Terms of Reference
The aim of this report is to give a detailed explanation of globalisation, what its main drivers are, its undesirable effects, how big a part Tesco plays in going global and what political, economic, sociocultural, technological and legal forces a multinational organisation might face when expanding into other countries.
Globalisation is the integration of the world’s domestic economies into one single international market. It can also be defined as the ‘death of distance’ (Cairncross, 1997). Globalisation allows for the free trade of goods and services between nations; it allows workers to be employed more easily around the world; it allows businesses to benefit from foreign direct investment (FDI) and it allows markets to develop at a faster rate due to the interchange of new technological advances and intellectual knowledge. The process of globalisation is motivated largely by the desire of multinational corporations to increase profit but also by the motivation of individual national governments to tap into the wider macroeconomic and social benefits that come from greater trade in goods, services and the free flow of financial capital.
* The term globalisation is generally used to describe an increasing internationalisation of markets for goods and services, the means of production, financial systems, competition, corporations, technology and industries. Amongst other things this gives rise to increased mobility of capital, faster propagation of technological innovations and an increasing interdependency and uniformity of national markets. (OECD, 2001).
The process of globalisation has several main drivers apart from of course multinational companies wanting to expand. Barriers to international trade are falling, tariffs and other import controls have declined making it cheaper and easier to trade between countries. Trading blocs allow for the free trade between countries within it, the EU has become the most powerful trading bloc in the world with a GDP nearly as large as that of the United States. There has been a major improvement in transportation, for example, containerisation greatly reduces the expense of international trade and increases its speed, especially of consumer goods and commodities, bringing prices down in the country of manufacture and closer to the prices in the export market. Deregulation of global financial markets allows for FDI and an increase in the free flow of money.
Tesco – A Global Organisation
Tesco is the largest chain of supermarket within the UK; it dominates the market with a share of 25%, making it a monopoly. The company has become successful through strong marketing techniques, good store location and efficient inventory management. It was one of the first to recognise that there was a gap in the market for unbranded value goods, which helped it to fast-track to the leading position in the UK in the early 1990’s. In 1995, Tesco overtook Sainsbury’s as the UK’s largest supermarket (www.corporatewatch.org) so as the company grew stronger and generated a larger cash flow, management decided that the only way to expand even further was to invest abroad.
When Tesco researched into international markets they decided that entering into countries where there were already well established supermarkets would not be the best option as they would struggle with tough competition. Unless Tesco invested heavily into research and development (R+D) in these established markets, they would not be able to compete with domestic chains that would already have a clear understanding of the needs and wants of their consumers. They decided to expand into emerging economies where there was little competition such as Eastern Europe and Asia.
Tesco initially expanded into Ireland and France but ‘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’ (Palmer, 2005). So in 1995, according to Tescoplc.com, Tesco’s first port of call was Hungary, this was also the year they introduced the Tesco Clubcard (www.tescoplc.com), this shows that as well as wanting to expand abroad, Tesco still wanted to build and retain a customer loyalty in the UK. Tesco expanded into Hungary as well as the Czech Republic, Slovakia and Poland by acquiring large stakes in domestic retailers.
This strategy of expanding was clearly successful as Tesco now have over 205 stores in Hungary, one of which is the biggest store in the world and over 21,000 employees (www.tescoplc.com). By merging with domestic retailers there was a lot less risk than building new supermarkets as these companies had a deeper understanding of the markets they were participating in and allowed Tesco to gain an understanding of specific consumer demands in different countries, but without the financial strength of Tesco these companies would not have been able to expand much further. In 1998, Tesco expanded again into Taiwan and Thailand, with the same business venture of acquiring shares of well knows retailers. China, being one of the world’s BRIC economies would clearly be of interest to a fast expanding western company, this is because of its advances towards capitalism and its low labour costs.
The move into China came in 2004. After much deliberation with potential partners, Tesco settled on a joint venture with Hymall who had been operating in china for 6 years. This was their biggest move yet as there was so much potential to expand at a much faster rate in a growing economy. By 2007 after having investments in 46 stores, they had enough customer awareness to be to open their own branded store (www.bbc.co.uk/news). Asda is Tesco’s biggest rival in the UK, in 1999 it was taken over by the American superstore Wal-Mart.
This would have influenced Tesco to increase its performance as even though Asda is not as big in the UK, Wal-Mart is the biggest company in the world and would have the financial capacity to increase the competitiveness of Asda – ‘The takeover has far-reaching consequences for British retail as other companies react to it and find new ways to compete’ (Corporate Watch, 2004).
How is Tesco affected by international Political, Economic, Sociocultural, Technological and Legal forces?
Tesco operates in six other countries of the EU apart from the UK so its performance is now affected by the European Union (EU). Different tax policies, trade restrictions and tariffs will apply across every border, Tesco will need to include these differences when calculating their costs. In the UK, corporation tax lies between 20%-26%, but in comparison it is 40.69% in Japan. Multinational companies will need to take into consideration how much influence the government has over the country of potential investment – i.e. whether it is a dictatorship or democracy etc., and whether there is too much state control that could prevent the company from working efficiently and producing enough profit. As Tesco continues to expand, it may encounter problems with different monopoly regulations and competition authorities.
In the UK, the Competition Commission investigates all mergers and take overs and ensures that there is healthy competition to benefit consumers, companies and the economy as a whole. This is so that customers aren’t exploited by monopolies in the market – i.e. by paying higher prices and smaller businesses have a higher chance of survival. Multinational companies need to monitor the economic climate of countries they wish to expand to. During the recent economic downturn, the consumer electronics market has been one of the hardest hit, as incomes are cut the demand for luxury items has also fallen. ‘Operating losses of £46.7million in six months’ -because of this ‘Best Buy’ has had to close down their stores resulting in a huge loss of jobs (The Guardian, 2011). Tesco may not get hit as hard when expanding because of their diversity of products but they do need to ensure that they are entering new markets with the potential to gain a dominant market share so that they are not forced to shut down even when consumer demand is low.
The minimum wage in the UK as it stands is £6.08 an hour (www.direct.gov.uk, October 2011) however this will not be the same in every country and Tesco has faced exploitation allegations concerning this. In 2006, Tesco faced allegations over the treatment of workers in Bangladesh; War on Want alleged that wages were as low as 5p an hour and that workers were working 80+ hour weeks. However, Tesco stated that ‘Our suppliers comply with local labour laws and workers at all Bangladeshi suppliers to Tesco are paid above the national minimum wage’ (The Guardian, 2006). It may be unfair that the minimum wage is so low but it is not Tesco’s fault, however they are doing nothing in the way to improve the situation so they will still face a lot of negative media. Consumers in every country have different demands, the food and drink supplied in the UK may be completely different to the needs and wants of people in China.
Tesco need to appreciate that the food they retail in England may not appeal to other countries and so would have had to invest strongly in R+D to find out what they need to stock on their shelves. Merging with leading companies would have helped them to do this but much investment would have been needed in new raw materials and machinery to produce the different goods. ‘In the UK pies and sausages might take pride of place in Tesco’s meat refrigeration cabinets but in China, customers can browse through baskets of braised pig trotters, bundled together in fours by string’ (The Telegraph, 2011). To be successful in merging into foreign markets, Tesco has understood that they need to adapt their operations and that the way stores are run in the UK may not suit the way companies are run in different countries.
Instead of sending UK staff overseas to manage stores, Tesco has employed domestic managers that will understand fully the needs and wants of their consumers. In the UK, Tesco now supplies international cuisine to apply to all areas of the market, for example there are whole aisles filled with different Indian spices and shelves stacked with Polish branded goods. Religion in different nations will affect what Tesco can sell in their stores, meat is easily sold in the UK but in some religions it is not part of people’s diet so Tesco will need to provide suitable substitutions. Expanding outside of the UK means that Tesco will be exposed to and highly influenced by other laws and legislation different to that of the UK government.
The way in which vegetables and fruit are produced and grown in the UK may not comply with laws in other countries. In 2011, an investigation by Greenpeace discovered that vegetables sold in supermarkets contained levels of illegal pesticides or pesticides exceeding the maximum level that should be found in the food, making the produce illegal to sell in China. ‘Supermarket giants such as Tesco should be leading the way when it comes to shifting China’s agricultural industry to an eco-agricultural one, which includes reducing the country’s heavy use of chemicals in production. And instead they, along with Lotus and Lianhua, are seriously lax in keeping to China’s current standards’ (Greenpeace, 2011).
Why would Globalisation be considered undesirable?
Globalisation has been linked to a widening of inequalities in income and wealth. The benefits of globalisation are mainly going to the rich developed countries whilst the poor in the developing world are getting poorer. This is because multinational companies can exploit workers in LEDC’s as they do not have the power to fight back. Wealthy companies from any one country are only going to target expanding or rich companies in another; this reduces the chances of small businesses to become successful and forces many to shut down. As Tesco expands, it will need to increase its supply of raw materials and factories to manufacture in, this provides jobs in poorer countries because of the cheap labour pool, but because these multinational companies are so dominating they have the power to exploit workers and pay them extremely low wages.
Workers in poorer countries may also lose their jobs due to the rapid technological change and the fact that machinery can remove inefficiencies from the work force. This also results in structural unemployment where many industries are weakening due to their long-term decline of use and the investment in capital-labour substitutions. The workers in these environments then find it difficult to find another job in a different industry as their skills are specific to their previous job. The biggest long term threat to arise from globalisation is the effect that it will have on the environment, rapid growth and development may lead to irreversible damage.
Demand for timber, for example, has led to large scale deforestation in the developing world. Improvements in transportation is one of the main drivers of globalisation, as it is now much cheaper and far easier to transport goods around the world, however much more fuel is being used and many more emissions are being created. Pollution can have an effect not only on the environment but also on the health of people, as China continues to be the world’s fastest growing economy there are many health consequences to be aware of. A report by the World Health Organisation (WHO) estimates that ‘diseases triggered by indoor and outdoor air pollution kill 656,000 Chinese citizens each year, and polluted drinking water kills another 95,600.’
From my research I have shown the factors why Tesco went global; these include the need to dominate international markets after becoming the biggest supermarket within the UK, the success of their strategies of merging with other companies with market knowledge and the rate of technological change that has allowed Tesco to grow so quickly. I have highlighted PESTL factors that Tesco may face such as the economic climates of different countries, sociocultural issues such as adapting to the needs and wants of consumers from a different market and the negative press that such a large company is bound to face. Even though globalisation is favoured by many, its effects can sometimes be undesirable, it is changing the world at such a phenomenal pace that there is always going to be some disadvantages and sadly it is always going to be the people with less money and power that will suffer.
– BBC News. (2007). http://news.bbc.co.uk/1/hi/business/6300993.stm
– Cairncross, F., (1997). The Death of Distance
– Corporate Watch. (2004). http://www.corporatewatch.org.uk/?lid=21&query=asda+wal-mart#history
– Directgov. (2011). http://www.direct.gov.uk/en/Employment/Employees/TheNationalMinimumWage/DG_10027201
– Nadia G., (2011). Daily Mail. http://www.dailymail.co.uk/news/article-2058494/Carphone-warehouse-closes-Best-Buy-stores-More-1-000-jobs-threat.html
– OECD. (2001). http://stats.oecd.org/glossary/detail.asp?ID=1121
– Palmer M., (2005). A case study of Tesco. Retail Multinational Learning.
33 (33,1), 28.
– Randeep R., (2006).The Guardian. http://www.guardian.co.uk/world/2006/dec/08/clothes.ethicalliving
– Tan M., (2011)
– The Telegraph. (2011). http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/8152422/Five-things-Tesco-sells-in-China-but-not-in-the-UK.html?image=1
– WHO. http://www.who.int/en/