Decision-making Process in Tesco.
- A. A description of the broad organizational context, and the particular area being analyzed.
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International expansion is one of the key features of many companies’ strategies nowadays, especially when it comes to European-based corporations. Due to the fact that domestic market is usually already divided by the top companies in the industry, it is difficult for many companies to grow without expanding to areas in which there is still plenty of space in the market. The annual growth rate of European-based or American-based supermarkets in the overseas market has been much larger than their growth rate in the domestic market due to its limitations and severe competition. International expansion of companies is usually connected with a large number of challenges which need to be addressed in managerial decision-making, starting with making a general decision of expansion to a particular country and finishing with decisions concerning pricing strategy in the new market. Because of incorrectly made decisions, many companies had to go through significant losses due to their international expansion and were destined to withdraw. At the same time, many companies increased their profits significantly as the result of expansion owing to well-balanced management decisions.
In this paper, the decision-making process of UK’s largest supermarket Tesco is being analyzed. It is widely known that Tesco’s growing power in the retailing market is for the most part determined by its aggressive international strategy. The particular aspect of analysis is decisions made concerning Tesco’s expansion to China, which are currently considered false by some experts. The paper seeks to highlight the strong and weak sides of the management’s decisions using relevant decision-making theories and provide recommendations of how the decision-making process in Tesco could be improved.
- B. An analysis of the causes of the difficulties, making clear why they can be understood using relevant theories
Successful international strategy chosen by Tesco has ensured its fast growth in comparison with major competitors which currently occupy a larger share of the market. Tesco has expanded to twelve countries. Tesco’s strategy in China can be described in the following ways. After making a decision of expanding to China, the company conducted marketing research for about 3 years and in the end of 2004 entered the market by buying a stake in the existing Chinese hypermarket chain Hymall which is considered small by Chinese standards and is not well-recognized in the country. The decision-making process of the company’s management is represented in chart 1.
Chart 1. Decision-making process in Tesco.
Most of the decisions marked in the chart were correct, except 3 decisions which could turn out crucial in the following years.
In our opinion, the decision about conducting marketing research for 3 years in China was incorrect and the company needed to invade the market much earlier. The reason why the management came up with an incorrect decision is inability to understand the principles of systems theory of decision-making. As the systems theory states, organizations need to respond in an adaptive way to changes in the environment and be prepared for constant changes. Tesco’s management has failed to understand that the environment in China changed all the time since they started conducting the research. Low level of competition in the first year of research changed dramatically in comparison with the end of the third year. When Tesco finally entered the market, there were already many Chinese hypermarkets functioning efficiently, as well as Carrefour and Wal-Mart with well-established positions. Thus Tesco had to face great competition. It could be avoided if Tesco entered the market earlier. Read which statement correctly explains the chart.
However, it is necessary to analyze the way of thinking of Tesco’s managers who came up with this decision. In the interview in 2002, Tesco’s executive David Reid marked that China’s market was still not ripe enough to operate in for Tesco: “Although you can open stores and generate sales in China, there aren't great examples of people converting that into profit as yet.” (Child 2002: 137).
At the same time, Carrefour and Wal-Mart thought otherwise, and they entered the market much faster than Tesco. As the result, they are already expanding fast in China while Tesco makes only the first steps. Therefore, the decision of conducting research for 3 years can not be considered favourable for the company.
Another decision which needs to be discussed is the decision to choose Hymall as a strategic partner. In this case, Tesco’s management has neglected Anticipatory Management Decision Process Model which is very important for decision-making process. According to Ashley and Morrison (1997: 47), in order to make a correct decision, the company had to identify emerging issues which could result from the decision before making it. Many experts do not consider Hymall as the most suitable partner for Tesco because it is not powerful enough in Chinese retail market to enable Tesco to obtain a large share of the market. “The deal runs against the benchmark Tesco set itself of securing partnerships with the number one or two player in each national market. Hymall is small by Chinese standards.” (Britain's biggest supermarket Tesco enters China's mainland. Available at source: english.people.com.cn/200407/14/ eng20040714_149590.html). This step might become fatal for Tesco in China. When choosing partners in China for joint ventures, it is important for foreign companies to decide very carefully because the first step is the most important. A choice of the partner not influential enough in the country can be fatal and the company will never be able to obtain a large market share. In Tesco’s case, this is exactly what has happened. Instead of following its usual well-checked strategy of buying stakes in the top companies in the market, it seems satisfied with the partner which is not widely recognized in the market.
Tesco’s management considers the step which was made very favourable for the company though. According to Tesco’s management, this deal is very favourable for the company because it enables it to establish firm positions owing to the acquisition: “We believe Ting Hsin is the right partner and Hymall is the right store chain for our strategic move into this exciting market.” (Britain's biggest supermarket Tesco enters China's mainland. Available at source: english.people.com.cn/200407/14/eng20040714_149590.html).
Despite the optimism of Tesco’s management, it is easy to notice that Hymall is not the best partner for the company. The traditions in China make companies find partners only among influential players in the market. Hymall is small, and thus Tesco can never be considered as a top player in the market. The decision to buy a stake in Hymall cannot be considered well-grounded because it contradicts with traditions in China. Tesco needed to buy a stake in a larger company.
The decision of opening stores under Tesco’s own name can be very negative for the company because Tesco has again neglected Anticipatory Management Decision Process Model. The decision could bring many problems to the company in the first years. The market still does not recognize Tesco as a strong supermarket retailer, and it would be hard for Tesco to attract customers in the very beginning. It is even doubtful whether it would be able to attract customers after a few years because Chinese consumers tend to favour domestic companies. Tesco’s management considers this step favourable for the company because thus it could increase its market share. However, it is very doubtful the company could gain many new consumers by opening stores under the name which many people in China have never heard.
Therefore, opening stores by Tesco’s own name cannot be considered efficient policy for the company. Instead, it needs to look for new partners and buy stakes in them in order to increase a market share.
It is also necessary to stop briefly on the analysis of correctly made decisions by Tesco’s management, such as Tesco’s decision to expand to Asia, and China in particular. Asia is considered one of the most attractive destinations for Tesco’s expansion, while China is the largest market. The markets in Europe already have severe competition and it is extremely hard to obtain an additional share of the market. On the contrary, Asian retail markets are not completely divided by world chains yet, domestic competition in them is relatively weak, and possibilities for winning a large share in them are literally unlimited, in case of correct application of marketing strategies. Besides, the population of Asia is growing much faster than Europe’s population.
Tesco’s decision to buy into an existing supermarket chain in China is very favourable for the company. As the experience of many companies has shown, this is the only suitable method of entering a new market in Asia.
Tesco’s decision to operate large hypermarkets in China versus convenience stores is also correct. For China, hypermarkets can be the best possible option due to various reasons. First, there are currently many hypermarkets in the country, and they are attended by large numbers of consumers. Second, hypermarkets offer larger scale of operations, and Tesco can obtain larger revenues through such operations. Third, Tesco operates quite many hypermarkets in other Asian countries, and this tactics has proved to be very efficient. Therefore, it is possible to conclude that this decision made by the management is going to let Tesco establish firm positions in the market.
In pricing strategy, Tesco has made a correct decision to target consumers which a higher level of income. As the research of consumer market in China provided by Chang et al. (2001: 332) shows, the dominating group in the market is currently “trendy, perfectionistic” customers, who know a lot about products, consider quality very important, and are open for new suggestions. Tesco could be very successful if it developed a strategy to target this group of customers.
Tesco’s decision to launch Tesco.com in China in the following years is correct because currently not too many consumers use online services. Very few people in China have computers at home and even though many have them at work, they do not use them for personal needs. It has been predicted that in a few years China will experience Internet boom, and Tesco’s online shopping services could be very useful and bring many profits to the company.
- C. Draw conclusions as to the main points raised in your analysis.
As the analysis has shown, there are the following disadvantages of the decisions made:
- large number of foreign competitors in the market due to late expansion;
- inability to occupy a large share of the market due to the choice of a relatively small Hymall as a strategic partner;
- possible complications in expanding by opening stores under Tesco’s own name;
- inability to attract attention to Tesco and gain respect of Chinese consumers due to partnership with a not well-recognized company (Hymall).
The advantages of the decisions which were made by Tesco’s management include the following:
- Expansion to China can help Tesco to increase its world market share as China’s retailing market has a large growing potential;
- Conducting marketing research prior to expansion helped to learn a lot about future consumers;
- Decision to buy into an existing chain is the best method of entrance of market in Asia and thus promises large profits;
- Decision to operate in hypermarkets is perfect for China’s consumer market because customers tend to favour hypermarkets;
- Targeting consumers with a high level of income is correct because currently income level in China is increasing;
- Launching Tesco.com in China in a few years is going to bring comparative advantage to Tesco because more and more consumers in China are expected to start using online shopping services.
Even though there are many advantages of the decisions made by Tesco’s management, some of the mistakes which were made in the decision-making process can be fatal for the company. Tesco has neglected systems theory of decision-making as well as Anticipatory Management Decision Process Model in some of its decisions, and thus expansion to China can be not as successful as it was expected by the management. Nothing can be done anymore about conducting marketing research in shorter terms, but the company is still capable to provide the search of a more recognized partner in the market. The company might experience certain constraints for the improvements, for example, it might be very difficult to find a new partner in China and obtain additional customers as the result of stake purchase in it. However, Tesco will be very successful if it manages to follow all of the submitted recommendations. In order to make better decisions, the management needs to be more considerate when choosing decision-making approaches. Systems theory is the most efficient for the market in which Tesco seeks to succeed, and all of its principles need to be applied by the management.
- D. Based on the above offer well supported recommendations as to how the particular aspect of decision-making could be improved.
In order to improve the process of decision-making in the company and make its expansion to China more successful, the management needed (and still needs) to focus on the following issues:
- Conducting of marketing research in shorter terms (no more than 1 year). Tesco still needs to expand to different regions of China, and it needs to make sure the expansion is made in shorter terms than it was done with the first entrance to China.
- Partnership with a top player in the Chinese market. Tesco needs to find a partner among the top Chinese retailers, for example Shanghai Bailian which is currently the top player in the market.
- Winning a large share of the market not due to opening stores under its own name but due to signing agreements with well-recognized supermarket retailers in China. Tesco needs to give up the idea of opening stores under its own name for the next 5 years until its name gets well-recognized in the country.
The improvements suggested in the recommendations have both strengths and weaknesses. The most important strengths include: decision-making based on understanding of the consumer market characteristics in China; application of approaches which were proved to be successful by other companies; decision-making based on the possibilities of the market development in future. The major weakness of the recommendations is the complications in locating a suitable strategic partner for Tesco in China.
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- Beach, L. R., ; Lipshitz, R. 1993. Why classical theory is an inappropriate standard for evaluating and aiding most human decision making. In G. A. Klein, J. Orasanu, R. Calderwood, ; C. E. Zsambok (Eds.),Decision making in action: Models and methods (pp. 21-35). Norwood, NJ: Ablex.
Britain's biggest supermarket Tesco enters China's mainland. Available at source: english.people.com.cn/200407/14/ eng20040714_149590.html. Accessed November 11th, 2005.
Chang Ludwig M.K., Hiu Alice S.Y., Siu Noel Y.M.,
- Wang Charlie C.L. 2001. An Investigation of Decision-Making Styles of Consumers in China. Journal of Consumer Affairs. Volume: 35. Issue: 2.
Child Peter N. 2002. Taking Tesco Global: David Reid, Deputy Chairman of the United Kingdom's Largest Grocer, Explains the Company's International Strategy, The McKinsey Quarterly. Issue: 2.
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