Tesco is a British multinational grocery and a general retailer in merchandise, headquartered in Welwyn Garden City founded by Jack Cohen in 1919. It is known to be a third largest retailer all over the world and Tesco is listed on London Stock Exchange and forms an integral part of the FTSE 100 Index, with a primary listing of any company on London Stock Exchange. In 1999, the company has entered South Korea in a joint venture associating with Homeplus which is a unit of Samsung Corporation (Tesco plc. 2017). The company had marked their success in market leadership and lead as an international retailer in a span of few years. A number of hypermarkets, convenience stores and supermarkets was operated by Tesco and in terms of revenue it is a proven fact that for Tesco setting up a business in South Korea is beneficial also known to be a successful international business (Business Today. 2015).
This report consist of the drivers of Globalization for Tesco relative to their expansion and exit from South Korea. The company maintained its growth over the years when other companies fails to do so. Once being known for the most lucrative consumer markets Tesco decided to exit from it due to the changes occurred in the operating environment of Korea. The company’s growth in past years and the drivers which had impacted their expansion and reasons behind exit are being showcased here under.
The key drivers are the key factors which are directly responsible for the flourishment of Globalization and its overall process. These key drivers embrace Globalization and affect entity’s performance by way of direct and indirect means. There are commonly known drivers to be follow around are Technological innovations, market drivers, competitive drivers and cost drivers. They cover a wide range of other drivers which also affect the globalization namely political drivers, social and economic drivers (Collinson, Narula, and Rugman, 2017).The drivers which are behind the Tesco’s expansion and exit from South Korea are cost drivers, government drivers, competitive drivers, market drivers and political drivers. These drivers are analyzed in detail below:
Cost Drivers: Tracing Costs and efficiency vary from country to country and companies who works global take advantage of the fact and rest of the cost drivers creates certain opportunity to build the global scale economies with a high product development costs. Where in South Korea, the reason for expansion by Tesco was the production costs and labor costs which were comparatively lower and they provide a simplified sourcing of efficiency and costs. The market knowledge and experience was wide so it becomes an advantage for Tesco to set up business there and expand and it was found out the existing personnel was within the certain culture. Cost drivers are not the reasons for their shut down in Korea rather they acted as a supporter in expanding their horizons.
Market Drivers: Global expansion creates opportunities in terms of growth as compare to domestic market where chances for growth are limited due to the cut throat competition that is why more and more companies are choosing the way of Globalization. The market driver works out the best for the expansion of Tesco in South Korea as the demand and standard of living was matching up to the needs of Tesco. Company has localized their products and the formats used by them in order to attract a large segment of consumer, they have opened up their stores in the inner areas of the country to make accessible to the consumers. In addition to raise values for customers, Tesco offered various additional services at their stores and fulfil all demands which resulted into favorable outcomes and led to expansion of the company in global terms. The rapid economic growth also plays a role in expansion of the company, it has been founded that South Korea has experienced a rapid economic growth since 1960 to 1980. At this point of time when modern shopping has increased and the increment helped the company to grow faster in its earlier years of growth but this driver of globalization also played a role in the exit of the company from Korea as in the year 2012, global recession prevails in the economy and the growth of Korea has adversely affected. The country was no longer profitable for Tesco to continue its business processes but to shut down from there (Sparks, 2014).
Government Drivers: In South East Asia there is rapid liberalization of previous restrictions on retail FDI. The Korean government had adopted few policies which restricts the retail sectors to access Foreign Direct Investments. Earlier in 1996, government of South Korea take pressure off the regulations for retail sectors. In order to attract foreign investment government allowed the retail industry to access FDI. Tesco has given the opportunity to enter South Korea as a joint venture in collaboration with Samsung Corporation because the government has eased the regulations regarding the same and led to the expansion of Tesco. Later in 2012, government has imposed restrictions on the retailers regarding their operating hours which comes as a huge shudder for Tesco as their operating hours were 24 hours in a day. This reduction in operating hours resulted in declined profits and sales and company was not able to muddle through the situation so decided to quit their business operations (Kim, and Hallsworth, 2016).
Competitive Drivers: With the globalization, the inter-firm competition increases and entities are forced to go international. In the support of this driver there are two-way trades and FDI actions which work for the organization to play global and interdependence among countries help in this aspect. In the case of Tesco, UK market imposes the situation of high competency in the market which led to fall in sales and made it difficult for acquisition of new sites. Resultant the possibility in price war can be seen in near future and the threats were growing from discounters. In earlier years Tesco compete with Walmart and Carrefour and made them to exit the market by giving them a tough competition in this case even when Wal-Mart’s competitive tactic was to offer low cost and low price of their products but failed to cover the market segment which was under Tesco and that is how Tesco enjoys significant success in the Korean Discount retail. The parliament in South Korea has passed a law that forced supermarkets to close their stores on every Sunday which comes as big shock because Sunday is the day when sales can get doubled up comparatively from other week days this situation alarmed Tesco and made them to leave the country (BBC News. 2009).
These drivers of globalization for Tesco supported the company to expand their business operations in South Korea and succeed but also impose few restrictions by government and competitors and made the company to exit (Dobbs, Manyika, and Woetzel, 2016).
Tesco had managed to position itself in the Korean market even after facing such hardcore competition from UK brands the Walmart and Carrefour which was no easy task. There are many factors that Tesco adopted not only to survive in the market but succeed with flying colors where other big retailers fails to do so (BBC News. 2015). There are few strategies explained here under which the company had adopted:
Store Layout: The layout of the stores are same as of departmental stores, strategy which was adopted by the company is concerned with the setting of stores. They have kept their racks higher with an intention to display their products in a way that consumer can locate them with an ease. Tesco has opened up their stores in the inner areas of the country so that it becomes assessable to the consumers and make the environment of stores lively with warm colors to attract customers and satisfy their wholesome needs. They not only offered casual services which was offered by other competitors but also additional services say, life services including some teaching courses for the children and adults. These courses involves various activities ranging from cooking, music, internet basics and many more. It is one of the strategy that maintained company’s growth in the years of its operations (Reardon, Timmer, and Minten, 2012).
Supply Chain Management: Tesco’s supply chain management is a sorted one which includes direct distribution of material to the stores by supplying material to the retailers directly. The strategy actually planned behind this was Centralization, where the powers to decide range and pricing of a product is not with the store managers. It is done in order to manage the supply in the stores (IGD Supply Chain Analysis. 2015). In 1990, they have adopted a combined distribution strategy just to accelerate ongoing improvements and such distribution used special vehicles which promises to hold a temperature in compartments to deliver chilled or frozen products. A keen and proper management of supply chain risk was adopted containing factors of managing the in-store range management, network management and primary distributions. This strategy of supply chain management had proven to be a beneficial strategy to maintain its growth in the years of its operations (Brindley, 2017).
Joint Venture: It is counted as one of the greatest strategy that has being adopted by Tesco which is entering the market as a joint venture by collaborating with Samsung Corporation. The intention behind this partnership was to comprehend with the market at its core and getting in touch with the local culture and basic needs of the consumers. Company has hired the local managers from Samsung for their venture and with this step the company was being considered as local Korean company and in conclusion the joint venture provides advantages in terms of easy access in establishing stores, being able to understand the needs and demands of suppliers as well as customers later adopt those products only (Samsung C&T Trading and Investment Group. 1999).
Brand Positioning: In the general sense, brand positioning is creating an image and name in the eyes and mind of consumer (Korea Business Central. 2017). In case of Tesco the store branding helped company in increasing their growth and performance and the company took step in this scenario by naming the venture as Samsung-Tesco Homeplus. Here Homeplus known to be a famous brand in South Korea and the decision of naming after such famous brand is to sell their products and target a big share of market and maintain their strong goodwill (Jones, 2017).
The reason behind the exit of Tesco from South Korea was the changing operating environment of the country as the company faced its first drop in profits in the year 2012 after enjoying profitable days since 20 years. It is done aiming at protecting the local merchants from foreign investors in market as their profits are affecting by the success of foreign companies capturing their customers. Another law has been passed which is related to the working hours or operating hours of the retail stores. The motive behind passing such law was to protect the interest of local businessmen of the country and made it mandatory for the large retailers that they need to close down their stores on two Sundays of every month. The operating hours was also mandate between the limit of 8am to midnight in every week. This comes as a huge shock for Tesco who operated 24 hours and 365 days and such changes would impact the sales and profits of the company. Later a restriction was imposed by the government that no supermarket can be setup and if any retailer want to they must get the consent of local merchants (Evening Standard. 2015).
There was another blunder who became a strong reason to exit the country was the global recession which was occurred in 2012 and left with no option but to leave the country as it no longer was profitable to operate there. The slow growth was experienced by the country in between 2009 to 2012 due to weak exports and private spending (Mack et al., 2015).
Conclusion
After studying the case study on Globalization impact on Tesco leaving South Korea it is concluded that Tesco has been a successful business in the earlier years and being considered one of the most profitable company in Global market and created a brand positioning by satisfying customer needs to the core. But due to certain regulations passed by Korean government the situation of growth taken its toll and changed the whole scenario for the company operations and affected its growth. Additionally the global recession forced Tesco to leave country but as far as the performance is concerned Tesco has enjoyed its global position by successfully marked their steps in 20 years in South Korea.
References
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