External Environment for Retailers in Russia
Globalization has urged business organizations to adopt strategies in internationalization, which involves the expansion of organizations to international markets. The decision of foreign investors, however, is largely influenced by the conditions of the external environment that constitutes the macroeconomic situation in targeted countries for expansion. Thus, it is highly important that prior to making decisions regarding investment practices, business organizations must be able to analyze and assess the external environment.
The emphasis on the need for analyzing the external environment will be further explored by discussing retail investments to Russia. The focus of the paper was to establish the macroeconomic framework inherent in Russia. In doing so, the STEPP forces model was applied in order to look into the various factors that affect the entry of retail businesses in the country. The STEPP forces model refer to social forces, technical forces, economic forces, political-legal forces, and physical forces in the targeted country for investment.
The social forces are tied to consumer behavior and profile, demographics, spending patterns, and culture in the target country while technical forces involve the adoption and reliance of the host country to technology. The economic and political-legal forces refer to the current economic conditions of the country and the various policies being implemented that affect foreign investment in the country. The physical forces simply refer to the geographical structure of the country, with certain emphasis on transportation and the physical infrastructures in the country.
Four retail platforms were selected initially in order to determine which platform suits the macroeconomic condition of Russia. The four retail platforms are Walmart, Tesco, Tiffany & Co. , and Debenhams. Since the technical, economic, political-legal, and physical forces in the external environment (Russia) encourage the fair entry of retail businesses in Russia, the assessment and selection was primarily based on the social forces in the country.
The analysis of the macroeconomic environment in Russia, and the understanding of the unique corporate profiles of the four retail platforms, has led to the selection of Walmart and Tesco. Based on the analysis, Tesco and Walmart will most likely succeed in the Russian market, considering the social forces that affect the country’s economic conditions. 1. Background The internationalization of businesses has been a major trend among commercial organizations since globalization influenced how business processes and functions were being implemented in these organizations.
Globalization has opened up numerous opportunities for business expansion. “The organizational move to globalization is the process of turning new ideas and concepts into creative and useable methods and techniques that assist organizations in expanding their marketplaces and extending their customer base around the entire world” (Lan, 2005, p. 54). Business organizations jump at the opportunity to increase their market share through internationalization because it enables them to gain competitive advantage and to cope with the ever-changing landscape of commercial management.
The internationalization of business, thus, is a globalization strategy of managing business organizations as they adapt to the changes and advancements of the commercial industry. Internationalization, however, does not merely allow business organizations to gain competitive advantage and continually evolve alongside changes in the landscape of commercial management, but also yields many benefits and contributions to the internal and external environment of businesses.
Internationalization also contributes to the “political, economic, social, cultural, and retail structure-related incentives” within a business organization’s home environment (Dawson, 2003, p. 11). Other reasons why business organizations choose to expand in international markets include the following:
- Market congestion in the business organization’s home country decreases profitability and slows down development.
- Expansion in the international market holds promise for business organizations due to the increasing demand of foreign goods and services from various countries around the world.
- Expansions are less complex and difficult due to the rapid development of technology that facilitates information sharing and communication.
- International political and economic climate, including laws that govern foreign trade and investment, allow business organizations to unreservedly penetrate international markets.
- Business organizations may take advantage of the strengths of foreign markets for international growth and development.
Internationalization of Retail Businesses
Retailing is one sector of the commercial industry that takes advantage of business internationalization. “Retailing involves creating an assortment of products from a variety of sources and offering them to consumers. Skill and efficiency in doing this is one of the main sources of one retailer’s competitive advantage over another” (Dawson, 1993, p. 15). Retailers directly sell or market their products directly to consumers who use these or goods and services in their daily lives. Thus, the transaction is from the business to the consumer and not from business to business. Read about benefits of environmental scanning
Retailers manage to directly sell to final consumers by purchasing goods and services in large amounts and selling them to consumers in small amounts. (Newman & Cullen, 2002) Other characteristics and features of retailers include the following:
- Retailers do not limit goods or services being sold to final consumers to one business that is the source of supplies, but acquire various products and services from different commercial organizations.
- Retailers do not limit its market to a specific group of consumers. The market segment of retailers is diverse and flexible.
- Retailers satisfy the needs and demands of consumers by ensuring that goods or services being sold are accessible in terms of location, accessible in terms of time, matched to consumer demand in terms of quantity, and matched to consumer needs in terms of their daily lifestyle necessities.
- Retailing is not limited to a single market setting, such as physical stores or stalls. Through technology, retailing nowadays, may be done online through various Internet platforms.
- Retailing is flexible to various settings, contexts, and environments.
Retail marketing decisions consider different factors such as the culture and behavior of consumers, the position of competitors, future trends in retailing, etc. Retailers have realized the benefits and conditions of expanding to international markets. The opportunities made available by globalization to retail businesses have urged both small and large retail organizations to consider expanding internationally. The primary reasons for internationalization may be explicated by the Internationalization Model of Motivation Structure. The model is shown in Figure 1 below.
Figure 1 shows the four positions that urge business organizations to expand to international markets: the reactive position, expansive position, autochthonic position, and the proactive position. The reactive position suggests that the internationalization of businesses is triggered by the high saturation of market in the home country despite low potential success in international markets. Due to high market saturation, business organizations will be forced to venture into the international markets in order to diversify and gain a larger market share even if the outcome of the transition is still uncertain.
The expansive position suggests that the internationalization of business is also because of high saturation of market in the home country, but on the contrary, is a response to the perceived potential of internationalization. Unlike the reactive position, internationalization is perceived to be beneficial and promising, and not risky to the business, in the expansive position. (Dawson, 1993; Alexander, 1997) The autochthonic position, on the other hand, is a complete opposite of the expansive position since both market saturation and potential of internationalization are low.
Hence, the urge to resort to internationalization is also low among retailers since competition is not tight in the home country, and the perceived outcomes of internationalization are not promising. Retailers within this position are usually small and have only started to operate. The final motivator for internationalization, the proactive position, suggests that despite the low market saturation in the home country, business organizations still consider venturing into the international market because of the promising potential benefits and contributions of internationalization to the business. For retail businesses, the motivation to penetrate international markets is influenced by three concepts – the push, pull, and facilitating factors:
- Push Factors, including the maturity or saturation of home markets, domestic trading restrictions, unfavourable economic conditions, rising costs, adverse demographic changes and imitation of trading styles.
- Pull Factors, including more enlightened corporate philosophies, perceptions of growth opportunities abroad (niche or underdeveloped markets), established bridgeheads in other countries and imitative ‘bandwagon’ effects.
- Facilitating Factors, including the lowering of political, economic and perceived barriers between countries, the broader vision of senior management, an accumulation of expertise, the ability to assess other retailers’ international moves and the improvement of communication technologies.
Based on the push, pull, and facilitating factors, retail business make their decisions on whether to venture into international markets or to focus on the development of the domestic market instead. Push and pull factors are based on the internal and external environments, considering the political, economic, social, and cultural factors, as well as the retail structure. Table 1 below shows the common push and pulls factors within the internal and external environments of retail businesses that are crucial in the decision-making process of internationalization management. The push and pull factors in Table 1 show the various aspects that influence the decision of retailers to venture into international markets.
Some of the push and pull factors in Table 1 also represent the various factors in the internal and external environment of retailing businesses that will urge these organizations to either cease or proceed with internationalization. Push factors are the aspects that elicit a reactive response from retail businesses to proceed with internationalization. Factors may include unstable and unsupportive political environment, deteriorating economic conditions, and lack of support and acceptance from society, may influence retail businesses to expand internationally.
Pull factors, on the other hand, may be some factors in the external environment that motivate retail businesses to adopt internationalization practices. Pull factors may include stable and supportive political environment in other countries and high demand and acceptance of retail goods from other countries.
The Market Situation in Russia
Although the effects of the economic crisis in the late 1990s was primarily observed in South East Asian countries, Russia experienced the outcomes of the aftermath after the economic downturn caused the decrease in oil prices. As a result, the profit of Russia from oil production also decreased affecting the economy in the country. However, Russia has exhibited a quick turnaround in the following years. The Russian government decided to focus on the development of other industries, aside from the oil industry, in order to distribute sources of income for the country. The plans for growth and development by the Russian government also led to the establishment of a positive social environment, which consequently motivated foreign business organizations to invest in various industries in the country.
The growth of the retail industry in Russia is one of the primary factors that led to the country’s recovery from the aftermath of the Asian financial crisis. Throughout the years, many shopping centers and stores have been developed not only in Russia’s capital, but also in other cities and regions in the country. The impact of the development of various shopping malls in the country was reflected in the Russian economy.
Prior to the Asian Financial Crisis, the market environment in the country was traditional in nature such that consumers only bought personal supplies from street and walkway vendors and other old establishments. Furthermore, shopping then was considered a luxury that only individuals belonging to the upper class may afford (Moss, 2005; Packer, 2008). After the economic downturn, however, and the entry of foreign investors in the country, the people displayed contemporary consumer behavior. Consumers began to rely on shopping malls and other new shopping establishments for various goods and services.
Indicative of Russia’s improving condition were new types of shopping opportunities and other consumer conveniences… By 2003, however, a growing number of shopping malls, supermarkets, stores, restaurants, and coffee houses were sprouting up, especially in Moscow. The average salary there was about three times the national average, and with its 10. 4 million inhabitants (2002 census figures) it was more than twice as big as the next largest city… Large numbers of other Russian… also came to Moscow for periodic shopping. The entry of numerous business organizations in Russia, especially retailers, has not only contributed to the economic growth in the country as one of Russia’s primary sources of revenue, but has also signaled the growth of the middle class. In contrast, shopping was mostly not considered as a luxury that only individuals from the upper classes of society can afford. Individuals from the middle classes and some from the lower classes can also afford to purchase their daily necessities from shopping malls and stores. (Trenin, 2007)
Russians also responded well to the entry of various business organizations in the country. The consumer behavior of Russians has changed throughout the years. Based on a survey conducted by ACNielsen in 2008, “40% of Russians love shopping and prefer shopping to other leisure activities” (Ciampi, 2008, p. 604). At present time, various sectors in Russia lead the retailing industry in the country. Some of the top retailers in Russia include supermarkets.
“Perekriostok, Ramstore and Sedmoy Kontinent (The Seventh Continent) are the three major supermarket operators in Russia… they each operate a chain of 20 to 50 stores” (Terterov, 2005, p. 201). Cash-and-Carry stores are also one of Russia’s primary retailer formats but a small number of stores adopt this format. The hypermarket is one of the major formats for retail stores in the country since 1997. “Since then, several other players have pursued this format. The most successful entry into the Russian market has been made by Auchan, a French retailer” (Terterov, 2005, p. 202).
In the fashion industry, selling perfumes and different cloths and accessories, especially branded items, has dominated the retail industry in Russia. Terterov (2005) has emphasized that Russia will be facing more growth and expansion of the retail industry in the coming years, especially in the shopping mall format. Shopping malls will become a hot topic for the next few years. This is especially true given the fact that most Russian cities have available space for shopping centre development.
Modern shopping malls will not only provide convenient shopping for local residents but will also serve as entertainment complexes. We also expect more successful foreign retailers to enter the Russian market in the medium term. Walmart, Carrefour and other possible entrants will bring their own expertise, thus making retail in Russia even more efficient and competitive.
Scope and Objectives
Overall, the success of internationalization among retail businesses relies on the internal and external environments of retail businesses. Thus, evaluating and assessing the internal and external environments is highly important in order to determine whether internationalization will be beneficial to retail businesses. The focus of the paper, however, is on the external environment of retail businesses. The analysis and evaluation of the external environment for retail businesses will specifically focus on Russia with the goal of determining if retail businesses will fit the political, economic, social, and cultural climates in the country.
Four retail businesses will be evaluated for this purpose – Walmart, Tesco, Tiffany’s, and Debenhams. Various theories in trade and internationalization will be applied to analyze the external environment in Russia, the internal environments in Walmart, Tesco, and Tiffany’s, and Debenhams, and the compatibility of these environments that will determine whether internationalization will be beneficial to the aforementioned retail businesses.
In order to accomplish the objectives of this paper, the succeeding discussions will include a thorough review and analysis of the internal conditions within the four retail businesses mentioned. The review and analysis will include a brief history of the retail businesses, goals and objectives, cultural climate, and capacity to penetrate the Russian market, among others. In addition, a shopping mall in Russia will be selected in order to underscore the compatibility of the four formats of retail to the structure of the establishment.
Theories and models in trade, internationalization, and the external environment in retail will primarily be applied to accomplish the objectives of the study. The external environment in Russia will also be discussed in depth in order to determine what retail business will match the current situation in the country considering various push and pull factors, given that that the retail industry is booming and the social and cultural environment is open and inviting of various retail opportunities in Russia.
The External Environment in Russia
Since it has been previously established that the establishment of retail businesses in Russia has witnessed significant growth and development in the country, it is equally important to review the overall external environment in the country including the political, economic, social and cultural climate in Russia in relation to business expansions and the entry of foreign retail businesses in its regions.
The discussion will be instrumental in determining which retail business – Walmart, Tesco, Tiffany’s or Debenhams – will match the retailing structure in the Russia. The review of the external environment in Russia will be conducted by basing the analysis and evaluation on the factors making up the STEPP forces. Analyzing the social, technical, economic, political-legal and physical (STEPP) forces is a valuable model for thinking about the firms external environment. The discussion of STEPP forces expands on the concept of opportunities and threats by looking at a larger environmental trends or forces that may not currently affect the firm but could in the future. Carlock & Ward, 2001, p. 172 The STEPP forces apply in the study because the factors included in the STEPP model, which look into the external environment of businesses, also include the various factors in the macro-environment of retail businesses.