Tesco-com - Taking Advantage of Technological Advancement - Case Study Example

Running Head: TESCO PLC: CASE STUDY ON MARKETING STRATEGY Tesco Plc: A Case Study on Marketing Strategy in APA Style by Course Name University Tesco.com: Taking Advantage of Technological Advancement The global retail industry has been largely driven by the speed of technological advancement. Following the commercialization of the internet technology is the creation of a new business model and the subsequent proliferation of dotcoms. Business organizations in the retail industry which employs pure brick-and-mortar operations are now shifting to click-and-mortar business models by putting up their virtual stores on the web. To retailers, the internet has provided a venue where they can distribute and market their products to their prospective clients. However, through the course of time, the success of online retailers proved to be a factor of its resources and how it employs these to achieve its specific goals and objectives. From its humble beginnings, Tesco Plc has gained the reputation of being the largest British retailer in terms of global and local shares. It is estimated that in every 8 UK retail sales, 1 is spent on Tesco (Tesco Plc 2007). Recognizing the growth opportunities in the virtual marketplace, the giant retailer has decided to establish online presence during 1994. Three years after, Tesco has started an online shopping which it named Tesco Direct (Tesco Plc 2007). Since then, Tesco has started offering grocery and food items in its virtual store, Tesco.com. On August 2006, the company announced the offering of non-food items in its online store under the name Tesco Direct. This marketing strategy has proved to be very efficient and profitable for the retailing giant. During the fiscal year 2006, the company announced a total annual turnover of 33.974 billion and reported a pre-tax profit of 1.962 billion. Out of this, 1.2 billion is shared by Tesco.com in terms of total revenue and 83 million in terms of profit. Even though the share of Tesco.com is meagre compared to total turnover and profit generated by Tesco Plc, its growth has been remarkable. The fiscal year 2006 reports online sales double-digit growth of 29.2% while profits soar by 49.5% (Tesco Plc Annual Report 2006). Compared to its rivals in the UK retail industry, Tesco.com captures a higher market share at 65%. Walmart-owned Asda chain lags behind with 16% while Sainsbury corners 14% (Best 2006). Its success has also been documented as it has been named the only retailer which has been able to make online shopping profitable (Walker 2006). On Crossroads: Evaluating Local and Global Opportunities The recent trends and developments in the global market stress the huge emerging opportunities in online retailing. In the UK alone, there has been a sharp rise in the number of people who are "cash rich but time poor" which triggers the higher demand for online shopping (Muncaster 2006). According to the National Statistics Office, the online market is still in the growth stage as only about 20% of adults in UK source food products from the internet (Best 2006). This improvement heats up competition in the local market as industry players battles for market share by launching aggressive strategies and enhancing the overall customer shopping experience. As a global player, Tesco Plc also eyes geographical expansion of its online shopping service by the identification of the profitable markets. In the global economy, it should be noted that internet usage has skyrocketed by 208.7% during the interval of 2000 to 2007 (Internet Usage Statistics 20007). Growth has been very significant in the highly developing Asian and Latin American countries including China, India, and Brazil. It is expected that the wide acceptance and popularity of the internet technologies in this country together with the sharp increase in disposable incomes in these regions will attract global retailers. Faced with these opportunities and challenges in the local and global market, Tesco Plc chooses the strategic direction that it would take in order to maintain the market leadership of Tesco.com. Since its success has always been directly related to its ability of employing its corporate resources efficiently, it considers how to maximize its current pool of resources and identifies the capabilities which it needs to develop in order to enhance its competencies. Tesco.com: A Quest for Inclusivity Through its long existence in the UK retail industry, Tesco Plc has invested heavily in its resources whether tangible, intangible, and organization capabilities. Tesco is able to establish a distinct, well-crafted competitive marketing strategy which it utilizes in its quest for market share. Its initial success in the UK market is based on the approach that John Cohen, its founder built the company with-"Pile it high, sell it cheap (Tesco Plc. 2007)." For some time, this strategy has worked for Tesco because the economies of scale allows it price more competitively than its rivals. However, this created distaste in the middle and upper class customers who are less price-sensitive but are more concerned on the quality and the image of the products they purchase. Thus, Tesco has started its competitive marketing strategy of inclusivity. Inclusivity is Tesco's response in order to attract all the market segments in the retailing industry including the lower, middle, and elite class. Instead of focusing in a specific niche, the retailer opted to craft strategies geared in capturing the entire buying public. This strategy includes overcoming the reluctance of customers in purchasing Tesco's own brand, customer focus, selling almost everything, and covering a larger geographical market through market development growth strategy (Tesco Plc 2007). Lastly, inclusivity is by offering more convenient shopping experience through the creation of Tesco.com. Tesco Plc's Resources: Success Drivers In order to enhance operational and administrative efficiency, Tesco.com has been separated from Tesco Plc during 2000. Tesco.com however, is still a wholly owned subsidiary of Tesco Plc where it derives needed resources required for its profitable operation. The success of Tesco.com is directly linked to the resources and capabilities which have become inherent in the operation of its parent company. These have been used in formulating the business organization's marketing strategy. Information Technology The efficiency of Tesco Plc's operation is largely facilitated by its huge investment in information technology. In the operation of Tesco.com, information technology is also instrumental in delivering customer value and satisfaction. Whenever a customer enters the website, their individual transactions are recorded in the company's database for future use (Seybold 2002). Tesco.com uses these set of information in its target marketing efforts. Acquiring knowledge about customer buying habits through their historical purchases has always allowed Tesco to tailor its marketing efforts to the preference of individual customers. The server in each store of Tesco saves the consumers favorite products, to ensure that they are always kept in stock (Seybold 2002). It should be noted that in the company's e-mail marketing efforts which sends 16-20 million e-mails a month, these knowledge about customers through the use of its database enables Tesco to generate more orders and gain customers' loyalty. In the words of Smith (Tesco in E-mail 2005), "We know that customers hate junk mail so we try to target them as much as possible and make it easy for them to stop receiving e-mails if they don't want them." Technological expertise also aids Tesco in enhancing the online shopping experience of each customer. When asked about the features that would enhance customer shopping, an average online shopper responds site availability and performance which is measured by the length of time that items are "loaded" in the customer's shopping cart (William 2006). Tesco recognizes this and invested in making its website serve its purpose-to provide a fast and convenient service to customers. Thus, Tesco.com leads the industry with a website availability of 99.47% and average load time of 5.694 second (William 2006). Table 1. Website Availability and Loading Time of Major Online Retailers Source: William 2006 Financial Muscle The financial strength of Tesco.com is imperative in supporting the business organization's campaigns and promotions. An adequate financial muscle also enables the company to invest in technological resources and training of human resources. Having an adequate funding also facilitates the growth and expansion strategy pursued. An analysis of the company's five year financial ratio shows an increasing trend in the company's profitability ratios including return on capital employed, gross profit margin, asset turnover, and net profit margin. This is even more apparent when the aforementioned ratios are compared to J. Sainsbury, Tesco Plc's main rival (Refer to Table 2 for Tesco's Profitability Ratios and Table 3 for J. Sainsbury's.). Table 2. Profitability Ratios of Tesco Plc (2001-2005) Source: Author's computation Table 3. Profitability Ratios of Tesco Plc (2001-2005) Source: Author's computation Managerial Expertise Tesco Plc's expertise in the promotion of its products and services to appeal in order to enhance its appeal to all the segments in the market distinguishes it from other players in the industry. Through its managerial resource, the company is able to come up with promotional strategies which create an image for Tesco Plc while boosting the saleability its various offerings to a diverse clientele. The giant retailer does this creating separate product lines which appeals to different sectors and marketing these by utilizing different approaches. For instance, Tesco Plc offers price-sensitive customers product lines like Value, while those who are less price-sensitive are offered "Finest" products. Tesco Plc has also become remarkable because if its ability in overcoming the customers' reluctance in purchasing its own brand. It should be noted that retailer's own brand is considered more profitable than those supplied by manufacturers as it retains a higher overall profit with this products. Tesco's managerial expertise can also be seen in the company's diversification into other previously unrelated businesses like financial services, consumer electronics, internet services, consumer telecommunication. All in all, Tesco becomes a company which offers almost all products in one roof. The contribution of inclusivity to the retailer's strategy is tremendous. Unlike its competitors which are only to able a capture a small portion of the buying market, Tesco became appealing to every customer. Critical retail analyst David McCarthy recognized the company's strategy and remarked, "They've pulled off a trick that I'm not aware of any other retailer achieving. That is to appeal to all segments of the market (Liptrot 2005)." Tesco.com capitalizes on this organization capability of its parent company in attracting buyers to purchase their products online. It should be noted that customers buying in online stores will usually choose from a range of products which are available in a store near their homes (Seybold 2002). Since each Tesco Plc outlet usually carries its own brand, Tesco.com benefits from the promotional efforts which has already created a product image and occupied a position in the minds of the consumer. Economies of Scale Tesco.com enjoys the economies of scale of its parent company. It should be noted that the mere size and scope of Tesco Plc commands a high bargaining power in its suppliers. This enables the giant retailer to source its merchandise at discounts and generally lower prices than other industry players. The company also benefits from the cost savings in terms of administrative and advertising expenses. The large operation of the business organization allows it to distribute costs among its business units thereby allowing it to become more cost efficient. This intangible resource of Tesco.com supports its aggressive pricing strategy. As the giant retailer strives to compete in the market by pricing more competitively than its rivals, it has been faced with the challenge of identifying value chain processes where it can cut down cost and drive down prices in order to enhance customer value. In-store Pick and Pack System Compared to retailers which solely employ an online business model, Tesco.com capitalizes its retail outlets in ensuring the adequacy of its merchandise and the speed of its delivery. Gary Seargent who was appointed to head the Tesco direct operation in 1996, describes the in-store pick and pack system as follows: "The pickers use a specially-equipped shopping cart with six trays and an online display. The display gives them their routes through the store and a list of the items to be picked as they go down each aisle. The store routes are optimised to avoid the peak in-store traffic areas. Items are scanned as they're dropped into each customer's tray, so they can't be mixed up. And if the item the customer ordered has gone out of stock in the few hours that have elapsed since the order was placed, the picking application proposes an alternative product from a list of items that the customer has previously purchased, either in the store or when shopping online. Seventy-five per cent of Tesco's online shoppers also shop at the store from time to time. And because most of them use Tesco's loyalty card, Tesco has a complete history of each customer's orders. Once the shopping cart is filled, the trays are loaded directly into the delivery vans that are ready and waiting behind each store. Again, the routing is optimised so that produce doesn't sit for hours but is delivered immediately after being picked from the store. Deliveries are scheduled based on customers' preferences (within a two-hour delivery window to allow for traffic delays). Any items that have been substituted are carefully placed on the top of each order so they can be reviewed and accepted or rejected when the order is delivered (Seybold 2002)." Excellent Customer Service Tesco Plc recognizes the fact that its tangible products have an intangible component. Thus, the company ensures that aside from offering best value products, it also offers excellent customer service. The company's success is also due to its very customer focused strategy. Tesco's vision boldly states this as "Our core purpose is to create value for customers to earn their lifetime loyalty (Our Core Purpose 2007)." This statement is further expressed in two key values known as "No one tries harder for the customer," and "Treat people as we like to be treated (Our Core Purpose 2007)." In their feat to know customer's preferences, they are gained the following information through their surveys: clear aisles; can get what they want; good prices; no queues; and great staff. Armed with this information, Tesco Plc strives to give exceptional service to its customers. Tesco's operation is also focused not only on delivering a wide range of choices for each buyer but also on the provision of unique services to make shopping experience easier and more convenient. In the 1990s, programs are launched such as "making a staff available to help customers pack bags and take them to the car, having a policy opening opening checkouts is there was more than one person in queue, linking in with Airmiles group in relation to its Clubcard, and the provision of facilities such as baby changing units, restaurants and coffee bars (Biz/Ed 2006)." This commitment of the parent company to extend excellent customer service has been extended in Tesco.com. However, as the experience of the buyer is largely dependent on his/her virtual visit in the online store, excellent customer service is defined differently. Tesco.com is designed to be user-friendly in order to facilitate easy navigation. As discussed above, loading time and website availability are also considered. Tesco.com also ensures accuracy of orders, prompt and on-time delivery, and customer satisfaction. In fact, the team also conduct simulation of the customers' online shopping experience to monitor end-to-end customer experience proactively (Seybold 2002). Conclusion: Looking into the Future Tesco.com's resources and organization capabilities have helped it in coming up with an efficient marketing strategy which puts it in the top of UK retailing industry. The company's ability to offer a wide range of products has been supported by the managerial expertise of Tesco Plc in marketing its diverse product lines which appeals to all segments in the market. The intangible component of the product, excellent customer service is made possible by the company's commitment in training its human resource and instilling them this essential corporate culture. Lower pricing strategy is supported by the company's mere size and scope which allows it to form strategic alliances with suppliers and distribute fixed costs, thereby achieving economies of scale. Meanwhile, it is the financial strength of Tesco Plc which supports its expansion and growth strategy enabling it to cater to a larger geographic market. Armed with these resources and organization capabilities, Tesco.com faces the local and global opportunities in its environment. Consistent with its experience in the industry, its success and mere existence is expected to be measured by the quality of its resources and its ability to strategically align to its specific objectives. Appendix: The Resource-Based View of a Firm This case study uses the resource based view of a firm in explaining the marketing strategy of Tesco.com. Since the online retail store directly benefits from the resources of its parent company, Tesco Plc.'s strengths have also been highlighted. The resource-based view of a firm emphasizes that a "firm can earn sustainable supra-normal returns if and only if they have superior resources and those resources are protected by some form of isolating mechanisms preventing their diffusion in the whole industry" (Resource-Based View of a Firm 2007). Furthermore, these supra-normal returns are possible only if resources are valuable, rare, imperfectly imitable, and non-substitutable (Dess, Lumpkin, and Taylor 2005). Resource can be classified as tangible, intangible, or organization capabilities. Tangible resources are relatively easy to identify. These resources are highlighted in the case study as Tesco Plc's investments in information technology and strong financial muscle. Intangible resources, on the other hand, are difficult for the competitors and even the company itself to account for, or imitate, and have typically embedded on the different routines and processes which have evolved over time (Dess, Lumpkins, & Taylor 2005). Again, these are identified for Tesco Plc as its in-house pick and pack system, economies of scale, and excellent customer service. Organizational capabilities refer to the competencies or skills that a firm employs to transform inputs to outputs, and capability to combine tangible and intangible resources to its desired end. Lastly, this is in the form of Tesco Plc's exceptional managerial skill in putting these resources together in order to achieve its desired end. References Best, J. 2006. "Tesco dominates net shopping with 2m loo rolls." Silicon.com. Retrieved 14 May 2007, from http://www.silicon.com/retailandleisure /0,3800011842,39161741,00.htm Biz/Ed, 2006. Strategic Planning: Tesco-Activity. Retrieved 14 May 2007, from http://www.bized.ac.uk/educators/16-19/business/strategy/activity/strategic1.htm Dess, G., Lumpkin G. T., Taylor, M. 2005. Assessing the Internal Environment of the Firm. Retrieved 15 May 2007, from http://www.utdalas.edu De Wit, B. and Meyer, R. 2004. Strategy: Process, Content and Context, 3rd edition. Thomson, chapter, 5. "Internet Usage Statistics." 2007. Internet World Stats: Usage and Population Statistics. Retrieved 14 May 2007, from http://www.internetworldstats.com/stats.htm Liptrot, H 2005, Tesco Supermarket Superpower, BBC.co.uk, Retrieved 14 May 2006, from http://news.bbc.co.uk/1/hi/business/4605115.stm Muncaster, P. 2006. "Online shopping spend increases." IT Week. Retrieved 15 May 2007, from http://www.itweek.co.uk/itweek/news/2163309/online-shopping-spend-increases Resource-Based View of a Firm 2007, Retrieved 23 March 2007, from http://www.valuebasedmanagement.net/ methods_barney_resource_based_view_firm.html Seybold, P. 2002. "Shopping Online at Tesco." Business Line. March 3, 2007 Strategic Management, Strategic Management Journal, Vol. 11 pp.171-195 Tesco in E-mail Marketing Assault 2006. BBC News. Retrieved 13 May 2007, from http://news.bbc.co.uk/1/hi/business/4429184.stm Tesco Plc 2007. Wikipedia: The Free Encyclopedia. Retrieved 13 May 2007, from http://en.wikipedia.org/wiki/Tesco Tesco.com 2007. Wikipedia: The Free Encyclopedia. Retrieved 13 May 2007, from http://en.wikipedia.org/wiki/Tesco.com Tesco Plc Annual Report 2006. Tesco.com. Retrieved 14 May 2007, from http://www.tescocorporate.com/images/Tesco_Report_2006_Full.pdf Walker, G. 2006. "Online failing to deliver." The Grocer. William Reed Publications. 2006-11-11, p.6. Williams, A. 2006. "Tesco checks out first in online grocery shopping." PC Pro. Retrieved 15 May 2007, from http://www.pcpro.co.uk/news/100234/tesco-checks-out-first-in-online-grocery-shopping.html Read More