The Impact of the Environmental Conditions on Tesco - Research Paper Example

Tesco’s foundation dates back to 1919 when its founder Jack Cohen started selling groceries in London. Tesco is currently the world’s third largest retailer in the world measured by revenue and the second largest when measured by profits. The company is undoubtedly the largest in the retail industry in the UK, where it controls approximately 30% of the market. This places it way ahead of its closest rival - ASDA. Its major competitors include Sainsbury which was number one until 1995, ASDA, Safeway and Morrison’s, of which ASDA is the most highly regarded being operated by Wal-Mart – retail giant of the United States. It was through a series of acquisitions that Tesco became the largest retailer in the UK. Tesco is now an international group as it now operates in 13 countries across Europe, Asia and the United States. It has approximately 4631 stores in all, with 2,482 of that total in the UK. The group recently opened the worlds’ first zero carbon store in Cambridgeshire in the UK and is committed to help the world reduce carbon emissions by taking positive steps in every country in which it operates. Despite the competition the group has made many strides in its goal to increase its customers shopping experience. Its stores can be classified into six groups based on their size and format/layout. They are: Homeplus, Superstore, Extra stores, Metro, Express, and Hypermarkets. Information on the group’s website (tescoplc.com, 2010) states: “Tesco has a well-established and consistent strategy for growth, which has allowed us to strengthen our core UK business and drive expansion into new markets. The rationale for the strategy is to broaden the scope of the business to enable it to deliver strong sustainable long-term growth by following the customer into large expanding markets at home – such as financial services, non-food and telecoms – and new markets abroad, initially in Central Europe and Asia, and more recently in the United States. The strategy to diversify the business was laid down in 1997 and has been the foundation of Tesco's success in recent years. The new businesses which have been created and developed over the last 12 years as part of this strategy now have scale, they are competitive and profitable - in fact we are now market leader in many of our markets outside the UK. The Group has continued to make good progress with this strategy, which has five elements, reflecting our four established areas of focus, and also Tesco's long-term commitments on community and environment. Importantly, the momentum which it has given the business has allowed the Group to continue to grow well through the economic downturn.” In order to assess the impact of the environmental conditions on Tesco, an environmental analysis needs to be done. The advantages to be gained with result in a better understanding of the environment in which it operates, avoid major surprises from its competitors and other factors in the environment, identify opportunities and threats earlier than usual, reduce the reaction period to changes in the environment, and improve the planning functions of the management of the organisation. A closer look at the macro-environment of Tesco PLC using PESTLE indicates that a number of opportunities and threats. If the threats are not handled properly may result in the company losing its position both locally and internationally. In the political environment there is the ongoing threat of terrorism. However, Tesco appears to be prepared. “A major incident or terrorist event incapacitating management, systems or stores could impact on the Group’s ability to trade. In addition to excellent contingency plans, we have security systems and processes that reflect best practice” (tescoplc.com Annual Report 2006). Currently, Tesco’s other international competitors Wal-Mart of the USA and Carrefour of France face temporary price controls in the southwestern Chinese city of Kunming where they currently operate. (Bloomberg News 2010). The western region is the poorest region in China and the Government has offered a number of incentives to investors. In the Economic Environment, most countries are on the recovery path as a result of the global recession. There were no major events in the grocery retailing business and the economic climate has not had much of a negative impact for the company. It provided opportunities, however, for growth through acquisitions. Even though consumer spending was affected by the recession, because of Tesco’s sheer size they were able to stave off the competition. The company, however, has serious debt obligations and a major economic crisis could affect it significantly. See Bar Graph on the growth performance of Tesco in the UK relative to its major competitors in Appendix 1. The social environment has its own share of problems. There risks in the supply chain that could affect customers. Recently there was a case in China where milk products were contaminated resulting in a number of deaths. If this was not properly handled properly by Tesco it could have had a dramatic impact on sales in China with those customers could have refused from buying goods from people of different cultures. Tesco has expanded into international markets and each market has its own beliefs and culture and this has to be taken into account in the company’s daily operations both locally and abroad. Changes in the technological environment have provided opportunities through which Tesco has increased the customers shopping experienced by the use of bar codes, and other technologically savvy devices to prevent customers from waiting in long lines and to improve the supply management chain. The company has also introduced its online shopping from which it made close to £1 bn. worth of sales in 2006. It currently has more than one (1) million active online customers. It has expanded its online business from food to include furniture and other items. “Any significant failure in the IT processes of our retail operations (e.g. barcode scanning or supply chain logistics) would impact our ability to trade.” (tescoplc.com Annual Report 2006). In the legal environment there are a number of regulations both locally and internationally which will impact in some way. This includes limits on mergers and acquisitions to prevent … in the retailing industry. Recently, government regulations prevented Tesco from taking over Safeway. Morrison because of its size and the lower impact their acquisition would have on the industry was given the green light instead. Tesco has made positive moves as it relates to the ecological environment. The company is committed to help prevent climate change by reducing energy use and the pollution of the environment. In 2006, the company rolled out the Corporate Responsibility Management systems to all its international operations. The company now has a zero carbon supermarket, the first in the world. It is encouraging the use of reusable bags in its stores internationally. It has waste bins for recycling in all its major locations and promotes its activities through schools and community programs. In spite of the various threats in the macro-environment Tesco has used its strong position to turn them into opportunities. Porter’s Five Forces Model is used here to analyse the competitive environment. “The more one can manipulate the forces in a direction favourable to oneself the more strategically effective one is.” (Walton 1999, p. 38) The threat of substitute products is not crucial for Tesco. The internet has given rise to customers shopping for goods online instead of going into its stores. Tesco is ahead of the competition as it was the first retailer to offer shopping online. Tesco.com now contributes significantly to Tesco’s PLC’s revenue. Barriers to entry may be high in the retailing industry. Tesco has increased barriers through various acquisitions. It has increased its presence in other complimentary businesses to increase it revenue generating capabilities. Rivalry in the industry is mainly affecting the smaller stores that do not have the bargaining power that Tesco and other large players have to drive down the prices of the suppliers. Tesco has applied pressure and so far has managed to stay ahead of the competition by increasing expanding its operations both locally and abroad. Tesco now offers a wide range of services inclusive of financial services and insurance products. The company has expanded its operations to 15 countries. It now competes internationally with Wal-Mart, the world’s leader in the retailing industry and another retailing giant Carrefour, out of France. Power of Suppliers – Suppliers in this industry includes farmers and manufactures like Proctor & Gamble and Uniliver. Both of which have taken up positions in China to benefit from the cheaper labour as well as large customer base their. Since Tesco is a large buyer with a large network of supermarkets, it wields a lot of power over its suppliers. Power of customers – The customer is very important to Tesco and it seeks to provide the necessary nutritional information on all food items. The company also endeavours to provide its customers with healthy choices. Customers are the reason for operating so Tesco seeks to improve their shopping experience and to provide them with low prices. Tesco understands that a bad customer review could have a devastating impact on the business, with all the other competitors ‘waiting in the wings’. This has forced them to do maintain their core purpose “to create value for customers and to earn their lifetime loyalty.” (tescoplc.com, 2010) In evaluating the strategic resources and core competencies of Tesco an internal analysis is necessary. “Internal analysis typically involves an analysis of the strengths and weaknesses associated with the primary and support activities of what Michael Porter (1985) calls the value chain.” (Walton, J. 1999). Porter’s Value Chain along with other models will be used to determine what strengths and weaknesses exists in Tesco PLC, how well they have used their resources to identify and take hold of the opportunities that exist and how well they have used their resources to minimise the effects of threats in the macro-environment. Michael Porter’s Value Chain, indicates that the company’s inbound logistics is working well as it has managed its supplier chain effectively. However, with anything there is always room for improvement and their may still be efficiencies to be gained in this area. Tesco has used its buying power to lower its prices, therefore providing lower prices for its valued customers. Tesco’s operations is linked their core value of creating value for customers in order to maintain brand loyalty. The company states that: “we regularly ask our customers and our staff what we can do to make shopping with us and working with us that little bit better.” (tescoplc.com, 2010). In relation to its outbound logistics, Tesco has improved customer service by offering its products online. It has also improved its operations at its checkout points through technological enhancements to its check out procedures. Marketing and sales has worked well with the changes in technology as the internet is being used as an additional medium through which it has increased its reach. This has benefited tremendously from giving customers the opportunity to shop online from the convenience of their home or wherever it is that they place their order from. The firm’s infrastructure is pretty much in order. However, there might be some advantages in terms of operational efficiencies to be gained. The group’s human resource management arm appears to be working well. The employee retention rate is high at 83% in 2006. Employees appear to be highly motivated and this lends itself to helping the customer increase their shopping experience. Staff cuts may be necessary in stores where sales has not picked up. They may also need to look at some locations which they may need to sell to one of their competitors. In relation to technological development, the group is developing continuously. They are very aware of their market and what it is that they have to do to continue in business. Procurement is an area where the company continuously look to make gains for their customers and simultaneously their shareholder. They have been managing their supply cahin effectively. In 2006 the supplier viewpoint measure was at 94%. The technology that they have applied to this area in order to increase efficiency speaks for itself. (See diagram in Appendix 2 for an illustration of the value chain) “Michael Porter (1985) argued that there are three fundamental ways in which firms can achieve sustainable competitive advantage, that is, growth. For him this would influence the choice of grand strategies.” (Walton, 1999) These strategies include: cost leadership, differentiation and focus. Tesco, the largest retailer in the UK, is not the price leadership. However it has the size to be able to drive its competitors out of business if they insist on a price war. They have successfully competed by lowering prices, but they are not low cost producers. The company has differentiated its products, by including a wide range of additional services. They have differentiated a number of their products as part of their focus. They target various segments of the market. So while they are competing with Sainsbury, ASDA and Morrison, they are also competing with brands such as Marks & Spencer. A SWOT Analysis of Tesco reveals that their strength lies in their reputation and their market share. The brand is well recognised and the customers enjoy the shopping experience that the company provides. Weaknesses include high cost of accommodation and aviation costs. Opportunities exist in emerging markets such as Lithuania and reducing costs to increase efficiencies. Threats include terrorist activities and government regulations locally and in their markets overseas. In applying TOWS analysis these threats can be avoided, minimised or turned into opportunities and weaknesses can be turned into strengths with the use of resources. (See illustration in Appendix 3) The Balanced Scorecard is becoming very popular. This technique is used by approximately 60% of the Fortune 1000 companies. The proponents of this technique: Kaplan and Norton indicate that strategy formulation and evaluation should be undertaken from four perspectives. They are financial, customer, internal business, and innovation and learning. Four fundamental questions arise from this perspective. They are: What must we achieve to satisfy our shareholders? What must we achieve to satisfy our customers? What processes must we excel at? What must we do to ensure that we learn and grow?” The diagram in Appendix 4 looks at what Tesco is doing. In comparison with Tesco’s Balanced Scorecard Wheel, which has five components, the Balanced Scorecard as proposed by Norton has four (2). . Tesco’s mission is has always been growth through diversification (to lower the company’s risk) and acquisition. With its aggressive growth strategies it has achieved increased sales every year since 2006. Its dividends and earnings per share has also seen tremendous growth. Therefore from a financial perspective it has satisfied shareholders as it continues to remain viable in an environment with numerous and increasing challenges. However, the company needs to work on its current and quick assets ratio which are both below what is regarded as satisfactory. The last financial statements show that they were 100% geared and even though the shareholders may prefer this situation, it may inhibit their prospects in getting a loan. In relation to the customers’ perspective, Tesco is a trusted brand. Therefore, their placing the customers at the heart of what they do (the company’s core values) is really paying off, not just locally but internationally. They understand their customers’ needs as they provide convenient ways to shop online. They seek to add additional value by offering customers Tesco Club Card. Customers also receive additional value by way of discounts on gasoline when they purchase a minimum value in the store. The company has experience tremendous growth through their increased understanding of the environment in which they operate both locally and abroad. (See diagram in appendix 4) Tesco has some work to do as far as it working capital management is concerned. the ratios are currently below par. If the company is considering further expansion, which I an sure it is, it may need to seek additional loans. Its gearing is currently at 100%. This could prevent the company from obtaining further loans. The rules and regulations both locally and abroad could prevent it for further acquisition because of its size. Therefore the only means for expansion may be organically, which is pretty expensive. References J.Sainsbury.co.uk (2010). Key Facts. Retrieved 16 Dec2010, http://www.j-sainsbury.co.uk/index.asp?pageid=192 Morrison.co.uk. Annual Report and Financial Statements. Retrieved 16 Dec 2010 http://www.morrisons.co.uk/Corporate/2010/AnnualReport/investor-information/supplementary-information/# Tesco plc. About Us. Retrieved 15 Dec 2010 http://www.tescoplc.com Tesco plc: Annual report (2006). Retrieved 15 Dec 2010 http://www.tescoplc.com/plc/ir/ar/archive/ar2006/arfs_06/4615306.pdf. 15 Dec 2010 Tescoplc.com (2010). Five Year Summary. Retrieved: 16 Dec 2010, http://www.tescoplc.com/plc/ir/financials/fiveyearsummary/ Walton, J 1999, Strategic Human Resource Development, Pearson Prentice Hall, UK. Appendix 1 Sales Revenue of Tesco and Main Competitors Year Tesco Sainsbury ASDA Morrison 2006 39,454 14,287 15,759 12,115 2007 42,641 15,277 16,896 12,462 2008 47,298 15,912 18,604 12,969 2009 53,898 16,815 19,862 14,528 2010 56,910 17,672 21,205 15,410 Appendix 2 Diagram of Michael Porter’s Value Chain Copied for the web Appendix 3 SWOT Analysis of Tesco PLC Strengths Profitable amidst crises Quality customer service High reputation High quality management Competitive advantage High retention rate of staff High supplier viewpoint measure Weaknesses Not able to find staff who are always willing to relocate when necessary Does not seem to have a generic strategy Opportunities Emerging markets in Russia, Switzerland Possible partnership in Russia and Switzerland More efficiencies/economies of scale to be gained from past acquisitions Threats Terrorist attacks Increased regulations in international operations Tesco’s TOWS Analysis Strengths Weaknesses Opportunities Strengths – Opportunities (What strengths do we have to take care of opportunities in the macro-environment?) Quality management to help the company reap economies of scale from past acquisitions Experience in acquisitions to seek partnership in other emerging markets Weaknesses - Opportunities (What weaknesses if addressed would result in taking advantages of opportunities?) Take the necessary steps to gain cost leadership by cutting some costs Carry out resource audit to determine what is its true resource base Threats Strengths – Threats (What strengths do we have to overcome or avoid threats in the macro-environment?) Use management skills to lobby against regulations that negatively affects its business Use competitive advantage to find ways to gain cost leadership of differentiation focus Weaknesses – Threats (What strategies can we use to minimise weaknesses and threats?) Use quality management to lobby against government regulations that negatively affects the business Carry out human resource audit to determine where cuts can be made. Appendix 4 Tesco’s Balanced Scorecard Read More