt through personal experience, and it is mostly tough to transfer ones acquired. Internationalization requires much more of experimental knowledge as it is not possible to acquire it like general knowledge.
It is therefore important that Arla Food have full understanding of socioeconomic factors of Nepal market before initiating the process of entering. The success of the company in Nepal focuses more on how much the social, economic and political environment is understood and how best the company can adapt to fit the needs of the foreign market. Uppsala Model theory therefore remains one of the most crucial theories for the present study.
Transactional cost theory: This theory refers to the cost usually incurred when creating economic trading in an international market. It involves all costs that are incurred from the beginning of a given transaction until to its logical conclusion . It can be referred to as the summation of all expenses incurred when establishing a new market in a foreign market. Transaction cost theory includes both implicit and explicit costs. Those who are affected by this cost are a customer as well as the service or product provider, which is the entering firm.
Dunning  further explains that international market entry strategy decision is a very sensible issue. Since the cost of transaction plays an important role, they need to be analyzed. Transaction cost analysis is a crucial tool to explain verbal integration decisions that relate to how organizations assess whether or not they want to establish a manufacturing subsidiary in an international market . The industrial network approach states that every organization has a relationship with its customers, distributors and suppliers like a network . There are four variables that influence the interaction process. These are elements and processes of interaction, attributes of the parties (customers, suppliers) that are involved, the atmosphere surrounding the interaction and the environment in which the interaction takes place .
When deciding on which entry strategy to use, Arla Food need to properly understand costs of each and every strategy with an aim of identifying the one that is economical and efficient in accomplishing the greater goal of the company. In the analysis, both implicit and explicit costs need to be understood because they are directly related to the success or failure of the company.
Business strategy theory: The business strategy method is established on the philosophies of pragmatism. The Business strategy theory states that organizations make tradeoffs between some variables in their decision to internationalize and the methods they adopt to do so . Reid further argues that international expansion is contingency based and takes place by making a choice between competing expansion strategies that are directed by the nature of the market opportunity, organizational resources, and managerial philosophy. According to Turnbull and Ellwood , the factors that need to be evaluated while using the business strategy approach are market attractiveness, psychic distance, accessibility, and informal barriers . The selection of the organizational structure to serve the market is dependent on market characteristics and company specific factors like international trading history of the company, company size, export orientation and commitment.
Business strategy theory is important for the present study as it helps in the understanding crucial variables that need to be traded off when making important decision as regard to internationalization. Through the theory, the attractiveness of Arla Food, its accessibility, and possible informal barriers can be identified prior to the implementation of the internationalization plan (Figure 1) .
Types of entry mode strategies
Market entry strategy: According to Kotapati , from the many reasons business enter into international firms, there are also so many strategies that companies use for entry depending on their reasons for entry. No single market entry strategy will be effective for all internationalization markets. Some of the reasons companies go for different strategies include tariff rates, adaptation level of the product, transportation and marketing costs and so many others. Some of the strategies that firms are expected to choose from include:
Direct exporting: Export as an entry strategy is divided into two as direct and indirect approaches. Direct exporting is entry strategy that allows the firm to sell its products directly into the market of interest. Direct export unlike indirect exporting, the organization makes a direct commitment to the international market . Through direct commitment, the company is capable of having control of its brand and all its operations in the foreign market more than it would be with indirect exporting. Piggybacking is one of the direct exporting where new products of the entering firm use the already existing distribution and logistics of a different business. The other one is the consortia which are the coming together of small or medium-sized enterprises with an aim of marketing their related or even unrelated goods in the international market. Arla Food can choose to enter Nepal by simply selling its dairy product to Nepalese market . The company can as well go employ indirect export strategy where it chooses an urgent in Nepal through which it distributes its product to the new market.
Licensing: Licensing is entry strategy that gives an overseas company the right to use its product or service within a given time. Most of the properties that are normally licensed include copyright, designs, formulae, patents, trademarks, and brand names . In most cases, licensing is used in the manufacturing sector where firms are offered the right to use process technology, and royalty payment is given in return. Financing international expansion can be best done through the use of licensing strategy. It reduces risks and chances of the product appearing on the black market. It is important for the company to analyze properly analyze this strategy as it has the potentials of restricting future activities of the company and reveal much other information that may give an advantage to future competitors. Licensing strategy is not of much importance to Arla Food’s plan of getting to Nepal Market as it majors more on the formulae, patent, trademarks and such like which is not an area Arla majors so much. The company is also not so much of a manufacturing sector like other manufacturing firms that dearly need the licensing strategy.
Franchising: Franchising as a market entry is where a single company supplies other firms with intangible property. This entry mode is mostly used in the service sectors such as car rental, hotels, and restaurant chains. Franchising is known to work well for companies with a repeatable business model like food outlets, which are easily transferable to other markets. The caveats needed to use franchise model has strong and unique brand recognition that is capable of being utilized internationally . There the need for being cautious when going for franchising entry strategy is necessary because it can lead to the creation of future competition in the field of the franchisee.
Arla Food which is interested in going to the new firm can consider going for franchising strategy as it deals more on repeatable business model. The company can allow investor in the new market to do promote the sales of the company product in their own premises but by maintaining the company set policies and goals of Arla Food.
Research strategy: According to Saunders et al., , the research strategy is the way researcher wants to carry out the research work. Some of the different approaches that are found under research strategy include action research, interviews, systematic literature review and case study. Out of the many approaches discussed under research strategy, the present research picks on the case study. A case study is defined as an empirical inquiry investigating the phenomenon that falls within real life . The present research is an exploratory research, which does not need a survey or even archival research strategy. The present study focuses on a contemporary issue, which is the current internationalization and entry method of Arla Food Company. The present study needs a clear understanding of how interaction occurs between the phenomenon and the context, which is very crucial in the study. This makes experiment strategy unsuitable as it disconnects the context and phenomenon. There are two different cases of case study one being a single case study and the multiple case studies design . The widely used type of case study is single case research, which has low generalizability and does not have enough statistical data as it is only a single case. There is a higher chance for biases in a single case research as the researcher equally has an interactive role when it is expected that researcher remains very passive throughout the process. This, therefore, means that multiple case studies are more advantageous due to the availability of numerous cases to analyze. In the present study, the type of case chosen is a single case in as much as it has a number of disadvantages.
The choice of single case study for the present research is justified by the fact that its aim is not meant to support or even contest any theory. Instead, it is meant to illustrate the application of a model that is more conceptual in business’ real life situation. The case study has five important sequential processes that begun from a selection of the researchable area and coming up with research objectives and research questions (Saunders et al., 2009). The next beat is the collection of data, sorting and analysis of the collected data and the last beat is to present research findings for the case study.
A collection of data can be done using two different sources. There is the primary and the secondary sources of data . Primary data is a firsthand source, which can be historical first hand or data sort from respondents through survey or interview data. Secondary data, on the other hand, is a data driven from work or opinion from the past research works. The present study uses evidence that comes from secondary sources. Some of the data are available in the public domain like information on Arla Food Company, which operates in the international market.
There are also numerous studies that had been done on the various market entry strategies in the international market which is the focus of the present study. This information is available from the official company websites, company reports, journals, articles, books and international magazines . There are numerous issues that come with the use of secondary data. One of the major drawbacks of secondary data is the fact that availability of secondary data is highly limited which makes it nearly impossible to answer questions needed in entirety . There is also the problem of authenticity of the secondary data being used in the study. In as much as there are weaknesses in using secondary data, it remains the best for the present study as it getting employees from Arla Food that was ready to disclose information needed by this study is not easy. The business is always not very ready to disclose important information other than those that are available to the public hence the only option remaining is the use of publishing information . The advantageous part of using secondary data is that it limits cases of bias as those that collect secondary data do that for the same reason as that of the present study. The data collection method seen as the most appropriate for this study is highly economical both in time and costs [25,26].
There are numerous ways through which data can be analyzed depending on the type of the research being conducted. Out of the many methods, the one that will be used in the present study to help in analyzing secondary data is known as content analysis. Content analysis is a method that is used in giving contextual data meaning . The analysis will involve identification of patterns and theme from the data. There will be the use of research questions and the available literature in scrutinizing secondary texts into themes and coming up with a logical recombination to give meaning.
Research Reliability and Validity
The fact that the data used in the present study is secondary data only makes the reliability of the study low. It is not possible to rely entirely on the secondary data. Even with the low reliability, thorough and objective evaluation of the secondary information gives an assurance for increased reliability level . On the other hand, the internal validity of the secondary sources used is doubtful. Internal validity is significantly low because the secondary data used in the study is not compared with primary data . External validity is not of great importance to the present study because the methodology used is a single based case study.
The research study focuses so much on ensuring that every process in the study especially in the data collection remains highly ethical. The study seeks to conform to the already set research standards. Issues such as informed consent, data confidentiality, deception data protection Act will not be of great concern as regard to ethical issues as there is no use of secondary data in the present study . The major ethical concern in the study since it involves heavy usage of the secondary data is plagiarism, which is the use of others work without acknowledging them. The present is properly referenced, and unoriginal sections are properly referred to avoid any cases of plagiarism. The present study has not practiced the art of copy and pasting or even careless paraphrasing of the work done by other people.
Limitation of the Study
The major limitation of the study is the use of secondary sources only, which has the potential of reducing the objectivity and cogency of the study.
Analysis and Discussion
SWOT analysis of Arla Food
Arla Foods has its strength which keeps it going, weaknesses that need to be adjusted now that it is entering an entirely new market, opportunities that ought to be grabbed and threats that have to be dealt with for they can pull the company down. The SWOT analysis is, therefore, essential in knowing the current stand of the company in light of the stated components of the analysis. The analysis gets to reveal the internal and external factors that are in the enterprise.
One of the strengths of the company is that it enjoys reliable supply of the dairy products. Thus, the countries that the company serves do not complain of shortages. Due to this reliability of supply, a lot of trusts is built in the countries are supplied to by the company. The continued supply means more sales and high profits. When this company makes its way into Nepal, the reliability in supplying the dairy products will be in the forefront. Additionally, the products produced by Arla Foods Company are among the strongest brands in Europe. The commodities supplied by the company to northern and southern Europe are believed to be the best due to the Company’s strong name and eventually strong brand. This aspect of the company being a strong brand in Europe makes it possible for the company to sell big in Europe and are easily able to internationalize their consumer base. The innovation capabilities are also strength of the company. This innovativeness makes it possible for the company to make the necessary adjustments on the products that they supply to the consumers as well as the coming up with more dairy products that eventually sell big in the market (Reardon, Coe, &Miller 2015). The aspect of innovativeness is a key in helping the company adjust to the changes that are always experienced in the markets, especially when it is a competitive market. Therefore, the company is in a position to be internationalized and enter the said country. Due to this innovative capability of Arla, these are an ease of the company to enter the Nepalese dairy market due to the variety of the products that are produced by this innovative capability. The presence of the company in the Latin America is another strength that expands the company’s consumer base and helps the company in maximizing sales. Maximization of sales means high amount of income that can alternatively be used in expanding the company and making it known and gaining entry into different country including Nepal. These strengths, therefore, makes the company be in a position to access the dairy markets in Nepal. The Nepalese dairy market gets to benefit from the varieties of the brands that the company produces out of innovation.
Additionally, the strengths make the company stable. This stability is essential for the company’s entry into the international market.
Amid the strengths, the company has a few weaknesses which need to be adjusted to ensure for the internationalization and to make the company suitable to gain access to the Nepalese dairy market. One of the weaknesses facing the company is the lack of Knowledge on the Market most of the international market. This translates to poor sales experienced in the area as well as a weak consumer base. This is, therefore, a weakness that should be thought through to help the company gain access to such markets. When this happens, the internalization of Arla markets will, therefore, be at a stake.
Additionally, there exists lack of brand recognition in certain countries. Some countries do not recognize Arla Foods brands. This lack of recognition of the brands makes it difficult for the company to access the markets in such countries and this, therefore, means that the competing companies gain a strong base and limits the access of Arla foods in such countries. Another weakness is that the company charges higher cost in some countries than the competing companies. This, therefore, favours the competitors. The company limits the amount of its products sold in these markets due to the high costs charged. This weakness is seen as a hindrance to the entry of the company into the international markets. Chile happens to be one of such countries
The opportunities that the companies have will make it be in a position to find a way into the international markets, Nepal inclusive. The company has many opportunities that get to propel it. There is a rising preference for healthy foods within the globe. The company is known to be good at supplying the healthy foods. The increase of this preference makes the company gain access to different markets to supply the healthy foods. The company can, therefore, gain entry into the Nepalese dairy market due to this demand for the healthy commodities. Additionally, there is a growing dairy consumption in different countries. This opportunity makes it possible for the company to gain the access to the markets in such countries. The company will, therefore, get to sell the commodities in the countries, and the brands will be known. It is therefore an eye opener for internationalization for the Arla Foods market. The aging population within the globe dictates for functional foods. The company is among the companies that supply the functional foods that are essential for the aging population. The company is in a position to gain access to different countries to supply foods for the aging population.
Apparently, Nepal is one of such countries with the aging population that dictates for the functional foods. Through this, the Nepalese dairy market becomes attractive to the Arla Foods. Similarly, there are relatively large middle-class groups which get to buy the products. The middle class will provide market for the commodities produced by the company in the international market.
The company is as well faced with different threats that might prevent it from gaining proper access to the global markets and entry into the Nepalese market. The company is faced with the threat of strong competitors with extensive market knowledge. The enterprises competing Arla Foods have a strong market knowledge that they use to compete Arla Foods. In Chile, for example, the competing firms have much knowledge about the market as opposed to the knowledge that the Arla Foods have. Similarly, another threat that faces the company is that the competitor’s value proposition is close to that of the Arla Foods. This makes competition difficult thereby making it difficult for the company to gain full access to the international markets. Additionally, the price sensitive markets are another threat that faces the company. These markets make the company sell at relatively lower prices thereby making it difficult for the company to make profits. The company should, therefore, find a way of dealing with the risks to make it easily access the external markets and limit these threats.
General market entry mode
Different companies use different strategies to gain entry into the international markets. These strategies can equally be adopted by the Arla Foods to get access to the Nepalese dairy markets. Exporting is one of such strategies . Exporting involves the transportation of commodities produced in one country into another for the sake of sale. Although the marketing strategy, in this case, is limited, the products exported to these countries get to market. Arla Foods Company can also use this method to gain entry into the international market as well as gaining entry into the Nepalese Dairy market. The company can export the commodities to the external markets and through this; they are entitled to expanding their market. Licensing is another market entry mode which is used by different firms to enter into different markets. In this case, the companies transfer the right to use a service or a product to another company. This idea makes it possible for internationalization. Arla Foods Company can, therefore, gain access to the international markets through buying a large number of market shares in the market that they want to enter into. This can also apply to the Nepalese dairy farm.
The company can buy shares in Nepalese dairy company, and this will therefore enable the company to gain entry into the dairy market. Franchising is another method that the firms have used to get access to the international markets. The method is typical of North America. Franchising is essential in the expansion of the market. It is mainly operational where individuals deal in unique products. For this strategy to operate efficiently, the company involved has to have a high brand recognition which is utilized internationally . Apparently, Arla Foods stands a better chance to exploit this opportunity and enter into the international markets. As stated in the strengths, the firm has a strong brand recognition, and it deals in food products. Franchising is, therefore, easier in this way. Franchising makes it possible for the company to gain access to the international markets. Joint ventures is another aspect that makes it possible for companies to enter into the global markets. It involves the creation of a third company which is independently managed. Two companies can agree to work together to create the third company . Arla Foods Company can, therefore, adopt this strategy to enable it to get into the international market.
The joint venture may work best with the Nepalese dairy market to create a third company since they trade in related commodities. Partnering is another aspect that can be employed by different firms to gain access to the international market. Arla Foods Company can as well adopt this strategy when entering international market base. The company can partner with another company to facilitate their entry into the global market.
Conclusion and Recommendation
From the analysis and recommendation section, in-depth analysis of the state of dairy market has been done. SWOT analysis which is a tool used to check for the strength, weaknesses, opportunity and strength have been effectively used to provide useful data that informs objective conclusion. With up to more than 500 000 households involved in milk market, the market shows that there is significantly large farm that needs to be served by a dairy firm.
In the SWOT analysis, Nepal dairy market looks very promising for any interested investor as it gains its strength from human resources that offer considerably cheaper labor in the processing of dairy products. The dairy is, however, facing challenges of political instability that has been experienced in the country for a while. The country seems not to invest so much in research and development and as such is not able to remain innovative. This makes it even a better destiny for Arla Food which has been in various international markets and has large finances that can be used in conducting search necessary research. There is increased interest in organic foods such as dairy products Nepal which is one of the best opportunities the industry has. The fact that the government of Nepal issue subsidies to firms that are interested in the dairy farming as well as selling dairy products is a positive sign that such a business is encouraged in Nepal. The greatest threat is natural calamities such as the recent earthquake that lead to massive destruction as well as the hostile environment is some of the major threats facing Nepalese dairy market. From the analysis of both internal and external factors affecting dairy farming in Nepal, it is clear that this market remains highly attractive for Arla Foods and the plan should be put in place to take advantage of the many opportunities.
Analysis of Arla Market shows that it has a wealth of experience in international markets and such is capable of navigating various challenges that come by internationalization. SWOT analysis has offered numerous strengths, weaknesses, opportunities and threats but one thing that comes out is the potentials of the organizations to enter Nepal and exploit the emerging market with already accumulated experience. Successful attempts that Arla has made into other international markets have been made majorly through the use of eclectic paradigm which is one of the many entry strategies that has been discussed in greater depth. Eclectic paradigm has remained a successful strategy for Arla Food in various instances as it focuses on the experience of the owners, internationalization, and possible advantages regarding location. There is, however, a need to change strategy from one country to another depending on some factors.
This study recommends that the company employee the use of direct import as an optimal entry strategy. This is because the strategy is cost effective. Besides being cost effective direct export is less risk. Nepal experiences political instability that can significantly affect the operation of the firm should be other entry strategies like Greenfield is used.
While considering using direct export, the study recommends that the company focuses on building its brand internationally to give it an easy time for the product to be readily embraced in the new market.
Another recommendation is on the threats posed concerning earthquake that significantly hurt the economy of Nepal by bringing down their infrastructure and massive destruction of properties besides the loss of lives.
The company must be careful when considering entry to Nepal as the country is geographically not accessible. Nepal is a landlocked country that is difficult accessing especially when exporting dairy products to the market.
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Figure 1: A Model of International Market Entry Source: Whitelock .