Strategic Analysis of Tesco Company - Case Study Example

Strategic Analysis of Tesco

• Introduction

The study will mainly revolve around a detailed strategic analysis of a real-world organization. It can be stated that strategic analysis helps in determining the key strengths and loopholes prevalent within a company. In general context, corporate level and business level strategy is usually formulated by an enterprise in order to obtain high profit margins. The main goal of every organization is to acquire desirable market share and remain competitive in long-run. With increasing consumer demand, the level of marketplace competition has also tremendously increased. There are core strategic models which will be used in this particular study so as to identify the ways in which the chosen organization has been able to establish strong brand position. Tesco Plc is one of the most powerful players in the U.K. retail industry. The company was incorporated in the year 1919, since then, the firm has strived hard to maintain high degree of customer loyalty. In global context, Tesco Plc can be stated as the third biggest retailer. Product diversification has been the key driver behind success of Tesco Plc. In current scenario, the company offers wide array of products, such as grocery, books, electronics, furniture, clothing, software and petrol, internet services, telecoms and financial services. The main focus of this study will be to conduct a detailed strategic analysis of Tesco Plc.

Discussion

• • Overview of the company

Tesco Plc is a well-known British multinational general merchandise and grocery retailer, having their headquarters in Hertfordshire, England. The company has established their retail outlet across 12 countries, such as Europe, Asia, Hungary, Ireland, Thailand and Malaysia. In the European market, the company is considered to be the grocery market leader. In 1919, Jack Cohen had founded Tesco. At the initial stage, the founder sold groceries at Well Street Market, where he had established a small stall. Originally, the brand gained market presence during the year 1924. In 1931, the first Tesco retail store was inaugurated by Jack Cohen at 54 Watling Street. The business operations were not only confined to retail stores, but supermarkets were also established. In the year 1956, the first supermarket store of Tesco was established in Maldon (Tesco Plc).

The brand has gone through extensive development, both in terms of geographical and product diversification. During the time-period 1950 and 1960, the brand had grown organically as well as through numerous acquisitions. In the mentioned time-frame, the brand encompassed more than 800 stores across the globe. The company was actively indulged in acquiring established supermarket chains so as to effectively expand their geographical base. Further brand development was observed, when Tesco entered into internet grocery retailing in 2001, specifically in U.S.

There are various products which are offered by the company. These products mainly comprise of clothing, food, financial services, electronics, etc. The product line of Tesco is able to address widespread needs of customers. As mentioned earlier, the brand has been able to strengthen their position even in the online marketing sector.

The stock symbol of the company is TSCO.L. Its latest stock price, as of December 2016, is 212.85 GBp. The price trading range can be calculated through subtracting opening stock price from the current year closing stock price. Hence, the price trading range is – (212.85 - 149.50) = 63.35 GBp (1year TTM) (Morningstar, Inc). Tesco Plc is listed in the London Stock Exchange. As per the current financial statistics, the market share of the company is around 28.3%. According to Feb 2016 statistics, the annual revenue of the firm is 53,857 million GBp.

The market dominance in context of the U.K. retail industry is high. Therefore, companies operating in this industrial segment always aim at offering innovative products or services to customers. The sales margin in the retail industry is dependent on economic conditions of a geographical region. Economic turbulence will eventually degrade purchasing power of customers.

• • SWOT

Strengths

In the current scenario, Tesco Plc holds approximately 13% market share in the U.K. retail market. For instance, the management focuses on increasing market share in the food segment along with expanding their space in the non-food segment as well. The other strength of this brand is their aggressive move into nearby geographical regions. Tesco Plc has been able to increase their sales volume over £577 million, due to inclusion of online sales channel (Tesco Plc). The organization possesses a strong brand image and is always linked with trustworthy goods and superior quality. A multi-format strategy has been developed by the company in order to survive in the competitive marketplace.

Weaknesses

The major weakness of this company is too much dependency on the domestic market. Though, the brand has expanded into other market, but the reliance on the domestic market is high. The aggressive expansion strategy has somewhere degraded the financial capability of the organization (Henry 27). There is always little free cash left with Tesco in order to conduct other operations. A series of acquisitions might gradually disrupt the brand image of delivering quality products.

Opportunities

The company can effectively utilize the low-cost structure and merchandising skills in order to further expand in the non-food retail sector. For instance, the company can adopt strategy similar to telecom venture for brand capitalization. The company can also expand their health and beauty sector by offering wide range of products to the global market. In current scenario, the company operates in around six countries located in Europe, along with that the firm has also been able to expand into Asian market (Jenkins and Williamson 91). The international market constitutes further opportunities which can be explored by the brand.

Threats

One of the major threats is international growth is basically an expensive phenomenon. Therefore, ROI in case of international growth becomes an area of concern. Asda and Wal-Mart poses competitive challenge for the company through offering special prices and discounts. Other threat is overseas returns can decrease at any point of time because of economic conditions or any kind of external influential forces. A price war can be initiated if there is structural change in the U.K. market.

Porter’s Five Forces

According to five forces model, the extent of environmental threat and opportunity is high in case of Tesco Plc. The bargaining power of customers is high due to availability of more number of options. Hence, the company faces a major threat in the form of intense competitive rivalry. There is intense competitive rivalry in the global retail sector. Similar cost leadership strategy has been adopted by Asda and Wal-Mart which forms another threat for the brand (Oubiña and Yagüe 29). The high investment required during the initial phase tends to decrease the overall threat of new entrants. Therefore, Tesco Plc has a scope for growth in international markets. The threat of substitute products is high; hence, the company needs to expand into possible sectors.

The distinctive competencies of the company are in the form of brand image, supplier base, cost-effective supply chain and loyal customers. Over the years, the company has strongly focused on providing quality goods or services to customers. Hence, the competitive advantage of Tesco Plc over competitors is their cost leadership strategy. Arguably, there are sustainability issues in relation to their existing competitive advantage. Similar cost leadership strategy is being adopted by other firms as well (Hiatt and Creasey 51). A three-pronged analysis can be undertaken in order to evaluate sustainable competitive advantage of Tesco Plc. Unique historical circumstances in the form of limited number of retailers in U.K. has provided the firm with competitive advantage. The management has somewhere misunderstood the overall characteristics of the retail market; therefore, aggressive expansion strategy is implemented without eliminating financial constraints. A complex social phenomenon has somewhere affected sustainability of the brand. The purchasing behavior of customers is fluctuating, which might affect the current strategy in long-run (Lasserre 93). The threat of international competition can be mitigated through offering unique products in the marketplace. On the other hand, the threat of ROI can be reduced through investing in a small-scale in unknown markets. Arguably, instable financial capability, as a weakness, can be addressed through maintaining a buffer cost for widespread supply chain operations.

• • Formulation of business level strategy

The company has been able to formulate effective business level strategy in order to reach out to wide market segment. Tesco Plc has taken into consideration rising consumer needs while designing the business level strategy. It can be stated that strategic formulation enables a company to set high performance standards in the marketplace. Porter’s Generic model can be used to identify the exact business strategy which has been adopted by the company.

Figure 1: Porter's Generic Model

Figure 1 represents the four distinct business level strategies which are incorporated by any real-world organization. Tesco Plc has used overall cost leadership strategy in order to further enhance their brand position. On the basis of this strategy, the company has been able to target right customers by offering wide array of products at lower prices.

The firm has implemented their business level strategy smartly by purchasing in bulk from suppliers and then transforming the savings into low product prices for customers (Peng 48). A competitive low-cost structure is being maintained by the company through maintaining a wide base of domestic suppliers and expanding their product line (Tesco Plc). To a great extent, the implementation of business level strategy has also been supported by series of aggressive acquisitions in the international market. It can be claimed that through business acquisitions, the firm has strengthened their brand position across the globe. Tesco Plc even accumulates profit margins in order to enter into a completely different business segment.

• • Corporate Level Strategy

The corporate level strategy of Tesco Plc is not only centered towards geographical diversification but also involves product diversification. It is evident that the corporate level strategy needs to be well aligned with the vision and mission of an organization. An unrelated diversification strategy has been followed by the company. Since its incorporation, the brand has always focused on acquiring high market share and attaining desirable profit margins. Tesco Plc has been able to survive in the competitive marketplace through following the unrelated diversification strategy. There are numerous benefits which have been gained by the company through implementing this particular strategy. For instance, unrelated diversification strategy has helped the company to be involved in low-risk investment (Wintzer 83). Higher returns can be expected in situations where the level of involved risk is relatively lower. Tesco Plc has gone into unrelated diversification in order to spread industry risks over a bigger scale. In case of a seasonal slowdown, related diversification strategy would certainly not yield desirable returns. Business acquisition can help a company to secure funds which can be later invested into the main business activity (Tesco Plc). Arguably, while spreading risks across multiple business sectors, it is important for firms to analyze whether other industry slowdowns is adversely affecting the main business operations. The firm has been able to successfully implement the corporate level strategy through identifying opportunities across the global market. In certain scenarios, the company has introduced new products or services, such as financial services, clothing, etc. On the contrary, the company has even acquired other business operations in order to obtain high revenue margins. From future perspective, the company might face challenges if the unrelated diversification strategy is consistently being followed. For instance, acquiring an unprofitable business segment might negatively influence other business activities of Tesco Plc. Therefore, the company can maintain their status through identifying core needs of customers and addressing them by delivering quality products, rather than diverse products.

• Conclusion

As per the above study, the U.K. retail sector is intensely competitive. Therefore, retail firms operating in this sector always strive hard to provide wide array of products to customers. It is witnessed that the business level strategy adopted by Tesco Plc is only for overcoming the market challenges prevalent in this area. The management believes in catering every possible need of customers. Hence, the company has shifted focus towards unrelated diversification strategy in order to deliver diverse products at competitive price range. SWOT analysis had been conducted in this study so as to understand the key strengths and weaknesses encompassed within a company. To a great extent, aggressive acquisition strategy has somewhere reduced financial capability of the firm. Therefore, strategic transformation is needed in later period of time.