Journal of Strategic Marketing Vol. 19, No. 5, August 2011, 455–469
Dynamic capabilities in a turbulent market environment: empirical evidence from international retailers in China Lanlan Cao* Marketing Department, Rouen Business School (ESC Rouen), Boulevard Andre´ Siegfried, 76825 Mont-Saint-Aignan, France (Final version received 15 January 2011) Dynamic capabilities, understood as the ability to renew a firm’s competences, enable a firm to attain competitive advantage over time, and successful performance in a turbulent environment. The present research explored the dynamic capabilities of international retailers in China from a grounded theory perspective. In-depth interviews with top managers identified 11 dimensions of dynamic capabilities. Their specificities in the field of retail internationalization, and the implications for how to build and classify dynamic capabilities for international retailers through the firm’s strategic activities in the host country, are discussed. Keywords: dynamic capabilities; retail internationalization; turbulence; China; grounded theory
Introduction Since foreign retailers were allowed to enter the Chinese market in 1992, this market has maintained its attractiveness to them, because of its continuous economic growth and the market potentiality that still exists, especially in tier two and three cities in the central and western regions (A.T. Kearney, 2009). Nonetheless, the Chinese market has not been easy to penetrate and develop because of its high degree of turbulence, which can be measured in four ways (Ansoff, 1979): (1) high levels of discontinuity: from 1992 to 2004, the Chinese legal environment for international retailers underwent five significant changes (Wang, 2009); (2) high speed of change: according to the 2009 A.T. Kearney Global Retail Development Index, the Chinese market required only 14 years to move from the opening stage to the beginning of the maturing stage, and then only a further three years to the end of the maturing stage (A.T. Kearney, 2009); (3) strong complexity of environment: the Chinese market remains highly fragmented, and comprises a number of smaller submarkets that are distinct from one another in many ways, including language, culture and economic development (Cui & Liu, 2000); and (4) intensified competition: the presence of many international retailers, and the rapid development of local ones, make this market increasingly competitive. Faced with changes and turbulence, the possession of dynamic capabilities is relevant to achieving a competitive advantage over time, and to the successful performance of multinational firms in this type of business environment (Teece, 2007). The literature has established that international retailers are more embedded in the local context than *Email:
[email protected] ISSN 0965-254X print/ISSN 1466-4488 online q 2011 Taylor & Francis DOI: 10.1080/0965254X.2011.565883 http://www.informaworld.com
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production-based international firms (Wrigley, Coe, & Currah, 2005). In other words, the competitive advantage of an international retailer is more vulnerable to the local environment in the host country (e.g. government regulations, infrastructure of logistics, structure and practices of suppliers, local labour costs, etc.) because the activities of retailers are more influenced by the local dimension (part of local purchasing, local consumption habits, the implementation of logistics and stores). International retailers must change and adapt to the local context if they are to attain success in the host country. Thus, for them understanding how to build dynamic capabilities is important. The current literature shows three types of limit: first, previous studies that explain the mechanisms of change and adaptation by international retailers in a host country have mostly not yet been explicitly put into a theoretical context (Currah & Wrigley, 2004; Goldman, 2001; Kacker, 1988). Even though researchers have recently maintained that the research areas outside the retail sector, such as organizational learning and knowledge management, may have the potential to provide new insights that explain the international development of retailers (Jonsson, 2008; Palmer & Quinn, 2005), the theory of dynamic capability is rarely applied in the international retail field. Second, the paradigm of dynamic capabilities is advanced in particular with the help of industry studies (Teece, Pisano, & Shuen, 1997). Given the extensive differences between the industrial and retail sectors (Dawson, 1994), research aimed specifically at international retailers is of significant interest, both for the top managers of international retailers, and for researchers in this area. Third, most research on this subject is of a descriptive and general nature. It would be interesting to carry out research based on in-depth company case studies, in order to add to the existing body of knowledge. To address these theoretical gaps, this article chooses dynamic capabilities as the theoretical lens by which to observe the strategic activities conducted by international retailers in China, and to identify the links between these activities and the different types of capability. Based on these empirical findings, we then discuss some paths by which to build the dynamic capabilities of an international retailer in one foreign market, and especially in one turbulent market, such as China. Theoretical framework Positioning of dynamic capabilities paradigm Building upon the theoretical foundations provided by Helfat et al. (2007), Nelson and Winter (1982), Penrose (1959), Schumpeter (1934), Teece (2007) and Teece et al. (1997), the dynamic capabilities framework is an eclectic paradigm that draws on multiple disciplines. It seeks to explain the sources of enterprise-level competitive advantage over time, and to provide guidance for managers when renewing a firm’s competences to match the requirements of a changing environment, especially one that is open to global competition (Teece et al., 1997). Compared to the RBV (Resource Based Review) (Barney, 1991), which emphasizes causal ambiguity and the barriers to imitation, this new paradigm provides a better explanation of the mechanism that maintains a sustainable competitive advantage. The ability to renew the firm’s competences, defined as dynamic capabilities, is precious for a firm operating in a turbulent market (Teece, 2007). Analytical framework of dynamic capabilities For analytical purposes, Teece (2007) disaggregated dynamic capabilities into the capability (1) to sense and shape opportunities and threats, (2) to seize opportunities and
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(3) to maintain competitiveness through transferring and reconfiguring the business enterprise’s intangible and tangible assets. He also identified which key activities of the firm are linked to these different capabilities, as explained in Table 1, and these are applied as the analytical framework in our empirical study. Methodology The present research was designed to investigate how an international retailer could build and classify its dynamic capabilities through the conduction of its strategic firm’s activities in a turbulent foreign market. Given these research objectives, China was chosen as our research country, because its market is characterized by turbulence (see introduction). Research in this area is at an early stage (Teece, 2007), and we adopted a grounded theory approach (Strauss & Corbin, 1998), which, especially if expressed in managerial language, may help us to attain new insights, and a better understanding of the relevant phenomena in a specific context (China). As we wanted to build on the existing theoretical vocabulary of dynamic capabilities, such as ‘sensing’, ‘shaping’, ‘seizing’ and ‘reconfiguration’, we pursued theory elaboration as the driver of our research design (Lee, Mitchell, & Sablynski, 1999). Data collection Sampling procedure To ensure the diversity and representativeness of the sampling, nine selection criteria were identified from the literature: sector activity; format; control level of the group on the Table 1. Types of dynamic capabilities, their nature and the related key firm’s activities. Type of dynamic capabilities
Nature of the capability
Key firm’s activities linked to the capability
Sensing (shaping) opportunities and threats
Organizational ability to scan, filter, monitor, assess, create, learn, interpret, figure out and calibrate opportunities and threats
†
Seizing opportunities
Organizational ability to address potential opportunities through new products, processes or services
†
Managing threats and reconfiguration
Organizational ability to recombine and reconfigure assets and organizational structures as the environment changes
†
Source: Adapted from Teece (2007).
†
† †
† †
Investment in research activity Probing and reprobing the information (existing/new, local/distant and Internal/ external): - Customer’s needs (expressed or latent) - Technological possibilities - Supplier and competitor responses - Structural evolution of industries and markets Selection of the physical technology Design of the business model Recruitment of managers to supervise and co-ordinate the functional activities Redesign of the business model Realignment of assets Revamping of routines
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subsidiary; mode of entry; order of entry; phase of entry; group size; capital structure of the group; and the physical and cultural distance between home country and host country. Employing these criteria, an initial sample list that included 121 international retailers’ subsidiaries was identified from the 152 such subsidiaries registered in China (Database of Ministry of Commerce, P.R. China). These companies were contacted through the China Chain Store and Franchise Association, the Shanghai Chain Enterprises Association and the alumni network of Tsinghua University, by telephone, fax or e-mail. Informants The key informants selected were those top managers of international retailers in China who were involved in both strategic decisions and strategic implementation. Thus the CEO, COO, General Manager and Directors in different functions were included in our research. Sample characteristics Twenty-one top managers of 18 international retailers in China participated in our face-toface interviews in three periods: March – September 2005, April – June 2006 and August – September 2007. The final sample (Table 2) reflected the diversity along the nine dimensions defined in our sampling procedure. Interview guide Our research used three versions (Chinese, French and English) of the interview guide, according to each respondent’s country of origin. The original version, in French, was pretested by professional and academic experts. The translated versions, in Chinese and English, were checked by native language speakers. The interview guide had three parts. The first asked the respondents to present the environment of distribution in China, especially in the sector in which their company was engaged. They were then required to evaluate the competitive advantage of their company compared to their direct competitors, as they defined them. They were also asked to describe how their company was able to create value for its customers, and to do so better than their competitors. The second part was designed to indentify the various dimensions of their dynamic capabilities. The participants were asked to recall and describe how their company had been able to maintain its competitive advantage as it had evolved in the Chinese market. They were also asked to illustrate their descriptions with examples. Finally, in the third part the respondents were invited to describe their company and their own background. Data analysis Each interview was recorded by digital equipment, lasted approximately 60 – 90 minutes, and was transcribed verbatim. The analyses of the transcription followed the traditional grounded theory guidelines. From the software available for qualitative analysis, we chose Atlas.ti to help us manage, extract, compare and explore the meaningful data in our transcribed texts. We identified the first round from the transcribed texts all the firm’s strategic activities. To improve the reliability of the data, the secondary data, including the academic literature, the annual reports of the companies concerned, the specialized
Kim, COO of the northern region subsidiary, 57 Bo, Administrative Director, 48 Jean, Managing Director of UK subsidiary, 60 Jack, General Director of store in Shanghai, 35 Lu, Deputy MD of the subsidiary, 58 Willis, Deputy MD of the subsidiary, 67 Riddi, Managing Director of group, 52 Xavier, Development Director, Asia, 38 David, Managing Director of the subsidiary, 36 Deng, Development Director for subsidiary, 42 Henry, Communication Director for the subsidiary, 45 Li, Deputy MD of the subsidiary, 46 Meng, Development Director, 46 Zheng, Communication Director, 55 Thierry, Managing Director, 45
Respondents (Pseudonyms)
Table 2. Study sample.
Mixed (food þ non-food) Mixed (food þ non-food) Mixed (food þ non-food) Mixed (food þ non-food) Mixed (food þ non-food) Non-food (general goods)
CARREFOUR
CARREFOUR
METRO
METRO
LOTUS
LANE CRAWFORD MONTAGUT
Mixed (food þ non-food) Food Non-food (beauty product specialist) Mixed (food þ non-food) Non-food (beauty product specialist)
DICOS
WALMART
7-ELEVEN
WATSONS
SEPHORA
AUCHAN
Non-food (decoration and do-it-yourself specialist) Fast food
B&Q
Non-food (general goods)
PARKSON
Non-food (textile specialist)
Sector of activity
Retail group
Specialist
Hypermarket
Restaurant chain Centre commercial Convenience store Specialist
Specialist
Department store Specialist
Hypermarket
Cash & carry
Cash & carry
Hypermarket
Department store Hypermarket
Format
Joint subsidiary
Joint subsidiary
Joint subsidiary þ Master franchise Joint subsidiary
Joint subsidiary
Joint subsidiary þ Direct investment Master franchise
Direct investment and licence Master franchise
Joint subsidiary
Joint subsidiary
Joint subsidiary
Joint subsidiary
Joint subsidiary
Joint subsidiary
Mode of entry
2005
1999
1989
1992
1996
1996
1999
1971
2000
1997
1995
1995
1995
1995
1994
Year of entry
Growth
Growth
France
Hong Kong France
United States Japan
Taiwan
UK
Hong Kong France
Thailand
Germany
Germany
France
France
Malaysia
Country of origin
(continued )
Repositioning
Growth
Growth
Repositioning
Growth
Repositioning
Growth
Repositioning
Growth
Growth
Repositioning
Repositioning
Growth
Entry phase
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ESPRIT
ETAM
DECATHLON ZARA
Paul, Managing Director, 55
X, Director, 40 Jesus, Director
IKEA
SEPHORA
Retail group
Heguo, Marketing Director, 47 Linda, Administrative Director, 41 Shen, Managing Director 52
Respondents (Pseudonyms)
Table 2. (Continued).
Non-food (beauty product specialist) Non-food (home furnishing) Non-food (textiles and accessories) Non-food (textiles and accessories) Non-food (sports products) Non-food (textiles and accessories)
Sector of activity
Specialist Specialist
Specialist
Specialist
Specialist
Specialist
Format
Joint subsidiary Subsidiary
Joint subsidiary þ franchise Subsidiary
Joint subsidiary
Joint subsidiary
Mode of entry
2003 2006
1995
1992
1998
2005
Year of entry
Growth Growth
Growth
Repositioning
Repositioning
Growth
Entry phase
France Spain
France
Germany
Sweden
France
Country of origin
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economic press and government publications were collected in order to compare them against the data collected by the interviews. During the second analysis round, we began to theorize on the basis of these identified firm’s activities using ‘open coding’ (Strauss & Corbin, 1998). This allowed us to identify key passages from different texts that corresponded to a large number of empirical codes. During the third analysis round, one practice of axial coding (Strauss & Corbin, 1998) enabled us to structure the empirical data into theoretical categories, and more general aggregate dimensions. The data structure in Figure 1 demonstrates the outcome of this process of theory elaboration. To improve the reliability of our interpretation of the data, we asked the second researcher to undertake a partial analysis of the data, and some adjustments were made after various differences had been discussed. To make possible further adjustments, we obtained feedback on the study results from some study respondents and experts in the Chinese retail sector. To improve the validity of our research results, each research proposition was the result of a comparison between the empirical research findings and the previous literature. Results Three dimensions emerged from our interviews with top managers in China: sensing; shaping; and transfer and reconfiguration, with their 11 categories of international retailers’ dynamic capabilities (Figure 1). This section discusses in detail these dimensions, and the international retailers’ strategic activities related to them. Capabilities of sensing #1: market survey The participants in our study consistently report that investment in market surveys and related activities is obligatory for development in China. Before entering China, the international retailers had usually asked a professional consulting company to do the global market research, which tended to last several months, or even several years: for example six months for B&Q, two years for Walmart and six years for Metro. After entry, the participants (e.g. B&Q) mentioned the importance of regular local consumer surveys, which enabled the companies to understand local consumers better, and to adapt their offers (products, services and prices) to them. To offer local products (especially food) the international retailers have to work with a large number of local suppliers (Coe, 2004), most of which are small and medium enterprises (SMEs). Several participants in our study (e.g. Lotus) also underlined the necessity of organizing a regular local supplier survey, by which their companies could select their suppliers well, and then invest in them by paying for training or other types of support. Since the arrival of major international retailers and the subsequent rapid imitation by local retailers, most of the companies in our study have set up special teams to undertake consistent intelligence research on competitors. For example, Auchan uses one special team to monitor their competitors’ prices consistently. Most participants also mentioned that the disposition of an efficient information system is crucial to obtaining a sense of the local market. Thanks to this system, they were able to collect credible, rich and real-time data from each store: Zara: Every day our headquarters in Spain can receive large amounts of data from China. These primary data even detail each transaction: article; size; colour; quantity; sales time; payment method; discounts, etc. Each department decomposes this information according to their requirements, and then makes their judgments regarding the Chinese market.
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L. Cao First-order codes
- Global research before entry - Special local consumer survey - Special local supplier survey - Intelligence research on competitors - Disposition of an efficient information system
Theoretical categories
Market survey #1
- Test in similar regions or countries outside the host country - Test in one store, one city or one region inside the host country
Experimentation #2
- Creation of call centre - Delivering consumer loyalty/membership programme - Organizing seminars and forums
Relationship management with stakeholders #3
- Alliance with local retailer - Alliance with local producer
Finding right local partners #4
- Introduction of new shopping and consumption patterns to local consumers - Consumer training programme - Application of international standards and producing processes to local suppliers - Supplier training programme - Introduction of new formats, retail technology and systems - Local retail talent training programme
- Decomposition of organizational structure - Partial delegation of power to local manager - Creation of local purchaser teams - Promoting local staff to managerial posts - Imposing centralized standards, systems and procedures - Transferring the company culture from HQ to subsidiary - Implementing the relevant incentive systems - Quantitative and qualitative audit
Aggregate dimensions
Sensing
Changes in consumption practices #5
Supply network dynamics #6
Shaping
Changes in local retail competitiveness #7
Decentralization #8
Governance #9 Transfer/Reconfiguration
- Knowledge transfer from HQ to subsidiaries - Local learning - Knowledge integration by HQ
- Innovation with local suppliers - Innovation with local complementors
Knowledge management #10
Innovation with local suppliers and complementors #11
Figure 1. Final data structure after third round of coding.
Capabilities of sensing #2: experimentation Companies acquire knowledge, intentionally or unintentionally, through direct experience or learning-by-doing (Palmer & Quinn, 2005). Given the special characteristics of China, before entering the mainland market, the international retailers could have chosen Taiwan, Hong Kong or Macau as an experimental field in which to test their business model. Most participants in our study declared that their companies had experimented in Taiwan because its environment was closest to that of the mainland, as had Carrefour, B&Q and Decathlon. Our participants then mentioned their direct experience in the Chinese mainland market, via first opening one store or several pilot stores in a metropolis, and then extending to the surrounding areas. For example, the first series of Carrefour stores was
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opened in Shanghai, and then other stores were developed in the Yangze River Delta. Walmart however chose Shenzhen as its first test city in China. Capabilities of sensing #3: relationship management with consumers and suppliers According to some participants, such as Carrefour, B&Q and Lotus, the provision of a call centre facilitates their company’s initial understanding of the consumers’ needs. Consumer needs can also be analysed from the information collected through the consumer loyalty or membership system, as illustrated in this passage: Sephora: Today we have around 50,000 loyal clients in China. We know well their choices, why they chose . . . the profile of each loyal client is in the details. We analyse their profiles . . . We provide them with product training, and promotion accordingly.
Sensing opportunities and threats can also be facilitated if the international retailers listen to their suppliers. Several participants mentioned that the creation of a call centre and the organization of seminars for suppliers are helpful for communication between the two parties, as with Carrefour and B&Q. Capabilities of sensing #4: finding the right local partners Apart from legal limitations, finding the right local partner is also regarded as a rapid way for an international retailer to achieve ‘embeddedness’ in the real estate and labour markets, the supply systems and the local cultures of consumption (Wrigley et al., 2005). The participants in our study differed in how they chose partners, with local retailers or local producers. Even for the former choice, there are two options: collaboration with two or three large and strong partners, such as Walmart, or collaboration with many partners located in different regions or cities, as with Carrefour. Compared to the generalist, which often chooses a local retailer as partner, the specialist tends to choose a local producer to help them integrate more quickly into the global value chain of one particular sector of activity, as in the choices made by Decathlon and Sephora. Capabilities of shaping #5: changes in consumption practices The situation of rapid economic development and rising living standards created a gap between Chinese consumers’ changing needs and traditional retailers’ inability to fill them. This gap was filled by modern foreign retailers (Goldman, 2001). Our study confirms the influence of the presence of international retailers on the changes in Chinese consumers’ consumption patterns: Metro: In 1996 our first store was opened in Shanghai. At that time the format of Cash & Carry, and Self-Service, are new concepts for Chinese consumers. They were used to buying fresh products in wet markets or street markets, and to buying textiles and apparel in the department stores, where most products are presented behind the counter. They found big changes when they visited our stores: self-service, open shelves . . .
After all it is only a short time ago that rapid economic development began in China. For some special categories of products, Chinese consumers lack sufficient product knowledge, and cannot make the right purchasing decisions. With this in view, several participants also indicated that they had organized special products training for local consumers. For example, Sephora trained its VIPs clients to learn how to use make-up, Carrefour held presentations inside its stores on how to taste red wine and Montagut helped its clients to distinguish between the true brand and a counterfeit.
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Capabilities of shaping #6: supply network dynamics The purchasing activities of international retailers have had a significant impact on local supply networks (Wrigely et al., 2005). International retailers have imposed centralized procurement systems, logistical system upgrading, shorter supply networks, new forms of intermediaries, quasi-formal contractual systems and private/international quality and safety standards on supply chains (Coe, 2004). This is partially illustrated by the participants in Metro in the following passage: Metro: We always meet the problem with our suppliers at the level of product standard. They often vary packing, size, weight and ingredients. When the quality of their products did not satisfy our standards, we refused to accept the goods. They complained that we were too critical, because the same products are accepted by the other local retailers . . . Anyway, it’s good for improving the whole industrial standard level since the entrance of foreign retailers.
Beyond imposing standards on local suppliers, international retailers are proactive in offering training to their suppliers to consolidate their supply networks, according to the declarations of most participants: ‘We propose regular training to our suppliers regarding varied subjects: quality control, legal practices, etc. The training is formalized by special teaching materials, for example the “B&Q Supplier Manual” and the “Handbook of Corporate Social Responsibility”’ (B&Q). Capabilities of shaping #7: changes to local retail competitiveness International retailers entering emerging markets bring with them new formats and pricing structures, improved information management processes, new marketing and merchandising methods and high levels of investment capital, thereby dramatically altering the local retailing landscape (Wrigley et al., 2005). Given this pressure, local retailers seek consolidation by an alliance with the international retailers, and by rapid imitation of them: Carrefour: It’s simple: the leaders are the international retailers who indicate the direction, and the local retailers copy them and, I have to say, some of them do so well enough and rapidly enough. This forces us always to have a big advance, to push everyone to advance. It’s one permanent war about the new concepts, the new stores, the new markets, which are exploited at a terrible speed.
Most participants mentioned that there had been a lack of local retail talent when their companies entered China. They had to invest heavily in human resources, and to create a training centre in China. As a consequence, more and more qualified local retail talents became available in the market after international retailers had been present for several years. Capabilities of transfer and reconfiguration #8: decentralization Decentralization must be pursued as enterprises expand, because otherwise flexibility and responsibility will be eroded (Teece, 2007). Most participants in our study emphasized that the decomposition of a company’s organizational structure in China into four to five subunits seems necessary, and the devolution of partial decision rights (decision rights regarding merchandising and shop staff management, and purchasing several categories of products) to these subunits, which are often regarded as quasi-independent profit centres: Carrefour: Each store is regarded as one profit centre in our company. The store manager was delegated important powers, which concern two aspects: firstly, the decision rights of merchandising management, including assortment, pricing, promotion, ordering and presentation in shelves. Secondly, the decision rights of shop staff management.
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Given the fragmentation of certain industries in China, and the lack of national suppliers, the decentralization of procurement management and the creation of local purchaser teams are also considered one solution that has been adapted to the local environment by some international retailers, including Auchan, Carrefour, B&Q, Ikea and Walmart. Since the local staff knows the local market better than the expatriates, most participants agree that the promotion of local staff to managerial posts helps the company adapt to the local context: ‘Over several years, we continued to introduce local products to enrich our assortment . . . Our localization is not limited to the introduction of local products, but also includes promoting local staff to the management level’ (7-Eleven). Capabilities of transfer and reconfiguration #9: governance Certain participants (Etam, Montagut, Sephora, Walmart) emphasize that when a retailer takes a decentralization decision, it must be able to ensure the implementation of organizational control, to avoid any potential abuse of power, which is often associated with strategic ‘malfeasance’ (Teece, 2007). Since the retailer should deal with lots of different types of flow – products/services, information and cash – and should collaborate with a large number of persons in geographically dispersed stores (Cao & Dupuis, 2009), standardized systems and procedures become the cornerstone of the retailer’s management. Unlike local retailers, the international ones have the advantage of using systems that have been tested and improved in the home country or elsewhere, and need only subtle adjustment in the host country: Metro: The problem with the local retailers is that there is a lack of well-formalized and standardized operational systems. Our key advantage at the level of exploitation is to duplicate our model in each store with the help of standardized operational manuals, which cover nearly all aspects and procedures of the company’s activities, from procurement to sales in the shop.
Being softer than the management systems, the company culture facilitates an international retailer in overcoming the barriers to multicultural management in the host country: Ikea: The strategy of adaptation doesn’t restrict Ikea to maintaining the specificities of its culture in China. For example, the employees in Ikea China are strongly affected by the company’s culture on the protection of the environment, which was transferred from HQ to the Chinese subsidiary. In each shop, the hot water is partially supplied by solar energy.
Most participants mention that governance issues are always associated with the capabilities of the Human Resources management of the company. Improving staff skills and enhancing their motivation at work are objectives to be achieved through implementing the relevant incentive systems: for example, the individual employee shareholding programme in Auchan China, and the internal promotion system for staff in B&Q China. Both regular and irregular internal audits are also useful tools, and participants emphasize that they assist in organizational governance: ‘We assess our shops in terms of their sales turnover, annual profit and operational charges. The result of these assessments determines the annual bonus of the store manager, and of the department supervisor’ (Auchan). Capabilities of transfer and reconfiguration #10: knowledge management Most participants confirm that their companies try to preserve their original formula even when adopting an adaptation strategy in China, to bring real value to local consumers, and to differentiate themselves from local retailers. These practices and experiences could be transferred by the expatriates who conduct the training and internship programmes for
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local staff, or teach them by word and deed in the field: ‘The transfer of company culture and experiences in Carrefour is traditionally by oral means, by the expatriates, especially the Taiwanese, and also by the training internship programme’ (Carrefour). In fact, knowledge flows not only from HQ to subsidiaries: flows are also possible from subsidiaries to HQ, or between subsidiaries. Through local learning, each subsidiary can be regarded as a centre of excellence, because it is closer to local consumers and local markets. The innovation process in the retail sector is often driven by bottom–up learning (Wrigley et al., 2005): B&Q: For us, as the subsidiary of our group in China, we have to report all our experimentation, all innovation to HQ. In our group, innovation is not driven by top –down but by bottom – up . . . Our shops in China were not inspired by those in the UK. They also integrated elements from France, Taiwan and Turkey. By contrast, in our shops in the UK you can also find elements from China.
During the learning process of international retailers (Palmer & Quinn, 2005), HQ plays the role of integrator for the knowledge sharing inside the network of the group (Currah & Wrigely, 2004; Jonsson, 2008). Real or virtual tools are applied to facilitate knowledge sharing. Tacit expertise can now be achieved at a distance through the virtual platform constructed by the group: B&Q: Our group constructed one platform . . . After having it integrated by the group, we know well what happens in the other subsidiaries . . . For example, we need one IT solution. At first we will not seek it outside the group, and we will check it inside the group . . . If a similar solution exists in another subsidiary, we can study it.
Knowledge sharing is organized in formal and informal ways, via, for example, joint projects or functional meetings and visits, the personal network (Jonsson, 2008): ‘Each year our group organizes reciprocal visits among different foreign subsidiaries’ (B&Q). Capabilities of transfer and reconfiguration #11: innovation with local suppliers and complementors Today the retailers do not simply act as one intermediary that transports the goods or services from the producers to the end consumers. They intend to extend their activities to the upstream of the supply chain, and to collaborate with the suppliers to develop new products or services. New products and services, or one global solution developed conjointly with suppliers, help the international retailer to redesign its original business model in the host country, and to adapt better to the local context. For example, Carrefour co-operates with the local organic farm to improve the quality of local agricultural products, because in China the safety of food is not effectively ensured. B&Q has an alliance with Haier, the largest local manufacturer of household appliances, to create a buy-a-set centre inside each B&Q China shop. This centre enables consumers to try out the products, and affords a global solution, including several additional services: design, installation and maintenance services, all of which are required, especially by local consumers. Besides collaborating with local suppliers, international retailers also try to work together with local complementary actors to realize front office and back office innovations. For example, 7-Eleven co-operates with Guangzhou Metro Corporation to open its shops in subway stations; B&Q collaborates with China Construction Bank to offer consumers the joint credit programme ‘Zero down payment, Zero interest for the first six months’; Metro works with Checkpoint System Corporation to test the application of RFID (Radio Frequency Identification) in its supply chain management in Asia.
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Discussion and conclusions The goal of this research was to fill a gap in the international retail literature by investigating the international retailer’s dynamic capabilities in a turbulent market. Although the scholarship of dynamic capabilities has advanced rapidly, especially by the series of studies of Teece, there is a paucity of concerned research in international retail. This study used an inductive process to analyse deeply the dynamic capabilities of international retailers in a context that, to our knowledge, has not been studied in previous literature. Classifying and building the dynamic capabilities of international retailers We first classified various dimensions and categories of the dynamic capabilities of international retailers in the host country, and identified those strategic activities of the firms that helped to build their dynamic capabilities (Figure 1). This finding affords one framework to enable an international retailer to analyse its dynamic capabilities in a host country, especially those with a turbulent environment. The results of our research, which has established the links between the firm’s strategic activities and each dimension of dynamic capabilities, lead us to make certain practical recommendations for the top managers of international retailers concerning how to build the dynamic capability of their company in its host country. For example, the activities of imposing centralized standards, systems and procedures on the subsidiary or on each shop, of transferring the company culture from HQ to subsidiary, of implementing the relevant incentive systems for local staff and of quantitative and qualitative audit, will enable the international retailer to develop its governance. The governance associated with decentralization enables the international retailer to transfer and redesign its original business model to adapt well to the local context, by reducing the risk of loss of organizational control. Specification of the dynamic capabilities of international retailers Comparing our findings (Figure 1) to the recent study of Teece (Table 1), which is especially advanced in the industrial sector, we could highlight the specificities in the field of retail internationalization. Rarely are new business models designed to seize local opportunities In our study, we find only rare evidence that international retailers have created completely new business models to seize local opportunities. In fact, most of them have chosen to transfer their original business models to, and duplicated them in, the host country. The motivation of an international retailer can be explained by the fact that a robust and distinctive business model constitutes its key strengths in its home country. However, a retail business model is embedded in its original context: its elements may be costly to transfer, and lacking in relevance, or less effective, in the new environment (Goldman, 2001; Kacker, 1988). It is then necessary to redesign an original business model to be adapted to the local context. For international retailers in the host country, seizing local opportunities thus concerns more the capability to transfer and reconfigure than the capabilities to design a new business model. The creation of one new business model specifically intended to seize local opportunities is, however, still a marginal phenomenon in our study. This phenomenon should be studied by further research, especially in the form of a profound case study of international retailers who have already been in China for a long time, and have passed from the rapid growth stage to the repositioning stage.
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Learning by doing is one important way of sensing the local market International retailers should be closer to the local market, and more embedded in it, than international industrial firms, with the result that the delay in the return on investment is longer, and the exit sunk costs are higher for them (Currah & Wrigley, 2004). Thus international retailers often prudently take the decision to enter into one new foreign market, and to try to obtain as much knowledge as possible via different sources and methods. In our study, we find that, apart from the market survey, the international retailers prefer to acquire knowledge through learning by doing. Testing the original business model in one similar but less important market (e.g. testing in Taiwan before entering the Chinese market), or opening a number of pilot stores directly in the target market (Palmer & Quinn, 2005), can help them to reduce effectively the perceived risk of one turbulent market. Shaping the local market because of the embedded investment Since the international retailer is more embedded in the local market, at the level of scope and scale, the interactions between the international retailer and its local environment are normally more important than those between an international industrial firm and its local environment. This means that the international retailer is shaping the local market, but is also constrained by it (Wrigley et al., 2005). In our study we discover that international retailers can have an impact on the local market in three ways: through changes in consumption practices; supply network dynamics; and changes in local retail competitiveness. Reconfiguration in the local context is facilitated by bottom –up innovation Unlike an international industrial firm, in which innovations are often centralized in the group, and then diffused top – down to each foreign subsidiary, the innovation process in the retail sector is often driven by bottom –up learning. Each shop is potentially an autonomous centre of innovation, embedded in (and shaped by) a unique local context (Wrigley et al., 2005). This bottom – up innovation mechanism facilitates the reconfiguration of the international retailer, and enables it to adapt its original business model in a variety of ways (and with constraints, more or less rigidly applied) to achieve a competitive advantage in the host country, in which the market is full of changes and turbulence. To test the external validity of these propositions, the same study should be carried out in other turbulent markets, such as India or other markets in Eastern Europe. Acknowledgements This research was funded by a grant from the China Retail Research Center, Tsinghua University (Grant ID: 100004003).
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