Porters Five Factor Framework for Competition - Tesco - Essay Example

? Tesco Table of Contents The company 3 3. Porter’s five factor framework for competition 4 3 Bargaining power of Buyers 4 3.2 Bargaining power of suppliers 4 3.3 Competitive Rivalry 5 3.4 Threat of substitutes 5 3.5 Threat of new entrants 5 4. Competitive strategies 5 5. Analysis of the company’s operating exposure 6 6. Management of operating exposure 7 7. Summary and conclusion 8 Appendices 11 1. The company Telco is a general merchandising and multinational grocery store in United Kingdom with its headquarters situated at Cheshunt. In the retailing section Telco plc ranks third in the word after Wal-Mart and Carrefour while it is second largest company in terms of profitability after Wal-Mart (Reuters, 2011). The company was founded by Jack Cohen in 1919.The company over the years has expanded geographically. The company is listed under the London Stock Exchange constituting of FTSE 100 index. Telco plc market capitalisation rate was around ?27.8 billion as on 15th September, 2012 (London South East, 2012). The main aim of the company is to provide its consumers with the best quality products at attainable rates, which make the company a success over the long period of time. The company operating in various countries like UK, US, Asia, Malaysia, Thailand and Republic of Ireland, etc. have to confront the different market rate fluctuations. Thus this can be sorted through the study made below (Appendix: 1). 2. The macroeconomic situation United States alike the other advanced economies of the country has come through a lot of improvements from the economic perspectives. The financial markets have been stable since a past few years which got reflected through the continuous rally of corporate bonds and equities. This was achieved through the narrowing of the spreads of the corporate bonds and fall in the interest rates of inter-bank. Most of the lead indicators of the economic activity are showing signs of recovery-though the recovery of the economy is likely to take place at a modest pace. The slow recovery of the economy is the price that US is ready to pay to come to a balanced economy. Consumers entering the downturn with relatively high debt levels and low savings are pacing out the consumption of growth. However, a remarkable recovery is mainly due to the stable consumer spending and the revival of demand at the consumer level (Deloitte, 2009, p.5). 3. Porter’s five factor framework for competition It is mainly the analysis based on which the strategy of the company is incorporated before establishing a company in a new country or city. It was developed by Michael E. Porter to understand the unattractive forces of the market which may pose trouble in the establishment of a company. 3.1 Bargaining power of Buyers Apart from Wal-mart and Marshals the country of Canada lacks prospective large retailers. This gives Tesco a wide chance in establishing its business in Canada, as the population of the Canada has an earning capacity of $22,000 to $ $42,000 on an approximation (Statistics Canada, 2012). 3.2 Bargaining power of suppliers Most of the suppliers of Tesco being loyal to its company Tesco never had to face dilemma in terms of production of the related goods. Still Tesco comprising of many suppliers their bargaining capacity is more when compared to Tesco as a buyer. In Canada the main three super markets are Wal-mart, Zellers and Giant Tigers. However, the threat faced from the suppliers is comparatively low as there is often a tendency for the large supermarkets to dictate the price paid to the suppliers of the product. If the suppliers do not agree with the price quoted by Tesco then it lies with very less options. Thus Tesco have a huge advantage in comparison to the local shops of Canada. 3.3 Competitive Rivalry Tesco can face competition on a larger scale from companies like Wal-mart, Zeller and Giant Tiger due to their business model strategy which is mainly based on the providing schemes of discounting on the overall products of the company. Thus to fight competition with the giants of the retail stores of Canada, Tesco needs to adopt strategy to enhance its brand equity amongst the customers of Canada. 3.4 Threat of substitutes Since Canada is one of the best places in terms of branded products and markets; Tesco will find a good position in the rising economy of Canada. Moreover threat from the substitutes of the giant super markets is comparatively low as the availability of the substitute good to the consumers will result in the fall of the prices of the goods of respective companies. 3.5 Threat of new entrants The competitive rivalry is a high threat for Tesco and companies like Wal-mart and Amazon are the other supermarkets and other non-food retailers who are in the similar business as that of Tesco. Generally the consumers finding differentiation in the quality of product competition tends to be on the basis of the price of the product. 4. Competitive strategies Canada is an emerging economy where establishing the strategies of Tesco plc will be quite appropriate for the company. The main strategies that are adopted by Tesco plc in its operation in UK is the remuneration strategy through which the company plans to recruit the most talented professionals from all across the world thus pushing forth the company towards profitable and sustainable growth of the company. The company also strategizes to diversify its products and services over an expanding market so as to extend its customer base on a large scale. However the online availability of products is the strategy of the company to stay afloat with the present technological up gradation (Appendix: 2) (Telco Plc., 2011, p.14). 5. Analysis of the company’s operating exposure The operating exposure leads to the measurement of the present value of the firm that result from the changes of the future operating cash flows of the company which occurs due to the unexpected change in the exchange rates. This exposure is responsible for dealing with the firms operations over the year with respective to its competitive position in comparison to other firms. Strategies that can help divert the operating exposures related to Tesco plc are R&D strategy, marketing strategy and product differentiation strategy (Ajami et al., 2006, pp.254-256). The transaction exposures faced by Tesco plc are due the fluctuation in the exchange rates. The exchange rate between Canada’s currency CA$ and UK currency GBP is: ?1 = C$ 1.5745. (Yahoo finance, 2012). If Tesco manufactures its products in Canada with 50% of its production sold outside Canada and the rest 50% is sold within Canada. All the sales in the country are invoiced in CA$. Average revenue of the company is equivalent to ? of the annual sales of the company with the average collection period of 90days.Inventories of the company amounts to ? of the annual direct cost of the company. Depreciation (d) amounts to CA$60,000 and the corporate tax rate is 25%. Exchange rate: C$1.5745/€ Sales volume (Q) = 100,000 units Sales price (p) = C$10 Direct cost (c) = C$5 Operating expenses (F) = C$80,000 Tesco’s expected cash flow from operations: CFO= (1-t) (pQ-cQ-F-D) +D = (1-.25) ((p-c) Q-F-D) + D = CA$ (0.75) (10-5)*100-80-60) + 60 = CA$ (0.75) (500-80-60) +60 = CA$ 330 =?209.6 (approximately) Hence this value is expected to remain the same for the next three years as no probable change can be noticed under the tax rate 25% for the next three years. However, if the pound value decreases over the year (2013) to C$ 1.0745 then the OCF of the company will amount to ?307.12 (Eiteman et al., n.d, pp.2-11). 6. Management of operating exposure The most standard method of hedging the transaction exposure is the employment of the forward contracts, futures contract, money market hedge and options. If Tesco goes for the forward contract then it can book a price for the future date at a specified price. Under the forward contract of hedging the transaction exposure the company will be able to sell or buy the foreign currency at a specified future date. Through this measure Tesco will be able to convert the uncertainty of future value of home currency related to the assets or liabilities into foreign currency which will remain independent of the change of the exchange rate over the remaining life of the contract. Future contracts are similar to that of the forward contract except that they are standardised, exchange traded and have limited maturity dates, contract sizes, initial collateral, etc. On the adoption of the Money market hedge strategy Tesco will be covered by the interest parity which means the forward price will be equal to the current spot exchange rate times the ratio of the two currencies riskless returns. If Tesco adopts the options then the company will have the right but not the burden of trading in the domestic currency with respect to the foreign currency or the other way round within a specified duration, quantity and price (Bodnar G., n.d., p.1). 7. Summary and conclusion Canada is the tenth largest economy in the world and is also amongst the wealthiest nations (Government of Canada, 2011). The latest increase in the retail sector of Canada has risen by 1.3% (Statistics Canada, 2012). The population of the country as of Q2 of 2012 is 34756 (. These data of Canada provides good prospect of Tesco establishing its business in Canada. Moreover the exchange price of the country being comparatively less than that of Europe the initial capital investment will be low. Reference Ajami R. A. et al., 2006. International Business: Theory and Practice. New York: M.E. Sharpe. Bodnar G., n.d. Techniques for Managing Exchange Rate Exposure. [Pdf]. Available at: . [Accessed on: 16 Sept. 2012]. Deloitte, 2009. Emerging from the downturn: Global Powers of Retailing, 2010. [Pdf]. Available at: . [Accessed on: 16 Sept. 2012]. Eiteman et al., n.d. Operating Exposures. [Pdf]. Available at: . [Accessed on: 16 Sept. 2012]. Government of Canada, 2011. Economy, Money and Taxes. [Online]. Available at: . [Accessed on: 16 Sept. 2012]. London South East, 2012. Tesco Share Price. Available at: . [Accessed on: 16 Sept. 2012]. Reuters, 2011. Tesco to outpace growth at global rivals-study. [Online]. Available at: . [Accessed on: 16 Sept. 2012]. Statistics Canada, 2012. Canada: Economic and financial data. [Online]. Available at: . [Accessed on: 16 Sept. 2012]. Statistics Canada, 2012. Gross domestic product at basic prices, by industry (monthly). [Online]. Available at: . [Accessed on: 16 Sept. 2012]. Statistics Canada, 2012. Visual census, Income and earnings, Canada. [Online]. Available at: . [Accessed on: 16 Sept. 2012]. Telco Plc., 2011. Annual Report. [Pdf]. Available at: . [Accessed on: 16 Sept. 2012]. The Economist, 2012. Retail sales, producer prices, wages and exchange rates. [Online]. Available at: . [Accessed on: 16 Sept. 2012]. Appendices Appendix 1: Financial Highlights of Tesco Source: Tesco Plc Annual Report, 2011. Appendix 2: Retail business sales Source: The Economist, 2012. Read More