The Analysis of British Tesco Company - Essay Example

Case of analysis report Tesco Executive Summary This paper dwells on the analysis of Tesco, a top British grocery shop in the UK. It explores Tesco’s comparative advantage against its disadvantaged areas in the UK. The analysis is done in four major parts: analysis of the external environment of Tesco through the PESTEL analysis and Porters five forces model; analysis of the internal environment using two strategic models (the Resource-based model and the value chain analysis); analysis of the PR crisis that have affected Tesco; and analysis of Tesco’s business and corporate strategy. This analysis gives insight into the operational and business environment within which the leading retailer is conducting business. It reveals the point where the company is capitalizing to succeed and possible lapses that may be costing the company. The paper also gives recommendations pertaining to the analysis, which leads to a concluding comment. Therefore, Tesco has to watch out on its environment (internal and external), PR actions, and strategic positioning to ensure that they are better placed to survive, grow and perform excellently in already saturated UK market and in its international operations as well. Table of Contents Page Executive Summary.......................................................................................................2 1.0 Introduction...............................................................................................................4 2.0 Analysis of the external environment......................................................................5 2.1 Macro Environment Analysis-PESTEL......................................................5 2.1.1Political factors.................................................................................5 2.1.2 Economic Factors............................................................................6 2.1.3 Social-Cultural factors....................................................................6 2.1.4 Technological factors.....................................................................7 2.1.5 Environmental factors....................................................................7 2.1.6 Legal factors..................................................................................7 2.2 Micro Environment Analysis-Porter’s 5 Forces Model............................8 3.0 Analysis of the internal environment....................................................................9 3.1 Resource Based View of the Company.....................................................9 3.2 Value Chain Analysis.................................................................................11 4.0 Analysis of PR crises...............................................................................................13 5.0 Strategic Analysis....................................................................................................16 5.1Business Level Strategy.................................................................................16 5.2 Corporate Strategy.......................................................................................16 5.3 Strategies Suggested for future/Evaluation..................................................18 5.4 Implementation Modes/Techniques and Final Suggestions.........................19 6. Conclusion.......................................................................................................................20 Reference List......................................................................................................................21 1.0 Introduction Tesco PLC is considered the one of the top ranking supermarket chain and the top ranking on online grocery in the UK and around the world, in terms of size, and revenue. It operates internationally in about 15 countries. In regard to the UK market, Tesco stands as the market leader enjoying a market share of approximately 30% (Tesco Corporation, 2014). The company uses the slogan ‘Every little helps’ to ensure their customers get the value of their money. In so doing, the company attempts to win and sustain their lifetime loyalty. This has the company grow, start operations in new markets, and earn remarkable profits international markets such as China, Hong Kong and Japan. Some of its efforts include Tesco Metro, club card and Express. In this report, an analysis is done of the external and internal environments, PR orientations, and alternative strategies are discussed and recommended. 2.0 Analysis of the external environment 2.1 Macro Environment Analysis-PESTEL 2.1.1 Political factors Due to its global presence Tesco is subject to political and legislative environments prevailing in concerned countries. For Instance, the UK government stipulates that the retailers offer equal opportunity employment that does not discriminate against anyone in terms of race, sex, ethnicity, age, and disability (Balchin, 1994, p. 43). This coupled with increased population calls at large retailers such as Tesco, Asda and Sainsbury to reconsider the way they treat employment matters. Tesco understands this and strives to manage its situation to remain competitive and relevant in the industry. Therefore, it employs different classes of people and considers most of the factors of jobs and people. This positioning is important considering that the industry normally experiences high staff turnover, forcing companies such as Tesco to look for loyalty found in employee classes such as the elderly and disabled. 2.1.2 Economic Factors The events of the economic downturn affected demand, prices, costs and profits around the world. After the recovery period, the level of demand is expected to rise and unemployment to reduce in the UK and around the globe. Nevertheless, Tesco has although maintained low prices and enhanced value, understanding that these factors greatly affect marketing mix and general performance of the firm even though it cannot control them. In terms of market focus, the UK forms the core market for Tesco even though they expect to make a big kill from the international operations (Martinell and Sparks, 2003, p. 577). Therefore, Tesco has to be prepared for any perils that come with market focus because any glitch in the UK market would hit it hard. 2.1.3 Social-cultural factors British customers currently have shifted towards bulk and one-stop shopping due to changes in their social settings (Finch, 2004, p. 184). As a result, Tesco has increase stock of non-food products. Efficiency in stocking and distribution activities has been enhanced through Electronic Funds Transfer Systems, Electronic Point of Sale and electronic scanners where the suppliers of the company are promptly updated of the customers’ needs. 2.1.4 Environmental Factors Companies and managers are expected to act in a way that benefits the society it deals with in general (Lindgreen and Hingley, 2003, p. 330). As a result, Tesco continues to act on this through its corporate social responsibility department. Some of the initiatives in this line by the government include conducting sustainable production and consumption that results into reduced waste and minimum consumption of resources and reduced environmental damage (Graiser and Scott, 2004). This implies that focus has shifted chiefly towards operational areas such as the supply chain. This makes leading supermarket chain reserve engaging new suppliers (Clarke, Bennison and Guy, 1994, p. 12). Consumers are nowadays increasing understanding health related issues, and are persistently changing their attitudes towards food. This implies that Tesco needs to bring on board a range of consumers of organic products. 2.1.5 Technological factors The current status of Tesco, in terms of product development, is greatly shaped by Technologic as a macro-economic variable. The benefits of innovation accrue both to the customer and the retailer in terms of customer satisfaction and convenience in the delivery of products and services (Leathy, 2004). Thus, the ‘YOU SHOP WE DROP’ message was crafted to shows Tesco’s superior online shopping services. 2.1.6 Legislative Factors The prevailing legislative and regulative framework directly shapes the direction of the company. The government is always busy enacting and implementing legislations and policies that affect the way business is conducted in different industries such as the food retailing sector (Mintel Report, 2004). 2.2 Micro Environment Analysis-Porter’s 5 Forces Model 2.2.1 Threat of New Entrants The four major supermarket brands of Sainsbury’s, Asda, Tesco, and Safeway dominate and control approximately 70% market share besides small supermarket chains of Waitrose, Budgens, and Somerfield that control a more 10% in the grocery market. The industry is now at the maturity stage and thus growth rate in the UK is slow (Joost, 2005). These supermarket brands have established their power by enhancing their operating efficiency, major marketing-mix expenditure and one-stop shopping; barring new competitors to enter the industry. 2.2.2 Bargaining power of Suppliers Suppliers are influenced by major grocery supermarkets and can lose their business to them. Thus, top ranking supermarket chains such as Asda and Tesco are advantaged in business negotiations over small individual rivals to correspond. Moreover, the UK based suppliers worry concerning the augmenting ability of large supermarkets to source cheaper suppliers from overseas. The same power applies to the relationship between the firm and the sellers. As result, the competitive rivalry forces determine the profit margins eventually gained by suppliers and supermarket chains. 2.2.3 Bargaining Power of Customers The more particular products become standardize or undifferentiated, the more the cost of switching reduces, and thus, buyers gain more power (Porter 1980). For instance, Tesco makes a big kill in terms of profit by employing the club-card for retaining loyal customers. Through this Tesco, as other large chains, manages its customer base by meeting their needs, guaranteeing low prices, customizing services, offering better choices, and continuous flow of in-store promotions. 2.2.4 Threat of Substitutes Availability of substitutes for a certain product means customer can easily switch their consumption (Porter 1980). The emergence of small but convenient smaller supermarkets and the presence of substitute (product-for-product) account for this threat in the grocery industry. This explains why Tesco alongside Sainsbury’s, Asda and other large chains are attempting to acquiring small-scale rivals establishing Metro and Express stores in any convenient point. 2.2.5 The level of rivalry amid present competitors The UK grocery market represents one of the complex and advanced market where major retailers dominate due to economies of scale, scope and market focus. This level of competition has forced large UK grocery retailers and even small ones to become innovative for building and sustaining a considerable market share. Tesco has reacted through creating value and price reduction by making innovative products. 3.0 Analysis of the internal environment 3.1 Resource Based View of the Company Tesco has to focus on two main resources: financial and human resources. On the financial front the company is reported stable performance even during the economic downturn. The reporting follows all the guidelines and therefore, indicates the financial health of the company (Mintel Report, 2004). This can be explained by the fact that Tesco is the third-largest retailer in the world, when revenue is considered. It is also true that it controls the largest market share in the UK of more than 30%. For instance, the group sales in 2010fiscal year reached £62.6bn resulting in a remarkable profit before tax of £3.5bn (Tescorporate.com, 2014). Financial resources present an area of great concern to managers and executives of any given firm. They have several investment options and opportunities. They also have several investment opportunities and financing options to employ. Therefore, making a justifiable decision involves a number of risks that calls for prudence to navigate, which means the best option or opportunity should be employed but with the necessary caution on the inherent perils taken (Macmenamin, 1999, p. 35). For instance, for Tesco to embrace cost leadership strategy well, it has to maintain its operational expenses at a certain budget allocation so as to have enough resources for both its marketing and exploration activities. The cash flow of the company should be under its control, which requires close monitoring of the financial management decisions with impact on both the firms internal and external business operations. At the same time, it pays well to invest training employees in areas of specialization and in profit-generating projects. Tesco has approximately 500,000 workers. Recognizing the importance of top level educational programmes, Tesco encourages and supports its workforce to enrol to enhance their professional skills. The courses involve two training options: Pre-optional test and Optional test. After completion of these courses, the employees can get a promotion to a higher rank in the organization. Through the training employees improve the both their retail and customer service skills. In this context, managers are now employing Oracle HR softwares to get employees information. The software enables the manager to get an understanding of the starting and ending time of a specific job. Management issues in Tesco also concerns recruitment and retention goals and Human resources systems (HRM) come in handy to aid in this. Therefore, enhancement of the human resources activities and objectives at Tesco is Key for the success of its activities. 3.2 Value Chain Management Analysis of Tesco The uniqueness of Tesco lies in attracting and retaining customers through creating value and maintaining low prices. This can be observed developments such the use of loyalty club-card, selling of more non-food goods and other lines of retailing such as Personal finance, telecoms and e-tailing. It also considered as a shopping mall and not just a grocery chain. Therefore, it offers a number of products and services: grocery products, CDs, videos, books, digital music, games, flowers, and gas gardening to name but a few. At the same time, it enhances loyalty of its customers and awareness of its brand through its Club card programme. Moreover, through the card Tesco to understands its customers and satisfies them by employing card data (identity and product recommendations are appear on the card) (Humby et al., 2003, p. 27). Tesco also greatly enhance its marketing strategy and thus, competitive advantage through the retailing services (i.e. Telecoms, Personal Finance, and tesco.com). Due to the fact that customers are going for bulk and one-stop shopping, the ever rising non-food market share boosts the firm’s financial performance greater than the core business. Tesco has also fully directed its corporate social responsibility to other organizations, people, and the settings it operates as a cause related marketing initiative. Moreover, Tesco can enhance quality through its executive management routine monitoring and evaluation of performance on daily and weekly basis. Finally, through efficiency enhancement the firm demonstrates its yearning to give both customer and employees the best experience as stakeholders. There is need that Tesco, besides, product differentiation strategy of business adopts cost leadership. The main areas in this analysis involve its two primary activities including inbound and outbound logistics. The activities of material handling, controlling inventory and warehousing describe Tesco’s inbound logistics. On the other hand, collecting, storing as well as delivering products to customers’ activities describe Tesco’s outbound logistics. Due to the fact that some of the goods and services produced by the company consume substantial financial resources, logistics would help in creating a competitive advantage better in combination with cost leadership than with product differentiation business orientation (Lynch et al. 2000, p. 52). Therefore, building capacity to come up with valuable techniques of cutting costs on these logistics primary activities would be very useful to Tesco. According to Fernie and McKinon (2003) Tesco has so far greatly enhanced its efficiency in logistics management. Tesco.com or e-tailing is the largest online marketing business, where a customer using the internet places a grocery order utilises automated central warehouses. At the same time, computer-controlled logistics structures offer a more efficient in the industry. In this context, Daniel et al (2004), suggests Tesco must be in a position to establish contact to its prospective and potential customer and end up closing a sale without appearing physically at the store. According Calkins et al. (2000), a number of retailers saved financial resources substantially ‘through replacing electronic-data-interchange (EDI) instruments with Internet-based ones. In this logistics are streamlined, product comparisons are facilitated, and it assist business-to-business merchants. However, Tesco ought to be keep check on the prevailing e-tailing tendencies because trends are changing in online retailing, marketing communications, and consumer buying behaviours among others. As a result, implementing marketing strategies calls for Tesco to build the ability to assess and come up with the best alternative if not less (Hocter and Thierauf, 2003, p. 44). It is therefore, recommendable that strategies should not be evaluated singly but enhanced by incorporating other components of marketing and management. Moreover, Tesco should cover a wider target market and depict a reputation relevant to each society members, which demands a definite corporate social responsibility. In the meantime, consumers highly consider service delivery as a major aspect of choosing where to get the product as compared to the quiet event of exchanging money. It becomes very important, as suggested by Thompson and Strickland (2003) that Tesco improves its ties with suppliers and covers more market using the characteristics of services such as simultaneity and intangibility. It means therefore, through this Tesco will positively benefit and its suppliers will also be happy with their business performance. All the following business agreements and transactions must accrue profits and advantages to the Supplier and Tesco. Therefore, priority should be placed on efficient and effective delivery of services and products via a well planned supply chain roadmap. 4.0 Analysis of PR crises Tesco has interests in grocery, financial services, non-food items, and telecoms. It is devoted to decreasing prices for customers and providing the best value in the UK and around the world. However, major PR crises have faced the organization on two issues: the horsemeat, living wages issues and a bad day at the office. The Tesco horsemeat scandal As one of the high ranking retail brands of the UK, Tesco was highly hit by this most popularised scandal at the beginning of 2013. This was highly pronounced as they faced thorough scrutiny after horsemeat traces were found in their frozen ‘beef’ burgers product line. It emerged that this beef product contained almost 100% horsemeat. The popularity of this humiliating revelation also raised questions concerning the UK’s Food Agency. At the same time, other recognized supermarkets such as ASDA and Sainsburys where the lean meat traces were also discovered especially Tesco have gone through thorough scrutiny from both the government and the public (Tesco, CSR 2009 report). The issue what to do when such a well-respected and trusted firm go against the trust of people and the values they hold. Tesco promises the best through its slogan of ‘Every little help’ and in this they also emphasise the honesty of their products supply as indicated within their corporate website at the corporate responsibility section. However, their honesty is questionable to the extent of permitting such a grave blunder to occur. The most important thing after the operation of the scandal is how Tesco reacts to remove this filth and most important regain the confidence and trust of the public and customer (Martinez, Christopher Williams Candace, 2012). This means, the public relation team of Tesco would have so much work to carry out in a crisis of such magnitude. On this case, Tesco firstly got rid of the burgers product line and any other form of meats that were regarded unworthy of being sold, swearing to just purchase meat that were regarded as local. This involved immediate recall of the products, and customers needed no receipts but packing to return the products. They subsequently released an unreserved public apology statement which was circulated in the UK newspapers as double page spreads, sincerely giving an apology for the scandal in question (see appendix). Therefore, having realized the error associated with their ways Tesco’s most important action to take was to communicate with both the public and the media, even though it has been scrutinized regarding the lack of utilising social media to its complete advantage. Examining the lack of a twitter account @UKTESCO at a time where PR department could have been utilised to its complete potential (Martinez, Christopher Williams Candace, 2012). This means that social media has become an important tool that companies should employ in any crisis. Generally, Tesco can be said to have managed the crisis successfully but it is useful to be prepared. Preparation involves getting everyone including the PR team ready for such crisis in terms of social media communication. However, Tesco is criticized for three main reasons: working conditions, monopoly, and pollution. Tesco own reports have admitted some stores such as London Road store in St. Albans will augment the pollution and will augment 70% traffic in that very busy location. Tesco is criticized for offering part-time jobs to store workers and refusing to engage local unions (Harris and Dennis, 2002, p. 33). Another PR crisis involving Tesco can be described as ‘a bad day at the office (Tesco’s PR office)’. It happened that when techno junkies discovered that Tesco, the biggest UK retail giant, were selling its latest iPad 3 tablet at only £49.99 that is a massive 90% discount of £500 recommended price for retail. Twitter was filled with news of the astonishing deal, which had the corporate website of Tesco come crashing down as purchasers rushed to buy iPad’s newest product, the iPad Wi-Fi 4G/64GB. For sure, in the plain view of things, it was just all very good deal to be true. Following a technical glitch, Tesco priced the product wrongly and it was soon corrected as claimed by its Spokesman (Tescorporate.com). All the purchases were reversed and refunds were quickly made to a number of disappointed customers. This was a big PR blunder. Everyone can agree that by all standards the company had messed up greatly. Tesco has not honoured its advertised price, it has reversed all orders and it has not provided its customers any compensation for its unwelcomed mess up. This is not the kind of PR any firm would confidently want to be linked to (Martinez, Christopher Williams Candace, 2012). However, it is not a very big PR disaster. The leading supermarket chain seems to suffer but the public will have to learn to forgive them anyway. They might be looking foolish at the moment but it will all end and that iPad orders will continue coming in plenty, although with the moderately higher retail tag pinned (Dennis, Fenech and Merrilees, 2005, p. 179). It is also likely that consumers will often flock in the local Tesco outlet for their weekly shopping. Loyalty points include cheap but quality food and need for club card points. Therefore, the reaction of Tesco can also be enhanced through the use of social media and other methods that enhance communication. 5.0 Strategic Analysis 5.1Business Level Strategy The general business strategy of Tesco can be classified as differentiation. As Sautter, Boberg and Maltz (1999) innovation is the driver of product differentiation. This is why Tesco is constantly looking for new products and services through adding value and making the difference. As described by Thomsen (2004) a successful differentiation strategy is visible ability of the firm to distinguish its products and services by coming up with matchless attributes including brand image, design, technology, and differentiated customer service amongst others. Considering Porter’s generic strategy, it is clear that differentiation creates a resource-based competitive advantage. The overall success and influence of differentiation on Tesco can be observed on its progressive performance from year to year over the last decade. Nevertheless, it is important that both cost leadership and differentiation business strategies work in harmony to achieve outstanding results. 5.2 Corporate Strategy The corporate strategy can be better analysed on the basis of Annoff’s Market/product matrix. 5.2.1 Market penetration Market penetration forms part of the corporate strategy of Tesco, which it classified into four major parts. According to Ogbonna and Whipp (1999), the international footing of Tesco relies on the Core UK, non-food and food services, expansions of global retail industry, and excellent customer services. In its markets Tesco employs intensive advertising, maintaining low prices, and other forms of sales promotions that enable it sell existing products and services. Tesco continuously ventures into new markets through mergers and acquisitions. 5.2.2 Market Development The expectation of Tesco to expand beyond its current market is encouraged by innovating new products and services, channels of distribution, and many other strategies (Palmer, 2005, p. 25). The main drive and objective is to appeal to customers and increase the market share. Therefore, Tesco customises products to suit the market it enters (e.g. China and India market needs). Through this strategy Tesco matchlessly managed to cover new market share with its existing products and services. Thus, market development is important for growth. 5.2.3 Product development Introducing a new product of service to a market involves risk taking. This is visible in Tesco’s growth strategy that involves increasing the non-food items. Besides food services Tesco brought to the market more services on the already secured market. This strategy employs several strategies (e.g. advertising, pricing, and sales promotions) employed in market penetration (Thomsen, 2004, p. 29). 5.2.4 Diversification This involves using new services or products to invest on untouched markets niches. It is upon Tesco to study and understand the perils that accompany the process. As a result, it is essential to use the concentrated research and development efforts (Rowley, 2005, p. 194). 5.3 Strategies Suggested for future/Evaluation The current strategies discussed above can be used for evaluation of Tesco. First, the market penetration strategy of Tesco can be used to gauge the direction and position of the company over time. Market penetration forms part of the corporate strategy of Tesco, which it classified into four major parts. According to Ogbonna and Whipp (1999), the international footing of Tesco relies on the Core UK, non-food and food services, expansions of global retail industry, and excellent customer services. In its markets Tesco employs intensive advertising, maintaining low prices, and other forms of sales promotions that enable it sell existing products and services. Tesco continuously ventures into new markets through mergers and acquisitions. Second, market development potential of Tesco is important for its future. The expectation of Tesco to expand beyond its current market is encouraged by innovating new products and services, channels of distribution, and many other strategies (Palmer, 2005, p. 25). The main drive and objective is to appeal to customers and increase the market share. Therefore, Tesco customises products to suit the market it enters (e.g. China and India market needs). Through this strategy Tesco matchlessly managed to cover new market share with its existing products and services. Thus, market development is important for growth. Third, product development can be used for enhancing cost leadership and differentiation. Introducing a new product of service to a market involves risk taking. This is visible in Tesco’s growth strategy that involves increasing the non-food items. Besides food services Tesco brought to the market more services on the already secured market. This strategy employs several strategies (e.g. advertising, pricing, and sales promotions) employed in market penetration (Thomsen, 2004, p. 29). As a result, it is essential to use the concentrated research and development efforts (Rowley, 2005, p. 194). 5.4 Implementation Modes/Techniques and Final Suggestions Tesco can probably use two strategic alternatives that involve the partnership or joint venture and product development success which will be associated with the three major success criteria: SAF-sustainability, acceptability and feasibility and acceptability (Johnson and Scholes, 2007). Sustainability will consider whether a strategy looks into the circumstances in which the Tesco is operating. This is discussed below. 5.4.1Market Development strategy Stepping foot on new markets like Japan and China can serve as a significant growth driver of Tesco’s revenues and expansion strategy. The needs and interests of Tesco in Japan are probable to go on growing in due course, as the markets of Asia are indicating an increase in consumer spending and augmented tendency towards retailing (Veliyath and Fitzgerald, 2000, p. 56). A surface examination of these new markets shows that they also have large population that provide a potential market. Tesco can buy into this strategy by entering into global alliances with the local retailers already operating their activities in the Asian markets. The advantage involves having a development channel that can enable Tesco to use existing competences and resources (Johnson and Scholes, 2007). The joint ventures or partnerships to quickly enter the market and cover a large market share, Tesco will befit mutually from the local partners. It will use their operating expertise and knowledge whereas injecting its own product development, supply chain and outlets operations skills to produce a superior shopping experience to clients (Warnaby and Woodruffe, 1995, p. 253). This analysis, therefore, show this strategy as being sustainable, acceptable and feasible. Nevertheless, given the enormous scale, complexities and potential of these markets, Tesco can feel that being the earliest mover is not essentially an advantage. 5.4.2 Product Development: Diversification Alterations in the business environment have the ability to bring up demand for new services and products while ignoring recognized provision. Ansoff’s matrix proposes that if new products are created for the already secured markets, then a strategy of product development has to be taken into account by the executives the given company (Yip, 2004, p. 17). During the development of new products for the diversification and expansion of Tesco’s product mix implementation of internal development is vital. It is also important that the extent and the nature of Tesco’s diversification be taken into account. This should be in association to Tesco’s portfolio diversity and the corporate strategy rationale (Johnson and Scholes, 2007). 6. Conclusion Analysis of bigger companies such as Tesco should be done at different levels and implemented according to importance on the priority list. These distinctive strategy orientations must be associated and mutually bring more value. Tesco’s corporate strategy involves illustrating the business that the company will conduct, to utilise its full potential and create a competitive advantage out of its unique competences (Hammett, and McMeikan, 1994). The competitive advantages that Tesco already enjoys in the UK such as economies of scale, innovations and market share need not only to sustained but also matched with the changes that are taking place both in the internal and external environment of the company. To achieve this company must implement all the major recommendations from the PESTEL and Porter’s five forces. This also means that the organization has to build on its reputation and keep a sound business and corporate strategy that keeps it competitive always. Bibliography Balchin, A., 1994. Part-time workers in the multiple retail sectors: small change from employment protection legislation? Employee Relations, Vol. 16 Issue. 7, 43-57. Calkins, J. D., Farello, M. J., and Shi, C. S., 2000. ‘From Retailing to E-Tailing’. The McKinsey Quarterly, Vol. 1, 140-147. Clarke, I., Bennison, D., and Guy, C., 1994. The Dynamics of UK Grocery Retailing at the Local Scale. 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Government Effectiveness, the Global Financial Crisis, and Multinational Enterprise Internationalization. Journal of International Marketing, Volume 20, pp. 65-78. Appendices Appendix 1 Apology letter by Tesco. Read More