the impact of market orientation on tesco

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The Impact of Market Orientation onthe Internationalization of RetailingFirms: Tesco in Eastern EuropeHelen Rogers a , Pervez N. Ghauri a & Katharine L. George aa Manchester Business School , The University of Manchester , UKPublished online: 15 Apr 2011.

To cite this article: Helen Rogers , Pervez N. Ghauri & Katharine L. George (2005) The Impactof Market Orientation on the Internationalization of Retailing Firms: Tesco in Eastern Europe,The International Review of Retail, Distribution and Consumer Research, 15:1, 53-74, DOI:10.1080/0959396042000299120

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The Impact of Market Orientation onthe Internationalization of RetailingFirms: Tesco in Eastern Europe

HELEN ROGERS, PERVEZ N. GHAURI & KATHARINE L. GEORGEManchester Business School, The University of Manchester, UK

ABSTRACT This paper investigates a Western retailers market orientation levels in two emer-ging markets. We examine whether the market orientationcompany performance link holds truefor retailers in emerging economies, despite environmental dierences. By using concepts fromkey studies we have assimilated a fully representative model applied through interviews withtop management from Tesco and its subsidiaries and aliates in Hungary and Slovenia. Usingthis example, we nd that the market orientationbusiness performance link is valid for Westernretailers in emerging economies. Here, the retailer applied market orientation predominatelythrough; the use of matching with suppliers of own brand goods; top management emphasis onmarket orientation and risk taking. Intelligence generation and dissemination was exercisedvia global processes such as brand review.

KEY WORDS: Market orientation, emerging markets, international retailing, matching, Tesco

Introduction

The emergence of a number of new markets in Asia and East Europe has creatednew opportunities for retailing rms. These rms are thus entering these marketsand becoming increasingly international. Most internationalization and marketorientation studies to date have focused on manufacturing companies in Western,highly developed markets. A key article by Kacker (1986) signalled a shift in focusin the retail sector towards a more global outlook. As we now know, this newfocus has signicantly changed the way that the retail sector operates. Lado &Maydeu-Olivares (1998: 26) dene market orientation as a strategy used to reacha sustainable competitive advantage . . . [through] the use of resources and capabil-ities . . . [and] complex organizational knowledge. This sustainable competitiveadvantage results in a long-term differentiated position, and therefore brandloyalty and prot. Market orientation has been described as the cornerstone ofmarketing (Kohli & Jaworski, 1990; Appiah-Adu, 1998). It is about satisfying themarket through a superior understanding and response to local needs, whichinclude those of nal and intermediate customers, competitors and the macro-

Correspondence Address: Pervez N. Ghauri, Manchester School of Business, University of Manchester,

P.O. BOX 88, Manchester M60 1QD, UK. Tel.: 0161-306 3438; Fax: 0161-306 3505; Email:

[email protected]

Int. Rev. of Retail, Distribution and Consumer Research,Vol. 15, No. 1, 5374, January 2005

ISSN 0959-3969 Print/1466-4402 Online/05/010053-22 # 2005 Taylor & Francis Ltd

DOI: 10.1080/0959396042000299120

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environment (Lado & Maydeu-Olivares, 1998). Landmark studies by Narver &Slater (1990) and Jaworski & Kohli (1993) have demonstrated how market orien-tation leads to superior performance and success.An increasing number of Western rms have expanded into emerging, high

growth markets with more fragmented competition, such as those in CentralEurope and Asia (Alexander & Myers, 2000; Buckley & Ghauri, 1999). However,the top ve retailers in Poland all foreign owned account for only 12 percentof the market; far below the 60 percent share that the top ve have in Germanyor Spain (The Economist, 2001, p. 6). Despite the existence of a greater psychicdistance between home country operations in the UK and those in transitioneconomies (compared with mature markets such as those in France andGermany), retailers are increasingly investing in these so-called emerging markets(Evans et al., 2000). Those emerging markets that have now reduced political andeconomic barriers are particularly attractive (McGoldrick & Ho, 1992; Cavusgil etal., 2002). Moreover, there is a signicant transfer of knowledge from WesternEurope to markets in Eastern Europe in the retailing industry (Dawson & Henley,1999).Diverse political, economic, competitive, social and technological environments

put a premium on market orientation strategies, which enable greater rmresponse to dissimilar needs (Ghauri & Holstius, 1996). A number of scholarshave presented the idea of strategic exibility and its impact on rm perfor-mance (Aaker & Mascarenhas, 1984; Yin, 1995; Hitt et al., 1998; Abbott &Banerji, 2003). However, owing to the nature of the retailing industry (its directcontact with the market and customers) and our focus on internationalization intoemerging markets, we nd market orientation as a more suitable concept toexplore the success of retailing rms into these markets. Market orientation is ofeven greater interest when entry into emerging markets is undertaken by aWestern retailing rm, suggesting that a close understanding and response tocustomer needs is vital. An extended case study of a leading Western retailer willprovide an enhanced understanding of their levels of market orientation in emer-ging markets. More specically we address the following questions:

. How can a Western retailer apply market orientation concepts in emergingmarkets?

. How can market orientation levels explain the performance differences of aWestern retailer in two different emerging markets?

. How do any other phenomena inuence performance of a Western retailer inthe two emerging markets?

Previous Research

Market orientation has been analysed from various perspectives. Narver & Slater(1990, p. 17) dene market orientation as the organization culture . . . that mosteffectively and efciently creates the necessary behaviours for the creation ofsuperior value for buyers and, thus, continuous superior performance for the busi-ness. This suggests that a business can have only one, ideal homogeneous culture.

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However, Kohli & Jaworski (1990) view market orientation as a continuous,rather than dichotomous either-or construct. They further state that the appropri-ate unit of analysis is the strategic business unit (SBU), rather than theorganization as a whole, since an organizations SBUs are likely to be market-orientated to different degrees (Kohli & Jaworski, 1990, p. 7). Firms and theirsubsidiaries and SBUs differ in the extent to which they generate, disseminate andrespond to market intelligence. As a rms level of market orientation is likely todiffer in different markets and environments, the Kohli and Jaworski pairingsbehavioural focus is therefore more relevant to this study.Kohli & Jaworskis (1990) concept of market orientation as intelligence genera-

tion, intelligence dissemination and responsiveness has been accepted and built onby most subsequent analyses of market orientation (see Narver & Slater, 1990;Diamantopoulos & Cadogan, 1996; Pitt et al., 1996; Appiah-Adu,1998; Hurley etal., 1998; Akimova, 2000; Hunt & Lambe, 2000; Elg & Cerne, 2001). In their subse-quent studies, Jaworski & Kohli (1993) found market orientation to have a positiveimpact on business performance. This was owing to a heightened responsiveness toconsumer needs, resulting in greater demand and therefore higher sales and protlevels. The impact of the economy must also be accounted for in fast-changingtransition economies. Hooley et al. (2000) have tested Narver & Slaters (1990)theory in the emerging markets of Central Europe, and found the market orienta-tion business performance link valid and reliable. Hooley et al. (2000) found themarkets they examined (specically Poland and Hungary) to be extremely turbu-lent, with unpredictable growth rates, and increasing levels of unemployment andination (see also Hooley, 1993; Hooley et al., 1993; Shipley & Fonfara, 1993).Alexander & Myers (2000) present a conceptual model for the study of interna-

tionalization of retailing rms. Their model is quite close to the general EntryStrategies model (Root, 1994; Cateora & Ghauri, 2000) and can in fact be appliedto the internationalization of any rm. They claim that studies on the internatio-nalization of retailing focus too much on retailing itself and not on the broaderframework of conceptual thought on international business (Myers & Alexander,1997; Alexander & Myers, 2000, p. 349). However, we believe that to understandthe performance of a retailing rm in a totally unfamiliar market needs somespecic conceptualisation (Burt, 1993; Wrigley, 2000). According to Piercy et al.(2002) market orientation is connected to retail operatives expectations. Theyconclude that the employees in market oriented rms are aware of service andquality imperatives. We believe that this would automatically inuence the perfor-mance of these rms.Hymer (1976) found that MNEs need to offset any disadvantages of interna-

tion-alization by utilizing other unique capabilities gained through their advantageof multinationality. Foreign rms bring new technology and know-how with themwhen they internationalize, not to mention greater economies of scale and econo-mies of scope (Ghauri & Holstius, 1996; Cateora & Ghauri, 2000). This providesa comparative advantage over local rms, though the less tacit component of thisknowledge is likely to be copied by other rms as competition increases (Kogut &Zander, 1993). However, this knowledge will be difcult to transfer, and, as Pelle-grini (1989) notes, rms will always lose some know-how when they inter-nationalize. It is the MNEs efciency in internalization or the transfer of its

Internationalization of Retailing Firms 55

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core knowledge competencies across its international subsidiaries that determinesits comparative advantage (Yamin, 2001). To make best use of unique know-how,rms must ensure that they adequately serve the markets needs, placing apremium on market orientation for Western rms in emerging markets (Han &Kim, 1998). Sternquist et al. (2004) relate this to different types of ownership.Ghauri & Holstius (1996) show how these MNEs may overcome problems relat-

ing to diverse cultural, political and economic environments. Through a dynamicanalysis, they examine how Western rms carry out matching in transition econo-mies. The rms facilitate entry into foreign markets through the active promotionof relationships with key players at home and abroad, thereby developing mutualtrust and a strong contact network (Johanson & Mattsson, 1987). Sternquist(1997) and Vida (2000) investigate internationalization of US retailers andconclude that internationalization is based on four characteristics; retail-specicadvantages, dimensional factors, market orientation and strategic teams. More-over, US retailers often go abroad to similar markets and with a full-control entrymode. However, while US retailers such as Wal-Mart emphasize low cost operat-ing service and a unique organizational culture they do not offer any signicantsupply chain advantages over local retailers (Arnold & Fernie, 2000).Ghauri et al. (2002, p. 2) suggest that increased retailer consolidation and inter-

nationalization has signicantly imposed challenging alterations of their business-models on the consumer and society. This suggests aggressive retailing whereforeign retailers impose their business practices on to local markets. One factor aretailer will often have to adapt is brand image (Brown & Burt, 1992; Burt &Carralero-Encinas, 1999). As a largely intangible variable, a brand or store imagewill not be completely transferred to new locations, and can project differentmeanings in different cultures (Brown & Burt, 1992). The retailer needs to under-stand what factors of its image are tangible or easily transferable, and whatfactors are intangible and thus take longer to transfer yet provide a moresustainable competitive advantage over other rms (Kacker, 1986; Burt & Carra-lero-Encinas, 1999; Burt et al., 2003). Williams (1992) notes obstacles tointernationalization, such as: lack of resources or management knowledge, localcompetition, operating difculties and government policy. Many of these obstaclescan be overcome, with international opportunities exploited through market orien-tation activities and a geocentric, interdependent, meritocratic rm attitude (i.e.the rm operates a system in which talented people are promoted on the basis oftheir achievement) (Perlmutter, 1969).Morgan & Hunt (1994) describe the benecial impact of inter-rm relationships

in providing the rm with different competencies. These networks will benet fromformal and informal inter-rm market orientation practices, ensuring that newcompetencies match consumer needs (Coviello & Munro, 1997). Relationshipswith all actors including customers, suppliers and authorities are thus devel-oped through market orientation. Burt (1993) notes that most UK retailersexpand internationally through investment into the USA, France or Germany all markets with low psychic distance. This problem of psychic distance has beenreduced in recent years by improved technology and converging tastes (Moore etal., 2000). In emerging markets, any disadvantage from psychic distance is likelyto be offset by both lower levels of competition and the fact that they are often

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large growing markets. Evans et al. (2000) believe that the concept of psychicdistance provides an appropriate theoretical framework to understand variationsin performance of retailing rms. We believe that market orientation is one wayof handling this psychic distance.Doherty (2000) claims that the retail internationalization process has remained

relatively under-researched. Specic factors related to retail internationalization doremain largely neglected in the literature. Brown & Burt (1992) suggest that futureresearch should look at retail internationalization in terms of standardizationversus adaptation. Moreover, they suggest that future research should compareinternationalization of retailers at different stages of the internationalizationprocess. Sparks (2000) contributed to the debate by presenting the results of alongitudinal case study following the global transformation of a retailing business.Here he argues that to encourage long-term success, internationalization is bestregarded as reciprocity rather than simple market entry. Burt et al. (2002) studiedthe internationalization of Marks and Spencer over 30 years, particularly its largescale withdrawal from international markets. In other words it studied failure ofinternationalization and concluded that to succeed internationally adaptation tothe local market is a key issue.

Model

The model developed here includes concepts implicit in Kohli & Jaworski (1990),Johanson & Mattsson (1987) and Ghauri & Holstius (1996). Intelligence genera-tion, intelligence dissemination and responsiveness have remained as the keyfactors that dene a market orientation. Performance as a consequence of amarket orientation has been added to the model (see Figure 1).When comparing a companys market orientation across two different countries,

it has been found that market turbulence and competitive intensity in particularare likely to have an impact in explaining differing performance levels (Appiah-Adu, 1998). Matsuno & Mentzer (2000) also found that the type of environmental

Figure 1. Micro level matching, network and market orientation in the internationalization ofretailing rms.


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business strategy used would moderate the market orientationbusiness perfor-mance link. For these reasons, these moderators are also incorporated into ouranalysis, along with economic indicators, as part of the Western and emergingcountry economic environments.In previous studies such as Ghauri & Holstius (1996) matching for all stages of

internationalization has been examined, whilst other authors, such as Dawson(2001), look more closely at just one matching phase, at the entry level. The modelused here discounts matching at the macro and global levels, as micro level match-ing is the best t here. Whilst macro and global level matching are important forrms entering less-industrialized nations (where market research channels are lessestablished) analysis of these additional factors were beyond the scope and focusof this research. Micro level matching is more relevant as an ongoing process formarket establishment and development, rather than market search and entry.Turning now to the remaining elements of the model shown in Figure 1, we

start with intelligence generation. This refers specically to market intelligence andforms the beginning of any market orientation strategy. It includes research intocustomer needs and preferences, and the monitoring of government regulations,competition, industry-level changes, technology and other environmental forces.Intelligence dissemination on the other hand, incorporates the communicationprocedures for all departments within the rm. Information is typically dissemi-nated through newsletters, chains of information, formal procedures anddiscussions. Finally, responsiveness refers to any actions carried out in response tothe above intelligence generation and dissemination procedures.It follows that increased intelligence generation, dissemination and responsive-

ness provides a more unifying focus and vision within the rm, resulting in greatercustomer satisfaction and hence repeat business and improved performance. Thismarket orientation business performance link is well established, as reported byNarver & Slater (1990), Pitt et al. (1996), Appiah-Adu (1998), Han & Kim (1998),Lado & Maydeu-Olivares (1998), Akimova (2000) and Hooley et al. (2000).

Methodology

Many previous studies regarding market orientation focus on a primarily quantita-tive approach (Narver & Slater, 1990; Jaworski & Kohli, 1993; Pitt et al., 1996;Appiah-Adu, 1998; Lado & Maydeu-Olivares, 1998). These studies are used toquantify the market orientationcompany performance link, providing informa-tion from a large variety of rms. However, the concepts used to dene marketorientation and performance levels are often based upon subjective, managerialopinion, which is best suited to case study design; enabling further understandingregarding how and why market orientation inuences rm performance (seeMiles & Huberman, 1994; Yin, 1994; Akimova, 2000). This research aims toprovide a greater understanding of retailer market orientation in emerging marketsas regards to how market orientation is exercised and implemented, rather thanexplaining whether companies use market orientation or not. As pointed out byHooley & Beracs (1997), market orientation is a crucial part of competitive posi-tioning that inuences rm performance. The resource-based view of their study isquite close to our approach, however we focus on market orientation due to the

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nature of the retailing sector. The research framework proposed by Akehurst &Alexander (1995) focuses on key questions regarding the what, why, how andwhere of the internationalization of retailing operations. Myers & Alexander(1997) adopted a survey approach to evaluate the relative merits of EasternEuropean markets in the context of their appraisal of other European and globalmarkets. This data indicated the perceived merits of these different markets on thebasis of the respondents market of origin.In our study, a rms level of market orientation is compared in two markets in

which it has different levels of success. The case study format enables an in-depthunderstanding of a retailers market orientation levels in two emerging CentralEuropean markets. The research design follows an exploratory single case studywith multiple units of analysis, allowing a comparison to be made between theoperations of one rm in two countries (Yin, 1994, p. 39). Moreover, we examinecurrent and historical data from the last six years to provide a dynamic investiga-tion, showing change processes and their impact over time. Using only cross-sectional information, as stated by Jaworski & Kohli (1993), limits the ability tofully examine these processes.The selection of the case company involved identifying a retailing rm from a

Western nation that had internationalized into at least two emerging markets. Thesupermarket chain, Tesco met these criteria. Central Europe was chosen as thearea of focus as the countries here were the rst emerging markets that Tescoentered. Hungary was their point of entry in early 1995, followed in 1996 byPoland, the Slovak and Czech Republics.Table 1 shows the number of stores per head of population. As shown,

Hungary has a population nearly double that of Slovakia, whilst having almost athird more hypermarkets. Hungary has in fact been the most successful marketfor Tesco in Central Europe. Their main success criterion is market share, and by2002 the company was hypermarket leader in all of its Central European markets(Tesco, 2002). However, hypermarkets account for less than 50 percent of theretail market in Hungary, and only 15 percent in Slovakia, indicating that signi-cant opportunity for further expansion remains (Wagstyl, 1999, p. 2; USDepartment of Agriculture, 2001, p. 19).The majority of data were gathered through in-depth, semi-structured personal

interviews. We spoke to both top management responsible for Central European

Table 1. Number of Tesco stores compared with population size in the UK, Hungary and theSlovak in 2002

Country population No. of hypermarkets No. of other stores

UK 59.8 million 41 (smaller thanthose in Central Europe)

445 superstores

168 high street stores75 small express stores

Hungary 10.3 million 23 31 small storesSlovakia 5.3 million 8 5 department stores

Source: Slovakia Statistical Ofce, 2002; UK National Statistics, 2002.


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operations and the particular entry, and subsidiary management responsible forspecic country operations. Observations were also carried out in host-countrystores of Tesco, as well as their competitors. In total 11 senior managers at Tescowere interviewed four represented Hungary, two Slovakia and ve UK head-quarters (see Table 2).All the interviews (carried out during 2002) were conducted using open-ended

questions, each lasting approximately one hour. They were tape recorded andsubsequently transcribed and summarised (Yin, 1994; Ghauri & Grnhaug, 2002).A summary transcript was returned to key respondents for verication. Certainpotentially sensitive information has also been kept anonymous, with the respon-dents job title removed and replaced with the less revealing title of TescoDirector. Secondary information was collected through company documentation,which proved extremely revealing. This includes company reports, accounts andtheir website. Other sources include the Hungarian and Slovakian national webpages, UK Mintel reports and newspapers.The analysis was carried out as described by the model in Figure 1. Relation-

ships external to the rm were examined through micro level matching, withenvironmental moderators also considered, particularly regarding; local customs;employees; suppliers; market turbulence and the economy; and competitive inten-sity. Antecedents to a market orientation are evaluated, focusing on topmanagement emphasis on market orientation and interdepartmental conict andconnectedness.

Findings and Discussion

Matching

The initial research Tesco carries out when examining expansion possibilities isthrough the Business Development Unit. This team goes out to a wide range oflocations, looking and talking to businesses mainly for acquisition. They investi-gate companies, examining any synergies with Tescos values and business culture,and with a view to looking for a t with the Tesco business model. Havingacquired businesses, followed by organic growth in both Hungary and Slovakia,Tesco entered into their project phase of development through establishing supply

Table 2. Management interviewed at Tesco

UK headquarters Hungary Slovakia

Chief Executive (CE) ofCentral Europe (2001 onwards)

CE of Hungary Commercial Director

Group Supply Chain Director(Former CE of Central Europe)

Hard lines Trading Director Category Manager, FreshFood

Group Process Directorfor Retail

Marketing Director

Group Marketing Director Research ManagerSupply Chain Manager

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chains and legislative contact networks, using mainly host-country employees assuggested by Ghauri & Holstius (1996). Retailers also deal with a large number ofbusinesses, particularly concerning the supply chain, which therefore benets fromthe formation of good relationships. Many local relationships are facilitated bythe countrys RACI representative, who ensures processes are carried outResponsibily, with Accountability, and after Consulting and Informing thenecessary people.Tesco works with local authorities, gaining knowledge of operations in the EU.

They assist in developing legislation and learning, encouraging increased standardson food safety. The company also works with Trade Unions in order to developthe work force, providing benets and rewards. For example, in 1997, Tesco intro-duced Sunday trading for the rst time in Hungary, where the premium wage paidfor those shifts were previously unheard of (CE Hungary).Slovakia and the Czech Republic share a head ofce in Prague, where many

functions, such as buying and marketing are centrally carried out. Tesco views theCzech and Slovak Republics as more regionally, than nationally, different. Duringthe time that they were united as one country there was a great deal of movementbetween the two areas, resulting in high levels of mixed parentage and culturalintegration (Slovak Category Manager). However, from a market analysis pointof view, it is important to remember that they are separate nations on a cultural,political and economical level with separate needs.

Local Employees

A heavy expatriate presence accompanies most market entries. Now that they areestablished Tesco has been working to reduce the number of expatriates in CentralEurope in order to forge closer relations with host country environments. TheExcel training schemes are country-specic programmes for the development oflocal people to full this role, hence avoiding potential difculties in ndingexperienced retailers (employees), as explained by the CE of Central Europe;

When we went to Hungary there was no infrastructure, no large retailer, so youcouldnt even poach retail skills as there were none in how to runhypermarkets.

The training of local employees has also posed some cultural diculties, asacknowledged by the Chief Executive of Central Europe:

Under the communist regimes people were just told what to do. One of thetoughest things is to say, you make the decisions, you think about it, use yourown initiative. So its quite dierent in the way you have to manage.

An open-minded approach is expected from both expatriate managers and localemployees, to aid mutual understanding between different parties. Initially, Tescowas less aware of this need, as described by a Director:


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If you want things to happen you have to nd out who the real movers andshakers are by having a quiet conversation with them. When we sent out therst expatriates, we didnt spend enough time exploring that. So they wouldoften go to meetings, agree all the stu, and they [local employees] had nointention of doing it . . . They dont always mean yes when they say it. And itsnot because theyre dishonest, its just the way they do business. Understandingthe cultural dierence is really dicult but its so important. We dont spendenough time doing it. The small things become really big things.

Suppliers

When Tesco initially entered Central Europe, they acquired existing businesses,with established supply chains. This made complex partnerships with new suppli-ers unnecessary, limiting the number of inter-rm relationships formed. TheProcess Director remarks that, one of our strengths is in partnering our suppliersand sharing information. Tesco make use of their scale leverages, which providesthem with more clout and capability towards suppliers, enabling lower prices.There are now two supply depots in Hungary. This has led to improved quality

control over suppliers, as large orders are checked centrally at the depot, ratherthan by each individual store. There are large tariff barriers and complex proce-dures for products imported into Hungary. For this reason, almost 90 percent ofall products sold are currently sourced in Hungary. Much of this has been importedby wholesalers, saving time and costs for Tesco. This makes good relations withlocal actors of great importance, as explained by the Hungarian Trading Director:

In the UK we know what sort of legislation is required so we can help. Ourmeat suppliers have been out talking to the meat suppliers in this country, tomake sure they reach a certain standard, the same with some of the producesuppliers. We try to do as much as we can to educate our suppliers. It would befunded three ways with Tesco, the Hungarian supplier and the UK suppliereach paying a share.

Environmental Moderators

Market Turbulence and the Economy

The economic conditions of Hungary and Slovakia have followed different pathsover the last eight years. As shown in Table 3, Hungarys GDP per capita isalmost 1.5 times more than Slovakias, with this difference being fairly consistentover time. Hungary has had more consistent increases in GDP than Slovakia, amore stable economy. However, both GDPs are much lower than the more indus-trialized UK, which had a GDP per capita of $25,875 in 2000 (UK NationalStatistics, 2002). The UKs GDP has also proven to be more stable than the tran-sition economies, with a consistently high GDP of between only 2.1 percent and3.0 percent (UK National Statistics, 2002).

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Table3.Economicconditionsin

Hungary

andSlovakia

1994

1995

1996

1997

1998

1999

2000

2001est.

2002est.

GDP(per

capitain

US$)

H4052

4359

4425

4495

4641

4757

4589

5121

na

S2721

3423

3679

3802

3970

3650

3556

3668

na

GDP(%

change;realterm

s)H

2.9

1.5

1.3

4.6

4.9

4.2

5.2

3.8

4.0

S4.9

6.7

6.2

6.2

4.1

1.9

2.2

3.3

3.5

Unem

ployment(end-yearin

%oflabourforce)

H12.4

12.1

11.8

11.6

10.1

9.9

9.1

8.4

na

S14.6

13.1

12.8

12.5

15.6

19.2

17.9

19.8

na

Consumer

prices(annualaverage%

change)

H18.8

28.2

23.6

18.3

14.3

10.0

9.8

8.8

5.7

S13.4

9.9

5.8

6.1

6.7

10.6

12.0

7.3

4.0

Transitionindicator*

H3.12

3.38

3.42

3.67

3.71

3.71

3.75

3.75

na

S3.17

3.17

3.25

3.25

3.29

3.33

3.37

3.42

na

Notes:H=

Hungary,S=

Slovakia.*Assessm

ents

madeforcore

areasofreform

towardsamarket

economy,includingmarketsandtrade,

enterprises,infrastructure

andnancialinstitutions.Measurementare

from

1(rigidly

planned

economy)to

4+

(standard

ofanindustrialized

marketeconomy).

Source:EuropeanBankforReconstructionandDevelopment,2000:6263,8081.


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Further turbulence is likely with the entry of Hungary and Slovakia into theEU in 2004. EU membership is expected to benet both the local economy andmultinational businesses such as Tesco, primarily through a reduction in the highduty and tariff barriers, providing greater access to international brands. Disposa-ble income is also likely to increase under the EU. This will in turn increaselabour costs for Tesco, whilst stricter EU legislation on driving hours allowed onthe roads will increase transport costs. As stated by the CE of Tesco Hungary;local bureaucracy is likely to be reduced, though it may well be replaced by thatof the EU.

Competitive Intensity

In Central Europe, retailers have to react swiftly to competitors moves becauseconsumers quickly become aware of any differences. When Tesco rst enteredHungary in 1994 there were no high street retailers as such, no other hypermar-kets and no category killers (CE Hungary). This is changing as there are nowtwo IKEAs and Mediamarket and Electroworld opened in Hungary near a Tescohypermarket in 2001. This provides cause to re-examine the Tesco offer. Shouldthey and can they continue to be successful? Since Electroworld opened nextdoor to Tesco, sales of electrical goods in the store have dropped sharply (CEHungary). However, Tesco continue to stock the core ranges, utilizing theirstrength in consumables. When Tesco entered Slovakia, they instantly became thecountrys largest retailer, since they had acquired ve department stores fromKmart. Since then, competition has greatly increased, and Slovakia now has simi-lar levels of competition to Hungary.Carrefour (the worlds largest hypermarket retailer) has a store directly opposite

to Tescos main Bratislava store, open from 8 a.m.11 p.m. (Tesco, is open24 hours). They now have two stores in Bratislava, and two outside the capital.Hypernova (Ahold Group, Dutch) entered Slovakia in 2002. They have opened astore in Bratislava, and in several other towns, with plans for four or ve morestores this year. They too are open limited hours from 8 a.m.10 p.m.In conclusion, Hungary is closer to being a fully developed market economy,

which may partly explain why Tesco has performed better there than in Slovakia.The other explanation may be to do with differing market orientation levels.When Tesco originally entered Slovakia, there was very little competition, makingthe rm an instant market leader. They entered Hungary at a similar time to otherWestern retailers, and so faced ercer competition. The fact that Tesco is nowmore successful in Hungary suggests that greater market orientation has beenexercised in this market.

Antecedents to a Market Orientation

Top Management Emphasis on Market Orientation

The Tesco Values, brought in from their UK head ofce, emphasises customerneeds. However, the fact that these Values are brought in from the UK, ratherthan developed in-country, means they are set at a global, rather than local level.

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This brings unity to the corporation but can restrict local adaptation. Attempts attop management market orientation are being made in both Hungary and Slova-kia, though an emphasis on international processes throughout Tesco such asthe Brand Review might conict with the need for country-specic practices.Innovation is actively encouraged at senior management level in both the UK andCentral Europe, as explained by the Hungarian Trading Director:

We trust people and use their ideas, even though we may not know every detailabout the nancial and operational viability, but because we believe its a goodthing, well go with it. Sometimes itll work and sometimes it wont, and welearn from our mistakes.

Interdepartmental Conict and Connectedness

There are strong global links between Tescos operations, with top-level managersregularly meeting their counterparts from other countries, sharing informationand forming close contacts. However, this is perhaps to the detriment of closer in-country contact with those from different levels of the company. The HungarianMarketing Director meets her other Central European counterparts three or fourtimes a month. There is considerable contact between people in equivalent roles indifferent countries, though less emphasis is placed on meeting other departmentsin the same country. The Slovak Category Manager explained that departmentsare spread out in Slovakia.We can conclude that the Group has well-developed antecedents to a market

orientation regarding top management, though lesser levels in terms of interde-partmental connectedness in Slovakia in particular. One of the most importantantecedents is top management emphasis on the market orientation, and subse-quent willingness to take risks (Jaworski & Kohli, 1993).

Market Orientation: Intelligence Generation

One of the main advantages of their initial acquisition strategy was that Tescoimmediately gained access to established businesses. They could use these as aspringboard to develop operations, rather than focus on time-consuming localresearch. Cutting corners like this can lead to problems. Since 1999 CustomerPanels have been operating in all Central European countries to enable intelligenceto be communicated to Head Ofce. This year, Customer Focus Groups havebeen put in place, along with the Brand Review (which measures performance). Inaddition, they analyse brand share and have a weekly sales report.Image research is carried out across the country as a whole, with a Brand Image

Tracker being completed every six months. Questions focus on perceptions ofprice image, quality image, service, range and promotions. These large-scale ques-tionnaires are distributed to catchment areas of their own and competitors stores.From 2002, detailed research has been carried out focusing on the markets onebiggest competitor. In Hungary, this is Auchan (with ve hypermarkets) and inSlovakia, Kauand (with 12 hypermarkets).


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Local research is focused on stores in specic areas of each country and exam-ines why they vary. Cross-sections of customers sit with store management todescribe their experiences at Tesco, in terms of price, quality, products, depart-ments, customer services, etc. Every year for one week each store asks every tenthcustomer about their postcode at the checkout. The amount spent and time/dateof purchase is then analysed. Cross border research looks at how more trade canbe drawn from over borders. Hungary and Slovakia are landlocked countries somany of Tescos hypermarkets are near to borders, though the equivalent amountof custom is not from other countries. This is only a recent initiation in CentralEurope. Customer complaints are recorded with the numbers of problems in eacharea analysed. Seasonal and pre/post advertisement research is typically undertakenthrough qualitative methods. As the main marketing tool throughout CentralEurope, promotion leaets are evaluated through focus group discussions.

Human Resources

The heads of each Support Ofce are all expatriates, but there are successionplans for all their positions to be replaced by locals. The Hungarian TradingDirector, explains that as an expatriate Im here to do a job . . . but Im also hereto train and help people. This means working with the Human Resource team toset up training courses, whilst also talking to people and building in the Tescovalues so that local employees can work independently.In Slovakia, management have also been poached from competitors to enable

greater information generation. Knowledge more general to the hypermarket busi-ness in Central Europe was also initially gathered through communications withthe already established Hungarian subsidiary.

Market Orientation: Intelligence Dissemination

Structures

In 1998, Tesco developed pan-regional IT infrastructures. These communicatedoperational capabilities for the countries, based on the more developed hypermar-ket experience from Hungary. Most knowledge though is shared through informalnetworks such as telephone calls (Former CE Central Europe). The country CEOsmeet every month for two days. Tesco has an International Commercial team,based in the UK that works with individual country teams and last year the Inter-national Support Ofce Marketing Team was established. This ensures that theyhave a similar strategy regarding how research is used and managed, makingresults more comparable.

Support Oces

The Process team is currently working with the Support Ofces in each country todevelop their own capabilities and solve their own retail issues. Ofces increasetheir independence through on-the-job training, skills sessions and straightforwardknowledge sharing by answering and encouraging questions. Hungary has had its

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own Support Ofce for two years. It helps head ofce to communicate with stores,which is needed when operations grow, since it accumulates information (such asmarket research) from all different parts of the business. There is a Support Ofcefor each Central European country, though the Czech and Slovak Republics shareone.We can thus conclude that Tesco management encourages information sharing,

particularly through international processes such as the annual country BrandReviews. This is cascaded through the company via presentations and meetings(though information is not shared as frequently as in the UK owing to a lowerresearch budget for Central Europe). International knowledge disseminationensures that all market operations have a similar strategy regarding how they useand manage research, making results more comparable and enabling solutions tobe utilized across the Group. The emphasis on inter- rather than intra-countryknowledge sharing could stie local market individuality, however, resulting in afocus on process, rather than the products demanded by the customer. SupportOfces and country-specic innovations help countries become more independent,whilst providing connections between markets.

Market Orientation: Response Design

Tescos trading philosophy is based around the Steering Wheel comprising aCustomer Plan, Operations Plan, People Plan and Finance Plan, which worktogether to deliver change through an annual country Business Plan, based oninformation gained from customers. The Steering Wheel is an ongoing continuousimprovement process, used in every country that Tesco has a presence.Information gained from the Brand Review is presented to the Board of each

country and the Central Europe Board. Despite carrying out separate BrandReviews, each countrys results are amalgamated for Central Europe as a whole.This results in a Customer Plan aiming to serve customer needs associated withprice, service and quality. Responding to the customer can be costly, so theOperations Plan attempts to cut costs through operational efciencies (such asnew ordering or stock replenishment systems) or obtaining better margins fromsuppliers.The People Plan aims to ensure that staff are capable of delivering the objec-

tives, especially by growing capability in-country rather than relying onexpatriates. There are many people challenges ahead, both in terms of improv-ing the capabilities of the existing workforce, and also in nding employees fornew stores including a store manager, 50 support managers and 500 staff, allof whom need to be trained. The Finance Plan tracks and measures the costsand benets of these plans, making sure that they deliver results. It also exam-ines the long-term aspirations of the business, which are then communicated tothe City.

Market Orientation: Response Implementation

Locally, variations in Tescos Central European markets are particularly apparentin areas such as specic legislation, knowledge and people, including consumer


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differences. The Process Director remarked that everythings local; everything.Nothing goes to the store in English; all the labels, etc. are in the local language.However, Tesco tries not to have too many differences between the CentralEuropean countries. According to the Hungarian CE:

Owing to the sheer size of the hypermarkets in Central Europe, we are able tooer a more exible range, including more seasonal items than in the UK.

Tesco introduced a merchandising function, which is putting Planogramsystems into stores. Here, a photograph is taken which reproduces product ows,enabling increased return of space for specic products through provision of rangeinformation. Tesco Hungary now has 3050,000 products in their range muchless than in other Central European countries since this offer is specically tailoredto customer needs. Planograms are yet to be introduced in Slovakia, as Hungaryhas been the test-bed.

Own Product Lines

Tesco has its own Value and Standard lines in all its Central Europeanmarkets. The Finest brand may be launched there in future, though thecurrent focus on price has restricted its feasibility (Slovak CategoryManager). Research results highlighted by the recent Brand Reviews showthe Value brand to be a major strength. There are more Tesco own lineproducts in Central Europe than in the UK because everything is so price-driven in these emerging markets. In 1998, Hungary was the rst CentralEuropean country to launch the Value brand. The Standard brand was thenintroduced in 1999. They have worked to develop their own label withinHungary. For example, meat and poultry is sourced from Hungary and hasthe Hungarian ag on it to remind customers of that. Tesco Hungary hasmore than 400 own product ranges, representing 20 percent of total foodsales (CE Hungary).The main competitors to Tesco Slovakia have far fewer own-branded products.

This gives Tesco Slovakia and Hungary a comparative advantage over competi-tors, as they are able to use knowledge from well-developed own brand lines inthe UK to enhance own brand production for these countries.

Service

Tesco UK has an extensive range of branded services, from in-store cafes, to on-line shopping and even nancial services. In Central Europe, most services are in-store and tangible; no overseas operations even have their own website, much lesson-line shopping. In-store services are currently rather basic, or provided throughthe other retail outlets on the premises (who rent sites from Tesco), such as alaunderette or cre`che. As the Central European economies grow, these brandedservice offerings are also likely to grow, as Tesco wants to offer them ahead oftheir competitors.

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Performance

Organizational Commitment and Esprit de Corps

In Central Europe there is a genuine perception by management of close-knitloyalty to the rm, backed up by observations in both countries of analysis. Slova-kias more dispersed management set-up, within different ofces in that countryand in the Czech Republic, suggests less opportunity to establish the esprit decorps of Hungary, which has the whole of management for that country withinone head ofce.

Prot

Hungarian operations are unilaterally described as the most successful in CentralEurope by top management; however, this is largely due to external factors, ratherthan any internal strategic differences in market orientation:

Hungary is the most developed, now. The economy is strong and we were thereearly. But the others are catching up all of the countries are protable. It isnot a case of being protable but about how you drive further prots; its allabout growth. (CE Central Europe)

By 2002, Tesco entered into prot in all of its Central European operations.Hungary achieved a prot the previous year, though market entry was a yearearlier than the other countries, so this is perhaps to be expected. Overall it tooksix years to make a prot. A lengthy payback period is to be expected, owing tothe start up costs involved in entering a new market. Here, these costs involvednot only researching and developing local knowledge and efcient supply chains,but also of rst acquiring and then building foreign retail outlets (Former CECentral Europe).

Market Share

Our strategy is that well only go to a country if we think were going to be thenumber one or number two player in there were not interested in going in andonly opening a few stores. (CE Central Europe)

Tesco is the market leader in hypermarket chains in all of its Central Europeancountries. This does not mean that the market is stagnant; there are still opportu-nities in all four markets for gaining overall market share. In Hungary, Tescoentered as a small player in a medium sized market. However, the competitionwas soon outstripped through a rapid expansion programme. When enteringSlovakia, Tesco immediately became the largest retailer but its dominance iswaning. As in Hungary, there is a huge opportunity for inltration in Slovakia,since hypermarkets currently only take 15 percent of this market (US Departmentof Agriculture, 2001, p. 19).


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Conclusions

Tesco is market leader in the UK, Hungary and Slovakia. The company has takenmany of the processes used in its UK home country operations and applied themto transition country markets. Countries are encouraged to follow successfulformulae achieved elsewhere particularly from the more developed operations inthe UK headquarters. Limited market research was carried out in these marketsand it is the recent introduction of processes such as the Brand Review, SteeringWheel and Pricing Function that improved levels. Central European BrandReviews encourage local market operatives to carry out market research, used toformulate country-specic Business Plans. These are disseminated to employees atall levels in that market, and to top management Tesco-wide. One unilateral factorcommon across Central Europe is consumer demand for low prices. The companyresponded to this through competitive pricing and regular special offer pricediscounts.Tesco carries out micro level matching mainly in the form of close work with

suppliers. Relationships with other actors, such as competitors and suppliers ofexternal brands, are limited. Some matching also takes place through the activeemployment of local, rather than expatriate managers. Top management provideantecedents to a market orientation through emphasis on the need for local aware-ness. Top management willingness to take risks and innovate also improves localrelations. We believe that with additional matching, Tesco could have achievedbetter success, e.g. prot in less than six years. Based on this example, therefore, itseems that Western retailers transfer processes developed in their home market totransition markets, in order to gain economies of scope through international knowl-edge sharing. This global focus can limit individual country market orientation,though many of these processes work to encourage a customer focus. However, theyare often introduced later and at lower levels than in the retailers home country, sohave a less positive impact on market orientation. Performance levels are also higherin Hungary, indicating some correlation with the higher degree of market orienta-tion. Western retailers do not necessarily have equal levels of market orientation inall of their markets. Since the same market that had a lower market orientation alsohad lower performance levels, a positive correlation between the two variables issuggested, as expected from previous research carried out in other environments(Kohli & Jaworski, 1990; Narver & Slater, 1990; Jaworski & Kohli, 1993).Tescos strategy of rapid growth and expansion in both of its Central European

markets (as shown in Table 4) was a very costly but calculated gamble. This wasmainly due to the fact that they opted to build hypermarkets, which owing to

Table 4. Number of Tesco hypermarkets opened each year in Slovakia and Hungary

1997 1998 1999 2000 2001 2002 Total

Hungary 1 1 3 4 6 6 21Slovakia 0 0 0 2 3 3 8

Source: Tesco Annual Reports, 19972002.

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their sheer size and associated project management implications, represent asizable investment to any company.In Hungary in particular, there was an imperative to expand quickly, as compe-

tition was keen and the existing stores that they were able to acquire were muchsmaller. In Slovakia, Tesco originally acquired ve relatively large departmentstores in 1996 and so instantly became the largest retailer in the country. Owingto the lower level of competition and investment in hypermarkets here, one wouldexpect that Slovakian operations should have entered into prot quicker than itsHungarian counterpart. However, it did not. We believe that the reason (in partat least) lies in the lower level of market orientation employed in Slovakia,compared with the more extensive levels in Hungary.When Tescos rst Central European hypermarket opened in Hungary in 1996,

an initial lack of market research caused several problems. Rather than goingdown the conventional route of listening to the customer and tailoring the serviceoffering to meet their suggestions, a new format was forced on the market. In theevent, this approach has been successful when viewed in the longer term. In addi-tion, in recent customer panels a different problem has emerged, in that peopledont remember which store they shop at (Slovak Category Manager). The Tescohypermarkets are so similar to those of other foreign competitors, that little differ-entiation is recognised. A corporate rethink is needed to nd a way ofencouraging customer loyalty in this very price-sensitive market.This research has focused on Tescos experience of international expansion

into emerging markets in Eastern Europe. However, the principles and lessonslearnt can be applied in a wider context. A countrys environment (including econ-omy- and market turbulence and levels of competition) inuences business successlevels. These inuences are even more insightful when seeming to go againstexpected performance levels. For example, operations taking place against exces-sive competition would be expected to have lower levels of success than those in aless competitive market. However, when this is not the case, and performancelevels are actually higher in the competitive market, this indicates the dominantinuence of another factor in this case a market orientation, as a higher level ofcompetition forces a company to be more market-oriented.

Managerial Implications

An analysis of a Western retailers market orientation in two emerging marketsshows that, even when external environmental factors are taken into considera-tion, operations in the economy with higher market orientation levels have greatersuccess. The method introduced in this study, by combining matching and marketorientation, provides useful guidelines for retailers to manage their operations inemerging markets more successfully. Retailer internationalization was examinedthrough micro matching and an examination of market orientation on an intra-and inter-rm level, which proved to have a denite impact on the performance ofa retailing rm.In order to sustain a market orientation and hence to perform well, retailing

managers need to be aware of certain antecedents that precede a market orientation.Of particular importance is a senior management emphasis on market orientation.


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Matching must be nurtured at all three levels, but particularly at macro and microlevels, through inter-rm relationships with suppliers and other actors in the market.Care must be taken in implementing these processes, however, to ensure that theyare not merely imposed from the Western, home market, on to the different marketenvironments. Matching and market orientation needs to emerge out of the marketintelligence gathered in a particular market.

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