Business Strategy in Tesco - Essay Example

?Business Strategy Table of Contents Business Strategy Table of Contents 2 Introduction 3 Section Strategic Formulation 3 a) Vision, Mission andCore Competencies 3 b) Stakeholder Analysis 4 c) Environmental Analysis 5 PESTEL Analysis 5 Porter’s 5 Force Model 7 SWOT Analysis 9 d) Strategic Positioning 13 Section 2: Strategic Planning 17 a)Market Dynamic Model 17 b)Strategic Planning Techniques 17 Section 3: Alternate growth strategy 19 Section 4: Strategy Implementation 21 Reference 23 Introduction One of the constituents of FTSE 100, Tesco is the global merchandise and grocery retail company. In respect of profit Tesco is considered to be the second largest retailer after Wal-Mart and by revenue it is the third largest after Wal-Mart and Carrefour. Tesco have its presence in over 14 countries including Asia, North America and also at Europe. Tesco headquarter is located at Hertfordshire and is the leading grocery market leader at UK capturing 30 % of the total market share. Apart from the core business areas the company is also located at Ireland, Malaysia and Thailand. Worldwide Tesco operates in over 2318 stores with 1878 stores located at UK only. With the success of self-service store of grocery Tesco was born from the amalgamation of Cohen and T.E. Stockwell. After a strong start the company stated expanding its business ranging from small retail stores to large supermarkets. With the diversification in household goods the brand became very popular in the mind of the people. Tesco then entered into the petrol stations for selling fuels at a very competitive price and then also expanded into banking, financial services and products. This report is mainly concerned with business strategies implemented by Tesco at different levels of its management process in different business areas (Data monitor, 2004, p.4). Section 1: Strategic Formulation a) Vision, Mission and Core Competencies Vision depicts what the company wants to be i.e. what it ultimately wants to achieve and it gives the direct to the firm. Whereas the mission of the firm is the business where the company wants to operate and the customer base the firm will serve. These are the foundation stone of the company according to which the company implement its different strategies. Core competence is the competitive advantages that a company posses to differentiate itself from the competitors which gives them an extra edge to be the market leader (Hitt, Ireland, Hoskisson, 2009, p. 18). The core value of Tesco is to take care of the customers. Earning lifetime loyalty of the customer and to create value for the customer is their only value (Nwagbara, 2011, p.62). The company believes that no one in the industry tries as harder as they do to reach to the customers (Polytechnic Institute of New York University, 2011, p. 1). Being responsible to the community and the society in which they operate they always try to maintain good neighbourhood and always try to be a responsible member in the society. The brand image for its great quality products with diversified product line is the core competencies for the firm. b) Stakeholder Analysis The sustainable growth and well governed business policies of Tesco gives the belief to the investors to get a competitive return of their investments and their shareholdings. The main reason behind gaining the trust of the shareholders is due to the transparency in the company operation and they expect the implementation of robust strategies by the company in every business processes for the long term growth of the organization along with the shareholders. Blackrock Inc with its 5.48 % share of the issued share capital, Legal & General Investment Management Limited with 3.99 % and Berkshire Hathaway with about 3.02 % of the total share is the major share holders of Tesco (Tesco Annual Report and Financial Statements 2011, 2011, p. 58). By maintaining quality service and increased customer value the company build its band value and continues its rapid growth in the market by benefiting the stakeholders of the firm like staffs, shareholders and the customers of Tesco. With the diversified product line the company constantly differentiate itself from the competitors and meet the demand of the market. The image building capability and its functional loyalty towards the stakeholders’ acts as the catalyst in the making of the strong relation of the company with the people related to it and in turn helps in the long term profitability and sustainable growth of the firm. Stakeholder management is a very critical aspect the company should take care of and should maintain a very strong relation. Proper market research and survey are needed to be done periodically by the company in order to understand the market situation and the company should engage various programs with the stakeholders to let them know about the business processes and maintain proper transparency with the customers. With proper involvement of all the departments the company can also discuss and identify the various problems that can arise in future and can act accordingly with the situation. c) Environmental Analysis PESTEL Analysis The forces that affect the firm in an unpredictable way in which it operates are analyzed by the PESTEL framework. The impacts of the several factors are needed to be evaluated before operating business in a particular environment (Bovaird, Loffler, Loffler, 2009, p. 87). Political Regional or the internal political factors within the organization can have a great impact on the company’s operation in a particular market (Williams, Green, 1997, p. 162). The free trade system from the China government gives a great prospect of new ventures for the foreign trading. Tesco signed deals with the China government to setup shopping malls at China. This political system gives a great opportunity for globalization and expansion for the company. Economical The current strength of the economy is also very important for the company to operate in the market. While operating overseas various factors like exchange rate, interest rate, inflation rate of the foreign country are needed to be evaluated by the company as it will differ from the country of origin (Best, Dalton, Allan, 2005, p. 8). Recession in the economy plays a vital role in the purchasing power of the customers. During the economic slowdown in 2008 people spend less on mainly on premium products which affected the sales volume of Tesco to great extent. But since grocery food are the last thing people will cut down cost on so Tesco was not as much affected as other companies in these critical situations. Social Social age structure in the population, consumers’ attitude, trend in the society also affects the sales of product (Applegate, Johnson, 2007, p. 29). UK population with more people on the old age group i.e. retired people are less likely to have foods than the young generation. They also are not eager to visit shopping malls for purchasing foods and the growing attitude towards health consciousness are affecting Tesco to some extent at UK market. Technological Technology plays a very important role in the advancement and facilitating the operational process of the company. Use of internet gives great reliability and security with ease in the process of transaction and customers can carry out e-commerce in a very user friendly environment (Khosrowpour, 2007, p. 114). Online Tesco.com helped the company to expand its business faster and reach to a wide range of customers in a more convenient way. Environmental Companies are now-a-day more concerned in operating business in an eco-friendly way. Being a responsible neighbour should be the vision of the company (Bensoussan, Fleisher, 2008, p. 180). Tesco with its Greener Living Schemes and environment friendly materials like recyclable plastic bags helps to maintain its image as a responsible corporate. Legal Various legal and government policies regarding industry law and consumer protection law affects companies and they need to evaluate the strategies accordingly (Person, 2008, p. 26). Increase in VAT percentage by the government in the non-food sector will affect Tesco in its non-core growing sectors. Porter’s 5 Force Model In order to understand the competitive environment of Tesco, Porter’s five force analysis can be very useful. Figure 1: Porter's five force model (Source: Marcus, 2006, p.22) New Entry threat Establishing new setup and brand name takes huge investment for the company especially in the retail sector. There are already many players in the retail industry like Tesco, Sainsbury’s and Morrison’s who captures the major market share. Thus there is a chance of new entrants if they produce low price quality products only otherwise it’s very difficult to enter the market. Existing Competitors Existing competition for Tesco is very high especially in the food and grocery industry. The company face strong competition from J.Sainsbury plc, Safeway plc, big food group plc and many others in the food retailing sector (Polytechnic Institute of New York University, 2011, p. 5). Buyer Power Due to the presence of many retailers in the food-market the bargaining power of customers are relatively high than in other products. Supplier Power The supplier’s bargaining power is fairly low as they want to build relation with the giants in the industry thus had to provide products at the lowest price possible to Tesco. Substitutes In food section the threat from substitute is low as there are not much alternatives than available for non-food market. Retail supermarket chains have the substitutes like small stores and organic shops for Tesco. SWOT Analysis Tesco’s diversified business process in various sectors other than food retailing into the banking and financial services and telecom departments are operated over 2291 superstores at UK, Asia and Europe. The Strength, Weaknesses, Opportunity and Threat of the company can be depicted as below. Strengths Weaknesses Increase in the market share Brand Value Tesco Online Insurance sector Leadership of UK market reinforced Debt Reduction UK market dependency Signs point to serial acquisitions Opportunities Threats Non-food Retailing International Growth strategy Health and Beauty sector Fall in overseas return Expanding Internationally Structural change at UK leading to price war Strengths Increase in the market share Holding 13 % share of the total UK market the in the retail sector the company’s growth and ROI shows great growth prospect. The high profit from the food industry contributes to huge extent to the non-core sector of the company. Brand Value The strong brand image of the firm with its excellent quality products and services to the customers helps the company in the innovation process and expand daily in its business process. Tesco Online The Tesco.com service, the online portal for the company drive a huge amount of customers and increase sale for the firm to about 29 % in the retail sector in a very user friendly way for the customers. Insurance sector Tesco not only operates in the food retailing but also diversified into the banking and Insurance sector and reached the milestone of 1 million customers in the motor insurance category and around 330,000 in the pets’ category. The company was also awarded with the title of Competitive Life Insurance Providers. Weaknesses Debt Reduction With the expansion strategy the company is also increasing its debt which results to very minimal amount of free cash for the company (Data monitor, 2004, p.16). UK market dependency UK market being the major region for the operation process of Tesco it can be a difficult situation for the company if the UK economy faces some problem. Though in short term it is not a weakness for the firm but if the economic problem persist for a long period then it can be a serious problem for the firm. Opportunities Non-food Retailing The Non-food retailing sector of Tesco is growing at a very fast pace and it is expected to grow even faster in coming years. The UK as well as international market is showing great potential for the firm in Non-food retailing. International Growth strategy The international expansion plans of the company are constantly evaluated and new geographical regions are reached for more and more sale profit (Data monitor, 2004, p.17). Health and Beauty sector The Health and Beauty retail expansion plan of the company is also working very well for the firm and it is one of the fastest growing sector in which the company is constantly investing to be the market leader. The increasing number of stores in the health care division generates huge revenue for Tesco. Threats Fall in overseas return The economy of the international market can also act as threat for the firm as overseas return are not always constant for the organization so it can affect the firms existing strategies and business models. Expanding Internationally For building brand image the company along with quality product also needs expand globally but this process of expansion incurs a huge investment for the firm and since Tesco already have high debt so this extra expenses can create problem in the long run (Data monitor, 2004, p.18). Structural change at UK leading to price war The price policy of the competitor can affect the price strategy of the firm. Tesco believes in maintaining the quality of the product which sometimes demands for high cost of the product. This can act as a possible threat from the low cost product from the competitors in the market. d) Strategic Positioning Considering the company’s resources, capabilities and opportunities organisation can adopt several strategies for moving forward. These can be- i> Growth Identifying the product and the market the company often adopts the growth strategy to expand with its existing product into new market or new product into existing market. The company can also approach with its new product into a completely different market or can penetrate the existing market with its existing product through cost leadership technique. ii> Stability Often companies like to follow a sudden expansion through mergers and acquisition and then stabilize the operation for the long run. Tesco also follows this strategy to some extent in the expansion plans. iii> Profitability The market shares are constantly grabbed by the company by most companies to increase its profitability which are involved in the business process of all companies. iv> Market Leadership Market leadership strategy is gaining the market share in majority and for the process the company also need to employ the best in every aspect to be the leader which incurs huge investments as well. v> Survival In difficult market situation this strategy is taken by firms to avoid loss and maintain its stability for the survival and wait for the improvement in future. vi> Efficiency Efficiency is the process of using resources in a tactful way to reduce the cost of products. Tesco need to be more efficient to reduce cost along with the maintenance of the quality of product. vii> Mergers and Acquisitions In accordance to the growing need of the environment companies go for merging and acquisition process for more expansion and also build relation with suppliers and dealers to offer products at low cost overseas. Tesco undertake this strategy to great extent for its global expansion worldwide. viii> Global Expansion In the modern world of globalization companies want to reach to wide target market with its global expansion strategy. Tesco adopt this strategy primarily for its strategic positioning into the market (Resource Development International Ltd, 2008, p. 2-7). The two main strategies which are implemented by Tesco are Growth and Global expansion. This can be elaborated as below. Ansoff Growth Matrix Market position of product is very important for the firm and the company need to understand two main factors i.e. what the product is and where the product is to be sold. The Ansoff Matrix gives a general guideline for the positioning of the product into the market and the growth prospect for the product or services (Lester, 2009, p. 51). Tesco mainly follows two strategies in the position process. It concentrates in providing new services and product to the target customers and also expands equally to new geographical locations for more profit and revenue generation. The Ansoff Matrix can be show as given in the figure below. Figure 2: Ansoff Matrix (Source: Stone, 2001, p. 51) Global Expansion Tesco is constantly evaluating its business processes and try to enter the global market by exploring more and more geographical regions. Having its presence overseas at Asia, North America and Europe and also at Thailand, Malaysia, and Tesco generates huge revenue from the global market. America being a very good market due to its high economical growth for most businesses but when Tesco tried to enter the US market it didn’t turned out to be a wise strategic decision for the company as it failed to understand the customers of the country. The cultural distances are needed to be understood by the firm to explore well globally. Section 2: Strategic Planning a) Market Dynamic Model Portfolio Analysis Tesco’s product line comprises of a diversified range of products ranging from food retailing to non-food products like apparels, insurance and banking sector. The company also diversified into fuel retail stores supplying at very low price. But with the growing demand of more healthy and low fat foods in the health conscious society the company need to introduce more products targeting towards the senior age group and woman who are very conscious about their health. The company introduced its ‘Free From’ category products for the people who are suffering from allergies and diseases (Tesco, 2011). The range need to be more diversified. The market demands more organic food in recent years. Thus to be in the competition Tesco provides 1200 organic products in its line and growing even more in recent future. The company with its merger and acquisition technique make partnership with different suppliers to improve their product line according to the need of the customers. Not only in the food category had the company also introduced several products into its apparel and insurance sector. But the company should concentrate more in the development of its core sector than diversifying into non-core sectors. Profit can be invested towards the food retailing for a stronger base in future. b) Strategic Planning Techniques Selecting the right planning process is an important aspect company should after very carefully. Many companies implement the top-down approach where as many adapts the bottom-up approach of planning technique. In the top-down approach the decision are taken at the highest level of management and there is no involvement of the lower level of the organisation in taking decisions for the organisation (Steiner, 1997, p. 64). Whereas the strategy followed by Tesco is Bottom-up approach as the company is closely related to the customer base and it require more focus on the ground level. Thus giving responsibilities to the expertise people gives the management a more focused handling of the satisfaction of the customers. The employees at lower level are interacted and their suggestions are discussed for the strategy evaluation process for the company and then the goals are set accordingly. BCG growth-share matrix The BCG growth share matrix is used to identify the position of the different business units of the firm and its relative growth in the market (Parnell, 2003, p. 77). Figure 3: BCG Growth-share Matrix (Source: Griffin, 2006, p. 219) Tesco is the leader in business of innovation with its diversified product line according to the need of the customers (Botten, 2006, p. 296). The food retail sector is the core business unit of the company which earns the profit for the firm i.e. in the cash cow phase of the BCG matrix. The newly introduced non- food sectors like apparel and insurance are growing significantly representing the Star phase for the company’s product line. Section 3: Alternate growth strategy The growth strategies adopted for the firm can be in two ways. It can either be internally or can be an external expansion through mergers and acquisitions. The figure below shows the various ways of growth strategies through different processes. Figure 4: Growth Strategies (Source: Sloman & Sutcliffe, 2004, p. 322) Tesco mainly follows market expansion and its product portfolio development strategy to maintain leadership in the market. The existing market is explored and new products are introduced into the market with its innovative strategic planning. The company also expands its business overseas and explore new geographical regions with relationship building through mergers and acquisitions. New suppliers are included into their list for more effective control of the new market. But Tesco since believes in its quality products it increases the price of the products than the market competitors. The company need to penetrate in several markets with price leadership for price sensitive customers. Also with more expansion strategy the company need to reduce its debt and evaluate feasibility of the growth strategy and find the appropriateness for the strategy. The non-core segments of the company should be evaluated by the company and products which are not in huge demand like the fuel segment can be divested by the company to save the investment over there and invest more in the core areas of the company like food retail and the growing banking and insurance sector. The expansion plans of the company can be controlled and Tesco can concentrate in the existing market with its new innovation and acquiring more market share within. This will lead to the reduction in debt as well as increase profit from the core its core food sector and non-food segments. Figure 5: Product market matrix and growth strategy (Source: Sabharwal, n.d., p. 145) Section 4: Strategy Implementation The strategy implementation depends a lot on the size and operation of the company. Often strategies fail due to several issues like unclear understanding of the purpose of the strategy, the process are not clearly explained to the employees and staffs, lack of resources and time, the people are not properly trained and involved in the process of implementation, without proper monitoring of the processes, without proper support system and proper evaluation and feedback method (Ibarreche, 2003). The individual goals of the employees are needed to be set by the company and need to communicate with the staffs to set targets at every levels of the firm and let them understand the activities of the company. Though communicating with the employees at small scale is easier for the management in small or medium sized company but giants like Tesco should implement evaluation and proper communication with various departments to maintain transparencies at different levels of the firm. Managing larger resources are sometimes difficult for any organization but if it can be handled effectively then with more manpower and materials processes become easier for the firm. Tesco should evaluate the various resources like finance and human resource before implementation of its strategies. Though the financial conditions of Tesco at UK are in good state but the increasing debt in the overseas market can be difficult to deal if not evaluated in the right time. The financial state should be improved by the firm to grow even faster. The profit margin and the sales growth are needed to be benchmarked with the past growth strategies and should achieve the targets set for each individuals of the organization. Time and material management are other two resources which will help the firm to reduce its cost overseas and might in-turn help the company to cut down its debt in the foreign market. Figure 6: Balanced Score Card method (Source: Dalkir, 2007, p. 275) Tesco should follow the balance score card method for the evaluation process of the different departments and identify the need for improvements where required. The corporate vision and strategies of the firm should be kept in mind for the evaluation process of the different departments and learning and developments needed to be carried out for the employees to set goals for them in accordance to strategies. With the belief to be the leader in green retailing Tesco constantly working in cutting down their own emissions by working with the suppliers and the stakeholders to help customers to reduce carbon footprint. The progress till now in the year 2008 was impressive with a value of 7.7 % cut in carbon emission and is expected to be 50 % less by the year 2020 and in a long term the company targets to operate with zero carbon emission business by the year 2050 from its efficient use of renewable source of energy (Tesco Annual Report and Financial Statements 2011, 2011, p. 15). Reference 1. Applegate, E., Johnson, A., (2007). Cases in advertising and marketing management: real situations for tomorrow's managers. Rowman & Littlefield. 2. Bensoussan, B., Fleisher, C., (2008). Analysis without paralysis: 10 tools to make better strategic decisions. FT Press. 3. Best, N., Dalton, C., Allan, W., (2005). Integrated Management. Butterworth-Heinemann. 4. Botten, N., (2006). CIMA Learning System 2007: Management Accounting - Business Strategy. Butterworth-Heinemann. 5. Bovaird, T., Loffler, E., Loffler, E., (2009). Public Management and Governance. Taylor & Francis. 6. Dalkir, K., (2007). 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