Tescos Internal and External Analysis - Case Study Example

Tesco’s internal and external analysis Tesco’s internal and external analysis All the businesses that sell goods and services fall under the umbrella of retailing, however, from this position there are several directions that are taken from here. It is imperative to understand that over the past few decades, there has been what can be described as general retailing business. In some parts of the wide world, the retail business is often dominated by smaller family and regionally targeted stores; however, this is changing at a very rapid rate as the market is being taken up by increasingly billion dollar multinational conglomerates such as Sears and Wal-Mart (Woods, 2012, pg 627). These large retailers have been able to set up huge supply and distribution chains, managing to finance pacts as well as large scale marketing plans. In the United Kingdom, retailing can be described as one of the major economic sectors of the country, with the retail sales leading to around $400 billion and the retail business employing around 3 million people as well as operating over 300,000 shops. In this sector, it can be said that there is a scale polarization both at the store and business level. The leading retailers in this industry are large and dominate the sector completely. The leading retailers often operate stores that are large like hypermarkets to small convenience stores. Tesco can be described as one of the largest retailers in the world, and it operates around 2,318 stores and it employs over 326,000 people. It often provides online services through its different subsidiary that is Tesco.Com. In fact, in the United Kingdom, the company operates under different banners; they include Extra, Metro, Express, and Superstore. The company often sells around 40,000 food products, including non-food lines and clothing. The company own-label products which is 50 percent of sales exists in three levels, normal value and finest. Further, as well as the convenience produce, many of its stores have gas stations and it has become one of Britain’s largest independent petrol retailers. The company includes retailing services such as Tesco Personal finance. Industry analysis: PESTEL FRAMEWORK Political factors The company operates in a globalized environment with stores around the globe; it operates in six countries in Europe. It is imperative to understand that Tesco’s performance is often highly influenced by the political as well as a legislative condition of the countries that exist in the different countries. The different governments often encourage retailers to provide a different mix of job opportunities from flexible, locally based and lower paid jobs to highly skilled, centrally located and higher paying jobs (Holmes, 2008, pg. 78). Further, the governments also demand from the retailing industry different employment opportunities for the different work groups such as students, senior citizens and working parents. Tesco has been able to understand that the retailing industry has a great impact on people and jobs and for this reason it has been able to employ large numbers of elderly workers, students and the disabled and often paying them at lower rates. The retail industry is often known to have a very high staff turnover and for this reason, these workers often offer a higher level of loyalty and consequently can be said to represent a portion that is known as desirable employees. Economic Factors Economic factors are of a big concern to Tesco, because they are often likely to influence costs, prices, profits and demand. In fact, this can be said to be one of the most influential factors on the economy. The 21st century economy has high unemployment levels, which decreases the effective demands for many goods and often adversely affects the demand that is required in order to produce goods. There are many economic factors that often lie outside the control of the company, however, their effects on performance, especially in the marketing mix can be said to be profound. It is imperative to note that although international business is growing and is expected to continue adding to the profits of Tesco over the next few years, the company is extremely highly dependent on the United Kingdom market. Therefore, Tesco can be said to be badly affected by any slowdown in the United Kingdom food market and the company is often exposed to market concentration risks. Social/Cultural factors Current trends amongst British customers have moved towards the one stop shopping that is due to a variety of different social changes. Tesco has, over the years, augmented the amount of non food items that are available on the shelves for sale. Demographic changes that include an aging population, an increase in female workers as well as a decline in home meal preparation mean that the United Kingdom retailers focusing on added value products as well as services (Ebeltoft Group., & Financial Times, 1998, pg. 59). Further, the focus is towards the own label share of the business mix, operational improvements as well as the supply chain which eventually helps in driving the costs out of the business. Further, the type of goods as well as services that are demanded by consumers have changed over time, and this is in fact has changed because of social conditioning and consequent beliefs and attitudes. Consumers are becoming more aware of their different health issues because their attitudes towards food are changing constantly. Tesco has been able to adapt to its product mix in order to accommodate to this increased demand for organic products. The company has been able to allow customers to paychecks as well as cash at the checkout zone. Technological factors Technology can be described as a major macro environmental variable that has been instrumental in the influencing of development of the different and diverse Tesco products. The new technology helps both the company as well as the customer. In fact, over the years, there has been reported customer satisfaction because the goods are more readily available, further services have become more personalized and shopping has also become more and more convenient. The adoption of electronic point of sale (EPoS), the Electronic Funds transfer systems as well as electronic scanners can be said to have greatly improved the efficiency of distribution as well as stocking activities and needs to be communicated. From the year 2003, there has been increased pressure on companies as well as their managers to acknowledge that they have a responsibility to the society. Further, pressure has also been put for the companies and their managers to act in a way which benefits the society overall. One of the major societal issues that currently threatens Food retailers is environmental issues such as key area for companies in order to act in a responsible way (Holmes, 2008, pg. 85). Companies in the industry have been able to recognize this trend with a broad ethical stance. In fact, when it comes to Tesco, it has been able to arrange its corporate social responsibility in a way that can be said to exceed the minimum obligations to stakeholders through both corporate governance as well as regulation. Over the years, the government has intended to launch a new strategy for both sustainable consumption as well as production in a bid to cut waste, reduce the consumption of resources and reduce the environmental damage. This legislation has created a new tax on advertizing of foods that are considered unhealthy such as highly processed as well as fatty foods. It is imperative to understand that the so called ‘fat tax’ directly affects Tesco products and for this reason has also gone ahead and affected relationships with both customers and suppliers. Legislative factors There are various government legislation, policies that can be said to have had a direct impact on the performance of Tesco. For example, the FRC enforced a code of practice that banned many current practices such as demanding payment from suppliers as well as changing agreed prices without notice. Porter’s five forces Threat of New Entrants The United Kingdom retail market is dominated by few competitors; in fact, there are four brands they include Tesco, Sainsbury, Safeway as well as Asda. These companies’ posses around 70% of the market share. The majority of these large chains have been able to build their power based on operating efficiency, major marketing mix expenditure as well as the convenience of one stop shopping (Bruhn, & Georgi, 2006, pg. 73). There is a strong barrier for new companies to enter the market. This is because the new entrants need to raise sufficient capital because of the large fixed costs that exist as well as the presence of the highly developed supply chains. Further, huge investments in advanced technology such as checkouts as well as stock control systems have impacted new entrants as well as the existing ones. Lastly, other barriers that exist include economies of scale, differentiation; this includes provision of products, services with a higher perceived value as compared to the competition. Bargaining power of customers When more products become standardized as well as undifferentiated, the products have lower switching costs and consequently, more power is given to the buyers. Tesco can be said to have been one of the leaders when it comes to reducing the bargaining power of the customers. Tesco’s famous loyalty card can be said to be one of the most successful customer retention strategy and it helped increase profitability of Tesco’s business. The company has been able to meet customer needs, ensure low prices, customizing service, and constant flow in store promotions as well as make better choices. This has enabled it to control as well as effectively retain its customer base. Threat of substitutes General substitution can be said to reduce demand for a product, for this reason, there is threat of consumers switching to alternatives. In the retail industry, this often occurs in the form of product to product substitute (Humby, Hunt & Phillips, 2008, pg. 52). Further, small chains of convenience stores are trying to substitute the large companies as they are emerging in the industry. In this case Tesco, Sainsbury are all trying to acquire existing small scale operations. Bargaining power of Competitors The grocery environment has over the years seen growth in its size as well as market dominance especially for the large players. This includes greater store size, increased concentration, as well as utilization of a range of different formats which include prominent characteristics of this ever growing sector. The purchasing power of the retail industry is concentrated on the hands of a small number of retail buyers. These buyers often operate in a mature, as well as flat market where growth can be said to be difficult (Ebeltoft Group., & Financial Times, 1998, pg. 121). Internal analysis of TESCO SWOT analysis Tesco is a market leader in the global scale; the company is the largest retailer dominating both the non food as well as food markets. 12% of all retail spending in the United Kingdom goes through its tills and this includes around 30% of all the food sales. This gives the company a huge advertizing reach to its customers, as well as leverage with it suppliers. The company also has a large access to talent because of its enormous size. The company has an overseas strength, in fact, under the leadership of Sir Terry Leahy, the company Tesco was able to build a vast as well as highly profitable overseas empire that stretched from Malaysia to South Korea. Tesco was an early entrant into the loyalty card market in the 1990’s and the company has over the years been able to develop the Tesco Clubcard into one of the most valuable marketing as well as promotional tools (Barrow & Mosley, 2006, pg. 59). Further, thanks to the customer database, the company has been able to stay close to its customers around the world. The company has been able to hold valuable freehold-property portfolio in order to store land bank both in the United Kingdom as well as overseas. This property strength is important as it helps in the provision of profits from the sales as well as leaseback deals which provide a source of potential finance from IPOs to different joint ventures. Weaknesses The United Kingdom is mature and neglected; there has been long standing issues in the United Kingdom regarding UK profits. This is because UK’s profits have been effected, milked in order to finance the overseas expansion and this has left the quality of shops, staff services as well as ranges that are currently lagging behind the consumption. The company has had huge losses in the United States; the company took on several strong local chains in the United States. The business struggled from the start; the business is still losing money as well as absorbing a lot of management time. The company has invested a lot of money into building hypermarkets; however, recent evidence has showed that consumers are moving against shopping in big hypermarkets. Tesco is at a vulnerable position as it has giant stores both in the United Kingdom as well as overseas. Opportunities Tesco intends to revamp it stores and it has set aside 1 billion pounds to invest in the initiative referred to as ‘Building a Better Tesco’ in the United Kingdom. The company intends to make more of its existing stores, instead of adding space, the company intends to refresh its stores with warmer ambience as well as increasing staffing levels in a bid to increase customer satisfaction. This will undoubtedly increase customer presence in the company. There is also possibility of a new advertizing stance, Tesco has over the years acknowledged the fact that it needs to improve its image in the United Kingdom. The hiring of the creative agency Wieden & Kennedy in order to handle marketing activity will come in handy when it comes to improving its image. Lastly, there is banking services, given the disenchantment that exists in the U.K public with the big banks, Tesco has been able to significantly build on the opportunity to build on the trust on its brand as well as exploit the footfall that exists in stores by offering more mortgage products as well as banking services to its club card customers. Threats The U.K retail sector is extremely competitive, and while Tesco is trying to re-position itself in order to catch up with its rival who are in fresh food. Companies such as Sainsbury’s, Asda as well as Morrison are ever expanding and investing in their own businesses. The top as well as the bottom of the market can be said to provide no easy pickings wither, given the fact that companies such as Waitrose are also excelling. The company has continued to experience problems. Tesco has not been exposed to Eurozone countries such as Italy, Spain and Greece. Its operation in South Korea has been constrained; further, the company’s operation in China has also been problematic. Further, given the strength of competition that Tesco faces, the nightmare scenario still remains intact. It is possible that the United Kingdom will not respond to all the different types of investment that is being thrown at. Further, it is possible that the company will exit the United States market. The banks may fail to deliver on their promises because of consumer inertia, and this might ruin the operations in Europe and Asia. Lynch (2003) defines value chain as the links flanked by key value adding activities as well their border with supporting activities. The value chain is a strategic evaluation tool that is often used in distinguishing weaknesses as well strength in a value adding processes. Inbound logistics The general management of Tesco is often exhibited through its lean as well as agile inbound logistics function. The organization has been able to use it leading marketplace point and economies of range as key bargaining powers in order to attain low costs from the company’s suppliers. Analysts have highlighted constant upgrading of ordering systems, in store processes, approved vendor lists that are intended to induce effectiveness as well as competence for the company’s inbound logistics operations. Operations management The company has received praise from critics for effective use of IT systems that facilitate company’s little cost leadership approach. The company has been able to invest over $76 million in the streamlining of its operations through Tesco Digital program which can be described as third generation ERP solution. In fact, the company has been able to achieve over $550 million in profitability since the year 2009 because of the preamble of this system. Lastly, the company’s extensive ERP scheme has also been instrumental in ensuring that there is minimization of stock holdings that exist within the organization. Outbound logistics The company has been able to hold a leadership position when it comes to offline as well online retail segments. This is because of efficient as well as an effective outbound logistics. The company has been able to develop a variety of store types and formats and these are strategically placed in order to achieve maximum exposure. These formats often include Superstores, Extra which are all segmented in a bid to get the target population. Marketing and sales Allegiance programs such as Tesco Club card are introduced through advances in information technology that often dissuade clientele from switching over to other competitors in the market. The introduction of Tesco’s Greener living scheme in order to give customers advice on ecological issues has also come in handy as more customers that want to live green are loyal to Tesco. Services Tesco has been able over the years to pursue a dual policy of cost headship as well as differentiation. This has led to increased importance when it comes to customer service. This dual strategy can be said to have been exhibited through the expansion of financial services, service kiosks as well as direct marketing. Tesco Crises Tesco has had several crises that have damaged its public relations. One of its biggest crises was the corporate tax structure. In the year 2008, it was revealed that Tesco had moved its online operations to Switzerland. Moving its operation to Switzerland was strategic as it allowed the company to sell its CDs, DVDs as well as electronic games through its website without being charged value added Tax (Woods, 2012, pg .77). The scheme when it was exposed dented a huge blow to the company’s image. Further, another scheme was also unearthed that involved the depositing of approximately 1 billion pounds in a Swiss partnership. This was intended to ensure that the loaned money could be transferred to overseas Tesco scores and that the profit could be transferred through interest payments. In order for the company to effectively handle these ethical breaches in conduct, the company needs to re-emphasize its position on ethics. The company should be able to distance its leadership from the crises. This is because people might lose faith in the company if their leaders are seen to be corrupt and this reflects badly on the company. The ethics that leaders in an organization often use to manage the employees often have an effect on the loyalty as well as morale of the workers. Therefore, the PR should either single out the leadership or distance them completely. This victimization will help to single out individuals from the organization and therefore, ensure that the company is not entirely harmed but the individual who committed the atrocity. There is a need the company to have business continuity planning; this will ensure that after a crisis the company cannot be disrupted and can be able to identify its critical functions as well as processes that are necessary in order to keep the organization running. When communicating information to the consumers and shareholders, there is a need to ensure that the information is gotten out from the source, a credible source. This is because getting the message out in the right way will count and earn high marks from both the consumers as well as retailers. Although the company’s consumers as well as shareholders would be upset by the situation, they will be appreciative of the response of the company. Further, there is a need for the company to reconstitute and reorganize itself and contribute to deeds that lead to the betterment of the society. In this way, the company will be able to ensure that it continues to maintain its state of ethics. The company should adopt a mentality that every crisis is an opportunity to showcase an institution’s character. The crisis should demonstrate that it is committed to its brand promise as well as institutional values. In order to address the shareholder impact, the management should move from a mindset that managers crises to one that generates crisis leadership. Research has shown that organizational contributory factors often affect the propensity of executives in order to accept an effective crisis as opportunity mindset (Magretta, 2012, pg. 83). Communications and public relations should not be used as a reactive strategy; it should be an active strategy. The company’s reputation, financial well being and potential damage is often pegged on the way the issue is management. Therefore, there is a need for the company to address the damage and the implications of the present and future conditions of the company, further; it should also look at the opportunities that exist for improvement. The retail business can be described as one of the major sectors in the United Kingdom. Tesco has been able to position itself in the retail market in the United Kingdom. The company has retail sales that often hit the figures of around 400 billion dollars. There is a famous statement in the United Kingdom that one pound in every seven that is spent in the UK often ends with Tesco Till. Tesco is the biggest retailer by sales as well as United Kingdom’s biggest private employer. The company has approximately 330,000 staff that works in over 3,200 stores. The company is the world’s third largest supermarket and it has stores that span over 12 countries. In fact, more than 27 million that live outside the United Kingdom have a club card that belongs to Tesco. The company has become a success story mainly because it has been extremely aggressive in adapting to different and diverse consumer trends. It has also been innovating as well as diversifying; in the 1990’s the company took a lot of risks which eventually paid off. Tesco has been able to diversify in almost all ways, the company is now a bank, and it offers insurance, credit cards as well as loans. The company can be said to have with clinical efficiency carried out its business plan. The company has gone ahead and cemented its position in the market by expanding massively. This in fact has been the source of much controversy. The company has been able to acquire a lot of small shops; it was, however, during the recession of the 1990’s that the company grew. It is at this time that big sites were acquired for the out of town superstores (Humby, Hunt & Phillips, 2008, pg. 56). This can be said to be one of the qualities that the company has possessed, an increased foresight into the future. The company spotted the market before its competitors, and this also happened when the company went back into towns and started the opening of small convenience stores such as Tesco Metro in the year 1994. The company has with great effort executed different strategies, going with the PESTLE analysis; the company has been able to strategically place it in different countries. This expansion program is important as it ensures that the company achieves notable growth and expansion in its profits. However, looking at SWOT analysis, one of the threats that stand out is the fact that the company might be headed towards its doom based on its hypermarkets. More and more people in the United Kingdom and the world over prefer small convenience stores as compared to large hypermarkets. This will work negatively towards the company because it has hugely invested in super-centers, recently, the company has had decreased profits in a span of 20 years. This might indicate that indeed there is a problem that exists within the company and that the market is radically changing. The company for once might not be getting the relevant information about the market and might be losing its battle not to its major competitors but to small competitors in the industry. Reference list Humby, C., Hunt, T., & Phillips, T. (2008). 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Understanding Michael Porter: The essential guide to competition and strategy. Boston, Mass: Harvard Business Review Press. Woods, M. (2012). Risk Management in Organizations: An Integrated Case Study Approach. Hoboken: Taylor & Francis. Read More