WEEK910 Case

The closing case describes Tesco's international expansion strategy. Tesco, the British grocer, has established operations in a number of foreign countries. Typically, the company seeks underdeveloped markets in developing nations where it can avoid the head-to-head competition that goes on in more crowded markets, and then enters those markets via joint venture where the local partner provides knowledge of the market while Tesco provides retailing expertise. The following questions can be helpful in directing the discussion. QUESTION 1: Why did Tesco's initial international expansion strategy focus on developing nations?

ANSWER 1: Tesco's global expansion strategy has been rather unique in the grocery industry. Rather than competing head-to-head with established retailers in developed markets like the United States and Western Europe, Tesco chose to pursue markets with strong growth potential, but little current competition. The strategy allows the company to use its expertise to grow international market share, without incurring the costs of establishing itself in already crowded markets.

QUESTION 1: Licensing propriety technology to foreign competitors is the best way to give up a firm's competitive advantage. Discuss.

ANSWER 1: The statement is basically correct - licensing proprietary technology to foreign competitors does significantly increase the risk of losing the technology. Therefore licensing should generally be avoided in these situations. Yet licensing still may be a good choice in some instances. When a licensing arrangement can be structured in such a way as to reduce the risks of a firm's technological know-how being expropriated by licensees, then licensing may be appropriate. A further example is when a firm perceives its technological advantage as being only transitory, and it considers rapid imitation of its core technology by competitors to be likely. In such a case, the firm might want to license its technology as rapidly as possible to foreign firms in order to gain global acceptance for its technology before imitation occurs. Such a strategy has some advantages. By licensing its technology to competitors, the firm may deter them from developing their own, possibly superior, technology. And by licensing its technology the firm may be able to establish its technology as the dominant design in the industry. In turn, this may ensure a steady stream of royalty payments. Such situations apart, however, the attractions of licensing are probably outweighed by the risks of losing control over technology, and licensing should be avoided

QUESTION 2: Discuss how the need for control over foreign operations varies with firms' strategies and core competencies. What are the implications of the choice of entry mode?

ANSWER 2: If a firm's competitive advantage (its core competence) is based on control over proprietary technological know-how, licensing and joint venture arrangements should be avoided if possible so that the risk of losing control over that technology is minimized. For firms with a competitive advantage based on management know-how, the risk of losing control over the management skills to franchisees or joint venture partners is not that great. Consequently, many service firms favor a combination of franchising and subsidiaries to control the franchises within particular countries or regions. The subsidiaries may be wholly owned or joint ventures, but most service firms have found that joint ventures with local partners work best for controlling subsidiaries.

QUESTION 2: How does Tesco create value in its international operations?

ANSWER 2: The keys to Tesco's success in its international operations is its ability to spot markets with strong underlying growth trends, identify existing companies in those locations that have a deep understanding of the local market, form a joint venture with those companies and transfer its expertise in the industry to the venture, and later buy the partner out. The strategy is highly successful, supplementing the company's United Kingdom earnings with an additional ₤9.2 billion in revenues in 2005. Tesco is now the number four company in the global grocery industry.

QUESTION 3: Under what circumstances are joint ventures to be preferred to wholly owned subsidiaries as the most appropriate mode for entering foreign markets?

ANSWER 3: Joint ventures offer many advantages to firms as a means of entering foreign markets. A key advantage for firms that partner with local companies is taking advantage of the local company's knowledge of the local marketplace. Another advantage of joint ventures over wholly owned subsidiaries is being able to share the costs and risks of developing a foreign market. In some cases, joint ventures are the only way a firm can enter a foreign market, and in politically risky situations where the chance of nationalization or other government interference are high, they may be a better choice than a wholly owned subsidiary.

QUESTION 3: In Asia, Tesco has a long history of entering into joint venture agreements with local partners. What are the benefits of doing this for Tesco? What are the risks? How are those risks mitigated?

ANSWER 3: Tesco's strategy of entering foreign markets via joint ventures has proven to be highly successful. The company is able to bring its expertise in retailing as well as its financial strength to the venture where it is paired with the partner's knowledge of the local market. Local managers are hired to run the operations, with only support coming from expatriate managers. This format allows Tesco to use its core strengths to get into the market, and then later, after the ventures have become established, buy out its partner.

QUESTION 4: In recent years, the number of cross-border mergers and acquisitions has ballooned. What are the risks associated with the popularity of this vehicle for entering foreign markets? Can you find an example in recent press reports of such risks? How can these risks be reduced?

ANSWER 4: Despite the current popularity of strategic alliances, they should not be taken lightly. In many cases, they give competitors a low-cost route to new technology and markets. It is vital that firms avoid giving away more than it receives. Many alliances run into managerial and financial troubles within a couple of years. To reduce the risks associated with strategic alliances, firms should be careful when selecting their partners, structure the alliance so that the risks of giving too much away are reduced, and build a trusting relationship with partners.

QUESTION 4: In March 2006, Tesco announced that it would enter the United States. This represents a departure from its historic strategy of focusing on developing nations. Why do you think Tesco made this decision? How is the U.S. market different from others Tesco has entered? What are the risks here? How do you think Tesco will do?

ANSWER 4: Most students will probably agree that while Tesco's entry into the crowded market in the United States represents a departure from its traditional strategy of focusing on developing nations with little existing competition, the strategy still reflects the company's traditional strategy in that the format the company has chosen to use, Tesco Express, still avoids the head-to-head competition that the company has steered clear of in developing markets. In that sense, the strategy could prove to be highly successful. The company can enter the market using its Tesco Express format, avoid major competition while it gains brand recognition and experience in the market, and then later, expand into the traditional grocery business.

QUESTION 5: A small Canadian firm that has developed some valuable new medical products using its unique biotechnology know-how is trying to decide how best to serve the European Union. Its choices are given below. The cost of investment in manufacturing facilities will be a major one for the Canadian firm, but it is not outside its reach. If these are the firm's only options, which one would you advise it to choose? Why? a. Manufacture the product at home and let foreign sales agents handle marketing. b. Manufacture the products at home and set up a wholly owned subsidiary in Europe to handle marketing. c. Enter into a strategic alliance with a large European pharmaceutical firm. The product would be manufactured in Europe by the 50/50 joint venture and marketed by the European firm.

ANSWER 5: If there were no significant barriers to exporting, then option (c) would seem unnecessarily risky and expensive. After all, the transportation costs required to ship drugs are small relative to the value of the product. Both options (a) and (b) would expose the firm to less risk of technological loss, and would allow the firm to maintain much tighter control over the quality and costs of the drug. The only other reason to consider option (c) would be if an existing pharmaceutical firm could also give it much better access to the market and potentially access to its products and technology, and that this same firm would insist on the 50/50 manufacturing joint venture rather than agreeing to be a foreign sales agent. The choice between (a) and (b) boils down to a question of which way will be the most effective in attacking the market. If a foreign sales agent can be found that is already quite familiar with the market and who will agree to aggressively market the product, the agent may be able to increase market share more quickly than a wholly owned marketing subsidiary that will take some time to get going. On the other hand, in the long run the firm will learn a great deal more about the market and will likely earn greater profits if sets up its own sales force.

QUESTION 6: Reread the Management Focus in International Expansion at the ING Group an then answer the following questions: a) Why did ING focus on entering the U.S. market rather than, for example, emerging markets such as China and India? b) What explains the timing of ING's entry into the U.S. market? c) ING entered the U.S. insurance and investment banking market through acquisitions, rather than setting up business from scratch. Why do you think the company choose this entry mode? What are the advantages and disadvantages? d) Why do you think ING opted to start its Internet bank, ING Direct, from scratch in the United States?

ANSWER 6: a) ING recognized that to be a key player in the business, it would need a significant market presence in the United States, the world's largest financial market. So far, ING has been successful. In just a few years, the company has gone from having virtually no position in the market, to being one of the country's top 10 financial services firms. b) ING took advantage of two regulatory changes that made it easier to enter the U.S. market. First, the removal of barriers that kept different parts of the financial services industry separate, and second, the removal of barriers to cross-border investment in financial services. c) ING followed the same strategy in the United States that had proved to be successful in other countries. The company identified companies that it could acquire, left the companies' management and products in place, and then, added in ING products and names. Many students will probably suggest that ING's strategy is so successful because rather than growing its business from the ground up, it acquires existing firms, leaves them largely intact so as to retain the existing employees and customers, but adds in the ING name and products in order to capitalize on a global brand name. d) ING's expansion strategy typically involves the acquisition of existing companies. Many students will probably suggest that ING's greenfield investment to open ING Direct occurred because there were no good candidates for acquisition.

QUESTION 7: Reread the Management Focus on the Jollibee Phenomenon, then answer the following questions: a) What explains the pattern of Jollibee's international expansion? Why do you think it entered the countries it did? b) Jollibee's expansion into the United States has been quite limited. Why might this be so? c) Jollibee now seems to be focusing on India and China for overseas growth. Why are these countries attractive to Jollibee? d) Why is Jollibee considering entering India via an acquisition?

ANSWER 7: a) Most students will probably recognize that Jollibee tends to target those countries where it will readily gain acceptance. Initially, Jollibee focused on expanding into neighboring countries like Indonesia. Later, Jollibee expanded into the Middle East and targeted a large contingent of Filipino expatriates. The United States, which also had a large number of Filipinos, became the firm's next target. b) Jollibee opened eight stores in the United States—all of which are in California. Many students will probably suggest that this is simply an extension of Jollibee strategy to target only those markets where product acceptance is likely to be high. c) China and India seem to be attractive to Jollibee simply because of their size. In China, the company operates more than 100 stores that serve Chinese food. The stores are operated under a local name. In India, Jollibee is considering acquiring an Indian fast- food restaurant. d) Some students might suggest that Jollibee's desire to enter the Indian market via an acquisition rather than a geenfield investment is a reflection of its overall strategy of entering those markets where the likelihood of acceptance is high. Since India does not have a large Filipino population, Jollibee may be more comfortable operating a local chain where product acceptance has already occurred. Because Jollibee does not have a global reputation, it must look for alternative ways to compete.

QUESTION 8: Reread the opening case on JCB then answer the following questions: a) Do you think entering India via a joint venture was the optima choice for JCB in 1979? What other options did it have? b) Why do you think JBC picked India for its first foreign direct investment? c) Was JCB right to gain full control of its Indian joint venture in the 2000s?

ANSWER 8: a) The choices of entry modes available to JCB in 1979 were very limited. High tariffs barriers made its usual strategy of exporting unattractive, and the Indian government did not allow wholly owned subsidiaries. Given those limitation, the joint venture was probably the best choice of entry mode. b) JCB was attracted to India because of the country's growth potential, however, because of high tariffs, exporting was not an option. JCB entered the market via a joint venture with Escorts, an Indian engineering conglomerate. c) Most students will probably agree that JCB's strategy of full ownership was appropriate. The company felt the joint venture curbed its ability to expand, and that full control was necessary in order to fully capitalize on its technology and innovation.

QUESTION 9: Reread the Management Focus on Cisco and Fujitsu, then answer the following questions: a) What are the benefits of Cisco's alliance with Fujitsu? What are the risks and associated costs? b) Given your assessment of the benefits, risks, and costs associated with this alliance, did it make sense for Cisco to enter the alliance? c) How might Cisco mitigate the risks associated with the alliance?

ANSWER 9: a) Cisco hoped to achieve several goals through its alliance with Fujitsu. The company hoped that by sharing R&D, new product development would be quicker, that combining its technology expertise with Fujitsu's production expertise would result in more reliable products, that it would gain a bigger sales presence in Japan, and that by bundling its routers together with Fujitsu's telecommunications equipment, the alliance could offer end-to-end communications solutions to customers. b) One of the key attractions of an alliance with Fujitsu's was the company's strong presence in the Japanese market. Japan is at the forefront of second generation high speed Internet based telecommunications networks, and Cisco wanted to be a part of that market. For Fujitsu, the alliance meant that it could fill the gap in its product line for routers, reduce product development costs and time, and produce more reliable products. For other competitors in the market, the alliance between Cisco and Fujitsu is significant. Together, the companies can offer one-stop shopping end-to-end communications solutions. Furthermore, because the two companies are pooling their resources, development costs are lower, which will put additional pressure on competitors. c) Students will probably suggest that the biggest risk for Cisco is that by sharing its proprietary technology with Fujitsu, it could potentially create a competitor. To avoid this, Cisco will need to take steps to protect its technology by making sure that safeguards are written into alliance agreements, and ensure that it is getting an equitable gain from the agreement.