Strategic Analysis of Tesco Plc: A Global Multinational Entity - Essay Example

?A STRATEGIC ANALYSIS OF TESCO PLC: A GLOBAL MULTINATIONAL ENTITY Outline Introduction......................................................2 Historyof Tesco’s Strategy..............................2 Strategic Management of Tesco......................3 Internal Analysis of Tesco................................5 SWOT Analysis of Tesco.................................6 Micro Environment of Tesco.............................9 Competitor Analysis of Tesco..........................11 Macro Environment of Tesco............................13 Conclusion........................................................14 References........................................................15 Introduction Tesco is a multinational organisation with its headquarters located in the United Kingdom. Tesco has been in operation for over half a century and it is currently the biggest UK supermarket chain (Sadler, 2003). Tesco currently operates in markets around the world with 14 divisions around the globe spread over five continents. This paper examines the strategy of Tesco. It analyses the elements of strategic management employed by Tesco to attain and maintain competitive advantage and optimise resources. It evaluates the history, corporate structure, internal competencies, the micro environment, competitors as well as the globalised and British macro environment within which Tesco operates. History of Tesco’s Strategy Sir Jack Cohen founded Tesco after the Second World War with the belief that the higher the volume of goods sold, the lower the prices for the seller and the consumer. So Sir Cohen started as a retailer focusing on bulk sales and increasing the number of outlets (TescoPLC.com) By the 1980s, Tesco had chains of supermarkets across the UK. However, in the late 1980s, Sainsbury and Waitrose were preferred retail merchants in Britain. Investors complained Tesco had lost touch with customers. So according to Sadler (2003), Tesco embarked on a large scale market survey and incorporated four things in its strategy: 1. Lower prices 2. Better and improved customer service 3. Give customer diversity through differentiation 4. Focus on non-food products In the 1990s, Tesco built more superstores with the aim of avoiding queues, deploying a sales team that will give customers a personal touch in their operation, include financial products in its array of services and also sell through the use of e-commerce. In 1996, Tesco beat Sainsbury as leader in UK retail. In 2001, Tesco hit the ?1 billion mark in its annual sales and increased earnings per share. In 2002, Tesco had 37% of its shops located overseas. Non-UK sales was about ?3 billion. Tesco now operates internationally with the slogan, ‘think global, act local’. (References about Tesco’s historical facts made from TescoPLC.com (Our History Page) and Sadler, 2003 pp 236 – 243) Tesco is a great competitor in the field of retail in the UK and beyond because of several reasons. In 2010, it made a group sales of ?62.5 billion and out of this, 53% was from international sales. (Tesco PLC Website, Annual Report Page). The Annual Report also indicates that the profit before tax for Tesco for 2010 was ?3.4 billion. In 2010 also, Tesco had a total of 4,811 stores around the world. Strategic Management of Tesco Tesco is run by a Board of Directors and a Team of Managers. The Board of Directors is made up of 8 Executive Directors and 7 Independent Non-Executive Directors. The management team is led by a CEO and 14 other CEOs drawn from the fourteen units and branches around the globe. Together, these two teams are tasked with the strategic management of the Tesco Group. Organogram of Tesco PLC Website (Executive Committee) “Strategic management is the art and science of formulating, implementing and evaluating cross functional decisions that enable an organisation to achieve its objectives” (David, 2003) Strategic management entails a set of decisions that affect the overall functioning of an organisation over a long period of time. It is the task of top-level managers and directors and it affects every unit of an organisation. Together, the Board of Directors of Tesco and the Management Team are required by the shareholders of Tesco to have full control and ensure efficient use of Tesco’s assets for the attainment of the goals and objectives of Tesco. The mission statement and strategic objectives of Tesco that is defined by the strategic managers which is accepted and observed throughout the organisation are: 1. To be a successful international retailer: Focus on giving customers whatever they want in any market Tesco operates in. 2. Grow the core UK business: Provide customers excellent value and choice/ 3. To be strong in non-food as in food: Transposing the great quality, range, price and service that Tesco has been giving over the past century in non-food products. 4. Develop retailing service: Bring simplicity and value for complex markets. 5. To put community at the heart of what they do: Make corporate responsibility an integral part of business and operations. (Strategy of Tesco, TescoPLC.com) These five principles affect the whole organisation and it must be reflected in the operation of all the units and department of Tesco across the globe. This is the essence of business strategy. Although strategic managers of Tesco have outlined these five strategic objectives, they have a further duty of matching the internal strengths of Tesco with the micro and macro environments to get optimum results for all stakeholders and also maintain competitive advantage. Internal Analysis of Tesco According to Hill et al (2009), an organisation can do internal analysis with the view of determining the firm’s internal strengths and weaknesses and from there translate the strengths to opportunities and the weaknesses to threats to get a deep understanding of the competency of the organisation. Tesco has a set of classical strengths that conform with Ferrell & Hartline (2008)’s classical description of the strengths of an organisation, which are: 1. Operational Excellence: Tesco has very high standards in innovation, technology and infrastructure. It has very strong and excellent HR policies that ensure efficient operations. Tesco has so many patents and legal superiority in markets they operate in. As an organisation, Tesco has strong asset and capital bases and the potential to expand to other markets with ease. 2. Product Leadership: Tesco has a strong penchant for producing value and diversity for its customers. This is often done in a way that ensures that products meet consumers in a given market at the real point of their need. 3. Customer Intimacy: Brand loyalty, promotional and pricing strengths like image, reputation as well as strong distribution channels make Tesco a household name in the UK and in many other parts of the world. SWOT Analysis of Tesco Strengths 1. Tailored store formats to meet customer needs. The Guardian Newspaper announced that Tesco is building new shops that reduce energy consumption by 50%. Connected surveys showed that these layouts increased market share from 30.4% to 30.5% when it was introduced (Guardian Business Website) 2. Understanding the needs of customer and providing them. Through constant surveys to identify consumer price and quality needs, avenues for diversity and satisfying environmental and health concerns of clients (Talking Tesco) 3. Community development and corporate social responsibility fulfilment (Corporate Social Responsibility, Tesco Website) 4. Large range of products on the market (As at 2005, there were over 2,000 range of products and over 4,500 production lines. Source: Tesco Review) 5. Strong E-Commerce systems. E-commerce is growing steadily around the year and they have attained a total penetration in the UK Source since the year 2000 when Tesco.com was launched (Source: Interim Report, 2000) 6. Flexibility in operations overseas and adaptation to local systems (International, Tesco Website) 7. Observance of high ethical standards overseas (International, Tesco Website) 8. Satisfied and well motivated employees. Competitive remuneration and great development opportunities (Careers at Tesco) 9. Strong financial position and performance (Annual Reports) Weaknesses 1. Lock up of huge capital in assets that come with high maintenance costs. For instance, tailored shops cost 30% more to construct (Guardian Newspaper). Group non-current assets stood at 34 billion pounds when profits are just as low as 3.4 billion pounds in 2010, which shows a low return on investment. (Annual Reports) 2. High corporate social responsibility costs. Cutting carbon emissions to zero by 2050 means rebuilding or building stores that cost 30% more for all operations worldwide which will be very expensive (Environment Page, TescoPLC.com) 3. Over-diversification. With thousands of products, it will be difficult for Tesco to compete with specialised entities 4. Potential E-Commerce disputes. This is an inherent problem for companies that rely heavily on e-commerce rather than face-to-face interactions. Tesco controls over 27% of UK’s retail market online (Tesco Case Study) 5. High costs in overseas operations. Thompson & Martin, in a case study of Tesco stated that the company sent experienced managers to foreign operations to support the growth of these international branches. They were paid extra and the initial set-up and subsequent maintenance costs were higher in new jurisdictions (Thompson & Martin, 2005) Opportunities 1. Customer satisfaction can always be assured in Tesco outlets. 2. Understanding of customers leads to customer intimacy and is a good indicator in marketing that can promote sales. 3. Corporate Social responsibility boosts the image of Tesco and creates trust with employees and other stakeholders 4. Diversity brings choice to consumers and more revenue for Tesco. 5. E-Commerce ensures faster cheaper and more efficient sales 6. Easy adaptation in foreign markets. 7. High ethical standards overseas support good reputation and development of underdeveloped countries. 8. Better performance by employees. 9. Good returns to shareholders and the propensity to expand and improve operations. Threats 1. Capital could be restricted to assets and this might harm profitability and performance, 2. Investing too much in corporate social responsibility can upset and discourage shareholders. 3. Selling too many goods and services can prevent Tesco from specialising in a particular product or service. 4. E-commerce disputes in CD sale have cost Tesco money in the past. It can cause further problems and troubles for the company. 5. Spending too much on community development overseas when Tesco is not required to can lead to loss of important revenues and resources. Micro Environment of Tesco Stakeholders are entities who affect or are affected by an organisation as it goes about the fulfilment of its organisational objectives (Freeman, 2010) Stakeholders are the individuals and organisations who can influence or can be influenced in one way or the other by the activities of an organisation. Stakeholders include the so many groups that are connected in various ways to the organisation and in some cases, include the unborn. In the situation of Tesco, the following stakeholders can be identified: 1. Investors/Owners: This includes the people who own shares in Tesco. This mainly includes institutional investors who have huge capital to invest in Tesco. From the Tesco website, the following institutional investors were identified as part of the largest bloc of investors they include: a. Bershire Hattaway b. Blackrock UK c. Legal & General Investing Management Ltd This group of stakeholders are owners and therefore expect to get some earnings on their shares each day. Being owners, they have the right to appoint and control activities of directors and to an extent, managers of Tesco. Tesco can also affect them by determining the amount of money that will be paid to them as interest on their capital. 2. Community: This includes the people in the larger community within which Tesco has a plant or a supermarket around the globe. These people are affected by the waste products that Tesco’s manufacturing process generates. They can therefore form pressure groups to address some of the actions or inactions of Tesco. As an organisation that operates in such communities, Tesco has also responded by providing various corporate social responsibility services to communities within which it operates. 3. Customers: This includes all the people and organisations that buy from Tesco. They will expect quality, health and satisfaction from Tesco. If Tesco fails to meet the expectations of customers, they can easily turn to other competitors like Sainsbury for their needs. 4. Employees: Tesco has 470,000 employees around the world and 285,000 employees in the UK. They all expect to be given their remuneration in return for their service and labour to Tesco. On the other hand, Tesco will expect them to work professionally, observe legal rules and also give off their best performance to move Tesco to the next level. 5. Suppliers: These are organisations that supply raw materials to Tesco. They will expect faithful payment from Tesco and Tesco will in turn expect raw materials of a good quality 6. Lenders: Tesco had medium and long term debts of ?15 Billion as at 2010 through its Euro Note Programme. The lenders included banks, lessors and other capital markets. These creditors will expect Tesco to pay the right amount with interest on time. Tesco will also want to meet their expectation to ensue that in future, they will remain credit worthy and get access to loans when they need it. Competitor Analysis of Tesco Courtesy, Michael, Porter, Harvard Business Review, January, 2008.Porter’s five forces is the most detailed model for the analysis of competitors. It states that there are five forces that determine competition in a given industry. They are: 1. Threat of new entrants 2. Threat of substitutes Products or Services 3. Bargaining power of suppliers 4. Bargaining power of buyers and 5. Tactical jockeying/ Rivalry among existing competitors (Society for Human Resource Management, 2006) New entrants are businesses that might enter the industry to provide the same services to the market. Tesco operates in the mega-superstore industry. Whereas there are few UK superstores that can grow to become a threat to Tesco, there are several international supermarkets that can enter the UK or other international markets and prove difficult to contend with. They include Wal-Mart (USA), Carrefour (France) and Royal Ahold NV (Netherlands). Wal-mart is a retail chain that engages in over 200 million transactions each week (About Us, Walmart Website) It employs over 2.1 million associates worldwide and had a global sales of over $405 billion in 2010 (About ?253 billion). This is in contrast with Tesco’s ?62.5 billion in the same year. Walmut has over 8,900 stores around the world and operates under 55 different banners in 15 countries (About Us, Walmart Website) Carrefour has been in existence for 40 years starting as a retail chain in France and other Francophone nations. It is now strong in Latin America and China. It has 15,000 stores mostly operated as franchises around the globe. (Our Group, Carrefour Website) Carrefour group turnover for 2010 stood at €101 billion around ?88.7 billion (2010 Sales, Carrefour Website). Royal Ahold is a Dutch retailer now centred in the United States and Europe. They have about 3,000 stores worldwide (Key Facts, Royal Ahold Website). Royal Ahold’s turnover in 2010 stood at €29 billion. . Substitutes are businesses that produce things that can be used in the same way as the products of Tesco. They include Chinese exporters of goods that act in a manner similar to Tesco products and Indian financial and retail service producers in the UK and around the globe. These producers can easily diversify their operations and become competitors to Tesco. The bargaining power of suppliers refers to the situation where a group of suppliers can become so powerful (usually because of the large quantities of goods they supply to the business in question). However, because Tesco has a policy of working with small suppliers and has a wide array (over 1,500) of suppliers (TescoPLC.com), it is not likely that its suppliers can become a dominant force in the competitor grid. The situation of the suppliers seems to apply to buyers too, because Tesco’s products are available to a wide range of buyers and it is sold at very low prices. This therefore means that there is a little chance that any group of Tesco’s buyers can evolve to become dominant competitors in the industry or get immense bargaining power. However, in the UK retail industry, Tesco has competitors. They main competitors of Tesco in the UK and outside the UK are Sainsbury, Waitrose and Asda. This is because Tesco and these three companies produce similar goods and services and they target the same markets. Secondly, Tesco, Waitrose and Asda started operating over fifty years ago and they have accumulated and consolidated a more or less equal stock of wealth in their operations. Additionally, when Tesco moves on to the international stage, it shares similar ethical, and macro environmental factors with these three companies that ensure that they have similar features and compete at almost the same level. Macro Environment of Tesco The macro environment a business operates is concerned with the elements of the larger national or international environment that it operates in (Hill et al, 2009). In analysing the macro environment of a business, Haberberg & Rieple (2008) suggest the use of PESTLE, which examines the Political, Economic, Social, Technological, Legal and Environmental issues of the organisation. Being a multinational organisation that has its core operations in the UK, the PESTLE analysis of Tesco needs to touch on the UK and the international markets within which Tesco operates. Political: Tesco is likely to benefit from the current UK budget that has reduced spending on defence, a practice that contributed immensely to the global credit crunch. However, Tesco operations in the Middle East are likely to be affected adversely by the numerous demonstrations and regime changes in nations like Saudi Arabia and Bahrain. In China, Tesco also stands to benefit from the new government laws that open up the nation to international trade. Economic: Now that the UK and global economies are gradually recovering from the credit crunch, it is likely that Tesco can increase sales and revenue. However, the current demonstrations and regime problems in the Arab world is likely to cause fuel prices to go up throughout the world. This can have an adverse effect on Tesco’s overall operations. Social: The increased spate of immigration to the UK from other European nations and the increase of tourism in the UK is likely to have a positive effect on Tesco. However, Tesco in Japan is likely to receive very adverse effects from the earthquake and tsunami that have killed a lot of Japanese and damaged infrastructure considerably. Technological: With the expanding reach of the internet around the world, nations not normally covered by Tesco’s operations can now purchase from Tesco. Also, new arrangements in the UK to encourage skilled immigration of IT personnel and researchers is likely to help Tesco to employ more skilled persons to help in the improvement of its methods of production. Environmental: Since it is likely that the world will sign a global warming pact in the coming year, there is a good chance that Tesco will be forced by environmental law to observe global warming practices and other environmental standards like recycling and waste management. Legal: Tax laws and other social justice laws in the UK are likely to be changed in the next year to reflect the new conservative government’s policies. This is likely to cause changes in Tesco’s strategy. Also, around the world, nations are becoming aware of the need to hold multinationals more accountable. It is likely that the effects of this evolution will be felt in the nations of Tesco and they might need to vary their strategy to meet those demands. Conclusion Tesco’s success is strongly connected to the company’s good strategic plans and monitoring. Currently, the strategic plan of Tesco is one that gives it competitive advantage in the UK and beyond. If the strategic management system of Tesco remains effective, it is likely to live above the demands of the new macro environment it operates in. 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