International Strategies of the Food Retail Industry
What factors contribute towards the implementation of a successful expansion strategy, deriving sustainable competitive advantage in the food retail industry in China for Metro Cash & Carry International?
Bachelor Thesis 2008 63 Pages
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First, I thank my tutor Dr. Nicholas Bowen for his continuous support. He taught me international business and widened my educational scope. Nicholas was always there to listen and to give advice. He is responsible for me to complete the writing of this endeavoring dissertation and the research that lies behind. This dissertation would not have been possible without the expert guidance of my esteemed advisor. Not only was he readily available for me, as he so generously is for all of his students, but he always read and responded to the drafts of each chapter of my work more quickly than I could have hoped. Thank you!
Special thanks go to my partner and best friend whom I love so much. Thank you for your friendship and honesty. You have supported me with unconditional love and believe. Thank you!
This research is concerned with the evaluation of factors that contribute towards sustainable competitive advantage in the food retail sector in China. Increasing globalisation encounters problems to market particularities from the macro and micro point of view. This research emphasises on the evaluation of political, economical, social, technological, ecological, and legal factors, the market attractiveness based on the bargaining powers of buyers and suppliers, the transformation of resources into capabilities, and the creation of value along the supply chain of key international market players.
The research is undertaken on the bases of cutting edge literature, articles, and journals. It is enriched by the use of primary research in the form of an interview with the general manager of Metro Cash & Carry, the world’s largest self service food and non food retailer. Contemporary studies have been conducted through online sources.
The contributing factors for a successful strategic alignment in China are economies of scale and scope. This has been gathered from the analysis and encompasses t the product range and the store format adaptability and excellent procurement logistics with regards to strong supplier relationship management. The store format adaptability arises from excellent local supplier relationship for optimized product fit.
The implications of this research derive recommendations in the area of quality and freshness of product assortment, excellent global procurement logistics, political negotiation powers, and organic growth for sustainable competitive advantage for future expansion.
Chapter 1- Introduction
Sustained augmentation for multinational food wholesalers has become subject to numerous contingency plans for incessant operational growth through the element of expansion. This research focuses on the process of constructing an international strategy, deriving sustainable competitive advantage amongst competition in the emerging retail market in China. It investigates criteria for a successful strategy, with regards to the macroeconomic environment faced, whilst undertaking foreign direct investment in China’s food retail sector.
This research conducts Metro Group’s Cash & Carry wholesale division. It supplies exclusive insights into the managerial process of crafting a strategy. The group’s portfolio incorporates seven retail oriented sales division. Cash & Carry operates six hundred stores in twenty nine countries. Its internationally affiliated workforce supports its position as a leading global player in self-service food wholesale in Europe and Asia/Africa.
From a wide ranging perspective, the pursuit to cross the threshold of entering foreign markets is triggered by the individual market position and the threats opposing it. Researchers have ascribed factors that induce multinational operations in foreign markets. These factors are to be evaluated, influencing the process of crafting an operational strategy for multinationals (Bennett, 2002; Blythe, 2002). The strategic picture has been compiled to provide an insight into the complexity and demands ofbusiness strategy.
Due to increasing local disposable income, China is expected to derive as well as drive future growth in its food retail sectors, allowing for new sourcing and off shoring possibilities for multinational organisations (PricewaterhouseCoopers, 2007). With each economy revealing its individual particularities, China’s economy is assessed on its attractiveness towards foreign direct investment by key international food retailers.
Multinationals experience different reimbursements from China’s retail sector. Pointing to the population of 1.2 billion people, GDP per capita remained consistently low. Nonetheless, sustained economic growth and enhanced purchasing power compose lucrative FDI propositions in China (OECD, 2000).
Competitive advantage over Chinese rivals arises evidently, based on advanced management expertise and operational procedures. The market entry of multinationals into the Chinese retail sector triggers operational challenges for domestic players. The rising trend of Chinese enterprises counterfeiting foreign output and moreover managerial techniques, is an inevitable response to growing competition (Pigott, 2002).
In the past fifteen years, China’s gross domestic product increased nearly fourfold (Bernstam, Rabushka, 2005). The country’s economic reforms in 1979 anticipate inflow of foreign capital into its domestic economy. China’s emerging macroeconomic environment within the retail sector will be assessed to identify foreign direct investment possibilities (OECD, 2000).
Russia, for instance, ranks amongst the seven largest emerging economies and will incur the greatest projected income per capita by the year 2050, according to PricewaterhouseCoopers head of macroeconomic, John Hawksworth (Hawksworth, 2006). The country’s economic growth over the past years altered consumer demand and perception. Operations need to implement effective strategies to deal with changing consumer habits and shopping attitudes (Hawksworth, 2006).
Multinational wholesalers operate in a niche. This research merges the niche with the retail sector. Operational effectiveness in correlation with cost reduction, supply chain management, retail space shortages, and effective warehousing conclude some operational challenges in emerging markets (PricewaterhouseCoopers, 2007). The predominant factors for determining sustainable competitiveness are cost and operational effectiveness, access to liquid capital, and mobility ofhuman assets (PricewaterhouseCoopers, 2007).
Chapter 2- Literature Review
The literature reviewed for this paper is organised in a rational sequence. Each individual component contributes to the completion of the research analysis and the findings. This chapter provides an outline and an analysis of what authoritative authors have said about the research topic. The aim is to provide the reader with contemporary approaches and opinions, influenced by examining cutting-edge literature. The literature review is divided into six parts, which are essential for the analysis of the research topic. The first part defines strategy according to the philosophies of field related authoritative authors. The proceeding parts emphasize on, the managerial process for crafting strategy, the macro environment, resources and competitive position, and the diversification approaches by business groups.
From the Greek “strategos”, meaning “commander of the army”, strategy has been devised to achieve cumulative or individual gain. Since companies faced evolving competition and limited resources in the 1960’s, strategic planning arose. The aim is to centralise and formalise the process of creating an aligned strategy (Schneider, Barsoux, 2003). Managers were trained to analyze strengths and weaknesses in the micro environment and opportunities and threats in the macro environment. Matrices from consultancies were called upon to anticipate market growth and position.
Thereafter, Porter constructed models based on industrial organizational economics, analyzing entry barriers and threats of substitution, in support for the quest of competitive advantage (Schneider, Barsoux, 2003).
Subsequently, Japanese management practices have influenced the process of ultimately deriving sustainable competitive advantage, resulting in the search for core or even distinctive competencies (Carpenter, Sanders, 2007).
2.2. Definition of Strategy & Definitions of Significant Writers
Johnson and Scholes (1993) have defined strategy within their reviews of cases about exploring corporate strategy.
"Strategy is the direction and scope of an organisation over the long-term: which achieves advantage for the organisation through its configuration of resources within a challenging environment, to meet the needs of markets and to fulfil stakeholder expectations" (Johnson and Scholes, 1993).
According to Johnson and Scholes (1993), subjects to strategy in general can be identified on the bases of, long term operational direction, precise crafting of scope, applicability of resources due to the individual nature of foreign market competition, macroeconomic impacts, and stakeholder expectation. Alternatively, Harvard Business School identifies the fundamental purpose of strategy in integrating operational activities into its distinctive market position (Harvard, 2008). Kenneth Andrews, of Harvard University, is thought to be the father of corporate strategy, as the founder of the field of corporate strategy. In one of his books, Concept of Corporate Strategy, Kenneth Andrews defines strategy as:
"Corporate strategy is the pattern of decisions in a company that determines and reveals its objectives, purposes, or goals, produces the principal policies and plans for achieving those goals, and defines the range of business the company is to pursue, the kind of economic and human organization it is or intends to be, and the nature of the economic and non-economic contribution it intends to make to its shareholders, employees, customers, and communities”(Andrews, 1987).
To strengthen Andrew’s impact in the field of strategy, Joseph L. Bower, professor at Harvard Business School, acknowledged his efforts. “...Ken Andrews built the field of business policy, which laid the foundation for what we now think of as the field of strategy. He also dramatically improved the professionalism of our Advanced Management Program and transformed Harvard Business Review into a leading journal of business ideas...” (Harvard Business School 2005).
The structure of the research and the approach to the analysis has been influenced by authoritative books and journals on cutting-edge strategic practices and by renown websites and a personal interview.
In an attempt to do so, Michael E. Porter’s conceptual approaches and theories must be consulted. As a professor of Harvard Business School, he is a leading authority on competitive strategy and international competitiveness. He argues that strategy is about competitive position. “differentiating yourself in the eyes of the customer, adding value through a mix of activities different from those used by competitors” (Porter, 1996). Porter seems to perceive strategy as both plan and position.
2.3. Crafting a Strategy
The managerial process of crafting a strategy entails five phases. According to Strickland and Thompson (2003), strategy evolves by developing a strategic vision, setting objectives, crafting a strategy, implementation and execution, initiation of corrective adjustments, and corporate governance (see app. 3) (Thompson, Strickland, Gamble, 2003, p.lll). Since the research question elaborates predominantly on phase three, it is nonetheless important to account for the other sequential phases.
Phase l involves thinking strategically about the future direction of the operation. Alterations in relation to product, market, target customer, and technology will enhance operations. It sets the current market position in relation to future prospects. Should the vision be well- communicated it can function as a sense of direction and create committed business groups, such as Metro Cash and Carry International. The vision, when mutually appreciated, will furthermore encourage personnel to action and provide managers with a reference point. In order to win support for the visioning, it has to be communicated throughout the organization.
Phase 2 foresees the purpose of setting objectives to specify performance targets, also referred to as cornerstones. In general, well stated objectives are quantifiable. Objectives can be categorized as financial or strategic. This research focuses on the outcome of strategic objectives which have impact on competitive vitality.
Crafting strategy as in phase 3, involves a certain degree of entrepreneurship. It is essential to continuously strive for new opportunities. Successful crafting lures successful performance, sustainable competitive advantage, and valuable operational competencies (Carpenter, Sanders, 2007. Thompson, Strickland, Gamble, 2003. Porter, 1985). However, with regards to Metro Cash & Carry International, Gamble (2003) concluded the levels of strategy as presented in appendix 4.
Phase 4 constitutes the implementation and execution of strategy. Key tasks include improving efficiency of strategy being executed and showing measurable progress in achieving targeted results. It is important that the strategic path goes hand in hand with the operational culture, as is the allocation of resources.
The concluding phase of the managerial process of crafting a strategy monitors the proceeds. Customer needs and competitive conditions change. New opportunities arise, partly due to technological advances. The change of board members opposes a threat to the contemporary strategy (Carpenter, Sanders, 2003). Particular aspects of executing the current strategy may not be going well in the eyes of new mangers.
2.4. The Micro Environment
The Company’s environment consists of "the actors and forces outside marketing that affect marketing management's ability to develop and maintain successful transactions with its target customers" (Kotler, 1994). In general, companies must identify both environments in order to account for any emerging trends and opportunities that can be developed into competitive advantage. Porter’s analyses of the market structure, through verifying the attractiveness of the market by accounting for the micro and macro environment, he compiled five major forces. The micro environment relates to the internal forces of a company. Major forces are the top management, suppliers, customers, competitors, and the public. They conclude the key issues when identifying the micro environment of a company. Other factors for determining the micro environment are research and development, purchasing, and accounting. In the case of Metro Group the emphasis on research and development is immense.
2.5. The Macro Environment
The macro environment of a company relates to larger forces that also affect society as a whole. Corporations can not influence these forces. They therefore have to adjust their strategy, which consist of a pro-active and a re-active element. However, adjustments are mainly executed in the reactive elements of a corporation’s strategy (Thompson, Strickland, Gamble, 2003). With particular focus on the Asian pacific market, research revealed that the key drivers of the macro environment are demographic, economic, natural, technological, and political.
Individually, these forces reveal trends that, if accounted for, can lead to competitive superiority. Demographic trends emerge from changing age and family structures, shifts on the population, developing education, and increasing globalisation (Thompson, Strickland, Gamble, 2003). Active forces within the economic environment are changes in per capital real income, savings and debts, general consumer expenditures, and fluctuations in interest rates and cost of living. These trends impact on the buying power and spending patterns of consumers and can therefore impact significantly on corporations managerial process pursuing the strategy.
The forces from the natural environment are not as significant, since they primarily focus on resources for production. However, increasing government intervention and energy costs cause new trends to emerge in the natural environment in the Asian economy. Forces that affect new technology, new product development, and market opportunities arise from the technological environment. Higher research and development costs and an increase in regulations are the driving forces for emerging trends in the technological field within the macro environment in the Asian market in particular. Trends in the legal and political environment include increased legislation regulating business.
2.6. Resources and Competitive Positioning
Referring to the origins of strategy, from the Greek “strategos”, strategy has been popularised and put into focus since the 1960’s. During this particular time phase, companies experienced the emerge of increasing competition and the challenge of limited resources. Strategic planning was induced to centralize and formalize the encountered processes (Schneider, Barsoux, 2003). In the case of Shell and General Motors, strategy was regarded as a religious ritual. Shell’s former executive stated, “Managers concerned with such strategic efforts fight a continuous battle to prevent them degenerating into a “corporate rain dance” (Gale, 1994).
The emerge of analytical tools throughout the development of strategic planning since the 1960’s has introduced not only the SWOT analysis. Although the SWOT analysis conducts forces from both the macro and micro environment, it is nowadays regarded as being insufficient. However, the language of SWOT analysis, cash cows, dogs, and stars has become a jargon in corporate management. Thereafter, Porter introduced models to assess barriers of entry, substitutability, and the evaluation of potential sources for competitive advantage (Schneider, Barsoux, 2003).
Next was the search for ‘core competencies’ and ‘strategic intent’. Nowadays, the quest is for knowledge management. Nonetheless, the research attempt considers alternative models of strategy formulation that are equally viable. This has implications for the development of strategy in the macro and micro environment and the strategic manoeuvres anticipated for local and global competition.
2.7. The Macro environment in China
Multinational enterprises have in recent years assessed and exercised opportunities and challenges posed by China and Russia and other emerging market economies. In fact, these emerging economies provide cheap imports to OECD countries, which successively helped to control inflation and interest rates adjustments. Simultaneously, countries like China and Russia grow with the aperture of their domestic markets.
Research revealed that there are multiple attempts to assess the relative size of emerging economies such as China and Russia as compared to the established OECD economies. GDP, in general, is an indicator for the average living standard or the relation of domestic input versus output. When attempting a foreign direct investment, multinationals need to anticipate the likely rise in the exchange rate of the emerging economy.
However, John Hawksworth, head of macroeconomics from PricewaterhousCoopers, suggest that “the exchange rate adjustment for the emerging economies may still not be fully completed by the year 2050” (PWC, 2006).
Moreover, his second conclusion derives that the E7(China, India, Brazil, Russia, Indonesia, Mexico and Turkey) economies will be 25% larger than the current G7 (US, Japan, Germany, UK, France, Italy and Canada), measured in dollar terms in 2050. On the contrary, the E7s are currently only around 20% of the size of the G7 at market exchange rates (Hawksworth, 2006).
However, likely shifts in relative growth rates within the E7 are driven by divergent demographic trends. Both China and Russia, in particular, are expected to experience significant declines in their working age populations between 2005 and 2050.
In contrast, countries such as India, Indonesia, Brazil, Turkey and Mexico, show positive growth over this period based on PricewarterhouseCoopers research. This is due to their working age populations. However, they too will experience effects of ageing by the middle of the century (PricewaterhouseCoopers, 2006).
China is projected to account for 95% of the size of the US economy at market exchange rates by 2050. Russia, due to its declining working age population, would also grow at a slower pace, but would still be similar in size to France in 2050 (PricewaterhouseCoopers, 2006).
PricewaterhouseCoppers sensitivity analysis suggests that relative E7 GDP projections are particularly sensitive to trends in education levels and the net investment rates. The rise of the E7 economies should boost average OECD income levels through creation of new market opportunities. The emerge of a global market allows OECD companies to specialise on their comparative advantage, home and overseas, while OECD consumers continue to benefit from low cost imports from the E7 and other emerging economies (PricewaterhouseCoopers, 2006).
Chapter 3 - Research Methodology
The research methodology outlines the different methods that are conducted for the analysis. Moreover, this chapter will evaluate the methods used in each individual part of the analysis with regards to their usefulness and appropriateness in answering the research question. In order to do so, my intention is to identify my research philosophy. There are three different ways of thinking about my philosophy. The three approaches are namely epistemology, ontology, and axiology. However, my research philosophy is best explained by epistemology and the principle of realism.
The theory of realism is that there is a reality independent from the individual mind (Saunders, Lewis, Thornhill, 2007). This implies that the collection of data is vital for the evaluation of my research and will lead to consequential comprehension. Direct realism, besides critical realism, constitutes what is said is what is perceived as accurate. Focusing on the applied methods reveals that the collected data was fundamental for my analysis. Methods incorporate the use of both primary and secondary data. Primary data is carried out through interviews and personal experiences in the field through internships.
Moreover, secondary data includes the use of literature in form of academic books, articles, journals and surveys. The different approaches are evaluated according to their hierarchical occurrence in the contents of the analysis. However, the procedure was predominately carried out with regards to qualitative, rather than quantitative data, but in order to contrast the emerging economies, quantitative data had to be consulted.
3.2. Applied Methods
3.2.1. Methodological Approach
The research process for this section mainly focused on books and articles compiled by the authorities outlined in section 2.2. Their evaluation of personal research and experiences builds fundamental ground on which this section is based on. Their literature is regarded to as being highly qualitative. Moreover, with regards to time constraints, the sources are contemporary preventing less accurate approaches that have been complied in the past and are not subject to contemporary alterations.
3.2.2. Methods for the Macro Environment
The evaluation of the macro environment in both countries is based on models and tools. They originate from academic literature that has been concluded in the previous chapters. Due to the authority in the field, Porter’s models for assessing internal and external environment have been conducted. Porter’s five forces, which assess barriers to entry, substitutability, and the evaluation of potential sources for competitive advantage, as well as his approach to assess resources and capabilities in the light of ‘strategic intent’. This will support the pursuit of the research question. Moreover, a SWOT analysis of Metro Cash and Carry will draw on general macro and micro economic issues faced by food retailers. The completion of these models is accomplished via secondary, however, qualitative research methods. This includes the use of academic literature, surveys from renown consultancies, and articles. Furthermore, primary data from personal experiences during internships has influenced the approach to the research question. Mr Gerd Becker, General Manager Metro Cash & Carry International, has significantly enriched the findings to this research, based on detailed evaluations regarding the resources and capabilities of the firm.
3.2.3. Tools Evaluating Competitive Advantage The literature reviewed for analyzing the competitive position of a corporation is concluded in literature, such as academic books and field related articles and journals. Although secondary data is mainly compiled, this section is furthermore enhanced by primary data. The use of interviews with top management personnel in the food retail allows for particular insights into the pursuit of deriving competitive advantage, especially in the economies of Russia and China. The interview with the General Manager of Metro Cash & Carry International, who himself has experienced the quest for competitive advantage throughout his time as CEO in the Board of Management in Metro Cash & Carry, has contributed significantly to this research. Moreover, the evaluation of competitive advantage is further assisted by Porter’s value chain. It identifies activities that create value and should outline operational advantage over market rivals (Carpenter, Sanders, 2007. Thompson, Strickland, Gamble, 2003)
3.2.4. Methods for the Microenvironment
The literature conducted for this section is primarily based on surveys. Macroeconomic analysts from PricewaterhouseCoopers have carried out extensive research backed by renown theory in the field of strategy. Their efforts enhanced the comprehension of the subject with regards to the contemporary situation of the emerging economies. The survey induces research in this particular area and reveals key factors that need to be assessed. With the use of secondary data, the research methodology for this section not only incorporates surveys, but also scholarly articles and academic literature. However, books sometimes lack the sufficiency of contemporary approaches. They have therefore been selected with a focus on up to date content.