Tesco - An In- and External Market Environment Analysis - Assignment Example

Tesco - An In- and External Market Environment Analysis Executive Summary Tesco Plc is a multinational retail grocery chain established in UK. It is also engaged in various other businesses like finance, clothing and non food retail among others. The company was established in 1919 and it stands as the world second largest retail chain after Wal-Mart. The paper is an analysis of the strategic business environment of the company through external macro and micro environment of the company, an analysis of the internal environment through value chain analysis and resource based view theory, a PR crisis analysis and strategic analysis. Through such insights into the business, the report suggests future strategies, measures and techniques of implementation of such strategies. The report tries to address its major current problem of declining sales and revenues. Table of Contents Executive Summary 2 Introduction 4 Q1 – Analysis of the external environment 4 Macro Environment Analysis – PESTEL 4 Industry Life Cycle Theory 6 Micro Environment Analysis – Porter’s 5 Forces Model 6 Q2. – Analysis of the internal environment 9 Resource Based View of Tesco 9 Core Competency 10 Financial Analysis 10 Value Chain Analysis 11 Q3. – Analysis of PR crises 13 Q4. – Strategic Analysis 15 1.Business Level Strategy 15 2.Corporate Strategy 15 3.Strategies Suggested for future 18 4.Implementation Techniques and Suggestions 19 Conclusion 20 Reference List 21 Introduction Tesco was established in 1919 as a company that is engaged in the business of grocery retail chains (Tesco, 2014). The company has grown today to become the second largest retail business after Wal-Mart. Its global store count goes up to 6351 stores while its revenues measure up to £72,673 million in 2013 (Tesco, 2013). The company is also listed on the London Stock Exchange with an estimated market capitalisation of £24.4 billion (Tesco, 2013). The report is aimed at an analysis of Tesco Plc from the strategic viewpoint. It is organised in a manner which provides answers to four critical questions. The first segment analyses the external market environment from the micro and the macro perspective for Tesco Plc through Porter’s five forces and PESTEL Analysis. The second segment deals with the analysis of Tesco’s Internal Environment through Value Chain Analysis and Resources based view. The third segment talks in detail about the crisis faced by Tesco and what impact it had on the company. The last part deals with an analysis of different types of strategies undertaken by a business including corporate strategy and business level strategy. With the help of such analysis, the report tries to suggest future strategies and implementation techniques for it. Q1 – Analysis of the external environment Macro Environment Analysis – PESTEL Political – UK supermarket industry has been affected by different political factors like tax rates and legislative compliances. The political climate is relatively stable and the government provides encouragement and enough support to the supermarket establishments because of the high levels of employment potential within the industry. Technological – The industry has been grossly moving more towards the use of information technology within the grocery and supermarket industry. The use of discount cards, online shopping cart facilities and customised services has changed the pattern of work within the industry. Competition is also observed in terms of enhanced customer services. For example, Sainsbury uses the ‘Customer First’ plan to modernise its customer servicing function. The industry is also experiencing technological shift in terms of use of ERP systems within their management systems. Economic – The grocery markets of UK facing stiff problems of high product costs. The rise in cost of products has contributed towards rising prices for the finished products. Along with this, the recent economic crisis has left behind the economy in a credit crunch. Both these factors have left the consumer with little money to spend and thereby consumers have reduced expenses on luxury items. Businesses in UK are experiencing a downward trend in product expansion due to widespread unemployment and low disposable income. Retailers are finding it difficult to meet employee expenses owing to losses in sales. Environmental – The dominant players within the grocery retail chain have increased focus on reduction of carbon footprint. Increase in environmental concern has also contributed towards innovation and development of healthy products. Companies like Sainsbury and Waitrose have already initiated their attempts in providing healthy alternatives to their customers. The need of the day is provision of healthy products that are fairly priced within the grocery industry. Social – Industry players are always trying to come up with innovative ideas for socially acceptable and healthy food alternatives to meet the increasing demand for health products. Competing market players like Sainsbury have been training their employees rigorously for providing better customer service and friendly management. Companies are constantly innovating towards sustainable options to get socially acceptable. Legal – legal compliances with regards to corporate social responsibility, environmental compliances, health and safety, consumer complaints and food grade standard maintenance gain high priority within the grocery retailing business. Industry Life Cycle Theory Figure 1: Industry Life Cycle (Source: Jorum, n.d.) The UK grocery market is operating within the maturity stage of the industry life cycle (ILC) when a number of large companies are trying to make the right business decisions and investments in innovation for sustaining within the market. Smaller players are being consolidated within larger companies to move towards a more structures market dominated by few firms. Firms are also trying to gain competitive advantage through modifications in production processes to gain sustainability. Micro Environment Analysis – Porter’s 5 Forces Model The Porters five forces model helps to analyse the external market with a micro perspective. Figure 2: Porters Five Forces (Source: Notesdesk, n.d.) Barriers to the entry- High: The UK grocery market is largely dominated by few companies among which, the four major ones are Tesco, Sainsbury, Safeway and Asda. These four companies comprise of almost 70% of the market share. Other smaller players like Waitrose, Budgens and Somerfield occupy only about 10% of the market share. During the past 30 years, the supermarket and grocery retail chain in UK has seen consolidation. Additionally, supermarket chains have plenty of large players and involve huge costs of establishment. These large players have grown to form one stop shopping solutions. The new company shall also need to have a well connected supply chain management with very less waiting period. These factors together make barriers to entry high within UK. Bargaining power of suppliers - Low: The suppliers have limited number of retailers to sell their products to. They do not enjoy a very high bargaining power because competition among the buyers is very less. Each company has its established supply chain and switching between suppliers is seldom because each supplier tries to achieve highest efficiency in supply. The buyers also have the option of buying high quality products from foreign countries at cheap prices which might get them additional customers. This implies that number of suppliers is large. Hence the suppliers find it difficult to have a bargaining power within the industry. Bargaining power of buyers – High: Products within supermarkets and grocery business are highly differentiated. This allows to consumer to have a variety of choices before making their buy decision. They have the freedom to buy a single product from different markets. This brings supermarket chains into high competition for retaining their customers by allowing them better choices, lower prices and high levels of customer service. High levels of competition between different supermarket chains have provided high bargaining power in the hands of the buyer. Threat of Substitutes – High: The demand for a particular product gets decreased in the presence of high number of substitutes because consumers have the option of switching between different choices. The emergence of convenience stores is also posing increased competition for substitution. This trend has compelled large brands like Sainsbury and Asda to consolidate and kill competition by way of acquisition of these stores and revamping them into Metro and Express stores located locally within towns and cities. Inter-firm Rivalry – High: large players like Tesco face stiff competition in UK from other large and established grocery retain chains for increasing market share. These companies are constantly innovating and developing for gaining larger markets. Q2. – Analysis of the internal environment Resource Based View of Tesco Tesco is a British multinational engaged in the business of retailing grocery and other merchandise. It operates largely in United Kingdom with profit figures high enough for it to qualify as the highest profit making retailer on the global level. The count of Tesco stores has reached 3,146 and its still growing at a fast pace (Tesco, 2013). The company has employee strength of about 530,000 people on the global scale with about 310,000 people employed within UK alone (Tesco, 2013). The company operates in 5 basic store types which include Metro, Express, Superstore, Extra and online retailing through their website tesco.com. Apart from the food retailing business, the company is also engaged in non food retailing, stores at petrol stations and an entire range of home and lifestyle products. The company operates through 3146 stores supported by 1000 pickers and 2000 vans. Tesco is also engaged in the provision of personal finance solutions through savings accounts, insurances, bonds, secure investments and online mortgages. The company makes a sale of about 40000 food and non food products through a very connected channel of superstores, express stores, metro outlets, petrol station outlets and online sales (Tesco, 2013). Hence, as per the resource based view, the company has undergone a slump that is temporary in nature and it is expected that profits shall be back on track through strategic efforts and recovery of the demand conditions in Europe. The company has close to 2000 suppliers for own brands. It has its 3 line of offerings as value finest and normal. Private labels include Miss M, 4 Future, mirage, James, Daniel Moore and Ellen Wesley among others. Core Competency The core competency of Tesco plc is economies of scale. It produces in bulk and sells to its large market base. The presence of huge market access allows for development of a competitive advantage of product differentiation or product development. Large and saturated markets lead to a product differentiation strategy. It has been developing new strategic business units and exploring new business lines like finance and insurance services in order to expand its business line. Product differentiation also allows new market access which in turn expands business scope. Financial Analysis The financial analysis of Tesco presents a very dismal view of the company which has been following from the demand slowdown in the aftermath of the recent hiccup in the global economy in general and the European economy in particular. In 2013, the company turnover was very low owing to the demand slump. The turnover saw a reduction of sales by 1.34%. Company EPS or earnings per share also decelerated from 35.7 p to 33.95 within 2012-2013 (Tesco, 2013). It is evident that the company is running weak in terms of profitability. The earnings of the company saw a sharp rise over 2011-2012 but due to the European market conditions, the demand fell and the company saw a fall in its sales. Net profits also faced a similar degree of fall. Tesco’s market share in UK is 30.6% which makes it the largest retail chain in the country. The followers lag far behind with Asda at 17.9% and Sainsbury at 16.6%. Rest small retailers occupy about 25.4% of the total market share. Company sales stood at £72,673 million has shown slight slump over the past year while its online portal boasts to be one of the largest grocers in the world on the online platform taking over 250000 orders in a week. As per reports, Tesco plans to gain advantage through benefitting on cost measures by implementing cost reduction strategy and minimising wastes wherever possible. Value Chain Analysis Figure 3: Value Chain Analysis (Source: Dudovskiy, 2012) The value chain analysis helps to identify the critical internal strengths of the company through which it creates value for its customers. It brings forth a comprehensive overview of all kinds of activities a company undertakes to bring the final product to its consumer. Inbound logistics- Tesco has incorporate an agile and lean inbound logistic function which is one of the most essential and crucial; factors in food retailing business. It is important that quick spoilage items are kept fresh in stores and damaged elements are eliminated in grocery retail business because a company is dealing with human health. The top market position of the company helps it to bargain for low costs from its suppliers. They have a just in time ordering system and a constantly updated vendor list and processes that help in maintaining high levels of efficiency and effectiveness (Roy, Hilbert and Ghobadian, 2012).. Operations management- Tesco follows a low cost leadership strategy and it manages to do so with the help of information technology within their processes. The company has made investments to the tune of £76 million in information technology systems like enterprise resource planning software’s with a view to streamline its operational framework. This system is better known as the Tesco Digital Program. It has been observed that profitability of the company increased by about £550 million after the system was implemented in 2009. The system also enhanced stock management for Tesco (Zokaei, et. al., 2013). Outbound logistics- Tesco’s leading position within the online as well as offline store modes is being owed to its exceptional outbound logistics management. It has been successful in making strategic placements of its Homeplus, Metro, Express, Extra and Superstore formats which provides utmost care to customer needs and wants. The formats are also segmented in terms of population targeted (Payne and Frow, 2013). Marketing and sales- Clubcard or Tesco’s loyalty program tries to retain customer loyalty and dissuades competition. It also tries to promote itself as an environment friendly company by educating and providing customers with the option of Green Living. They provide information on measures to reduce food wastage and carbon footprint. Services – Tesco operates through strategies that aim at deriving cost leadership and differentiation. This is evident form Tesco’s promotion of self service techniques in various areas of marketing and financial services. It also tries to differentiate itself by providing unique client servicing facilities that help in customer retention. A company with such huge size also operates high levels of efficiency within its value chain in order to gain its rightful position in the retail business and getting a sustainable competitive advantage. Q3. – Analysis of PR crises The stakeholder group can be easily defined as a section of people who are engaged in the process of making decisions for the company. These set of people are responsible for any strategic decisions taken by the company because they provide their valuable inputs to the company’s problems and formulate strategies for survival and growth of the organization. Such inputs can come in the form of an idea or as resources and are helpful in formulating future aims and goals of the company. Tesco has been completely committed towards the external stakeholder interests and issues. It makes sure that each one of its external stakeholders aware of what is happening within the company and what are the major decisions and actions being taken in Tesco. Tesco strives to maintain healthy relations with all of the stakeholders and in order to attain that, the company. It does this by way of making sure that the stakeholder group is engaged and involved in all important and strategic decisions taken by the company for the attainment of desired objectives and goals (Corbae, Jensen and Schneider, 2003). The crisis emerged in 2008 when the company had to face strong opposition and defamation form its shareholders because they believed that the company kept its measures of resolving corporate governance issues undisclosed. They also demanded that Tesco should make a disclosure of all kinds of financial and strategic decisions in a more vivid manner. In 2008, Tesco sought an increase in its transparency requirements and higher levels of company ethics (Williamson, et. al., 2013). It was observed that the suppliers were kept away in the process of information sharing. This is because it was believed that Tesco was capable of importing products at much cheaper prices from other nations. Such vulnerability made suppliers quite unhappy and they demanded a greater degree of disclosures from the company. Tesco had been providing very little critical information to the stakeholders who were directly linked with company affairs. The top management was largely responsible for taking major company decisions and such separation of decision making authority created distance between the company and the stakeholders. Lack of information sharing also inhibited sharing of ideas and innovative opinions from the supplier or the stakeholders end which again acted in great disadvantage for the company. Hence, it can be said that the company was operating as a big failure in meeting the transparency and social responsibility norms of its stakeholders during 2008. Such information sharing allows the company to identify the risks associated with particular projects and also ensures that the company looks at the long term strategy into perspective. Such a strategy might also get detrimental to the company’s operations because of too much involvement of external stakeholders within the decision making process. Such high levels of involvement might make it difficult for the management at Tesco to take strategic business decisions. Tesco has managed to involve its stakeholders and also keep them restricted to a limited degree of involvement. It understands the importance of taking in inputs from the suppliers, shareholders, consumers as well as employees for smooth functioning of the business. Q4. – Strategic Analysis 1. Business Level Strategy The company undertakes a cost leadership strategy as a business level strategy. Each organization tries to compete with the other in gaining customer strength on the basis of price wars. In such an attempt, companies lower their prices trying to keep their revenue margins unharmed. This implies that cost adjustments are being made within the production process and Tesco tries to do the same with its business level strategy (Haerifar, 2011). Business level strategies aim at providing cost leadership for Tesco. Reduced prices attract customers and provide the much needed competitive advantage. Top retailers produce products that are undifferentiated and hence cost leadership can help in retaining as well as attracting customers. Such a strategy is essential for not only Tesco but for all producers who are engaged in the production and sales of standardised and generic products. Tesco should be able to maintain efficiency in facilities so as to make it tough for competitors to copy it. Additionally, it should also focus on strategies that enable the company to sustain increased control over its production and overhead costs and also reduce expenses that go into research and development by as much as possible. The value chain needs to be revamped and upgraded on a continuous basis for it to remain efficient and cost effective. Hence generic strategies can help Tesco gain sustainable competitive advantage. 2. Corporate Strategy Strategic analysis for a multiproduct company begins right at the corporate level decision regarding the different product lines and their sales strategy are taken such that companies have a portfolio of businesses that can be called as strategic business units or SBU’s. In case of Tesco, different lines of business which provide additional profits to the company can be identified as its strategic business units. Such analysis makes it easier to transfer cash from low growth oriented but high cash generating businesses to such SBUs that have high growth potential along with high cash generation ability. Figure 4: Ansoff Matrix (Source, Riley, 2012) The Ansoff matrix here can be used for identification of corporate strategies for Tesco. Tesco should continue with its existing strategy of market penetration through existing products or new products into existing markets. Tesco has penetrated into the insurance and savings account segment as a part of its market penetration strategy. This is essential for gaining long run profits. Analysis of strategies states that use of Clubcards and maintaining lower product prices have helped to attract and retain customer and shall also be helpful in increasing sales in present markets. It has been identified that market development and product development are found to be essential elements for company growth. This suggests that Tesco should continue its feat of entering into new businesses and thereby adding on to company profits. This additionally requires that loss making SBUs are discontinued to invest into new venture that have potential profit margins. The diversification strategy as mentioned within the Ansoff matrix is another important segment for analysis. Tesco has developed health products to target the new market segment of health conscious consumers. This calls for business expansion along with product expansion. Such expansion can be in the form of a related diversification or an unrelated diversification. Related diversification pertains to businesses that are related or in synergy with the existing businesses of the company and shall benefit from the existing value chain of Tesco. Such diversification strategy can be segregated within horizontal and vertical diversification strategy (Hensmans, et.al., 2013). Vertical integration is said to occur when a considerable segment of company’s supply chain comes under the common ownership of a single corporate. Tesco enjoys high control over its suppliers which makes it a company with high degree of vertical integration. Additionally, the Clubcard scheme assists in the identification of high sale products and low sale products. Such an analysis supports strategy formulation for demand placement with desired suppliers and enables bargain on discounts and prices. With the usage of Clubcard scheme it can identify the products that have high sale and the ones that have low sale. After the analysis they can make demands to the suppliers for lower prices and discounts. The bargaining power of the company gets elevated due to the vertical integration it has with the suppliers. Under horizontal integration, the company takes up production units that are capable of producing complementary or competitive products. Horizontal integration can be initiated through mergers and acquisitions which also inhibits the growth of small competitors. Such integration brings in economies of scope, scale and strengthens company existence in markets (Henry, 2011). Economies of scale are possible for Tesco if it sell the same product in different markets and hence diversifies. Synergy in market penetration can be gained by way of establishing factories overseas and simultaneously differentiating between resources that are common and uncommon between different products so as to reduce input costs associated with global trade. Another way of gaining economies of scale for the company can be by way of implementing increased production levels such that bulk production allows for better usage of resources. Economies in bulk producing reduce per unit costs and thereby elevate per unit profit. Cost monopoly eliminates competition through high profits associated with low prices (Ulwick, 2007). 3. Strategies Suggested for future With a view to sustain in the long run, it is suggested that Tesco has taken up strategically decided and controlled steps in different aspects of the business. Strategic business units or SBU’s that are profit centres can be continued into operation while loss making units needs to be closed or revamped. Such an analysis is also required in its different lines of businesses. Tesco need to make a continuous upgrade of its ERP and production technology in order to retain its competitive position in the industry. The company needs to move forward in providing higher customer satisfaction levels. Employment activity brings in additional cost implications and efforts need to be made to hire staff as necessary with a view to reduce unnecessary staffing expenditure. In order to improve on the product aspect, it is suggested that the company looks at innovative packaging, presentation and labelling that shall enable customer attraction and thereby increasing sales. For maintaining sustainability, it is important that Tesco implements new strategies along with existing ones in order to maintain its current market position. Regular business forecasts and analysis shall enable it to have higher control over its businesses (Ulwick, 2007). 4. Implementation Techniques and Suggestions Company’s issues and concerns related to acceptability, sustainability, and business feasibility can be successfully assessed by using the Staircase model. Figure 5: Staircase model (Source: Goab, n.d.) The model is a diagnosis tool that helps to identify the process of organizational development by raking it up into different stages. The movement of the organization up the staircase shows the strengthening of the company. High levels of achievement can be set as steps in the staircase model to facilitate planning, monitoring, implementing and evaluation. The management at Tesco should make extensive use of their logical reasoning, intuitive thought, memory and decision making power to resolve issues that might challenge the company’s future. The problem of declining sales in the UK market can be analysed by the use of this model. Conclusion Strategic analysis of the company helps to understand the key areas of its strength and weaknesses. The analysis of external environment for Tesco Plc presents that the company is facing present issues of declining sales. The analysis helps to find out ways of managing such issues by reducing unnecessary staffing expenditure and increasing sales by exploring health conscious segment of population. The internal analysis for Tesco identifies company’s potential internal competency along with areas of concern. That analysis brings forward that Tesco needs to formulate ways to retain its consumers by strengthening its outbound logistics like the Clubcard. Analysis of crisis and strategies of Tesco’s business provide insights into the company’s management team and suggests ways to improve corporate image through increased corporate social responsibility and transparency. Reference List Corbae, G., Jensen, J.B. and Schneider, D., 2003. Marketing 2.0: strategies for closer customer relationships. New York: Springer. Dudovskiy, J., 2012. Dell Value-Chain Analysis. [online] Available at: [Accessed 27 March 2014]. Goab, n.d. The staircase model in brief. [online] Available at: < http://www.goab.se/Rapporter/3shortgoab.doc.pdf/> [Accessed 27 March, 2014]. Henry, A., 2011. Understanding strategic management. Oxford: Oxford University Press. Jorum, n.d. Technological change and industrial structure. [online] Available at: [Accessed 27 March 2014]. Notesdesk, n.d. Porter’s five forces model. [online] Available at: [Accessed 27 March 2014]. Payne, A. and Frow, P., 2013. Strategic customer management: Integrating relationship marketing and CRM. Cambridge: Cambridge University Press. Riley, J., 2012. Ansoff Matrix. [online] Available at: [Accessed 27 March, 2014]. Roy, P.F., Hilbert, J. and Ghobadian, A., 2012. Strategic management: The challenge of creating value. London: Routledge. Tesco., 2013. Annual Report 2013. [pdf] Tesco Plc. Available at: [Accessed 27 March, 2014]. Tesco., 2014. About Tesco. [online] Available at: [Accessed 27 March, 2014]. Ulwick, A. W., 2007. Business strategy formulation: Theory, process and the intellectual revolution. Zurich: IAP. Williamson, D., Williamson, D., Jenkins, W., Cooke, P. and Moreton, K.M., 2013. Strategic management and business analysis. London: Routledge. Zokaei, K., Lovins, H., Wood, A. and Hines, P., 2013. Creating a lean and green business system: Techniques for improving profits and sustainability. Florida: CRC Press. Read More