International expansion in retail -

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MSc Thesis

International expansion in retail

-

Key factors influencing the performance of Dutch retailers

across borders

Internship at PwC Advisory

April, 2011

University of Groningen

MSc International Business & Management

Heleen Isabel Jansen

S1582178

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Abstract

International expansion is currently a main trend in retailing and offers substantial growth opportunities for retailers. However, the retail internationalization process appears to be highly competitive, complex and disjointed. Most literature on the topic focuses on the biggest retailers in the world, the USA or internationalization in general. This paper focuses on Dutch retail companies in the process of international expansion as Dutch retailers indicate to struggle with international expansion, despite the fact that the Netherlands is a small country with a long history in international trade. Based on literature, interviews and questionnaires, the research reveals 11 general key success factors regarding international expansion that also apply to Dutch retailers: location strategy, entry mode choice, market potential, a strong brand identity, financial resources, commitment of employees, commitment of management, adaptation to foreign markets, experiential learning, access to networks in foreign markets, and daring to take risks, respectively. Two key lessons have been found to apply to Dutch retail companies in particular: optimism or arrogance resulting in underestimating the complexity of international expansion and the underestimation of geographical distances in other markets.

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Acknowledgements

For the final part of the master International Business & Management, I have chosen to conduct research and write the thesis at a company. After several years of studying at the University of Groningen, I wanted to combine the theory learned during many courses, with some lessons from practice. Fortunately, I had the opportunity to start an internship at PwC Advisory towards a subject that appeals to me because of the international touch.

Now, the end product of several months of conducting research and thesis writing lies in front of you. At PwC, the results have been presented at two roundtable sessions for CEO‟s of Dutch fashion retail companies. In addition, a white paper will be published on the subject in June 2011, based on the outcomes of this research. For the university, part of the research conducted at PwC has been used and the results are presented in this thesis. Because completing the master thesis at a company is not common practice in the master International Business & Management, the result has been accomplished by combined efforts and support from several people that I would like to thank for assisting me during this process.

First of all, I am very grateful for the continuous feedback and support from my first supervisor Huib Stek at the University of Groningen. It has been pleasant to work with Huib as he has always been very patient and understanding along the way and provided extensive and constructive feedback when needed.

My internship at PwC Advisory has been a very interesting and nice experience due to my colleagues and the many activities that took place. I would like to thank a few people at PwC in particular. First of all, Veronique Roos, who has been my supervisor at PwC during the internship and introduced me to the world of a top consultancy firm. Secondly, Nadine Diepeveen who has coached me and provided me with lots of tips and advices. And last but not least, Wilmer Kloosterziel, director at PwC, who has joined our „research‟ team because of his interest in the topic. All of them have devoted some of their time to guide me during the research process, have accompanied me to interviews and reviewed pieces of work.

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List of Figures

Figure 1: Overview of the Way Station model of Yip et al., (2000) 13

Figure 2: Revised retail internationalization model 24

Figure 3: Key success factors before and after conducting the interviews 41

Figure 4: Key success factors according to Dutch retailers 45

Figure 5: Level of importance of each success factor to Dutch retail companies 46 Figure 6: Average level of importance of each success factor to Dutch retail companies 46

Figure 7: Main barriers encountered by Dutch retailers 47

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International expansion in retail

–

Key factors influencing the performance of Dutch retailers

across borders

1. Introduction

International expansion is currently a main trend in retailing (Kumar, 1997; Vida & Fairhurst, 1998; Hanf & Pall, 2009). International expansion offers many opportunities for retailers and consequently an increasing number of retail companies choose for international expansion to realize further growth (Etgar & Rachman-Moore, 2007). In practice however, it appears that the international expansion of retailers is not a smooth and easy process but rather a highly competitive, complex and sometimes underestimated process that does not guarantee success (Williams, 1992; Vida & Fairhurst, 1998).

A wave of increased and accelerated international activity by retailers since the 1990s (Dawson, 1994; Reynolds, 1998; Hanf & Pall, 2009) has resulted in a parallel increase in mistakes and underperformance of foreign operations, exacerbated by a widespread lowering of rates of retail growth in the early twenty-first century (Burt, Dawson & Sparks, 2003). The switch from an essentially domestic retailer towards an international retailer remains difficult (Williams, 1992; Burt et al, 2003). As Zou, Taylor & Osland (1998) state: „success in the domestic market does not guarantee success in foreign markets‟ (p.37) resulting in many stories of failures in retail internationalization that can be found in all retail sectors and across the globe (Burt et al., 2003, Howard, 2004). Even in the beginning of the 21st_{century, a number of high profile retail internationalization major failures}

occurred including closure of Marks and Spencer International stores, withdrawal of Ahold from China, Carrefour‟s underperformance with several formats in the UK and the sale of Home Depot stores in Chile and withdrawal of C&A from the UK (Burt et al., 2003).

This is interesting because international retailing is by no means a new phenomenon (Williams, 1992). Retailing across national borders has been a long-established activity that already took place in the late 1800s (Reynolds, 1998; Dawson, 2001). During the 1970s, however, attention regarding international expansion of retailers increased as retailers started to expand on a substantially broader scale (Alexander & Myers, 2000; Burt, Dawson, 2001; Dawson & Sparks, 2003; Burt, Davies, McAuley & Sparks, 2005). In the last two decades the internationalization process has accelerated incredibly (Dawson, 1994; Dupuis & Prime, 1996; Reynolds, 1998) making internationalization one of the top priorities on retailers‟ agendas in today‟s business world.

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their combined learning should have spilled over to newly internationalizing firms (Yip, Biscarri & Monti, 2000). But despite the abundant literature that has been written on the topic, the retail internationalization process continues to be relatively poorly understood by both practitioners and academics (Alexander & Myers, 2000). Whereas some retailers are very successful internationally, the uninterrupted progression of retail internationalization strategies has been questioned lately. According to Burt et al., (2005) it is now widely recognized that for the majority of companies, retail internationalization is a „disjointed process often resulting in retrenchment and the re-evaluation of activities‟ (p. 195).

1.1. Role of PwC

For the above reasons, the consultancy branch of PwC would like to gain deeper insight in the topic of retailer internationalization, so that knowledge of expansion experiences, barriers, and success factors can contribute to improved international expansion performance of PwC‟s retail clients in the future. As nearly all retailers are at least exploring international expansion moves, it is relevant to research experiences of retailers over the years in order to increase understanding of the process and improve the process in the future expansion operations. This research will be conducted in cooperation with PwC in the Netherlands, and will therefore focus on experiences of Dutch retail clients of PwC. By researching the subject, PwC shows that the company is aware of actual and relevant issues at play for her clients. In this way, PwC gains prospects for the subject of international retail expansion and the company markets/promotes PwC as an „up-to-date‟ company by continuously publishing research papers conducted at PwC.

1.2. Dutch retailers and the main research question

In this paper, the focus is on retailers who have a Dutch heritage and are thus influenced by the legal, political, socio-cultural and economic situation of the Netherlands. Dutch retailers are operating in an environment which is stimulating international trade.

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The main research question for this research therefore will be:

‘What are the key factors influencing the performance of Dutch retailers during international expansion and why do these key factors have a substantial impact on improvement of performance of (Dutch) retailers across borders?’

1.3. Approach

In order to provide an answer to the main research questions, the research paper is structured as follows: the first section will discuss the retail internationalization process and will, per phase of the process, identify key factors having a substantial impact on international retailing performance based on academic literature. The Way Station Model of Yip et al. (2000) will serve as the structure of the first part of the paper. A list of key factors influencing the performance of international retailers derived from academic research will be provided as a result of the literature review.

The second section will describe and explain the first part of the methodology of the research, involving a description of the research method used to identify and explain keys to success for Dutch retail companies. Next, the third section will look at the experiences of the Dutch retailers regarding the international expansion process and which have been the keys to successful international expansion for them. During semi-structured interviews, Dutch retailers will be asked to describe their internationalization experiences and they will be asked to indicate what they perceived to be their key lessons learned from the internationalization experiences and why. Aim of this section is to collect information on success factors, barriers, and learned lessons based on Dutch retailers‟ experiences to verify, adjust and/or complement the list of key factors influencing performance derived from literature with factors accounting to the population of Dutch retailers in particular.

The following section will describe the research method applied to quantify the outcomes of both the literature study and the interviews. The findings will be tested in an online survey amongst a larger group of Dutch retailers. The literature study and the interviews will provide the input for the questionnaire. The section will provide insight in what factors influencing performance are perceived to be most important by the population of various Dutch retailers. In the 6th_{section, the results of}

questionnaire will be discussed. The final section will comprise of conclusions and managerial implications.

1.4. Contribution of the paper

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2. Literature review

This section will review the existant literature on the topic of the retail internationalization process (RIP) and the accompanying key factors that lead to superior performance mentioned in the literature. The retail landscape is subject to evolution and development over the years (Burt, 2010), together with the increase in international expansion activities of retailers, a lot of experiential learning has taken place providing an increasing amount of information and knowledge on international retailing.

The academic articles that have been reviewed are primarily articles published since the 1990s. As mentioned in the introduction, a wave of increased and accelerated international activity by retailers since the 1990s occurred (Dawson, 1994; Reynolds; 1998, Hanf & Pall, 2009), making it interesting to look at articles published since this decade. Because little is known about Dutch retailers in particular, the literature review focuses on literature on retailers from all around the world regarding the topic.

The section starts with a short description of the challenge of crossing borders, what international retailing success entails and a brief overview of models for RIP‟s that exist. After that, the RIP of Yip et al. (2000) will be used as a framework to discuss key factors mentioned by literature per station of the process of international retail expansion.

2.1. The challenge of crossing borders

When retailers start expanding their operations to host markets, they face great uncertainty, as the host-market environment is very dissimilar to the home market (Dawson, 1994; Ghauri, Elg & Sinkovics, 2004). It is a challenge to transfer a shop formula successfully in the domestic market towards host countries because a fit has to be created between the characteristics of the company and the host market(s) (Bianchi & Ostale, 2006). The retail sector in particular is subject to uncertainty as retailers operate in the selling of products and services directly to consumers in the host market. Therefore they are dependent on the „fit‟ to survive and become successful in foreign markets.

2.2. International retailing success

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2.3. The Retail Internationalization Process (RIP)

Over the years, many models for international expansion have been developed: the ten steps to success in foreign markets, (Miller,1993), the retail internationalization process by Vida & Fairhurst(1998), the strategic international retail expansion model –SIRE model- (Sternquist, 1997), the OLI paradigm of Dunning (2001), the stages model of Johanson & Vahlne (1977), entry strategies of Root (1987). Despite many attempts that have been made to fit international retailers‟ activity into deterministic strategic models, it is proposed in the literature that opportunism is a better way to explain international retail activity (Dawson, 2001). At present, the international market is turbulent making it difficult for retailers to plan and execute their expansion accordingly to their expansion strategies. It has become clear that international expansion of retailers typically does not follow a carefully set strategy. The process of expansion is often fragmented and disjointed, with periods of successful expansion, interspersed by discontinuity and disruption, which are often the products of serendipity and opportunistic incidents (Burt et al., 2005, p.196). Evans, Bridson, Byrom & Medway, (2007) found that retailers nowadays describe their international expansion decisions as quite ad hoc and Dawson (2001) argues that internationalization of retailers results as much from planned strategies as from opportunistic reasons in the volatile international business environment.

2.4. An overview of the Way Station Model by Yip et al. (2000)

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Figure 1: Overview of the Way Station model of Yip et al., (2000)

Palmer & Quinn (2005), Johanson & Vahlne (2003), and Arnold (2002) have asserted in their articles that important insights and lessons have been learned from experiences which can help to develop and subsequently avoid previous mistakes in order to undertake a successful route to internationalization. The experiences and lessons learned during RIP by management consultants, international retailers and researchers over the past few decades (Yip et al., 2000) will be discussed in the next section and key factors influencing performance will be identified per station in the process.

2.5. Station 1: Motivation & strategic planning

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On the other hand, in today‟s world, it has become almost a necessity rather than an option for some retailers to operate internationally as a way to survive the increasing competition (Vida & Fairhurst, 1998; Hanf & Pall, 2009). Market saturation and increased competition can force companies to look for other possibilities to grow, outside the home market. Growth below overall market rates will inevitably result in either company failure or acquisition by a competitor (Dawson, 2001, p.264) and therefore some organizations might find themselves forced to expand across borders in order to survive.

2.5.1. Market pioneering

It has been argued that the reasons for expansion have influence on the performance levels of the retailer. A proactive company actively looking for opportunities to bring new products to new markets before other companies do – a market pioneer – (Mueller, Titus, Covin & Slevin, 2009) will have potential first-mover advantages over a retail company that has a more reactive approach towards expansion across borders. First-mover advantages discussed in literature relate to building brand loyalty, pre-empting competition and establishing a (short-term) monopoly. However, the first company is in a substantially more risky position than a late-moving retailer that can enjoy the reduced market uncertainty, taking advantage of the incumbent‟s inertia by free riding on the first-mover‟s investments. As Mueller et al. (2009) conclude: „Market pioneering can function as a double edged sword, acting as both a primary means of firm growth and a serious threat to organizational survival‟ (p. 6).

2.5.2. Key factors at station 1

In short, the key factor already identified at the motivation station refers to market pioneering, and the ability of a retail firm to balance the pros and cons of market pioneering and using this knowledge to the retailer‟s advantage.

2.6. Station 2: Market research

The second station where retail companies aspiring international growth arrive at, is the station of market research. At this point, the company has reasons to expand internationally and needs to conduct market research in order to find the right destination.

As has been mentioned before, operating a successful shop formula in the home market does not automatically mean that the shop formula of the retail company will fit the host market (Bianchi & Ostale, 2006). Therefore, target markets need to be investigated to see whether a fit between the firm‟s objectives and capabilities and the chosen foreign market exists. A „fit‟ can be created by looking at both the objectives of the retail firm and the characteristics of the external environment.

2.6.1. Host market understanding

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their strengths and weaknesses, legal and political factors, etc. is required in order for an international retailer to expand successfully (p.3). Rogers, Ghauri, & George (2005) refer to this as market orientation and state that market orientation is a factor leading to superior performance in retail internationalization. The knowledge gained by the research serves as a base for the next station, because the research should reveal which markets are suitable for the firm to obtain the retail company‟s objectives.

Host market understanding by conducting market research is seen as a key factor in the RIP. In addition, market orientation is identified as a key success factor. The latter key factor acts as an umbrella-factor for other key factors and will be discussed more elaborately later in the paper.

2.7. Station 3: Market selection

After the data gathering on potential growth markets has been processed, the retail company has to select the target market. The most important consideration at this stage is to select the market where the best fit can be created between the retail firm‟s characteristics and the characteristics of the external environment so that synergistic effects can lead to superior performance (Dunning, 1997).

2.7.1. Criteria for expansion strategies

The retailer can choose for beginning international expansion to adjacent countries that are culturally and/or geographically similar to the home country. As they gain experience in each country or region, they move into another area (Sternquist, 2007). According to Reynolds (1998) this „border-hopping‟-strategy was common practice for international retailers during the 1980s. The „border-hopping‟-strategy is also referred to in the literature as the Stages Theory of International Expansion of Johanson and Vahlne (1977) who also suggest that generally speaking, similarities are easier to manage than differences and therefore it can be expected that business will achieve more success in similar markets. For Dutch retailers, this means that the expansion pattern would typically start with Belgium and Luxembourg, spreading towards Germany and France before entering more culturally/geographically different markets.

Another criterion for the expansion strategy for the retailer are potential comparative advantages in the foreign market, with the retailer responding to competitive advantages in host countries regardless of the geographic and/or cultural distance (Dawson, 2001). Following the latter expansion criterion, less attention is paid to the cultural/geographical proximity. It should be noted however, that the assumed „similarity‟ between markets is often based on the perceptions of management.

2.7.2. Psychic distance and the perceptions/attitudes of decision-makers

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distance is based on the individual‟s perception and should be assessed at the individual level (Sousa & Bradley, 2006, p.63). Evans, Treadgold, & Mavondo, (2000) refer to psychic distance as a key factor explaining variance between performance of international retailers. As psychic distance is based on the perceptions and attitude of managers/decision-makers, the latter is referred to as the key factor. The perceived cultural and psychic distance between domestic and host markets influence the decision-makers in regards to their expansion strategy.

2.7.3. Attractive (consumer) market

To create a „fit‟ between the company and a foreign market there needs to be demand for the company‟s products/services or the possibility/opportunity to create demand in a foreign market. In other words, the host market should have an attractive (consumer) market for the retail company. Consumers are the ones to purchase the retailer‟s products and services; it is useless to select a market where there is no demand for the retailer‟s products/services and demand cannot be created.

2.7.4. Networks

Besides the attractiveness of the consumer market, networks can facilitate the RIP. Dupuis & Prime (1996) and Ghauri, Elg, & Sinkovics, (2004) have found that the extent to which a retailer is able to create a network and harmonious relationships with actors in the host market leads to improved performance in a host market. Actors include suppliers, business partners, local media, government and so on in the host market (Ghauri, Elg, & Tarnovskaya, 2008). The ability to create a network and harmonious relationships with actors in the foreign market plays an important role at the station of market selection as the network can be a determining factor for market selection. For example, awareness for the retailer‟s brand can be created by use of the network and agreements with suppliers and government can provide access to local resources. However, networking is a key factor throughout all stations of the RIP.

During the station of market selection, the retail firm has to decide on which market suits the retailer‟s strategy best and offers the most potential for growth. In short, this research distinguishes between retailers that internationalize by expanding to geographically and culturally close companies or they internationalize regardless of the proximity, but purely based on the comparative advantage they have in an international market.

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2.8. Station 4: selecting the entry mode

Having selected one or more foreign markets to expand to, the next step is to select a suitable entry mode to enter the market.

Several options for entering a market are possible for a retailer (Whitehead, 1992). First of all, organic growth, implying that the retailer expands by use of shop development in foreign markets. For this entry mode, the retailer must have enough financial capital to set up a shop abroad. The main advantage is that the retailer can monitor and exert complete control over the shop(s).

The second category of entry modes are takeovers, mergers or acquisitions, where the retailers takes over control of a firm in the foreign market. By acquisition of chains in foreign markets the retailer can create volume in a short time period. In general, acquisition of a shop in a foreign market requires less investment than building a shop completely.

The third category is joint ventures, by use of a joint venture the retailer cooperates with a party in the foreign market for the joint operation of retailing (Dawson, 1994). Joint ventures are often used when there are great (perceived) cultural differences between the home and host country (Sternquist, 1997). The retailer might feel uncertain about its knowledge on the foreign market and therefore wants to reduce this uncertainty by cooperating with a local firm that is aware of the local culture and dynamics of the market. In addition, in some host countries, the government requires foreign retailers to enter the market by a joint venture (Sternquist, 1997).

The final category comprises of franchises. Franchises are defined by Doherty & Quinn (1999) as „an organizational form based on a legal agreement between a parent organization (the franchisor) and a local outlet (the franchisee) to sell a product or service using a process and brand name developed and owned by the franchisor. The franchisor typically provides the franchisee with the right to use this intellectual property in return for a lump sum payment and an annual royalty fee‟ (p.225). Franchises are a relatively low risk way for retailers to expand because this entry mode can generate volume in a relatively short time period and investment for expansion is reduced (Howard, 2004). On the other hand, franchising can be risky because of the loss of control by a retail firm.

Besides choosing the entry mode, the location choice within countries should be made. As retailers enter a new market, this always involves the opening of shops in this research. Consumers must find their way to the shop for the retail company to sell its products and services and thus to make profits.

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A second key factor are the financial resources available to a firm for expansion. The financial resources play a big role in the choice for an entry mode and indirectly impact the amount of control that retail companies can exert over their foreign operations. Therefore, financial resources are also regarded as a key factor influencing the performance of a retail company in an international context.

2.9. Station 5: planning for contingencies and problems

Before and during international expansion, retailers face several barriers which need to be overcome in order to improve their performance. Careful host market research can reduce barriers during internationalization as the retailer can anticipate on these barriers. Nevertheless, despite all research efforts towards foreign markets, obstacles might still arise throughout the process. During the history of retailer internationalization, many examples can be found of retailers withdrawing from foreign markets because of unexpected and unanticipated barriers. As Koopman (2000) states: „Never underestimate the hidden shoals‟.

A distinction between the environmental, external barriers and internal or organizational barriers to internationalization can be made. Both types will now be discussed.

2.9.1. External barriers

The main barriers are all related to the social, cultural, political, legal and economic/financial environment of the host country and the differences between the host country environment and the home country environment resulting in a certain level of risk and uncertainty perceived by the retailer.

As the title of one of Hofstede‟s (1994) articles suggests; „The business of international business is culture‟. It is not surprising that almost all articles on retailer internationalization refer in one way or another to cultural differences as one of the main barriers. The general assumption is that cultural proximity between the domestic market and the host market improves understanding of a foreign market and its actors which facilitates setting up operations in a foreign country. High cultural distance between home and host markets can make it increasingly complex to move to a foreign market (Evans et al., 2007). It influences the marketing approach of the retailer in a foreign market (Dupuis & Prime, 1996) and has an impact on the choice of market entry mode, the retailer‟s HR strategy and so on.

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makes it crucial for a retailer to find the right extent of adaptation to a foreign market. Other barriers deal with market stability of both host and home market, competitive structure in the host market, the availability of a network consisting of foreign market connections (Evans et al., 2003) and so on.

2.9.2. Internal barriers

In contrast to the external barriers that include barriers related to the external environment of the retailer, internal barriers are barriers that exist because of the retailer‟s own organizational characteristics and internal operations. The main internal barriers referred to in the international retail literature are lack of financial capabilities and commitment, lack of (market) knowledge and experience, management attitudes to growth, lack of resources and skills, paralysis of decision-making, and organizational characteristics/culture (Burt et al., 2003; Evans et al., 2003; Hutchinson et al., 2009).

Not all barriers mentioned above necessarily have a negative impact on the performance of an international expansion operation. Factors like market stability or management attitude to growth and commitment for instance can turn out positively for a retailer. Decision-makers‟ perception and attitudes have even been identified as success factors earlier.

Conducting market research and thus increasing host market understanding can reduce the external barriers. Sometimes the internal barriers cannot be solved and therefore a retail firm has to find a way to reduce the barriers. In addition, as the RIP continues to new markets, retailers should make sure to learn from expansion experiences. By learning from earlier expansion experiences, the retailer‟s knowledge base increases and the retailer will avoid previous mistakes. In this way, retailers are able to build experiential knowledge and apply this in the expansion strategies and policies. The retailer will improve by learning so that chances for success are higher in future expansion operations.

In short, the importance of host market understanding by market research to reduce uncertainty and potential barriers has been emphasized at this station and the importance of experiential learning during the RIP to improve retailer‟s future performance.

2.10. Station 6: post entry strategy and commitment of resources

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2.10.1. Committing resources

At the final stage, the retailer will have to decide what he/she assesses as the best strategy in the foreign market. „Different strategies might be suitable for different competitive environments‟ (p.16 Yip et al., 2000). However, it is generally agreed upon that commitment is a shared key feature amongst all possible strategies that will result in superior performance in international expansion. This means commitment of the firm‟s resources, that is to say, financial resources but also human resources and the accompanying skills, knowledge and capabilities of the people working for the retail company.

Financial resources available for international expansion have been discussed earlier as a key success factor. Human resources also need to be committed to the international expansion of the retail firm. It is generally agreed upon that employees are a source of comparative advantage of firms (Howard, 2004). The key feature of human resources can be divided into two important parts: on the one hand, the management/decision-makers. On the other hand the employees working at the retail company.

2.10.2. Inspirational leadership

Out of Arnold‟s (2002) analysis of the world‟s best retailers (based on sales volume) follows that all top retailers appeared to have leaders inspiring their organizations through periods of growth and innovation. In doing so, they create an organizational culture with everyone in the organization motivated to making it their top priority to serve customers and the community in which they are operating. (p.569). The key success factor here is inspirational, committed leadership as the leadership style stimulates the organizational culture amongst the employees to be favorable towards international expansion. In general, managers/decision-makers should show their commitment regarding the RIP as to inspire their employees for their international goals.

Besides inspirational, committed leadership, decision-makers need to be continuously involved in the internationalization process to a high extent because important decisions for strategies need to be made at this stage concerning e.g. the HR strategy, marketing strategy and the organizational structure. The interpretation by decision-makers regarding what are the best strategies is based on the earlier-mentioned attitudes and perceptions of decision-makers/managers.

2.10.3. HR strategy

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In practice, a combination of both strategies often can be observed. Retailers can decide to work with expatriates because in this way companies can reassure themselves that standards, systems and ethics of their company are being maintained (Howard, 2004, p.10) and in the process of expansion, the business concept and know-how can be transferred to local people who will replace the expatriates and their positions (Rogers et al., 2005).

2.10.4. Creating superior customer value

Managerial and complex organizational knowledge is necessary for continual understanding of both existing customer needs and potential customer needs in order to continuously create customer value. People in the host market have to perceive the company‟s distinctive features as competitive advantages and should therefore be interested in a certain retail company and start purchasing products/services of the retailer, eventually resulting in loyal customers increased profits. Arnold (2002) states that the main distinctive feature of the world‟s best (based on sales volume) retailers was the people orientation.

At station 2, market orientation has briefly been mentioned as a factor acting as an umbrella for other key factors influencing performance among which the already mentioned factor host market understanding by conducting market research. The basic principle of market orientation also focuses on that every business employee and business function contributes to create superior customer value with their continual knowledge and skills for organization (Özdemir, & Kortunay, 2008, p.427). In other words, it is about satisfying the market through a superior understanding and being responsive to local needs, value systems and cultures, which include those of final and intermediate customers, competitors and the macro-environment (Rogers, et al., 2005, p.53; Dawson 1994).

2.10.5. Marketing strategy

In line with the focus on creating superior customer value by being responsive to local consumer needs is the decision that managers have to make regarding the marketing of their products/services in the new market. According to Kotler & Armstrong (1996) ‘Marketing is the business function that identifies customer needs and wants, determines which target markets the organization can serve best, and designs appropriate products, services, and programs to serve these markets. It guides the entire organization’.

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preferences. In addition, the brand should stay innovative and/or distinctive to continue to be attractive for local consumers (Dupuis & Prime, 1996). Taylor (2010) summarizes the marketing decision by stating that, at present, retailers have two basic opportunities to compete. They can either compete with their brand on the uniqueness of their shopping experience or on price in each new market.

The second aspect of the marketing decision refers to whether the company decides to take a global versus a multinational approach. In other words, does the retailer strive for standardization of the shop formula across borders or does the company adapt the shop formula to each new market entered. Standardization across markets is often hard because of different political, judicial, economical, socio-cultural and governmental environments. The main advantage of standardization is the possibility to replicate your marketing strategy and mix in each new market resulting in lower cost because of economies of scale and scope. The main risk is that the retail concept will not lead to success in each of the markets where the retailer is present. In general, big retailers with established formats and concepts are more likely to succeed in this approach than smaller companies with less well-known brand identities. IKEA is a good example of a retailer with a standardized marketing approach.

However, in practice, it appears that a limited extent of adaptation to foreign markets is always necessary to gain legitimacy in a host market (Bianchi & Ostale, 2006). Wal-Mart for example has learnt this the hard way when trying to enter China with the wrong merchandise resulting in withdrawal from China (Kumar, 1997). Therefore, retailers should be able to recognize the right extent of responsiveness of their operations to foreign markets as to create customer value and become legitimate in host markets.

In conclusion, the final stage of the RIP involves the commitment and implementation of strategies. Several key factors influencing performance of retail companies in foreign markets have been mentioned. Commitment is key during the final phase. The factor has been subdivided into commitment of (financial) resources to international expansion and the commitment of human resources, that can also be subdivided into two key factors. First, inspirational, committed leadership, implying high involvement of the managers/decision-makers regarding the RIP. A stimulating organizational culture favoring international expansion should be created. Second, the earlier-mentioned factor; attitudes and perceptions of decision-makers, who need to be open-minded and highly motivated to stimulate progression regarding the RIP.

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value. Even in companies that apply standardized approaches, adaptation to a certain extent is always required or necessary to become successful.

2.11. Key success factors derived from literature

The literature review has revealed many important key factors during each of the stations of Yip et al.(2000). It should be noted that most of the factors are related, applicable throughout the process and often do overlap as the framework of Yip has merely served as a structure to facilitate the readability of the paper rather that the stations determine the attached success factors. In the next section, interviews will be conducted to check whether the factors also count for the population of Dutch retailers and whether adjustments or additions should be made.

The current list of key success factors that can assist retailers in creating a fit between their company and that can contribute to acquiring competitive advantages and thus to growth and profits in a foreign market can be summarized in alphabetical order as follows:

 Attractiveness of the foreign (consumer) market

 Availability of networks or the possibility to create a network

 Creation of superior customer value by being responsive to local needs in foreign markets  Commitment of (financial) resources available to a firm for expansion

 Entry mode choice  Experiential learning

 Host market understanding by conducting market research

 Inspirational leadership creating a organizational culture favorable to international expansion  Market pioneering-timing of expansion

 Perceptions and attitudes of decision-makers regarding the RIP  Strong brand identity

2.12. Adjusting the internationalization model for the retail sector

As has been stated earlier, the process of international expansion is often not a systematically approached but rather ad hoc or opportunistic. However, there are several steps that all retailers have to take whether the expansion strategy has been carefully planned or has occurred based on ad hoc opportunities abroad for the retailer. Having reviewed the literature on the topic, a few adjustments to the Way station model of Yip et al. (2000) can be proposed. The Way station model is based on the internationalization literature and not on the retail sector per se. The following adjustments can be made to make the model more suitable especially for the retail industry.

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Secondly, station 4 involves the entry mode selection and it is suggested to add location strategy at this station. For retail, location strategy is also an important decision as retailers operate shops abroad. This strategy can be related to the entry mode choice. For example, when a retail chain is acquired in a foreign market, the location of shops is already determined, but when a retailer decides to set up its own shops, for example one at the time, the location strategy can be carefully determined. Because retailers sell directly to consumers, awareness of the company‟s existence is important to attract consumer traffic so that sales can be generated.

A third adjustment is removing station 5 from the internationalization process because anticipating on barriers and obstacles to overcome is inherent to all the stations in the process. To every station, success factors but also barriers –often the reverse of the success factors- can be attributed making station 5 abundant as a separate station. In addition, because of the turbulent nature of the retail industry, also in combination with international expansion, it is not likely that anticipating on barriers/obstacles will be a separate station but will merely happen on a trial and error basis or throughout all stations.

The final adjustment to be made is the specification of „performance‟. The aim of international expansion for retailers is to be successful internationally. Success for retail can be specified as increased customer value, profit/turnover growth and increased brand power.

2.13. A revised retail internationalization process (RIP)model

For this research paper, a revised model of successful international expansion for the retail industry has been developed.

The new model for international expansion in retail is presented in figure 2. The 4 steps mentioned in the model will be adhered to as the main structure for the next sections.

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3. Methodology: empirical research part I

The literature review has explored which success factors exist for retail companies during international expansion. The literature was predominantly based on research papers describing and discussing the internationalization of retail companies from the USA. In addition, part of the literature discussed internationalization of companies in general and part of the research papers reviewed discussed international trade. However, this research would like to investigate whether the success factors mentioned by the authors of the reviewed articles do also apply to Dutch retailers. In order to confirm and/or adjust and complement the list of success factors with evidence from Dutch retailers a research approach has been chosen that combines the theory –the literature review- with practice. The literature has explored which factors are regarded as critical success factors according to the research papers published regarding international trade in general and the internationalization of predominantly USA retail companies. The factors have been applied to the retail industry and attached to a model with four steps describing the retail internationalization process. The next step is to explore what Dutch retail companies with international expansion experience perceive to be critical success factors during the international expansion process. After the key success factors for Dutch retail companies have been explored by conducting qualitative research among a small sample of Dutch retail companies, they will be compared with the results of literature review.

3.1. Research method

To create understanding of the behaviour, opinions, and process of Dutch retail companies regarding international expansion and to explore whether the factors mentioned by literature do also apply to Dutch retailers, a suitable research method is to conduct interviews (Saunders, Lewis & Thornhill, 2007). Interviews are considered the primary data collection technique for gathering data in qualitative methodologies (Cooper & Schindler, 2006). Because this phase of the research is exploratory and it is important that retailers provide a lot of information (spontaneously) on the topic, semi-structured, face-to-face interviews have been selected as the appropriate research method.

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3.2. Sample

In total, five Dutch retail companies well-known in the Netherlands have participated in the research. The retail companies operated in a variety of retail segments so that the retail industry would be better represented than when only one retail segment was selected. The retailers operated a retail chain in the Netherlands and in at least one foreign market. Since international expansion strategies are developed at Board level, the respondents were all either CEO or CFO of their company.

3.3. Procedure

All participants have been contacted by their PwC contact person to arrange the interviews. Prior to each interview, the respondents have received an email that informed the retail company of the purpose of the research and what their added value could be when they would participate in the interview. Every interview was conducted by two interviewers and took approximately 1,5 to 2 hours. After the interviews the outcomes were discussed among the two interviewers to assure the main points could be derived and were agreed upon.

3.4. Limitations

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4. Interview results

In this section, the interview results will be discussed per step of the retail model with an additional 5th

chapter describing key success factors crucial throughout the process (section 4.1 -4.5). The literature has identified key success factors crucial at stations during the process of international expansion, in this chapter the key success factors will be evaluated and complemented according to the information provided by 5 interviewed Dutch retail companies well-known in the Dutch market who all have experience with failures and successes in international markets. Names and figures of the Dutch retail companies will not be mentioned as the retailers have participated in the research on the condition that all results will be treated confidentially and anonymously. Some key factors appear to be crucial throughout the entire process -experiential learning, the commitment of management and employees and the commitment of financial resources- and they will be discussed in a fifth section after the four sections discussing the key success factors and lessons learned per step.

4.1. Step 1: Motivation & planning

All interviewed companies had growth and progression as main reasons for expansion. At this stage, the strategic planning regarding the pace and direction of expansion is determined which varies substantially among the researched retail companies. The key success factors and lessons learned for this stage will now be discussed, the complete interview outcomes can be found in appendix 2.

4.1.1. Success factors compared to success factors from literature 4.1.1.1. Market pioneering

In literature, market pioneering is mentioned as a key success factor when motivating and planning international expansion. During the interviews, this success factor has been discussed as a key success factor as well, but merely in combination with risk-taking. One of the retailers operates an retail formula with innovative products combining home & living products with personal-care products. This retailer mentioned that there is a trade-off between market pioneering and the risk that something goes wrong during international expansion. The latter situation can result in withdrawal which indicates financial loss. However, the retailer stated that this is manageable on a small scale -financial losses stemming from one of a few shops can be considered minor losses- but should not happen on a broader scale. Begin innovative and a pioneer in the market involves risks but can turn out positively as well.

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more appropriate than market pioneering as other discounters are also active in the markets that the Dutch discounter has entered. The general key message for all retailers at this stage is that retailers should dare to take risks. Daring to take risks appears to be considered even more important than „market pioneering‟ as the retail structure in Europe is quite well-developed and therefore many of the Dutch retailers interviewed are not the first in their segment to enter new markets.

4.1.2. Additional key lessons at the Motivation & planning step

Other key lessons learned at this stage refer to success in the domestic market and the publication of expansion expectations in anticipation of the actual expansion.

4.1.2.1. Success in the domestic market

Several interviewed retailers mentioned that a retail company should be successful in the domestic market before attempting to expand to other markets. This statement confirms what was stated in the literature. The retailers believe that there is no chance to become successful abroad when the retail brand is not well-established in the home market. Reason for this is that it is highly important to be able to build the retail format in each new market. Therefore „you should know who you are and what you want‟ according to one of the retailers. If the retail formula is not clearly defined and does not appeal to the local consumers, chances are low that the retail formula can be transferred to new markets and suddenly becomes successful there. However, success in the domestic market is merely a condition to successful international expansion than that success in the new market is dependent on the success in the domestic market. As the many failures of even major well-known retail companies with presence worldwide have shown in the literature review; success in the domestic market does not guarantee success in foreign markets.

4.1.2.2. Publishing expansion expectations

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Nevertheless, the experiences of these interviewed retailers can prevent other retail companies to making the same mistakes.

4.1.3. Conclusion of results at the Motivation & planning step

The key success factor at the Motivation & planning step was market pioneering. Based on the interview outcomes, market pioneering can better be adjusted to „daring to take risks‟, as risk-taking can be more generally applied as a key success factor to the Dutch retailers who are often no first-movers in a new market, but rather late-first-movers.

Two key lessons learned have been discussed at this stage. First of all, that success in the domestic market is a requirement for success in new markets. Secondly, retail companies should be careful when publishing their expectations regarding number of shops and turnover to be generated during international expansion as it turns out that Dutch retailers are often too optimistic and even arrogant about the complexity of entering new markets successfully.

4.2. Step 2: Market research & -selection

In the Market research & -selection phase, retail companies decide on which market or markets to enter after conducting market research to a certain extent. In retail, opportunism plays a main role when selecting markets so in some cases market research is conducted after a market has been selected for entry. Markets are still mainly selected by Dutch retailers because of their perceived cultural and geographical proximity.

4.2.1. Success factors compared to success factors from literature

In the literature four key success factors were discussed when combining the market research & -selection step. One of them, referring to the perceptions and attitudes of decision makers, will not be discussed here as it appears that this factor is crucial at each step of the process. The other three key success factors are also relevant throughout the entire process but are crucial at this stage of the international expansion process for retail companies.

4.2.1.1. Host market understanding by conducting market research

The literature has indicated the importance of understanding the target market to be entered. To increase understanding, conducting market research is vital. Most of the retailers agree as all the retail companies have experiences failures in the past, they state to have learned that market research can reduce potential barriers/obstacles significantly: „Do your homework before you start expanding to new markets. Preparation is key and thus our company never enters a market without having conducted market research in the target market first‟.

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retailers that are active in Belgium mentioned to have made the mistake to think that the Belgian and Dutch market are quite similar. In reality, the differences between these two markets are huge, even though cultural and geographical proximity is close. Take for example a Dutch retailer who had to find out the hard way that the typical Dutch sausage; the „rookworst‟ did not appeal to Belgian customers at all.

The same difficulties as with Belgium were experienced by retail companies when entering the German market. One retail company had spent 10-12 years to become successful in Belgium, 7-8 years to start making profits in Germany and after these experiences, the company learned that conducting extensive market research before entering new markets is essential. At present, the company states that about 3 years of extensive market research results in sufficient preparation and understanding. By involving local people with local knowledge and doing pilot tests in the market, the company managed to run its business successfully in 1 day when entering France.

Compliance issues were perceived as one of the main obstacles experienced during international expansion. Retailers were not aware of the fact that for example labeling should be adjusted for multiple languages, some food-products are not allowed to be exported to e.g. Brazil, shop opening times differ between countries, and in France it is for example required that a certified optician is always present in an optician shop during opening times. Conducting market research can reduce the compliance issues by anticipating on these differences between markets.

A retail company that has less financial power than the other interviewed retailers and that operates only franchises, indicated that conducting extensive market research was not a must to become successful. They believe that their brand is strong enough and their products innovative enough to attract customers in new markets. As they operate franchises, the financial losses from franchises in the case of unsuccessful franchising are less substantial than for retailers operating own shops abroad. Nevertheless, even this retail company conducts market research to select appropriate shop locations in foreign markets, although in this case, finding the right franchise partners was perceived more important than the market itself.

4.2.1.2. Attractiveness of the foreign (consumer) market

This success factor has been confirmed during the interviews with retailers. In most cases this factor was probably assumed and perceived as so logical that it was not mentioned as a key lesson learned but was implicitly mentioned in their stories on their expansion experiences, especially with regard to market selection. „Select markets where there is high growth potential for your products and services‟ as stated by one of the retailers summarizes the attitude of the retail companies regarding this key success factors.

4.2.1.3. Availability of networks or the possibility to create a network

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key factor. According to the Dutch retail companies, networks are important to reduce protectionism by gaining trust and getting easier access to licenses, to connect to suppliers, and to find the right partners in foreign markets, especially in case of franchises.

First of all, two retail companies operating in the optical and hearing aid segment, have to deal with local insurance agencies when entering new markets, they stated that local connections are necessary to gain trust of local actors and government. For example, when expanding to France it is very important to involve a French organization during the process. The French have relatively low trust in foreign companies and the government tends to be protective. Involving a local company resulted in easier access to licenses than when the retailers had not involved French people to assist them. An even more specific example was that one of the retailers had to learn that in smaller villages in France it is often necessary to visit the mayor of the village in order to get the business running.

Networks are also important to manage the supply chain as two other retailers indicated. International expansion complicates the supply chain and managing the distribution of products/services often costs much time and effort. One of the retailers indicated that the stability of supplier networks in France and Belgium are less stable than in the Netherlands. Therefore, connections with actors in local markets can help to facilitate the international growth.

A third way in which networks are important relates to franchises in particular. Finding local partners to help running the business in local markets can reduce socio-cultural, economic and legal barriers. For each company this is important when local partners are applied to provide information on the market during the Market research & -selection phase but also to act as country managers/local management with knowledge of the market at a later stage. For franchises, local partners are crucial because they are the ones responsible for operating the shops across borders. Careful selection of shop managers and partners is necessary according to one retailer who predominantly operates franchises and has experience with incompetent partners with e.g. no retail background that has resulted in financial losses in the past.

4.2.2. Additional key lessons at the Market research & -selection step 4.2.2.1. The importance of branding

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4.2.2.2. Underestimation of cultural differences

Several of the interviewed retailers stated that cultural differences should not be underestimated. „As a Dutch company, you have to realize that your are Dutch and that you look at new markets from a Dutch perspective‟. Because the Netherlands is a small country, and the companies interviewed are all established in the Netherlands and well-known in the market, retailers tend to forget that recognition and awareness of their brand only reaches until the borders with neighboring countries.

4.2.3. Conclusion of results at the Market research & -selection step

At the Market research & -selection step, host market understanding by conducting market research is perceived as a key success factor. Although it should be mentioned that the extent of market research necessary can vary among retailers dependent on the retail segment and for example the entry mode; own shops versus franchises because the latter takes less investment and time and is operated by a local franchisee with local market knowledge who becomes responsible for the operation of the shop.

The attractiveness of the consumer market and the availability to access or create networks have both been confirmed as key success factors. In addition, key lessons learned at this stage were the importance of branding; having a clear brand before attempting to expand abroad. A strong brand identity is referred at as a key success factor in the literature at the fourth step. The interviews have revealed that a clear and transferable brand identity is already crucial at this stage. Finally, the Dutch retailers experienced that their Dutch heritage influences their operations significantly resulting in underestimating the complexity of coping with socio-cultural, legal, economical and political differences.

4.3. Step 3: Entry mode & location strategy

Once target markets have been researched and selected, the company needs to decide how to enter a market and where to locate the retail shops. The interviews revealed that the Dutch retailers choose for a variety of entry modes, based on e.g. retail segment and available financial resources. Location strategy appeared to be essential to retail companies and was mainly selected based on the number of inhabitants of a city/region and within a city or region mainly based on high consumer traffic-locations.

4.3.1. Success factors compared to success factors from literature

In the literature, selecting the entry mode and committing financial resources were mentioned as critical success factors at this stage. The interviewees emphasized that location strategy is a key success factor as well. The commitment of financial resources will be briefly discussed in this section and more elaborately in the fifth section (4.5) because this key success factor is crucial at all stages of the retail internationalization process.

4.3.1.1. Entry mode selection

International expansion in retail -

MSc Thesis

International expansion in retail

Key factors influencing the performance of Dutch retailers

across borders

Internship at PwC Advisory

April, 2011

University of Groningen

MSc International Business & Management

Heleen Isabel Jansen

S1582178

Abstract

Acknowledgements

Table of Contents

List of Figures

International expansion in retail

–

Key factors influencing the performance of Dutch retailers

across borders

1. Introduction

2. Literature review

2.5. Station 1: Motivation & strategic planning

2.6. Station 2: Market research

2.7. Station 3: Market selection

2.8. Station 4: selecting the entry mode

2.9. Station 5: planning for contingencies and problems

2.10. Station 6: post entry strategy and commitment of resources

2.11. Key success factors derived from literature

2.12. Adjusting the internationalization model for the retail sector

2.13. A revised retail internationalization process (RIP)model

3. Methodology: empirical research part I

4. Interview results

4.1. Step 1: Motivation & planning

4.2. Step 2: Market research & -selection

4.3. Step 3: Entry mode & location strategy