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Macro Environment Impacts on Tesco Company in China

Executive Summary

Tesco, a UK-based multinational retail firm has outlets in 11 countries across Asia and Europe. In China, this company benefits and suffers from macro environmental forces in equal measures. The demand by the Chinese government to have control over ventures between state-run entities and foreign companies prevents Tesco from making critical decisions on the matters that affect its overseas outlets.

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The majority of Chinese households have high disposable income, thus offering business opportunities to Tesco. Nonetheless, the Chinese have a high degree of uncertainty avoidance, compelling Tesco to partner with local firms. Despite China being technologically advanced, many people avoid transacting online.

The need to conserve the environment has forced Tesco to invest in an environmentally friendly supply chain. Business policies like “Made in China” encourage customers to do business with local firms at the expense of foreign companies. Government influence is a major challenge that hinders the growth of Tesco China. The company requires partnering with private firms to minimize bureaucracy. It can also open independent stores in strategic cities across the country.

Introduction

Macro environmental forces have significant impacts on the performance of any business. They influence the demand for business’ products, and therefore its growth. Qiu (2014) argues that focusing on the macro environmental factors may enable investors to identify new business opportunities, grow the organizational portfolio, and expand market coverage. Tesco, a United Kingdom-based multinational, is one of the organizations that leverage macro-environmental factors in its foreign operations.

Currently, this company has establishments in 11 countries worldwide. Macro environmental forces affect Tesco’s operations in China. This country’s political dynamics, economic performance, technological advancement, and socio-cultural practices influence the performance of Tesco Company. This paper will evaluate the impacts of the macro environment on Tesco China and give recommendations on what the company should do to boost performance.

Company Assessment

Tesco is a British international company that specializes in the sale and distribution of general merchandise and groceries. The company’s mission is to work with clients to improve the quality of goods that matter to them. Its vision is to be the most valued firm by consumers, the society that it serves, employees, and shareholders. This company’s values encourage employees to give precedence to clients’ interests and strive to improve their well-being.

Tesco has its main offices in Welwyn Garden City, Hertfordshire, England. Wood, Wrigley and Coe (2017) argue that Tesco is the third-largest grocery store, which operates in 11 states globally. At the outset, Tesco was founded as a grocery store but later diversified into other areas. Today, this company specializes in the sale of clothes, furniture, books, software, electronics, petrol, and toys. Moreover, Tesco offers financial and internet services and has ventured into the telecommunication industry. This business sells a range of products and services to both middle- and high-income clients.

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In 2015, Tesco’s market capitalization was over £18.1 billion, leading to the company being the 28th best performing firm in the London Stock Exchange (Wood, Wrigley & Coe 2017). This corporation has an array of outlets that depend on their sizes. They include Tesco Extra, Tesco Superstores, Tesco Express, Tesco Metro and One Stop. In April 2018, Tesco announced that its operating profits had increased by 28%, which was attributed to improved sales growth (Butler 2018). The sales volume in the Irish and the UK outlets grew by 2.4% as many customers opted to do business with this company (Butler 2018).

High demand for food products was cited as another factor that contributed to Tesco’s improved performance, particularly in the UK market. In spite of the strong performance in the UK, Tesco encounters challenges in the Asian market. In 2018, this retail giant suffered a 14% decline in sales volume across Asia (Butler 2018). This poor performance was a result of alterations in marketing strategies.

This paper will focus on China as one of the countries where Tesco has opened stores. Ansoff’s growth matrix outlines four critical parameters that investors consider before venturing into a new market. They are market development, diversification, market penetration, and product development. China has a high population, which offers an opportunity for Tesco to grow its market share. This company has already opened outlets in the country and it understands the needs of the target customers, making it easy for Tesco to penetrate the market.

The Chinese population comprises of people with diverse tastes and preferences based on their generation. Hence, there is a significant chance for Tesco China to develop and sell new products in its current market. This firm has established outlets in Weifang and Taizhou, and it requires establishing additional stores to reach more customers. The reason for selecting the Chinese market is because it offers an immense prospect for Tesco to expand its market coverage. This company offers a variety of goods and services, thus it has the potential to target diverse market segments. Moreover, Tesco can develop its market by introducing novel products or services to new areas.

Macro Environment Evaluation

Political Forces

Political factors have significant impacts on the performance of a business, especially in overseas markets. These factors include tax rates, the stability of a nation, embargoes, tariffs, patent rights, and subsidies among others. According to Gilholm (2017), for a multinational corporation to succeed in a foreign market, it must abide by the regulations established by the host government. Currently, China is experiencing financial instability, forcing the government to compel companies working in the country to hire local employees. This order has been a major challenge to most foreign companies including Tesco.

The company’s operating costs have increased significantly due to the demand to recruit additional local employees. Pan et al. (2014) allege that China has one of the most lucrative markets in the world. Moreover, the country is a member of the World Trade Organization, thus allowing foreign companies to do business with limited restrictions. It underlines the reason Tesco opted to open stores in China.

China has removed the majority of the trade barriers that could prevent foreign companies from venturing into the country. This has led to Tesco targeting with an objective of profiting from its over 1.3 billion people. In spite of China offering a stable business environment to foreign companies, competition amid multinationals has affected Tesco’s performance in the country. This company competes with other foreign corporations such as Wal-Mart and Carrefour.

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Tesco is one of the overseas firms that have benefited significantly from joint ventures with state-run Chinese businesses. Nevertheless, the Chinese government is reviewing the terms of these joint ventures to make sure that it has an influence on decision-making, investment, and hiring. This move will have devastating impacts on Tesco because it will be difficult for the company to make critical decisions that might improve entrepreneurship and innovation.

Gilholm (2017) cites political influence as a major demerit of China’s state-dominated economy. The Chinese leadership continues to enact policies that give it the power to control businesses as a strategy to create extra jobs and augment national wealth. Government interference has prevented Tesco from operating freely in China. For instance, internet censorship has hindered the ability of this company to promote its products. As per Gilholm (2017), the “Great Firewall” gives the Chinese government superior control over the Internet, which hinders the ability of the foreign companies to use virtual private networks (VPN). It has become difficult for Tesco’s outlets in China to collaborate with the mother company in the UK.

Economic Forces

China is ranked as the second-biggest economy by nominal gross domestic product. Nevertheless, it is the leading economy in terms of purchasing power (Zhu & Sarkis 2016). In the 1970s, China implemented multiple economic reforms, which enabled it to develop its economy. Today, this nation has abandoned centrally-managed economy and embraced the market-based financial system. According to Zhu and Sarkis (2016), rapid economic development in China has resulted in the rise in wages, thus affecting the operating costs of multinational corporations. Tesco no longer benefits from cheap labor, which was one of the factors that attracted it to the Chinese market.

In spite of the rise in wages, there have been noteworthy changes in China’s economy, which Tesco has exploited. Zhu and Sarkis (2016) allege that the level of disposable income amid urban dwellers has gone up significantly. Consequently, Tesco has invested in retail products that are in high demand as a strategy to profit from this rise in disposable income. Moreover, Tesco has taken advantage of the fragmented nature of the Chinese retail market. Zhu and Sarkis (2016) maintain that the Chinese retail sector comprises of multiple small and medium-sized stores. Consequently, Tesco does not encounter stiff competition, enabling the business to boost its profit margin.

Chinese e-commerce sector is evolving at a high rate, posing significant opportunities to retail outlets. Tesco understands the value of e-commerce and has invested in the sector to enhance its sales volume. Today, this company sells toys, books, apparel, and electronics through online stores. The introduction of free trade zones in China is leading to the relaxation of policies that govern foreign direct investment (FDI). Currently, foreign companies have a chance to access a huge share of the Chinese market without restrictions. Tesco has leveraged the presence of a free trade zone in Shanghai to establish retail outlets in the area.

Social Factors

Understanding the social-cultural practices of a target market enables an organization to manufacture products and offer services that suit consumer demands. One of the primary reasons why most foreign companies perform poorly in China is the failure to consider the social and cultural values of the Chinese people. Zhu and Sarkis (2016) argue that over 48% of foreign companies do not stay in China for more than two years. Zhu and Sarkis (2016) insist that many people in China prefer to live luxurious lives. They purchase high-end vehicles, designer clothes, and sophisticated mobile phones as a way to prove their success. This increased consumer spending has prompted Tesco to establish multiple outlets in China to exploit the ready market.

China has a distinct culture that hinders the ability of foreign companies to do business with ease. According to Zhu and Sarkis (2016), Chinese investors prefer transacting on a face-to-face basis to over the phone or contracts.

Therefore, for a foreign business to succeed, its leadership must build a strong relationship with Chinese partners as well as customers. It would be difficult for an overseas company to thrive in the Chinese market without opening outlets in the country. Tesco appreciates the value of having physical outlets in China. Consequently, it has established and continues to open stores in different parts of the country. This firm has cultivated a healthy relationship with local suppliers and intermediaries, enabling it to circumvent many bureaucratic hurdles.

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The Chinese communist regime has imposed a culture of collectivism in people. Wasan and Tripathi (2015) posit that in China, loyalty is paramount and people avoid doing business with strangers. Hence, it is hard for a foreign company to do well in China, especially if its management comprises of foreign experts. Tesco understands the potential impacts of a collectivistic culture on its performance.

Consequently, it uses intermediaries to market its products and services in China. As Wasan and Tripathi (2015) state, Chinese people relate companies to their representatives. Organizations that are headed by foreigners are considered alien and customers avoid doing business with them. It underscores the reason Tesco endeavors to partner with local investors in China to improve the company’s reputation.

Technological Factors

Technological forces have a noteworthy influence on business performance in China. According to Harwit (2016), over 772 million Chinese have access to the Internet. Therefore, for a company to reach a sizeable target market, it has to invest in technology. One of the mistakes that foreign companies commit is using Facebook to promote goods and services in China. This social network is only available to millennials who are tech-savvy.

Harwit (2016) posits that the best platform to use in marketing businesses in China is WeChat as it is accessible to many people. Tesco has a WeChat platform that it uses to communicate with Chinese customers and business partners. However, Internet censorship prevents Tesco’s subsidiaries from sharing information with the parent company in the UK (Harwit 2016). Additionally, poor transportation system hampers the capacity of this company to reach many clients. Most foreign companies are unable to sell goods and services in entire China due to its vast landmass. Consequently, some companies have resorted to outsourcing distribution services to local firms that have established supply chain systems.

Chinese customers are gradually embracing virtual means of payment, making it easy for companies to transact online. Nevertheless, the high degree of uncertainty avoidance prevents them from purchasing goods on online stores. Harwit (2016) identifies the lack of a secure online payment system as a major problem that ails the business-2-consumer (B-2-C) sector in China. Moreover, the rate of credit card use in China remains low despite this technology being widely accepted in other parts of the world.

Environmental Factors

Air pollution is a significant challenge in China, which contributes to over one million deaths annually. Consequently, the Chinese government encourages companies to engage in environmentally friendly activities. One of the environmental challenges that Tesco faces in China is a need to use recyclable materials to package its products. Moreover, the increase in the cases of food adulteration has led to many Chinese preferring organic products.

Tesco deals with suppliers of certified organic products to boost its competitiveness. Zhu and Sarkis (2016) posit that the transportation sector plays a key role in environmental pollution in China. Tesco endeavors to operate an environmentally friendly distribution system. This company utilizes hybrid cars to distribute products. Moreover, it packages products in recyclable bags as a measure to minimize pollution.

Legal Factors

Maturing markets, slow economic development, and competition from local companies are three primary challenges that foreign firms face in China. Research conducted in this country revealed that most foreign companies were concerned about the regulatory policies that governed their operations (McDonald 2017). China’s business regulations benefit local companies at the expense of foreign firms. For instance, the call by the government for customers to purchase products that are made in China hinders the ability of Tesco to export the UK products to the country.

Problem Identification

Government bureaucracy, Internet censorship, and unnecessary protectionism are the major problems that Tesco experiences in China. According to McDonald (2017), the Chinese government often informs local firms about upcoming tenders in advance, thus giving them adequate time to plan their bids. Tesco has signed an agreement with state-run entities, making it difficult for the company to make independent decisions.

It hampers the capacity of Tesco’s subsidiaries in China to improve on products and service delivery in line with the company’s mission, vision and core values. Interference from the Chinese government prevents the effective relationship between Tesco’s parent company in the UK and its subsidiaries in China. Consequently, it is difficult for Tesco China to build customer loyalty, meet societal expectations, and boost shareholders value.

Recommendations and Implementations

The joint venture between Tesco and China Resources Enterprises (CREs) has deprived the former of the opportunity to make critical decisions on the matters that affect its foreign operations. Therefore, there is a need for Tesco to look for alternative ways that will enable it to grow its market coverage, diversify operations, launch novel products, and venture into new markets. Tesco requires devising strategies that can enable it to operate stores in China with minimal or zero government interference. Some of the strategies that this company can apply include forming joint ventures with local firms and establishing wholly foreign-owned enterprises (WFOEs).

The partnership between Tesco China and CREs has proved unproductive due to government interference. Tesco should consider partnering with local private companies in China. The move will enable Tesco to minimize operations costs because it will have access to the resources of the local company. This firm will leverage the supply chain system, sales personnel, and network of the host company to distribute products and services.

This partnership will enable Tesco to deliver products on time and to satisfy consumer demands. Signing business deals with local firms will protect Tesco from government bureaucracy, therefore minimizing the time that foreign businesses take to establish operations in China. A period of three months will be sufficient for Tesco to negotiate with potential partners and sign agreements. The only challenge that Tesco is likely to encounter is conflict in leadership styles. Nevertheless, this issue can be addressed through dialogue and a degree of compromise by both partners. Chinese business regulations allow joint ventures between local and foreign businesses. Therefore, Tesco is unlikely to face legal challenges if it opts to collaborate with Chinese private companies.

Opening a WFOE will give Tesco a chance to make critical decisions and manage all the operations of its foreign subsidiaries in China. Therefore, it will be easy for Tesco UK to replicate its operations in China, thus facilitating service delivery. Chen, Jiang and Lin (2014) claim that China has not set minimum capital requirement for businesses that fall under trading, information technology, consulting, and retailing. Therefore, Tesco would not require remitting capital to be allowed to operate WFOE in China. One may argue that setting up WFOE can be time-consuming due to a need to build premises.

Nevertheless, it is imperative to note that many departmental stores and shopping malls are encouraging foreign companies to rent their spaces as a way to build their brands (White et al. 2014). Therefore, Tesco can rent spaces in shopping malls and departmental stores that are strategically located. In fact, a majority of these stores and malls offer attractive lease terms to potential tenants to lure them into doing business. For instance, they charge them low, offer extended rent-free period, provide subsidized marketing costs, and assign them strategic locations within the malls.

Conclusion

Tesco is a UK-based multinational retail company with establishments in 11 countries in Europe and Asia. The company is in the processes of establishing additional outlets across the globe. Macro environmental forces impact Tesco’s performance in foreign countries, particularly China. The joint venture between Tesco and CRE has become unproductive because of government interference.

The introduction of free trade zones in China has allowed Tesco to invest in diverse goods and services. The high level of uncertainty avoidance amid Chinese customers cannot allow Tesco to operate stores without hiring or partnering with local experts. Moreover, it hinders the company’s capacity to sell goods and services through online stores as many customers do not trust them. The rise of health-conscious customers and the call for environmental conservation has led to Tesco selling organic products and using biodegradable packaging materials. This company requires partnering with Chinese private firms or opening WFOEs to circumvent government bureaucracy.

Reference List

Butler, S 2018, ‘Tesco beats forecast with 28% rise in annual profits’, The Guardian. Web.

Chen, J, Jiang, C & Lin, Y 2014, ‘What determine firms’ capital structure in China?’, Managerial Finance, vol. 40, no. 10, pp. 1024-1039.

Gilholm, A 2017, ‘The big squeeze: China’s business environment evolves’, Forbes. Web.

Harwit, E 2016, ‘WeChat: social and political development of China’s dominant messaging app’, Chinese Journal of Communication, vol. 10, no. 3, pp. 312-327.

McDonald, J 2017, ‘Politics weighs heavily on foreign businesses in China’, The Seattle Times. Web.

Pan, Y, Teng, L, Supapol, AB, Lu, X, Huang, D & Wang, Z 2014, ‘Firms’ FDI ownership: the influence of government ownership and legislative connections’, Journal of International Business Studies, vol. 45, no. 8, pp. 1029-1043.

Qiu, T 2014, ‘Product diversification and market value of large international firms: a macroenvironmental perspective’, Journal of International Marketing, vol. 22, no. 4, pp. 86-107.

Wasan, PG & Tripathi, G 2015, ‘Revisiting social marketing mix: a socio-cultural perspective’, Journal of Services Research, vol. 14, no. 2, pp. 127-144.

White, GO, Hemphill, TA, Joplin, JRW & Marsh, LA 2014, ‘Wholly owned foreign subsidiary relation-based strategies in volatile environments’, International Business Review, vol. 23, no. 1, pp. 303-312.

Wood, S, Wrigley, N, & Coe, NM 2017, ‘Capital discipline and financial markets relations in retail globalization: insights from the case of Tesco plc’, Journal of Economic Geography, vol. 17, no. 1, pp. 31-57.

Zhu, Q & Sarkis, J 2016, ‘Green marketing and consumerism as social change in China: analyzing the literature’, International Journal of Production Economics, vol. 181, no. 2, pp. 289-302.

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StudyCorgi. (2020, December 14). Macro Environment Impacts on Tesco Company in China. Retrieved from https://studycorgi.com/macro-environment-impacts-on-tesco-company-in-china/

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