Strategic Analysis Of Tesco

Submitted by enowtakala on August 4, 2011

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INTRODUCTION

One of the prevailing trends in today’s global market is the internationalisation of businesses. Businesses are experiencing growth in their foreign operations more than they do domestically. Automobile companies for example are experiencing stiff competition in the global market. In order to combat these undesirable trends and achieve superior performance, businesses need to come out with valuable strategies so as to better exploit and expand in the global market. A good strategy is a key component to the success of any company internationally and domestically.

According to Hill and Jones(2009) ‘superior performance is typically thought of in terms of company’s profitability relative to other companies in the same or similar kind of business or industry’

According to Robert Kelly and Janet Caplanhas a company is said to have superior performance when it has the capacity to recognize opportunities that can add value, the capacity to complete quality work on a time, the ability to act as a change agent, work through organizational politics, the ability to inform the manager of the progress and impacts of the project, the ability to inspire customers on a regular basis and also the ability to work across boundaries.

The strategies an organisation pursues have a major impact on its performance relative to rivals.

Hill and Jones (2009) define strategy as ‘a set of actions that managers take to increase their company’s performance relative to rivals’. Competitive advantage can only be achieved if the company’s strategy leads to superior performance.

Mitzberg defines strategy as ‘... the pattern plan that integrates an organisation major goals, policies, and action sequences as a whole. A well formulated strategy help to allocate an organisations resources into unique and viable posture based on its relative internal competencies and shortcomings, anticipate change in the environment, and contingent moves by intelligent opponent.’

Furthermore, Johnson and schools (1999) further define strategy as ‘the direction and scope of an organisation over the long term: which achieves advantage for the organisation through its configuration of resources within a changing environment, to meet the needs of markets and to fulfil stakeholder expectations’.

For the purpose of this assignment, Tesco will be looked at as a superior performing organisation. Thus this piece of work shall be looking at the different strategies used by Tesco that has helped it gained superior performance. I am going to look at the schools of strategy in line with Tesco’s mission, vision, objectives and strategy. An analysis of some international theories such as; Michael Porter’s five forces framework, Porter’s generics, the game theory, strategic group, blue ocean, chaos and complexity as well as internal analysis on the 7S, the BCG matrix and comb analysis strategies applied by Tesco as well as use relevant frameworks and models to appraise the strategies.

However, we can’t continue this discussion without an overview of the company (Tesco)

Tesco Company Overview

Tesco is among the largest food retailers in the world with revenue in excess of £54 billion in 2009 and employing

over 470,000 people . They operate approximately 4,331 stores in 14 countries around the world. The company operates primarily in the USA, Europe and Asia and their Head Office is based in Hertfordshire, UK. According to Datamonitor (2010), the commercial network portfolio of Tesco comprises : over 960 Express stores which sell approximately 7,000 products including fresh foods at suitable localities ; 170 Metro stores which sell a variety of food products in town and city centres; and 450 superstores which sell both food and non-food items including books and DVDs. Tesco also provides online retailing services through their website tesco.com and Tesco Direct . In addition, they provide broadband I nternet connections and financial services through Tesco Personal Finance (TPF). Tesco was founded in 1919 and launched its first store in Edgware, London, UK in 1929 (Tesco, 2010); however, over the decades it has evolved to become the market leader within the UK food retail segment (Datamonitor, 2010). The comparative positioning of Tesco’s market share with respect to other leading players in the market has been illustrated as follows (Euromonitor, 2010):

Schools of strategy

Two renowned scholars Mintzberg and Whittington came up with international strategies that helped managers to make better decisions.

Mintzberg divided strategy into 10 schools of thought which he further categorises into three groups. The prescriptive group is made up of Design, positioning and planning schools. These simply illustrates how strategies are formed. Secondly , there is the descriptive group which is composed of entrepreneurial, cognitive, power, learning, culture and the environmental schools are more concerned on how strategy is made than on how it is formed. The last group, the synthesis school tries to integrate all the stages of strategy into the life cycle of the organisation. In this assignment, I shall dwell on four schools, which include design, positioning, learning and culture schools relating them with models relevant to Tesco and how these models and strategies have helped Tesco to gain competitive advantage .THE DESIGN SCHOOLThe design school, an aspect of the prescriptive school views strategy as a process of conception. This school focuses on the internal state and the external prospect of the organisation. It sees strategy formation as a means of achieving a fit between the internal strengths and the weaknesses and external threats and opportunities. Internally, the organisation is to have comprehensible and well defined goals and skilled managers while on the external assessment, it is very important to know the environment in which the organisation operates and how changes in this environment can directly influence the organisation. The design school resolves the problem of

decision making by inferring to the strengths/weaknesses and the threats/opportunities (i.e. the SWOT analysis of the organisation.SWOT ANALYSIS: TESCO• According to Datamonitor (2010), Tesco operates over 4,331 stores in the world notably in Europe ,USA and Asia and is the third largest grocery retail company in the world.( Euromonitor, 2010) further assets that Tesco holds 30.7% share of the UK grocery retail market in 2010 .• Tesco has exhibited a strong financial performance over the years. Datamonitor (2010), futher states that Tesco’s £ 54billion turnover recorded an increase of 14.9% as opposed to 2008. This is all thanks to the prime strategy of product and services customization in relation to the market demands. • Tesco’s established customer retention strategy with the introduction of its loyalty scheme called ‘ Tesco Clubcard’ has enabled it to retain it’s customers. Data obtained from this scheme is used for valuable direct marketing and various other promotional techniques. DunnHumby (2008)

• Tesco has a very competent top management that propels the company to success.

Weaknesses

• Compared to its competitors Tesco has not excel over the last year . Mintel (2010) states that , some products were removed from the market in 2009 and this has led to a financial loss and has had a negative impact on its brand image. • The key operations of the company are concentrated within the UK retail sector, where it recorded more than 75% of its revenue during the fiscal year 2009 (Tesco, 2010). This lack of geographic diversification can be seen as a key weakness for the firm as it is subjected to systemic risks of the UK market.Opportunities• Tesco is rapidly expanding. Over 620 stores were opened in 2009 .435 were in different countries (Mintel, 2010). Diversifying geographically will will enable the company to mitigate systematic risk exposure.• The reputation of Tesco.com is on the increase. It accounts for over 1 million customers in 2010 (Guardian, 2010).This has given the company the advantage of attracting new customers thus reducing the overall cost and resulting in more profit.• Tesco global market position is reinforced by its entry into the Indian market. A franchise agreement between Tesco and Trent( retailer of Tata group), one of the largest industrial corporations of India (Daily Mail, 2010).Threats• The beginning of the global financial crisis has had a negative impact to the UK’s economy. Therefore Tesco’s

attention in the UK market can have a damaging effect on its financial performance.• The buying behaviour of consumers has changed due the decline in disposable income and the rise in unemployment. This has adversely affected the company’s sales, particularly the non-food items.• There has been stiff competition in the UK grocery market. Tesco has been leading the grocery sector for 15 years (Mintel, 2010), but is now faced with strong competition from ., Asda, Sainsbury’s and Morrisons which are gaining in market share. That notwithstanding, the design school system of strategy has its short comings. It gives us the impressive of strategy formulation being a just a conception thereby bypassing learning. The strength and weaknesses of the organisation are considered by mere judgement supported by analysis (SWOT) without application or being tested. In a real world scenarios strategies are to be followed by implementation, if not it sounds more of a ‘political motive’. One other limitation of the Design school is that it does not take into consideration conditions of uncertainty. An organisation will obviously find difficulties in changing environments if its strategy is known. As Stated by James Quinn ‘It is virtually impossible for a manager to orchestrate all internal decisions... so that they come together at a precise moment’ (1978)

THE POSITIONING SCHOOL.

This school of strategy asserts that not all strategies are important for a company’s growth and expansion. The school focuses on the position of the company in the economic market place. It looks at how to achieve that position, how to defend it against competitors, how to achieve higher returns than other firms through market positioning. It uses analytical tools which assumes that strategies are generic, that the e marketplace is competitive and that position can be guarded by making strategic choices;Michael Porter(1980) and Sun Tsu author of “The Arts of War” are supporters of this school. They argue that due to the competitive nature of the market environment, company’s need to be well positioned in the market place so as to gain a competitive advantage over its competitors. Michael porter came up with models such as the comparative analysis and the generic strategies. We shall analyse Porter’s Five Forces in relation to Tesco

Porter’s Five Forces Analysis of Tesco

In order to establish valuable sources of competitive advantage an analysis of the structure of the structure of industry has to be done (Porter, 1985). Porter’s five forces analysis will throw light on this

Threat of substitute products and services• Grocery retail market for food item has a very low threat and that for non-food items is medium to high• Small chain of convenient stores, off licences and organic shops are substitutes of major retailers like Tesco but they pose no threat as Tesco offer quality products at affordable prices(Financial Times, 2009). In order to combat this, Tesco opening Express stores in local towns and city centres making it difficult these substitutes to enter the market.• Nevertheless, non food items such as clothing poses a serious threat of substitutes. It is worthy of note that prevailing economic recession will make customers to go for discounted prices hence Tesco is a threat to the speciality shops.

Threat of entry of new competitors• There is a very low threat of entry of new competitors into the food retail industry .• It needs a substantial amount of capital investments in order to be competitive and to establish a brand name. Tesco, Asda, Sainsbury’s and Morrisons are giants that have captured the food market and they make up for 80% of all shopping in the UK (Mintel, 2010). Consequently, new entrants have to manufacture an extremely low price and high quality products to ascertain their market value.• It usually takes time to acquire planning authorisation from local government and resources to open new

supermarkets. This poses a significant barrier to new entrants.

Intensity of competitive rivalry• Competition in the food and grocery retail industry is very high.• Asda, Sainbury’s, Morrisons and waitrose are direct competitors of Tesco and are competiting with each other over price, products and promotions occasionally. It should therefore be highlighted that Asda, a major competitors has witnessed an increase of market share from 16.6% to 16.8% during the fiscal year 2010/ 09, whereas Sainsbury’s market share has increase from 15.8 to to 16.1%,while Morrisons saw an increase of 11.6% from 11.3% during the same period (Euromonitor, 2010). The slow market growth essentially means that these increasing market shares from competitors have intensified the market rivalry, which is threatening Tesco’s market leadership position.• Sommerfield and Co-op attract consumers in rural areas where superstores are far off.

Bargaining power of buyers• Buyers bargaining power is quite high.• In cases where products have a slight differentiation and are more standardised, the switching cost is very low and the buyers can easily switch from one brand to another.• Customers are generally attracted towards low prices,

and the advent of online retail shopping, have made prices of goods to be easily compared and selected.

Bargaining power of suppliers• The bargaining power of suppliers is fairly low.• It should be noted that the suppliers are inclined towards major food and grocery retailers and dread losing their business contracts with large supermarkets. Hence, the position of the retailers like Tesco, Asda, and Sainsbury’s is further strengthened and negotiations are positive in order to get the lowest possible price from the suppliers.

The Boston Consultancy group matrix is another model available for a company like Tesco to analyse their expansion options. This Matrix helps organisations with a diversity of products to consider how to manage these products. The BCG Matrix categorises the products into star, problem child, cash cow and dog.Tesco can be considered as a cash cow because distributes quality and extra services to its customerand equipped with new innovative products and services in Malaysia.At the same time the company can be considered as stars because they put alot of effort to increase the awarenessof their customers to the benefits of e-commerce and retailing. Tesco can use this matrix to strategically prioritise which products within the organisation, gets more funding and attention and also the product to lead in the international market.

Pestel analysis

The PESTEL analysis analyses the changing and unpredictable environment in which Tesco operates by recognising the forces that have the most impact on Tesco’s performance:

Political• The entry of China’s in to the WTO has encouraged the free flow of foreign trades by eliminating all barriers encouraging Western companies, including Tesco, to give way into the world’s most lucrative market having over 1.3 billion people (Straits Times, 2010). Tesco iIn 2009 signed an agreement to set up a series of joint ventures to develop shopping malls in China. Three malls namely: Anshan, Fushan and Qinhuangdao were included in the joint venture. Moreover, it was expected that 18 new hypermarkets were to be open in China by 2010 (Tesco, 2009). The growth of Tesco’s international business sectors is expanding and it is set to account for a quarter of the company’s profit.

• The entry of 10 new countries into the European Union (EU) in 2004 has encouraged trade between Western and Eastern European countries. This has enabled Tesco to extend its network across the EU (BBC, 2009)

Economic• Prevailing economic factors are of concern to Tesco, as they are likely to affect demand, costs, prices and profits. The 2008 economic recession in the U.K resulted to high unemployment . As a result , the spending power of consumers declined and reduced the demand for many good. However spending power of consumers has witness a steady rise as they are more confident about their current financial situation. Nonetheless, there is still financial insecurity signifying that consumers are likely to spend less on quality products, which will negatively affect Tesco’s sales value and margins (Keynote, 2010).• Nevertheless, the recession brought about it’s positive aspects by forcing customers to eat out less and eat more at home enabling Tesco to increase their output (Guardian, 2010). It must be noted that food is the last thing that customers will cut back on. Generally, consumer spending on food has increased significantly over the years (Euromonitor, 2010)

Social• A study of UK population indicates that there are more retired people than children representing the Baby Boom generation (Herald Scotland, 2010). An ageing population is discourages food retailers as older people have a tendency to eat less. They don’t travel to supermarkets to shop compared with the younger age group. • Consumers are becoming more health-conscious and

their attitudes towards food are constantly changing. Tesco has accommodated this increase demand for organic food by supplying its customers with organic products.

• A number of social changes have encouraged British customers to move towards ‘one-stop' and ‘bulk' shopping. Tesco on its part have, consequently, increased the amount of non-food items available for sale.

Technological

Technology is a major macro-environmental factor which has affected the development of many Tesco products. Customers are satisfied because goods are made readily available, services are more personalised and shopping more expedient. Tesco launched what is called the Efficient Consumer Response (ECR) initiative which is now used in the management of food supply chains (Datamonitor Report, 2003).• Online grocery retailing has become a common feature of supermarkets. Internet subscriptions has risen by over 50% and estimates show that the Internet is being used by 70% of the population in the UK (Office for National Statistics, 2010).• The introduction of Loyalty programs through information technology are discouraging customers from switching over to competitors (Sun, 2009).

• Online retail shopping has gained significant attractiveness due to the increased access to broadband internet in the UK. Keynote (2010) highlighted that the number of broadband users in the country is 15.5 million which accounts for 70% of the overall market.Environmental• The promotion of environmentally friendly, reduced packaging by the Government has helped to reduce overall cost and has projected Tesco’s corporate social responsibility image. Research by the Office for National Statistics (2010) established that there is rise in percentage of consumers using reusable bags from 71% to 74.• Tesco introduced a programme called “Greener Living Scheme” which aimed at counseling consumers on environmental issues, as well as how to reduce food waste and their carbon footprint when preparing meals (Yuthas, 2009 ).• Tesco rewards through Tesco’s Green Clubcard points those consumers reusing bags, recycling mobile phones and aluminium cans and preferring bagless deliveries.(Tesco, 2009; Datamonitor, 2010).

Legal

A variety of government legislations and policies have a direct impact on Tesco’s performance.

• The Food Retailing Commission (FRC) banned a certain number of current practices such as changing prices without prior notice. (Mintel Report, 2009).

• A predicted 20% increase in VAT as result of huge budget deficit (HM Treasury, 2010) will adversely affect the non-food sectors of Tesco, such as clothing.

• The government's strategy for monopoly controls and reduction of buyers' power can limit entry to this sector with such controls as license requirements and limits on access to raw materials (Mintel Report,2009)

Value Chain Analysis of Tesco

Inbound Logistics

Tesco’s inbound logistics function exhibits it’s cost leadership strategic management. According to Abeysinghe (2010), its leading market position and economies of scale enables Tesco to bargain to achieve low costs from its suppliers. The analysts have also highlighted the constant upgrading of their ordering system, approved vendor lists, and in-store processes to induce effectiveness and efficiency into the company’s inbound logistics operations.Operations ManagementTesco has been praised by a number of supply chain

management critics for its effective use of IT systems that facilitate the company’s low cost leadership strategy. According to Tesco (2010), the company has invested over £76 million in streamlining its operations through their Tesco Digital program, which is a third generation ERP solution for the company. The company has achieved £550 million in increased profitability during 2009 alone due to the introduction of this system. This company -wide ERP system has also facilitated the minimisation of stock holdings within the company.Outbound LogisticsTesco holds leadership position in online and offline food retail segments, which is due to its efficient and effective outbound logistics. Drawing upon Mintel (2010), the company has developed a range of store formats and types, which are strategically placed to achieve maximum customer exposure. These formats include Express, Metro, Superstores, Extra and Homeplus, which are segmented according to the target population.Marketing and SalesLoyalty programs like Tesco Clubcard are being introduced through information technology advances which dissuade the customers from switching over to their competitors. Tesco has introduced its Greener Living Scheme to give consumers advice on environmental issues, including how to reduce food waste and their carbon footprint when preparing meals .Services

Tesco has been pursuing a dual strategy of cost leadership and differentiation, which has led to an increased importance placed on customer service. Drawing upon Keynote (2010), this dual strategy is exhibited through the development of self-service kiosks, financial services, focused direct marketing and promotions.In order to put Tesco’s value chain analysis into perspective, it should be noted that despite cost leadership strategy the company has been able to create a high degree of value in comparison with its key competitors.

Core Competencies of Tesco

Core competencies are the skills that enable a business to deliver a fundamental customer benefit - in other words: what is it that causes customers to choose one product over another? To identify core competencies in a particular market, ask questions such as "why is the customer willing to pay more or less for one product or service than another?" "What is a customer actually paying for?

Core competencies that mean customers value the Tesco.com experience so highly:

- Designing and implementing supply systems that effectively link existing shops with the Tesco.com web site

- Ability to design and deliver a "customer interface" that personalises online shopping and makes it more efficient

- Reliable and efficient delivery infrastructure (product picking, distribution, customer satisfaction handling)

ConclusionsBusiness performance Tesco is market leader in UK and 3rd largest retailer in the world after wall mart of US and France Carrefour. (About.com retail industry 15/04/2010)They are quite successful in understanding and satisfying their customers demand.They have been successful in delivering right product at right price considering differenttechnological and demographic changes.They have been following their strategy to expand globally that gives them advantage of increased sales and ultimately economies of scale that enable them to offer low prices which is oneof their strength in competition.Old method for growth (diversification) is continued but a tool of joint venture and strategicalliance is used to reduce the risk of failure. This has saved resources and provided strength to newbusiness in new market (Ansoff matrix). Non-food and other departments are run through jointventure first and then they acquire all the business as they done in Tesco finance. (Annual report2007)Due to diversification different portfolio business reduce the risk of depression as the lossesmade

in US and covered by increased sales in UK and Europe.Tesco has reduced buyer power by increasing switching cost providing rewards through loyaltycards. Supplier s pressure Reduced due to their increasing sales. Have reduced threat from newentrants and facing high threat from its competitorsIn short Tesco has a good market position as compared to its competitors havestrong resourcesand have the ability to survive and successfully operate and can face the competition.They are achieving their business objective in short term and their business strategy in long term• 4.4 RecommendationReduce dependence on UK market

• • As consider above Tesco is mostly dependent on its UK market whereas it operates in 14different countries that provides 30%of their sale.Tesco needs to considers and increase those sales to reduce dependence on the UK market. Especially considering current situation where economic status of UK people has badly affectedby current economic crisis