Tesco's Market Entry Strategy in Germany: A Business Report

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Business Organisations and Environments in a Global
Context
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Table of Contents
Introduction......................................................................................................................................3
Organisation Overview: Tesco........................................................................................................3
Situational Analysis.........................................................................................................................3
PESTLE Analysis:.......................................................................................................................3
Porters Five Forces:.....................................................................................................................6
Strategic Approach..........................................................................................................................7
Porter’s Generic Strategies..........................................................................................................7
Ansoff Matrix..............................................................................................................................8
Conclusion.....................................................................................................................................10
References......................................................................................................................................11
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Introduction
The intent of the report is to lay emphasis on business environment is an international context.
The report focuses on explicating the aspects of FDI in regards of an MNC and the strategies
adopted by the company in order to establish their market in that specific geographical area. The
report will cater information regarding the selected business organisation, the assigned business
environment, which is Germany, along with the application of most suitable analytical approach.
Organisation Overview: Tesco
At present, Tesco is the leading company operating in the retail sector throughout the different
regions of the world. Tesco serves areas such as Malaysia, India, United Kingdom, Hungary,
Thailand, Ireland, Poland, and Czech Republic. In 2019, the organisation reported a revenue of
£63,911 million. Along with this, the operating income of Tesco is £2,206 million whereas the
net income of the organisation is £1,320 million as of 2019. The employee strength of Tesco as
registered in 2019 is £1,320 million. The products of Tesco are sold at the hypermarket,
supermarket, convenience shop, and Superstore. Apart from this, the company has a total of 6800
shops all across the different regions in which it operates as of 2019. The core purpose of the
organisation is to serve the consumers a little better each of the days.
Situational Analysis
PESTLE Analysis:
Political:
Germany is the EU’s most influential nation in both politically as well as economically. The
nation comprises of a stable politics along with this Germany also boasts a dynamic regime in
order to safeguard the IPR “Intellectual Property Rights” Along with this, the judiciary of the
nation is independent as well as the rule of law and regulations in Germany prevail. Besides this,
the regulatory framework of the nation is highly efficient and facilitates the entrepreneurial
activities making it viable for the business companies to carry out their operations dynamically in
comparison to the other nations. Apart from this, the national minimum wage per hour is
increasing. The 2017 changes in the regulatory came up with limitations on the aspect of
temporary employment as well. The political system of the country is also successful in
maintaining the monetary stability. The subsidies in Germany have hit the topmost level in the
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year 2018 and the subsidy expenses continue to expand at an exponential rate (Heritage.org,
2019). Therefore, in regards of politics, Tesco will have certain advantage to expand their
business in the setup of Germany.
Economic:
The economic freedom score of Germany is 73.5 making the nation’s economy 24th freest in the
index of 2019. Along with this, the GDP of the nation as of 2019 is $4.2 trillion with an growth
rate of 2.5%. The GDP per capita of the nation is $50,425 and the inflation rate is 1.7% whereas
the rate of unemployment is 3.8%. The FDI inflow of Germany is $34.7 billion. The freedom of
trade in Germany is 86.0% along with an investment freedom of 80% and financial freedom of
70% (Heritage.org, 2019). Hence, Germany has a strong economy and is highly suitable for
Tesco to make significant investments for extensive expansion of their business and market. The
company has an advantage in regards of the economic stability of the nation.
Social:
The consumers of Germany have an ever-changing nature and attitude, as they constantly look
forward to enrich their lifestyle and raise their living standards significantly. Along with this, the
unemployment rate of the nation is also quite low and the nation comprises of highly skilled
labours in the labour market, as the labour freedom in the nation is 52.8% (Heritage.org, 2019).
The people of Germany prefer receiving value for money while they make any purchase. Thus,
in terms of social aspect, there are certain challenges, which Tesco requires facing due to the
constant such changes in their demands. However, the only advantage the company will have is
to employ high skilled local labours, as it would help the firm in influencing the people over
there.
Technological:
Few of nations have contributed to technology and science as Germany. Germany is the world
leader when it comes to innovation and has full range IT and manufacturing sectors. Germany
ranks amongst the leading four nanotechnology locations all across the world as well as it is the
world’s biggest exporter with a whopping 19.1% share of the overall international technology
market. Besides this, Germany comprises of the fourth largest ICT market at the global stage.
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Along with this, the nation is also the sole largest software market in the Europe (Gcb.de, 2019).
The government of Germany lays high emphasis on the ICT infrastructure and the nation caters
the business companies with the world’s most robust and dynamic technological platform as
well. Besides this, the technological field of Germany is growing at an exponential rate making it
more than a great place to operate businesss. Therefore, in terms of technology Tesco is going to
experience numerous benefits and it will be highly advantageous for the company to exploit the
progressive technology, which the country offers.
Legal:
The regulatory system of Germany lays a comprehensive understanding on the importance of
business and the way in which it helps the country in GDP growth. The freedom of business in
the nation is 83.3% and the monetary freedom is 77.9%. Along with this, the trade freedom is
also quite high in Germany accounting for 86% (Heritage.org, 2019). The German government
enforces several EU-directed nontax trade barriers. Besides this, the corporate excise rate in
Germany is 15.8% and the overall tariff burden is 37.6 percent of the overall income
domestically. Thus, the company will enjoy the benefits of regulations in Germany.
Environmental:
Germany is one of the leaders in the sector of renewable energy and falls under the top 3 in
raking concerned with their emphasis on environment. The nation has launched nuclear power
phase out (Stiftung, 2019). Besides this, it has imposed carbon tariff for mitigating the CO2
emissions. Thus, it is essential for Tesco to comply with the environmental policies of the nation
to operate their business successfully.
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Porters Five Forces:
Bargaining power of the purchasers:
The retail sector of Germany is saturated with quite a few companies offering similar sort of
products, which Tesco does. Thus, the consumers bargaining power is extremely high I'm this
case, as they have the opportunities to shift from one company to another with ease. It is of
extreme importance for Tesco to ensure that they keep the prices of their products and services
reasonable and maintain superior quality in them as well.
Bargaining power of the suppliers:
Tesco has its own set of suppliers. The suppliers’ power in this context is quite low, as Tesco
makes the suppliers work on a contractual basis, which further makes it difficult for the suppliers
in bargaining.
Intensity of the competition among the existing companies:
The retail sector of Germany is quite saturated, which tends to increase the aggressiveness of the
competition even further. In this context, Tesco is more likely to face a severe competition and
thus, it is of utmost significance for the company to keep on increasing the value of their
products and services to stay ahead of the services that they offer. Along with this, it is essential
that Tesco stocks to their competitive pricing strategy and keep their prices as low as possible as
opposed to that of the rival companies.
Threat of being substituted:
The various companies operating in the German retail sector provide similar sort of products and
services. Thus, the threat of being substituted is high in this context. It is because the consumers
will be having more options in their hand to switch from one brand to another without facing any
difficulties that to at a low price. Of the consumers come to know that a company is offering the
same goods and services at a lower price than that of Tesco they are most likely to switch brands
without any hassle. Therefore, it is of significance for Tesco to ensure that they maintain high
quality in their services and products alongside offer them at an affordable price.
Threat of new entrants:
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The threat of new entrants in the German retail sector is quite low, as the existing companies
have already created potential barriers. Along with this, for a new company to enter the market,
it would cost a significant amount of investment, the existing companies in the sector have an
established brand image, which makes it further difficult, and challenging for a new company.
Thus, it can be said that Tesco will not get affected in this context.
Strategic Approach
Porter’s Generic Strategies
Cost Leadership:
It is the most common business strategies and the companies adopt this strategy for acquiring a
strong competitive advantage. Cost Leadership entails the company leading the marketplace by
controlling the costs in two different ways. With the execution of this strategy, the company will
have two ways to go. One of the choices for Tesco is to offer the goods and services at such a
cost, which is lower as opposed to their competitors in the German retail sector. The firm
requires persuading the consumers to choose or select the items and services, which Tesco offers
because it has the least price within the market. On the contrary, the company can also employ
this strategy in order to cut down the operational costs (Tanwar, 2013). This makes it viable for
the firm to keep the price of their goods and services reasonable. It enables the company in
making larger profit margins on every sale as well allowing the business to ensure success over a
longer time. Although it seems to be, quite an easy task to implement the strategy of cost
leadership and sell, the services and products at the least price possible but it is of utmost
significance for Tesco to sustain the plan for a longer period of time.
Differentiation:
In numerous numbers of ways, the differentiation strategy is exactly the opposite of cost
leadership. With the adoption of this strategy, Tesco will be looking forward to take over the
German retail marketplace from the standpoint of functionality as well as superior quality in their
commodities and services. The company with this strategy in place does not attempts to sell the
services and goods, which are least expensive. With the effective implementation of this strategy,
Tesco will be required convincing the consumers in the market that the design and quality, which
they offer and deliver to their clients are completely worthy of paying high price. It will be of
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extreme importance for the firm to differentiate the brands from the option of low cost services
and goods (Nandakumar et al., 2011). However, it is not that simple to execute the strategy of
differentiating from the other companies on the standpoint of functionality and superior quality.
The firm not only requires a great product in the store to offer, but it is of significance to have an
effective and proper marketing plan in place as well in order to inform and make the consumers
in the German market aware of the services and commodities, which the form offers. It is
necessary to do so, as it caters the consumers with the facility to solve out their queries and
doubts regarding the services and products that they seek to avail. The firm requires educating
the consumers on the items and services along with their functionality.
Cost Focus:
It is strategy derived from the cost leadership. The main difference is that the strategy of cost
focus lays emphasis on a specific niche within the marketplace instead of the entire market.
Tesco with the effective implementation of this strategy will entail selling their services and
goods to a particular segment of customers. Although this strategy does not have a great growth
potential but it will definitely make it feasible for the organisation to deal with the wider segment
of market in the most efficient way (Baroto et al., 2012). With the execution of this strategy in
place, the firm will be capable of becoming the main player within the niche of the marketplace.
Thus, the company will face next to no competition and the likelihood of succeeding will
increase largely.
Differentiation Focus:
The differentiation focus is also quite similar to that of the cost focus. The only difference is that
with the deployment of this strategy, the firm lays emphasis on functioning within a particular
niche within the marketplace whilst attempting to make an impact through standing out from the
point the functionality alongside superior quality in their services and items (Teeratansirikool et
al., 2013). There are high possibilities that the products offered by Tesco are the most expensive
within the niche.
Ansoff Matrix
The four growth strategies are as follows.
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Market Penetration:
With the execution of this strategy, the firm will be seeking to attain growth of their business
with its current services and products within the exiting market segment itself. The intent of this
approach is to increase the market share. The strategy of market penetration comprises of low
risks, as it leverages several of the company’s present capabilities along with the resources
(Hussain et al., 2013). However, the major drawback of the strategy is that once the marketplace
is saturated, it becomes compulsory for the company to adopt another strategy.
Market Establishment:
With the placement of this strategy, Tesco will be seeking to grow and establish their business
through targeting completely new consumer segments while keeping the products and service
line the same. The strategy of market establishment is only effective when the firm’s core
capabilities of the company are highly related to their particular commodities and services
instead of their specific experiences in different markets (Taylor, 2012).
Product Development:
With the execution of this strategy, Tesco will be required accentuating on seeking growth by
coming up with completely new services and products within the existing segments of market in
which they operate the business. This strategy is suitable only when the firm’s capabilities are
highly associated to the particular segments of consumer instead of the specific goods and
services (Hussain et al., 2013). In this strategy, Tesco will be required leveraging its
competencies to emerge with new commodities.
Diversification:
The execution of this strategy requires the company in seeking growth via extensive
diversification of their business in regards of the commodities and services they offer as well as
with targeting new segments of consumer. Among all the strategies, this is the one with highest
risk. It is because in this strategy, it is necessary for the company to focus on product and market
development both at the same time (Taylor, 2012).
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Conclusion
On completion, it can be derived that it is of significance for Tesco to comprehend the external
business environment of Germany for making FDI to expand their business even further. Along
with this, the company also requires understanding the level and intensity of competition in the
German retail sector. It is essential for the firm to adopt the cost leadership approach and market
development strategy to operate their business successfully.
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References
Baroto, M.B., Abdullah, M.M.B. and Wan, H.L., 2012. Hybrid strategy: a new strategy for
competitive advantage. International Journal of Business and Management, 7(20), p.120.
Gcb.de. (2019). Technology and innovation. [online] Available at: https://www.gcb.de/discover-
germany/discover-german-expertise/technology-and-innovation.html [Accessed 2 Jul. 2019].
Heritage.org. (2019). German Economy: Facts, Population, GDP, Inflation, Unemployment,
Business. [online] Available at: https://www.heritage.org/index/country/germany [Accessed 2
Jul. 2019].
Heritage.org. (2019). Index of Economic Freedom. [online] Available at:
https://www.heritage.org/index/visualize?cnts=germany&type=2 [Accessed 2 Jul. 2019].
Hussain, S., Khattak, J., Rizwan, A. and Latif, M.A., 2013. ANSOFF matrix, environment, and
growth-an interactive triangle. Management and Administrative Sciences Review, 2(2), pp.196-
206.
Nandakumar, M.K., Ghobadian, A. and O'Regan, N., 2011. Generic strategies and performance–
evidence from manufacturing firms. International Journal of productivity and performance
management, 60(3), pp.222-251.
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network.org/2018/Germany [Accessed 2 Jul. 2019].
Tanwar, R., 2013. Porter’s generic competitive strategies. Journal of business and
management, 15(1), pp.11-17.
Taylor, E.C., 2012. Competitive improvement planning: using ansoff's matrix with abell's model
to inform the strategic management process. In Allied Academies International Conference.
Academy of Strategic Management. Proceedings(Vol. 11, No. 1, p. 21). Jordan Whitney
Enterprises, Inc.
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Teeratansirikool, L., Siengthai, S., Badir, Y. and Charoenngam, C., 2013. Competitive strategies
and firm performance: the mediating role of performance measurement. International Journal of
Productivity and Performance Management, 62(2), pp.168-184.`
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