Tesco Competitive Strategy - Case Study Example

TABLE OF CONTENTS 0Introduction 1Overview of the activities of TESCO 2.0 Tesco and Porter's Five Forces Framework 2 Tesco and Porter's Competitive advantage 3.0 Recommendations 3.1 Conclusion References 1.0Introduction Today's businesses are in a phase of increasing complex network of activities, customer's flexibility, market volatility and increase in natural disaster, present day companies have to reformulate their strategies and tactic within their global operations (Cheng Wonglimpiyarat, 2004). In the present states of activities, the war on terror state of global and changing consumers' pattern it has become necessary for companies to be more responsive in their activities and operations to customers and other stakeholders (Bowlby 2001). Wonglimpiyarat, (2004). echoes that, today the challenges for companies is not just providing high quality product but the ability to provide these products at a lower cost and price (Prahalad & Hamel 1990). These must be incorporated in the company's strategies. Against this background companies are in dear search for different ways and measures to remain competitive and consequently create values for their shareholders. (Hamel & Prahalad, 1994). Having said this, the paper focuses on TESCO. In section two I will provide an overview of the company, its products, people and resources, part two of the paper looks at its competitive position in line with the five forces model, while part three discusses its competitive advantage, and the last section provides the conclusion and recommendations. 1.1Overview of TESCO TESCO Plc is an international retailer founded by Jack Cohen in 1919 that has established itself as the largest super store in Europe (Report 2008). According to the company 2008 corporate report and the website, being an international retailer, its principal activities include food retailing, simple travel insurance, personal finance, TELECOM and recycling having over 2,000 stores in the United Kingdom (Company's Review 2008). The company also has stores and retail outlet in other countries like the Republic of Ireland, Hungary, Poland, the Czech Republic, Slovakia, Turkey, Thailand, South Korea, Taiwan, Malaysia, Japan and China (Tesco 2006 Review). In addition, it operates 165 International Express stores. In addition it operates 39 stores in China, 111 in Japan, 13 in Malaysia, 62 in South Korea, 6 in Taiwan, 219 in Thailand, 35 in Czech Republic, 87 in Hungary, 105 in Poland, 91 in Republic of Ireland, 37 in Slovakia and 8 in Turkey. (Tesco Annual Review, 2008). It therefore operates round the clock which demonstrates its commitment to create customer value which in turn generates superior value for its shareholders. The success of this international giant in the retail sector can be attributed to its aggressive global strategy of geographical diversification, product differentiation, cost focus and it use of umbrella branding. In its attempt to renew the brand and keep it in sync with changing customer tastes, Tesco follows an umbrella strategy including international diversification, providing value to customers, product diversification, innovation, acquisition and umbrella branding. (Tesco Annual Review, 2008). 2.0 Tesco and Porter's Five Forces Framework Through the below stated framework developed by Michael Porter we will identify the sources of competition in an industry. Here, according to Porter (1990), the sources of competition in an industry such as the grocery sector in the case of Tesco can be easily depicted. Figure 1: Porters Five Forces Framework adapted from Johnson et al (2007) Figure 1 above depicts the forces of competition in an industry. According to Porter (1990) enables market analyst and investors to asses the attractiveness and profit potentials likely to be in an industry. Using this framework an analyst gets to identify the sources of competition in an industry or sector (Johnson & Scholes 2005). The basis upon which this framework is built will serve to analyze TESCO Plc competitive position. The United Kingdom UK retail sector is made up of many independent groceries stores, major players in the market are TESCO, J.Sainsbury, Morrison, Mark and Spencer and a host of others each player will have to adapt to local values within its areas of operations. Though, there are no close substitutes which decreases customers switching cost to be high, a host of other supermarkets offer similar items as TESCO. Consequently competition has shifted to the four Ps, as today Tesco has become a low cost supermarket. Competition in the UK grocery sector is fierce, major players like Tesco, Wal-Mart are using and introducing customer's loyalty scheme as a way of retaining their customers. Competition today is also focus on pricing; most supermarkets in the UK are becoming low cost provisions. The competition is going to be fierce, with Tesco and Wal-Mart, currently being the market leaders. Thus Tesco should pay attention on the four Ps, product price, promotion, and place in these markets (Charles 2007). Tesco has a pool of financial resources, reserves; managerial capabilities that can help the company cope up with competition. In this market, the threat of new entrants is moderate, as high yield and high returns can therefore increase the chances of other entrants to gain a share. Another big threat here is the number of customer's centered grocery stores increasing everyday. A barrier to entry is the potentially high capital requirements needed to convert into a large scale supermarket to compete with TESCO over night. In other markets like the United States, Thailand and Japan, Tesco has adapted to local values through sourcing of local materials and resources and the recruitment of local staff. Management will have to think globally but act locally (Company 2008 Report). The company ongoing exclusive rights with suppliers, distributors and transporting companies should be replicated in these markets. In addition, customers have a high bargaining power because of the numerous options open to them. This is also due to high rate of store ratio, and same items being offered by the major players. In the UK, grocery concentration ratio is high. The high availability of existing products means that customers have alternatives to choose, and are pushed into using the service. Buyer price sensitivity is high as buyers are price sensitive to basic items. Because suppliers switching cost relative to firm's switching cost is low, most grocery supermarket enter into a long term relationship with their suppliers as a result of quality and industry standards. However, the low degree of differentiation of inputs means that the suppliers have minimal power. In these markets, it will be difficult for local supermarkets to get up overnight and start operating at Tesco scale. Though there are potentials for the sector to attract potential competitors or new entrants, the situation is however difficult for new entrants to enter the line of business, because huge capital, and capabilities are necessary to support after sales services. In terms of technical expertise to get up overnight and open a grocery store that will compete with Tesco is not easy. Suppliers and customers have a high bargaining power in these markets. Each grocery store strive at having unique items, others offer almost the same thing making customers and potential customers to base their attention on price, quality and after sales benefit (Mayo 2001). 2.1 Tesco and Porter's Competitive advantage Competitive advantage is a situation whereby a firm is able to provide a particular service in an industry better than its competitors thereby increasing its market share and profit potential (Blocher et al. 2005). In this regard, Porter (1990) argues that competitive advantage should be asses from the core competencies of the firm, which to the researcher are unique skills and techniques including staff and suppliers achieved by the firm otherwise not available to other firms in the industry (Blocher et al 2005; Mintzberg 2003,). Tesco competitive advantage, have been analyzed in respect to Porters competitive advantage framework. Considering the strategic capabilities of Tesco, Tesco competitive advantage will be analysed with respect to its strength. This is based upon Porters argument that, a firms position itself by leveraging it strength. Lower Cost Differentiation Cost leadership Low product system Low life cycle cost for Tesco product High reliability of Tesco product and non intrusive serviceability for Tesco electronics. Tesco unique resources, trademarks, proprietary know-how, uninstalled and installed customer base Differentiation Adequate advanced functionality Aesthetic product features Integration capabilities and upgradeability, convenient product availability in terms of quantity, location acquisition and installation. Confidence in the product Equity of Tesco brand Cost focus Differentiation focus Looking at the overall strategy of Tesco, one will not hesitate to conclude that Tesco has a broad target. Here Tesco is able to bring its product faster to the market than some of the competitors. Thanks to its huge investment on technology, it existing relationship with suppliers that facilitate the smooth flow of resources. Thus the company is focused on cost leadership and differentiation. 3.0 Recommendations Tesco position in the retail industry can be attributed to its vast experience in the market, product differentiation, assorted brands and cost leadership. It business concept of "No-one tries harder for customers, and we treat people as we like to be treated". As one of the supermarkets that place values on the employees, workers are put at the forefront of the business. "If the Tesco team find what we do rewarding, they are more likely to go that extra mile to help our customers". This has become part of the company's culture. The higher the accessibility to technology and cost leadership the higher will be the customer base and thus the competitive advantage of the firm. Effective communication plays an important role in that it explains the product as well as it positions the company and the product (Storey and Easing wood 1998: p. 344-). Staff/customer interaction is a measure of service quality as opposed to product quality. This requires the company's management to asses the quality of the service products as customers also tend to evaluate how the service was delivered by the staff. Customers look in particular at the welcoming nature of the staff, their physical appearance or outlook, consciousness, promptness and efficiency. Our advice to the company's management is to shift attention to these taken for granted assumptions. Tesco should cut down on the number of question marks. These could be easily turned in to stars and cash cows with excesses from cash cows. Tesco has gained advantage from this fact. This could also be capitalized upon. Tesco as a company should use clear values to underpin what they do. Their core purpose is based on customers' value creation. In all, cost-leadership has become part of the organization's culture through symbols and effective processes being respected. Our caution to Tesco's management is that, such a strategy will only work effectively in situation where the organization can provide products or services at a lower cost than competitors. It is not a try and error exercise. It is a commitment and a culture. In all, we recommend Tesco to see such an action from the marketing concept which lay on the premise that, achieving organizational goals depend on determining the needs and wants of the market target and delivering the desired satisfaction more effectively than competitors (Kortler 2002). 3.1 Conclusion Our analysis tells us that, Tesco through its umbrella branding, products differentiation, diversity programs and core values on the principles of putting customers first has earned the company a strategic position in the global retail industry. The company places emphasis on customer's satisfaction and stresses on innovation, like the metro format Tesco stores in China. Today, Tesco has open its first energy efficient and environmental friendly store as a means of getting more socially responsible and putting the community at the forefront of its activities. Our caution, to the company's management is to strive at doing what it has been doing in an extra ordinary way, for sooner or later competitors to will start operating in the same format and the process will begin all over again. In all, Porters generic strategy and the core competences help explain Tesco's success as compared to its competitors. These methods of analysis are useful but do not provide the complete story. Furthermore, neither approach can predict short or long term success However; these methods should be complimented through information collected from questionnaires and interviews. References Mayo, M.J. The American Grocery Store: The Business Evolution of an Architectural Space. Greenwood Press. Mintzberg H et al (2003). The Strategy Process Concepts Contexts and Cases. Pearson Education, Pearson Education Ltd. Prahalad, C. K. & Hamel, G. (1990). "The Core Competence of the Corporation." Harvard Business Review 67(3): 79-91. Wonglimpiyarat, J. (2004). Amex's strategies for launching the smart card innovation. Technovation 24 (2004) 773-777 Read More