The European Union is an economic bloc that comprises of countries within the geographical location of Europe. It is the world’s largest and richest economic entity, largest single importer and exporter, and largest governmental donor of foreign aid(Ginsberg, 2010, p. 96). It is an economic magnet for European states. The 2004/2007 EU enlargement was the fifth enlargement of the European union and is considered the biggest ever, with the entry of ten new members in 2004 and a further two joining in 2007, thereby regarded as the Big Bang Enlargement (Smith, Hadfield, & Dunne, 2012, p. 464).
The enlargement of the EU trading bloc brought with it many opportunities both at the micro-level and the macro-level. At themacro-level, the benefits were meant to benefit the member countries in terms of access to capital, security, cushion from broader world economic shocks; while at the micro-level, expansion provided opportunities that were to benefit the private sector, individuals and businesses.This paper provides an analysis and discussion of how Tesco Plc took advantage of the enlargement of the European Union during the 2004-2007 period to advance its interests and maximize its revenues and bottom line through the employment of various business strategies such growth strategy, acquisition strategy, and price-skimming strategy. This essay will attest that through taking advantage of the enlargement of the EU Bloc, Tesco plc has been able to grow as a company.
Benefits of EU Membership
European Union’s policies meant that there were no trade barriers or infrastructural problems. Many of the non-tariff barriers to trade are brought to an end by membership to the economic zone. According to Euromove(2011), the integration of countries into the European Union brings with it a myriad of benefits to businesses within this economic bloc. First, within the EU bloc there is free movement of EU citizens. This is invaluable as employers are able to recruit from a wider pool of labor. This benefit has especially been exploited by British companies which have made extensive use of this access to a larger potential workforce to address the skills shortages in the United Kingdom.Secondly, European laws have made business in the bloc less bureaucratic in terms of registration and protected intellectual property. A company can register an industrial design or trademark once and have it recognized in all the 27 member states.Thirdly, European Union competitive law has been invaluable in opening up previously closed markets to new entrants. This enables new companies to expand on the continent. This enables unhealthy market monopolies to be challenged and tackled in a way that facilitates the growth of new businesses. Another benefit that businesses gain from the single market is that they only have to satisfy one set of laws and regulations as opposed to 27 different rules when operating in or exporting to more than one European Union member state.
Business Benefits of the European Union
The expansion of the EuropeanUnion during the 2004/2007 period brought a lot of benefits both to the old member states as well as to the new member states.Firstly, the old member states profitedfrom an export market that was larger. It is approximatedthat exports to the new member states in the five years after enlargement contributed one percent point on average per year to an annual export growth of 6percent in the old member states. Partly as a result, most of the old member states attained a trade surplus with the new member states(Buti, Székely, & Keereman, 2009).
Secondly, the private sector of old member states countered the challenges brought about by enlargement by reorganizingproduction networks and locating plants to maximize efficiency. This enabled the public sector to maintain global competitiveness, boost growth all across the European Union and in the long runpreservejobs in the old member states. Short-term adjustment costs arose in some sectors such as food, clothing, publishing, motor vehicles and communication equipment (Buti, Székely, & Keereman, 2009).This was for the reason that employment in the old member states was inverselyconnectedwith the rise in employment in the new member states.Finally, the enlargement did not result to an influx of migrant workers “stealing” job opportunitiesfrom the old member states. Beginning 2004, close to 1.6 million people migrated from new to old member states, this number being less than 1percent of the working age population in the old member states. This migration adds some 0.4 percent to GDP in the medium term as bottle-necks in labor markets ease and the skill composition of the migrants is favorable but not optimally used in the long term (Buti, Székely, & Keereman, 2009).
In brief, due to the enlargement of the EU, global competitiveness, and in extent the growth potential, of the EU business and economy in totalstrengthened by means of deepened financial integration and intervention, fast-trackedknowledge transfers, and increasing cross-border employment and trade.Improved allocative efficiency and risk sharing promoting a higher degree of specialization and raising productivity all across the enlarged EU.
Background Information on Tesco Plc
Tesco plc is regarded as one of the largest retail chain globally, after Home Depot, Wal-Mart, and Carrefour, and the world’s largest on-line grocery retailer (Aaker & McLoughlin, 2009, p. 126). It boosts of having the largest distribution of supermarket stores in the United Kingdom.Beginning the year 1999, Tesco has been United Kingdom’s most profitable retailer. In 2009 it had 4308 stores in 14 countries worldwide including more than 2300 in the united kingdom and almost half a million employees worldwide.Tesco plc operates six main store formats.According to Plunkett(2008), these are “Tesco Express, combination convenience stores and gasoline retailers; Tesco Metro, small urban stores designed to meet the needs of the local community; Tesco Extra, hypermarkets located primarily in Asia; Tesco Homeplus, offering clothing and non-food items; Tesco Onestop; and Tesco Superstores, which provides traditional grocery items as well as other non-food products and services.”
Companies always seek lower production costs, gain access to new markets, technological innovations and other means to stay competitive. European companies face competition especially from the United States, India as well as china. Investing in central and Eastern Europe instead of third world countries can help European industry to maintain jobs and create growth throughout Europe.These are some of the benefits that Tesco Plc was looking for when through its managementlobbied for the expansion of the European Union to include economies from Central and EasternEurope.With the inclusion of economies from western and central Europe into the European union, Tesco embarked on an active expansion strategy in the countries within which they already had a network of stores while opening new stores in the countries it previously had not expanded to due to reasons such as trade restrictions, legal obstacles or unfavorable political and economic climate.
How Tesco Plc took advantage of the EU enlargement
According to the European Commission: Press Release Database(2009), after the inclusion of the additional 12 members, the enlarged EU became the largest integrated economic area in the world, accounting for more than 30 percent of world GDP and more than 17 percent of world trade. This presented many companies within this region with extensive investment and growth opportunities, as the expansion enabled the EU to be a decisive player in a global world.
Tesco plc adjusted its strategies to take advantage of the enlarged EU bloc in the following ways:
Access to a wider market through expansion
The expansion of the EuropeanUnion presented an opportunity for companies to expand into the new states economies and markets. This presented a larger market for their goods and services. Tesco was one such company that took advantage of the enlarged European Union, which is one of the strongest economic blocs in the world with 500 millions people making up 7.3 percent of the world’s population(Ginsberg, 2010, p. 96).The company undertook an expansion strategy that involved entrance into new markets as well as expansion of stores in the economies which it already had established some stores thereby increasing its market. This resulted to the overall effect of increasing its revenues and establishing the company’s brand as a common household brand.
Access to cheaper labor
The enlargement of the European Union encompassed a free movement of labor within the union. However, in as much as some of the old member states put in place restrictions of labor within their countries, some of the older member states did not place the restrictions. This resulted to the influx of labor from the new member states into the old member states. This labor was, mostly unskilled or semi-skilled, and thus was fit for job descriptions that were highly manual or required very limited educational background. As a company Tesco is involved in an industry that requires unskilled and, or semi-skilled labor force except for supervisor, line managers, accountants and other higher managerial positions. The influx of labor from the new member states presented an opportunity for Tesco to tap on a cheaper source of labor for the company, thereby reducing their operating costs. It also provided a wider labor pool to choose employees from.
There are usually trade creation effects from increasing the size of a trading block or custom union. Since the enlargement of the European Union, Tesco has been able to source some of her imports or suppliers of goods and services more cheaply from other markets leading to an improvement in the company’s terms of trade. The efficiency of Tesco has increased as resources are diverted and channeled to areas of the company’s comparative advantage subject to local suppliers.
Exploitation of economies of scale from supplying to a larger market
With the expansion of the European Union block, Tesco was able to take advantage of the increased market base and benefit from economies of scale. This meant that the company achieved lower costs per unit and stretched administration dollars over a large product line: professional fees, banking charges, marketing and insurance to name a few.
Free trade and removal of non-tariff barriers have increased access to previously inaccessible markets. Due to Tesco’s increased competitiveness in some economies outside its home country of United Kingdom and the pre-enlarged European Union market, the company faced a myriad of trade restrictions in the form of regulations and protectionist laws that benefited and protected the home country’s companies by increasing foreign company’s costs, reducing efficiency and reducing competition. The inclusion of these economies into the European Union meant that the trade restrictions against Tesco had to be removed and the company had an equal competing climate with the home country’s companies. This enabled Tesco’s operations in these economies to be more efficient, less costly and resulted to Tesco being more competitive thereby increasing its stores in these economies.
Through the EU expansion, Tesco was able to have access to a relatively untapped western and central Europe market. The retail store was able to expand into these markets which were previously relatively reserved for the domestic companies and were safeguarded against external competition through protectionist laws and regulations that minimized the entrance of multinationals into the market. The entry and subsequent expansion of Tesco in such markets as Czech Republic, Hungary, Poland, and Slovakia after their entry into the European Union made Tesco a household brand in these markets and establishing the Company as a market leader in these economies.
Finally, following the 2004 European expansion, Hungary was Tesco’s first expansion venture into central Europe and rapidly became the lead market for Tesco in the region (Reuvid, 2005, p. 194). This was for the reason that after the inclusion of Hungary into the EuropeanUnion, and the trade restrictions minimized, Hungary provided an economy that provided Tesco with an existing base of suppliers, property and customer, as well as a ready market for the retail store.In Slovenia, after its inclusion into the European Union block, Tesco took advantage of the relatively low risk of the country due to the soundgovernmental guidelinesand stability within the economy to expand (Mentis, 2013, p. 1). Additionally, the presence of a fast-growing information technology sector provided an opportunity for Tesco regarding its e-commerce sales platform, in addition to the sporadic increase of internet users.
In conclusion, through a change in operating strategies, Tesco plc was able to take advantage of the enlargement of the European Union through a fusion of an expansion and growth strategy, acquisition strategy, and price-skimming strategy. This is reflected in the extensive increases in the number of stores within the European Union market during and after the 2004/2007 enlargement. Their exploitation of the EU enlargement is also reflected in the recent spur of their revenues and bottom line in their financial report. However, it is worth noting that despite Tesco plc flourishing in the face of the 2004/2007 EU enlargement other small and micro enterprise which did not have the expansion power relative to Tesco’s were negatively impacted by the enlargement and subsequently closed down.
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