Tesco Managing Capabilities - Essay Example

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Table of Contents 0 Aims and Objectives 2 2.0 Introduction 2 3.0 Importance of capabilities and how they contribute to competitive advantage at Tesco. 3 3.1 Capabilities, Strategy, Competitive Advantage and RBV 3 3.2 Tesco Competitive Advantage 3 3.3 Tesco Capabilities 4 4.0 Analysing Resources, Competencies, Core Competencies, & Dynamic Capabilities 5 4.1 Resources 5 4.2 Competencies 6 4.3 Core competencies 6 4.4 Pestle Framework 7 Political Factors 7 Economic Factors 7 Social Factors 7 Technological Factors 8 Environmental Factors 8 Legal Factors 9 Primary Activities (Inbound Logistics) 9 Operations 10 Marketing and sales 10 Support Activities 11 Company Infrastructure 11 Human resource management 11 Technology development 12 5.2 Balance Scorecard 12 5.3 VRIN Framework 13 6.0 Conclusion 13 7.0 Bibliography 15 8.0 Appendix  18 1.0 Aims and Objectives The basic aim of this study is to undertake a RBA (Resource Based Analysis) of Tesco using most suitable frameworks and tools in order to evaluate and identify the sustainable competitive advantage. 2.0 Introduction Tesco is a general merchandise and multinational grocery retailer based in United Kingdom. It is headquartered in Cheshunt. On the basis of revenues Tesco is third largest retailer round the globe and in terms of profit it is the second largest. Tesco was founded by Jack Cohen in 1919. It is listed on the London Stock Exchange and also is the component of FTSE100 Index. The company experienced a market capitalization of about ?24.4 billion by 15 January 2012. According to a retail analyst it has been revealed that Tesco is the most successful retail business round the globe. According to Tesco’s strategy the company uses its own brand products. The innovative technology usage has been Tesco’s core part for its expansion strategy (Wrigley, 2000). The Company is listed on London Stock Exchange with the symbol of TSCO. Tesco represents in UK the largest food and drink retail sector industry. It provides employment to more than three million people in manufacturing, retailing and primary production. Tesco’s largest market is in UK and the company banners under four main things that are Extra, Metro, Superstore and Express. Almost 40,000 food items and products and also the non food lines and the clothing are sold by the company. The annual sales in 2011/12 for Tesco were ?65.17bn. Out of this figure ?42.8bn were produced from UK and showed a rise of 5% and the online sales of UK rose by 10% in this time period. 3.0 Importance of capabilities and how they contribute to competitive advantage at Tesco. 3.1 Capabilities, Strategy, Competitive Advantage and RBV The competitive rivalry forces have lessened the margins of profit for the supermarket chains and also the suppliers. Famous loyalty card of Tesco known as Clubcard remains the mainly booming strategy for customer retention that considerably raises Tesco’s profitability. To retain the customer base Tesco meets the customer needs, customizes the service, ensures lower prices, helps in making better choices, continuous flow of in-store promotions. In grocery industry the substitute of need and the product for product concept is very common (Ritz, 2005). An accelerated development level has been fostered by this highly competitive market, this results in a situation for innovation for UK grocery retailers in order to maintaining and building market share. Innovation like this can be seen in the development of a range of trading formats, in reply to transformation in consumer behavior. The main market leaders respond by focusing again on the value and price, while also reinforcing the elements of value addition of the services they 3.2 3.2 Tesco Competitive Advantage As Tesco is giant retailer, so in order to get a sustainable competitive advantage they must follow any one of the three generic strategies mentioned ahead. Cost leadership is the first strategy that Tesco can use to get the lowest of all the costs in the same industry (Palmer, 2004). Cost leadership strategy is likely to be based on ability of Tesco to get control over their operating costs. This needs to be done so well that it enables the company to price its products competitively and making it able to make higher profit margins, therefore attaining a significant competitive advantage. Tesco can also use another strategy that is of differentiation. In this strategy Tesco has to offer products and services that possess unique features which the customers’ value. The last focus strategy can either be a cost leadership or a differentiation strategy that aims towards a narrow but focused market. In chasing a cost leadership strategy, Tesco pays attention to the creation of internal efficiencies to help them survive external pressures. Consequently, it happens to be reasonable to give a thought that Tesco is likely to have frequent interactions amongst the supplier environment sector and governmental/regulatory. According to this framework, whilst both in general differentiation strategies and cost leadership aim towards the broad market, Tesco is likely to choose to keep their products to specific market areas or may be decide to propose a smaller line of products to the broad market, thus pursuing a strategy of niche or focus. Summing it up, Tesco pursues a cost leadership strategy or differentiation strategy in a specific market or with some specific products. Structuring tools and strategy frameworks are main keys to assess the situation of the business. Value trade-offs and risks are made explicit that lead to proposals that are concrete for adding value and reducing the risk. Plans for action that are explicit include the effective planning. Tesco needs to be developed this as strategic alternative. The generic strategies that are discussed before, Tesco is probable to employ two strategic options which are also expected to be the primary focus of market objectives for market development. 3.3 Tesco Capabilities Innovation and the overcapacity are being experienced by the retailing industry and the products being the most important competitive advantage. So therefore, in case of product development innovation needs to be a main driver for Tesco (Anon, 2004). For instance, in the UK Tesco can build up a portfolio of diverse store formats, where each store is designed for a unique shopping experience. The value addition by uniqueness is likely to eventually direct Tesco to control a premium price. Technological innovation management is progressively more concerned with the strategic decision-making (Okumus, 2003). Tesco needs to exploit its internal strengths. It also needs to minimize the internal weaknesses to achieve sustainable competitive advantage. 4.0 Analysing Resources, Competencies, Core Competencies, & Dynamic Capabilities 4.1 Resources The annual sales in 2011/12 for Tesco were ?65.17bn. Out of this figure ?42.8bn were produced from UK and showed a rise of 5% and the online sales of UK rose by 10% in this time period. The physical and technological resources of Tesco include plant, machinery, premises, materials, equipments and stock, and skills, experience, intellectual property, patents, copyrights and software licensing etc respectively. Tesco is the biggest retailer of UK that dominates the market in both the non food and food markets. It has a good hold overseas so it is also a strength the company has. The company has valuable portfolio of freehold property and the store land bank in UK and overseas both (Ogbonna and Whipp, 1999). The company has made a profitable Division of Services. The company is now spreading into the financial services too. Tesco is famous for being pioneer of online shopping in the early hours in UK through Tesco.com and always has been able to make valuable profits. Apart from this the company has some weaknesses too. Tesco had to bear big losses in the US, the uncertainty amongst the management; the hypermarkets and the non food exposure are some weaknesses of the company. It has been shown by evidences that consumers are starting to move against shopping, in giant hypermarkets therefore Tesco is exposed to big Extra stores, in UK and overseas both. There are a lot of opportunities for Tesco like the UK store revamping, the new advertising stance for improving the company’s image in UK, the banking services to build trust and increasing the services for its customers etc. The company also has a lot of threats like a large competition in UK, there are a lot of overseas problems too and the threat to fail to respond to all the investments that are thrown at Tesco is another big threat for the company (Veliyath and Fitzgerald, 2000). 4.2 Competencies The nine behaviors identified by the competency framework that have played a major role in Tesco’s success are as its customer focus, managing change, team working, decision making after critical analysis, developing self and also the others, gaining commitment, performance management, personal integrity and drive. The customer focus relates to paying attention to every little thing as it is important. Timely and analyzed decisions are also a competency for Tesco. Team building, positive relationships, personal development etc are very important competencies of Tesco. 4.3 Core competencies Customer focused strategy is one of the core competencies of Tesco. The scheme of Tesco that is named as the club card reward system is used for collecting, analyzing and understanding the customers to the best. This card has given Tesco a distinctive capability that has enabled the company in predicting the buying behavior of the customers. The supply systems of Tesco is next to come. Tesco has valued its customers always and this has helped the company in improving its performance. Tesco is a strong brand and on its basis the company has earned a competitive advantage. Tesco is recognized for being the best company to provide customized and efficient products and services. 4.4 Pestle Framework Now applying the Pestle Framework to Tesco, the company is aware of the fact that retailing can have a big influence on people and their jobs as it is a labor intensive sector. Political Factors Tesco is employing big numbers of disabled, elderly people and students and offer them a good salary. As a result Tesco enjoys a higher loyalty level and desirable employee’s numbers. As demand, prices, costs and profits are likely to impact the business so Tesco takes care of them. Economic Factors Economic factors are of concern to Tesco, because they are likely to influence demand, costs, prices and profits. Amongst the economic factors the high unemployment levels is one the most influential factors as it reduces the demand for a lot of goods effectively this adversely affects the demand needed to make goods like this. The economic factors mentioned above are mostly beyond the company’s control but at the same time their effects related to marketing mix and performance can be reflective (Clarke, Bennison and Guy, 2004). Social Factors It is recently been found out that the interest of British customers have moved towards bulk shopping and one stop. This change is because of a number of changes in social context. Therefore, Tesco now have higher amounts of the non-food products present for sale. It is the function of the social conditioning that shows the kind of services and goods is in demand by the consumers. The awareness of the health issues is increasing amongst the consumers day by day and the attitudes they hold towards food is continually changing (Polo, 2002). For instance, the adoption of product mix by Tesco is to hold an amplified organic products demand. Tesco is also first company to permit its customers for paying via cheques and also cash. Technological Factors A big macro-environmental factor that has impacted the growth of a number of the products by Tesco is technology. New technologies profit company and the customers both. The customer satisfaction increases with the goods being available readily, as a result the services are likely to become more personalized and the shopping becomes more convenient. Tesco stores utilize intelligent scale, electronic shelf labeling, wireless devices, self check-out machine, Radio Frequency Identification as the most used technologies. Environmental Factors The corporate social responsibility of Tesco is linked with the processes in which the organization crosses the least obligations to stakeholders that are specified by corporate governance and regulation (Johnson and Scholes, 2003). A lot of policies and legislations of the government have a direct and bid influence on Tesco’s performance. For example, the Food Retailing Commission recommended that a Code of Practice is to be settled that bans many current practices like changing the agreed prices with hindsight or without notice and demanding payments from suppliers (Mintel Report, 2004). A threat is created by the powerful competitor’s presences that have established brands that create an intense war of price wars and also create an environment of strong requirements in terms for product differentiation. Legal Factors The policies of government in order to control monopoly and the reduction of power of buyers can lead to put a limit to entry in this sector by putting controls such as license requirements and limitation to access the raw materials (Mintel Report, 2004; Myers, 2004). To implement the right pricing policies politically, Tesco offers the consumers a reduction in price on purchases of fuels that are based on amount spent on the groceries at the stores it has. Whilst the prices are reduced on goods that are promoted, prices in a different place in the store are increased in order to compensate. 5.0 Diagnosing and Evaluating Strategic Capability. 5.1 Value Chain Primary Activities (Inbound Logistics) The value chain’s first stage is inbound logistics because they possess earliest opportunity to create value. The essentials of this stage are known to be upstream activities. The receipts from the suppliers of the goods are logistical tasks. The goods handling & their transportation internally, goods storage, and their placement on shelves are all part of this task (Flavian and Haberberg, 2002). Tesco makes an effort for maintaining consumer choice level in store (+), at the same time looks to improve the distribution system’s efficiency (+). In case of applying the quality control process regarding damaged products and goods it gives an outstanding opportunity to lessen the costs incorrectly incurred, hence stopping these costs to pass on to consumer (P+). Operations Tesco’ production activities are more service orientated. Therefore, the operations can be the next upstream opportunities which enable products and services to be provided. This includes tasks like opening each day according to the trading hours, shelves maintenance, and also the stock maintenance (+). To get competitive advantage in future Tesco needs to expand in operating hours in areas where it does not exist or by opening new Express stores and Metro stores (P+). Moreover, there are chances for it being restricted by planning councils or law, which basically takes away competitive advantage (-). Outbound logistics Value chain’s third stage is the outbound logistics which is linked with the products deliverance to customer (Guy, 1996). Through home delivery value is added by Tesco (+). There are a few tangible things that need improvement like till staff, parking facilities, trolley collectors, and systems to get competitive advantage. If they can be executed in a more efficient way than the competitors then Tesco is likely to add value through saving the customer time (+) and increasing the turnaround at the same time (+). By implementing deposit system of trolley value can be added. Keeping the trolleys clean and making customers able to get to and from the premises in lesser time and making such facilities easily available and quicker to get (P+). Marketing and sales Under the downstream fundamentals of value chain come the marketing and sales. Clubcard offers loyalty and discounts for customers (+). Tesco can take a decision to attract greater number of customers via advertising by local newspaper, radio and national T.V. for instance, lower prices advertising campaigns and increased discounts offers (+). With an increased customer awareness and sophistication regarding the ethical practices of business, some constraints may rise for the company so by selling products that are environmentally friendly will be compulsory (-). In return what Tesco can do is it can take it like an advantage and make recycling points available to the customers and include the information in advertisement sources. By this customers who believe in environment friendly concept will choose to shop at Tesco and will feel that by doing so they are helping and playing their role to keep the environment clean and healthy (P+). Support Activities Company Infrastructure The cash and cost control of the company operations are focused by planning and control functions (+). Departments like profit protection serve to reduce shrink (Hammett and McMeikan, 1994). The company recently has increased the number of staff involved in the up-gradation of the anti-fraud software (infrastructure or technology, interdependence), and installation of newer security systems that serve to minimize the internal theft, as a failure to do so can result in the increased price for customers to purchase goods from Tesco (+). Human resource management A downstream activity is the HRM that covers everything that ranges from recruitment to the management development. The company has an aim to raise the number of schemes of training and for further development of its recruitment programs in order to make customers benefit from a well recruited and well trained staff (+). Tesco has always invested well in customer services (+), a case where the training is associated directly with pay. This keeps the staff motivated for learning, and always encouraged in improving their approach towards the customers and the provision of quality service (P+). Technology development Technology development is a downstream activity. It is the ability to offer new and innovative solutions and product ranges that foresee customer needs. It remains to be a main competitive advantage, value additive, as brand name of Tesco provides the product vitality (+). Nevertheless, capital investment and installation is a process that is long term and requires total and complete staff commitment. But at the same time it needs t be figured out that who will be accountable for service provision etc (-). 5.2 Balance Scorecard In Tesco a balanced scorecard was introduced and is now known as the Steering Wheel. It is the major driving tool for the business. It has assisted Tesco in the achievement of a lot of things and is being followed from board room to shop floor. This steering wheel is reviewed annually and ensures that achievement of goals of Tesco. Moreover it makes sure that Tesco meets the organizational strategy demands (Acur and Bititci, 2004). Even though the customers are not as aware of the balanced scorecard as is the staff of Tesco. The staff follows this steering wheel strictly that is based on the weekly data collection. The scorecard at store level is handed over to the stores’ manager in which the quarterly corporate scorecard is available. There is a strong link between the store level scorecard and the corporate level scorecard as the entire data is gathered through a variety of systems and mechanism. The top management monitors the performance and looks for the problematic areas. After the identification the problems are asked to be resolved by the local management and improvement is to be brought in (Guy, 1994). 5.3 VRIN Framework By applying this framework it can be determined that whether the source of the resources that Tesco has are helping it to gain a sustainable competitive advantage or not. To serve this purpose the resources must be valuable, rare, inimitable and non-substitutable. Tesco is a source of greater value in terms of costs and benefits as compared to its competitors. The items that Tesco sells are sold in a unique way and helps them win a competitive advantage. 6.0 Conclusion In today’s business environment that is rapidly changing and has high pressures of competitors, Tesco needs to adopt new strategies of expansion or can also diversify the already existing ones. This will help it to sustain its leading position in an already established retailing market. It is strongly recommended that the company should continuously acclimatize to the speedy changing circumstances. One of the recommended strategic options for Tesco is international alliances with local retailers of Asian markets. It is likely to be taken as the development method and may be created to exploit existing resources and competency. Joint ventures and partnerships can help to gain a better economy of scale and bigger market presence. Change is always important and keeping a strict check on the current and future need of the company with the changing external and internal factors is very important. Tesco has always been ahead of its competitors and does not hesitate to try new technology and bring innovation on regular basis. Being a leader in the retail business, the company needs to have a proactive approach rather than reactive approach to stay as successful as it is in the present time. This study can be of great help for Tesco to maintain its strong position and implementation of the frameworks given in this study can further assist the company to enjoy the heights of success. 7.0 Bibliography Clarke I., Bennison D. and Guy C. (2004) The Dynamics of UK Grocery Retailing at the Local Scale, International Journal of Retail & Distribution Management, Vol. 22 Issue 6, pp.11-20. De Toni A. and Tonchia S. 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(2005) Retail multinational learning: a case study of Tesco, International Journal of Retail & Distribution Management, Vol. 33 Issue 1, pp.23-48. Veliyath R. and Fitzgerald E. (2000) Firm Capabilities, Business Strategies, Customer Preferences, and Hypercompetitive Arenas: The Sustainability of Competitive Advantages with Implications for Firm Competitiveness, Competitiveness Review, Vol. 10 Issue 1, pp.56-82. Warnaby G. and Woodruffe H. (1995) Cost Effective Differentiation: an Application of Strategic Concepts to Retailing, International Review of Retail, Distribution & Consumer Research, Vol. 5 Issue 3, pp.253-270. Wrigley N. (2000) Strategic market behaviour in the internationalization of food retailing, European Journal of Marketing, Vol. 34 Issue 8, pp.891-920. 8.0 Appendix  Figure 1: Strategic planning and firms’ competencies Figure 2: Tesco Club Card Reward vs. Market Share Figure 3: Comparative Analysis Figure 4: Figure 5: Read More