Tescos Business Model Interrogation and Development - Essay Example

Tesco’s business model interrogation & development Company background Tesco has become an important food retailer in the United Kingdom’s food retailindustry. The company has global presence through number of super stores and super markets. For example, 568 stores in Scotland, England, Northern Ireland and Wales; 13 in the Czech Republic and Slovakia, 43 in Hungary, 103 in France and 31 in Poland (Tesco Plc, n.d.). Through these super stores and super markets, the company sales food related items mainly besides electric and electronic equipments as well. In this regard, it is important to highlight that the company works as a medium through which buying and selling of products are carried out. In other words, the company is not limited to selling of products nor is specifically related to the sale of products instead it carries out both buying and selling of goods. Graph 01: Tesco’s Business Model Evaluation Source: (Tesco Annual Report, 2014). Tesco’s business model is composed of four fundamental activities: buy, insight, sell and move and these four activities collectively work to attain the objective of “we make what matters better, together” (Tesco Annual Report, 2014). At the same time, the business model encompasses other layers which consist of other strategic values and objectives which collectively make this entire business model work for the co Tesco’s business model is adequate to satisfy the strategic long term business objectives besides serving the short term objectives. For example, the model is composed of four core operations which highlight four different business areas which do not share similar activities instead they have different operational and strategic significance for the company. More clearly, Tesco’s business operations start from the purchase activity in which the company engages with the suppliers of different food products. In this activity, the company looks putting substantial amount of concentration and energy as quality of food products largely relies on the fresh food products which are mainly reflected through the market goodwill of suppliers and producers as well. In this regard, it is important to mention that this purchase activity is of paramount importance for the company as it has strategic implications and effects of the market perception of Tesco. For example, if the company provides low quality food items and customers regularly complain about various quality issues, this would put negative effect on the perception of the Tesco and if the negative perception continue to stay longer, the company would face serious strategic issues including drop in sales, drop in the volume of sales and other relevant issues including increase in the production cost. Graph 02: Statement of Comprehensive Income Source: (Tesco Annual Report, 2014) This graph clearly exhibits unhealthy financial and operational performance of the company over the period of last two years. The graph highlights the financial performance of the company from start to 2012 to end of 2014 financial year. The graph displays deteriorating revenue figure over these two years; in 2013, Tesco recorded £63,406 and £63,557 million in 2014 was generated by the company. A closer analysis of this revenue signifies that the company was only able to include 0.233% during this period whereas 0.498% rise was recorded in cost of sales, aggregately highlighting more cost of sales growth than the revenue growth throughout this period. Based on this situation, it can be highlighted that the firm was not able to put any healthy growth rate in the revenue instead cost of sales was increased more than the revenue figure. Similarly, diminishing gross profit also highlights the poor financial performance of the company. In the year of 2013, Tesco posted £4154 million gross profit and £4010 million in 2014, comparatively reflecting that the amount of gross profit has not increased instead it has diminished. In other words, it would not be incorrect to say that the company has incurred gross loss when the gross profit of 2013 is compared with the gross profit of 2014 in which the gross profit of 2014 is lower than the gross profit of the previous year. And this is mainly caused by the decreased revenue over these years and increased cost of sales from 2013 to 2014. At the same time, this situation does not stop there as the subsequent quantitative financial figures reflect that the company has experienced higher administrative expenses over these years. For example, the company incurred £1482 million and £1657 million in 2013 and 2014 respectively. When the figure of 2013 is compared with the figure of 2014, the subsequent result highlights that 11.80% increase in the administrative expenses has been recorded during this period. In this regard, it is important to highlight that considering the level of revenue and gross profit over these years, the reported percentage of the administrative expenses clearly signifies that the company has failed to control its administrative cost and have not taken enough administrative measures for controlling and reducing the frequency and tendency of the administrative expenses. Subsequently, the operating profit figure is not encouraging as well. For example, in 2013, the company recorded operating profit of £2382 and £2,631 in 2014, showing an increase of 10.45% over these years. This is not positive or encouraging because on the one hand the company has increased its administrative expenses on the other hand it has included property-related profit which is not a conventional income statement item; more clearly, this increased operating profit is mainly contributed by the property sale. At the same time, the graph clearly highlights that the company has incurred more finance cost when it is compared with the previous year’s finance cost, reflecting overall poor financial and operational performance of the company. Graph 03: Tesco’s Business strategy and organisational structure Source: (Tesco Annual Report, 2014) This figure presents the business strategy of Tesco. It highlights core business values adopted by the company for putting its business strategy into action. For example, Tesco’s first business strategy is based on the concept of value for money in which competitive and affordable prices are offered and given to Tesco customers. Similarly, the company believes quality customer services which is used for generating customer loyalty besides closely working with the suppliers for ensuring quality products. Subsequent part is composed of stores in which strategic expansion of the global network of stores is being envisioned through this business strategy. Graph 04: Tesco Organisation Structure Source: (Tesco Annual Report, 2014) This graph highlights the internal organisation structure of Tesco. This structure is composed of five committees and each is assigned to work on different business and organisational aspect of the company. For example, the role of nominations committee is to conduct scrutiny of potential directors and nominate directors for the subsequent appointment whereas the role of audit committee is to carry out the different audit procedures and inspections within the company. In this regard, it is important to highlight that the audit committee is internal as it independently liaise with the external audit committee which is legally authorised to conduct audit procedures and forward the audit report to the shareholders. Subsequently, remuneration committee is authorised to determine and provide recommendations for remuneration of directors whereas disclosure committee is mandated to elucidate and specify different disclosures which are included in the financial statements of the company. Compatibility between business model and organisational structure 1400 Tesco’s business model and organisational structure do not provide strategic support to the organisation. For example, the organisational structure is as reflected by the graph 4 clearly exhibit that the company has more financial and audit outlook in which more emphasis and focus is being given to these areas whereas the business model is more inclined towards the business operations and quality of products and supply chain management dimensions. Under this situation, it looks that Tesco’s senior management has not put focus on this particular aspect of their business where incompatibility between organizational structure and business model is causing more strategic loss and harm to the firm. For example, instead of developing and establishing the disclosure committee, Tesco should have opted for business operations committee which should have focused on the supply chain, business operations and product quality issues. In this regard, it is important to mention that this focus would have enabled Tesco to develop and implement the most effective way to improve quality and supply chain management. Additionally, this focus would have enabled the firm to develop more effective and durable business relations with the suppliers as they are the main individuals who directly and indirectly influence on the product qualities. Technological effects on business model Technology puts substantial effect on Tesco’s existing business model. For example, electronic selling and purchase are becoming more and more common throughout the United Kingdom and this increase and tendency towards the virtual world convinces many retailers, including Tesco, to shift their focus from the conventional method of buying and selling of products and raw materials. In this regard, it is important to mention that Tesco has commenced its electronic business operations by enabling the buyers to buy Tesco products from their online stores where they can pay and select their products and the subsequent delivery to the products is forwarded to the purchaser. This digital operation is more common in the United Kingdom where the company has its business basic routes. At the same time, the company is endeavouring to expand this aspect of business operation in other countries where the market and buyers are heading toward electronic purchase of food and retail items. However, Tesco still faces some serious investment and operational issues. From the graph 2, it can also be deduced that the company faces financial issues including unimpressive revenue figure, gross profit, operating profit and net profit as well; on the other hand, the company faces the issue of rising business cost as substantial increase in administrative expense is just one glimpse highlighting the level of financial stress throughout the different company operations. Avenues for cost reduction and quality improvement Instead of focusing on strategic expansion in other countries, it is highly relevant to search out avenues for cost reduction so as to improve the financial and operational indicators of the company. First, Tesco should revisit its current administrative expenses and those causes that increase the tendency of expenses over these years. For example, if it is required to reduce the level of current workforce so as to reduce growing cost of doing business, it should be done without wasting any time as it would enable the company to control the tendency of the administrative expenses. By controlling this tendency, Tesco will become able to reduce the subsequent effect. At the same time, for improving the financial and operational performance of the company, it is highly relevant that Tesco should improve product quality and this quality improvement should be done by closely working with the suppliers as they are the one who directly affect the quality of Tesco products. For example, Tesco should remain in constant with the suppliers and ensure that they do not provide below quality products to the company. For this purpose, it is highly essential that Tesco should also take certain practical and effective measures for gaining their confidence and trust which is highly important in such type of business relations. For example, on time payment to suppliers remains the most important step that can bring and retain trust and confidence of suppliers. Additionally, Tesco management should not undermine their other operational queries and issues and they should be resolved without any delay. Analysis of product market conditions and strategies Tesco faces strong competition in the local retail market (Creasey, 2014). Tesco plan to shut down 43 stores (Molloy, 2015). Sainsbury, Morrisons, Aldi, Asda are among the leading retailers throughout the United Kingdom (Silvera, 2014). And more importantly, Tesco’s sales are diminishing as the competitors are putting new and improved ways to attract and retain customers (BBC New Business, 2014). In this regard, the recent market statistics highlights that Aldi, which is new entrant in the United Kingdom retail market, has a very strong and convincing offer which includes cheaper and bigger options has attracted the eye of the UK consumers as the country faces the issues of stagnant wages and austerity measures (Butler, 2014). More specifically, some reports highlight that Tesco is at risk as the investors and shareholders are losing confidence from the current management of Tesco; this position largely reflects that the existing Tesco management has failed to live up to the expectations of the shareholders by not improving the financial and operational parameters of the company (Perkins, 2014). Tesco should develop and implement the following strategies to effectively compete in the UK retail industry. As mentioned earlier, it is high time for the senior management to reconsider the strategic direction and current operational policies of the firm; in this reconsideration, the strategic assessment should be made through comparing with the strategies and policies of competitors in the UK retail industry. More specifically, the firm should take into account all those financial and non-financial parameters which are employed by the competitors for gaining edge in the UK market. For example, Aldi is adopting new methods to attract customers and this attraction is made by considering the expectations of the customers and their purchasing power as well. In other words, Tesco should focus on the cost-cutting strategies across the organization. In this regard, it is relevant to highlight and emphasise that cost cutting should not be only specific to human resource areas instead it should reduce all those factors that have become liability and have become less productive to the company (Butler, 2015) and the previous Christmas improved the online sales for the company (Cunliffe, 2014). For example, reducing advertisement expenditure would also be a reasonable way to reduce cost and improve savings as well. At the same time, it is also essential that other less expensive and more productive marketing and advertising methods should be used for improving the financial and operational performance and outlook of the company. References BBC News Business, (2014). Tesco’s sales fall faster than its competitors. BBC News. Available: http://www.bbc.com/news/business-29706435 Accessed: 16 February, 2015. Butler, S. (2014). How Aldi’s price plan shook up Tesco, Morrison’s, Asda, and Sainsbury’s. The Guardian. Available: http://www.theguardian.com/business/2014/sep/29/how-aldi-price-plan-shook-up-tesco-morrisons-asda-sainsburys Accessed: 16 February 2015 Butler, S. (2015). If Tesco’s boss can trim the fat, 2015 could see the retailer rise again. The Guardian. Available: http://www.theguardian.com/business/2015/jan/04/tesco-2015-recovery-streamlining-strategy Accessed: 16 February, 2015 Creasey, S. (2014). Troubled Tesco to face further competition for market share. Available: http://www.thegrocer.co.uk/channels/supermarkets/tesco/tesco-to-face-further-competition-for-market-share/356637.article Accessed: 16 February 2015 Cunliffe, P. (2014). Tesco lifted by surge in online sales over Christmas. Express. Available: http://www.express.co.uk/finance/city/453054/Tesco-lifted-by-surge-in-online-sales-over-Christmas Accessed: 16 February, 2015 Molloy, A. (2015). Tesco to axe 43 stores-but Christmas sales exceed forecasts. The Independent. Available: http://www.independent.co.uk/news/business/news/tesco-announces-betterthanexpected-sales-over-christmas-9964259.html Accessed: 16 February, 2015 Perkins, K. (2014). Tesco at Risk from Competitors. Morning Star. Available: http://www.morningstar.co.uk/uk/news/125668/tesco-at-risk-from-competitors.aspx Accessed: 16 February, 2015 Silvera, I. (2013). Britain’s Big Four Supermarkets Sainsbury’s, Tesco, Asda, Morrisons Feel Pressure from Smaller Competitors. International Business Times, Available: http://www.ibtimes.co.uk/supermarket-retailer-research-aldi-lidl-sainsbury-s-508586 http://www.ibtimes.co.uk/supermarket-retailer-research-aldi-lidl-sainsbury-s-508586Accessed: 16 February, 2015. Tesco Plc, (n.d.). Tesco Plc: Corporate Strategy. Available: http://www.tesco.com/investorInformation/report97/review/page1.html Accessed: Tesco Annual Report, (2014). Tesco Plc Annual Report and Financial Statements 2014. Available: http://www.tescoplc.com/index.asp?pageid=548 Accessed: 16 February, 2015 Read More