Internal Strategic Analysis of Tesco - Case Study Example

Tesco Case Study Assignment Executive Summary Gaining sustainable competitive advantage has become one of the major concerns for all business organizations in the present scenario. The food retail industry represents one of the most competitive industries of U.K. The firms in the industry intensely compete in order to gain competitive advantage over the others. In this regard, the case of Tesco has been analyzed in details. Tesco is currently the market leader among other major companies like, ASDA and Sainsbury’s, in the domestic market. The strategic practices adopted by the company have been studied in details. In this regard, frameworks of strategic management like, PESTLE, Porter’s competitive forces and value chain analysis, has been employed. The first part of the report discusses macro environmental issues, which affects the U.K. food retail industry. This is followed by analysis of Porter’s competitive forces to evaluate parameters that affect competitiveness of the business. The section of the report containing the internal strategic analysis deals with financial appraisal, resource appraisal and value chain analysis. The penultimate section of the report comprises ethical practices that have been adopted by the Tesco. The last section presents the recommendations that can be adopted by Tesco so as to overcome current issues that are being faced by the company and maintain its position as the market leader. The findings from the report indicate that weak economic conditions in Europe can dampen future growth of the business. The first recommendation for the company is to introduce lower costs and discounts in the future in order to retain market share. The changing pattern of food consumption in U.K. and rising popularity of organic food will be essential determining factors for growth of the food retail industry. So, the second recommendation focuses on increasing availability of cheap organic food. The analysis from the report has shown that sale in U.K. has dropped for Tesco. This paper suggests that increasing promotional measures can raise the sales. Owing to increasing concern of the government regarding environmental issues, this paper recommends that further sustainability can be attained by adopting energy saving practices. Finally, the analysis has also revealed that dialogue with the customers have weakened, which is hindering business growth. The final recommendation of the report is that engagement with the customers must be strengthened in way of modifying existing practices or adopting new ones. Contents Executive Summary 2 Introduction 4 Analysis 4 PESTLE Analysis 4 Porter’s Five Forces 6 Internal Strategic Analysis 7 Financial Appraisal 7 Resource Appraisal 9 Value Chain Analysis 10 Business Ethics 10 Strategies and Recommendations 13 Reference List 16 Introduction In any modern industry, competition is becoming more intense as rivals are continuously changing their strategies to gain competitive advantage over one another. This implies that development of strategies, that will provide sustainable competitive advantage, is of paramount importance to firms. This situation also holds true for the food retail industry in U.K. According to works of researchers like, Uncles, (1998) and Turock (1999), the food retail industry represents a dynamic field for generation of persistent competitive advantage (Obitz, 2008). The purpose of this paper is to analyze strategic practices that have been adopted by Tesco, which has made the company a leader in the market. The first part of the report consisting of external analysis focuses on those factors, which impact the food retail sector of U.K. as a whole by employing the PESTLE framework. This part is followed by analysis of the food retail industry using Porter’s competitive forces. The next part of the report deals with internal strategic analysis of Tesco in order to comprehend internal capabilities and core competencies of the firm, which has provided the organization with competitive advantage. The financial performance of the company has also been evaluated in this section. The value chain analysis of Tesco concludes this section. This section is followed by business ethics and CSR practices adopted by Tesco. The final section deals with recommendations that can be used by the company for maintaining its position in the market in forthcoming years. Analysis There are basically two types of environmental influence, which are important in influencing business of an organization, namely external environment or macro environment and industry or competitive environment. In the literature of strategic management, PESTLE analysis is useful for conducting analysis of the macroeconomic environment and Porter’s five forces is a staple for determining the industry environment (Thompson, 2002). PESTLE Analysis Political: Retailers as well as shoppers are affected by the political factors of a nation. The major political factors to influence the retail food market in U.K. are stringent regulations regarding hygiene and health conditions of the population. These legislations are set by Food Standard Agency and General Food Law Regulation. The Food Standard Act came into existence in 2000 and General Food Law Regulation was set in 2004, which requires all retailers to comply with the set standards (Vladimirov, 2011). As the retail industry employs a large proportion of population, labour laws of the country are also important determinants affecting performance of the industry as a whole (Whitelock and Jobber, 2004). Economic: The economic factors that are particularly important for the food retail sector of U.K. are disposable income of the consumer, rate of inflation and taxation prevalent in the country. The recent financial crisis, which has heavily crippled the economy of U.K., could not reduce demand for food by consumers. The consumer spending on food products increased approximately at a rate of 5%. Overall, GDP of the country had fallen considerably after the crisis. The monetary policy of the government has been focused on keeping the interest rates low for which probability of expenditure on the consumption increases as cost of borrowing for food retailers reduces. Social: According to statistics, population of U.K. is ageing as the percentage of retired people in the population is rising. As elder section of the population lives on a limited income, food retailers who offer heavier discounts have the probability of gaining competitive advantage (Timmins, 2010). One of the emerging trends in the U.K. retail industry is rising health consciousness among the population. Particularly, the retailers with a higher proportion of organic products in their product mix have better chances of growth in the future (Thomas, n.d.). Technological: The last decade had witnessed robust growth of the retail sector heavily based on strong rise in popularity of internet. The emergence of online selling has greatly benefitted the food retailers and has raised their revenues. Adopting this practice have reduced cost of operation and increased sales of the stores. The adoption of efficient technology in transportation of the products through advanced vehicles has also reduced adverse environmental impact (Sweet, 2010). Legal: The legal actions taken by the government affects the food retail industry both directly and indirectly. The legislation of the country regarding food safety standards, labour laws and planning and environmental laws affect activities of the retailers. The land laws of the government restrict expansionary activities of the retailers (Dawson, 2001). Environmental: The transportation involved in the food retailing sector requires retailers to take measures in order to reduce pollution during transportation and proper handling of waste material released. The issues of recycling are also considered to be important. One of the actions taken by the government was charging for plastics by supermarkets from the consumers. Porter’s Five Forces Rivalry among the competitors: The rivalry among existing players is extremely high in the industry as companies compete on the basis of pricing, promotions and products. The key market players are Tesco, ASDA, Sainsbury’s and Morrisons in the domestic market. Apart from this, international competitors like, Wal-Mart and Carrefour also provide competition to domestic players (Kotler and Keller, 2006). Threat of substitutes: The food products do not have any direct substitutes; however, there can be few alternatives to large superstores, such as, organic stores and small stores. Besides that, supermarkets also face threat of substitutes from the restaurants to some extent (Palmer and Sparks, 2004). Threat of bargaining power of the buyers: The buyers, in case of retailers, refer to the consumers who buy the products. As most of the stores offer homogenous products, buyers have sufficient options to choose from and switching costs of the buyers are less. Owing to the presence of large number of convenience stores, superstores and hypermarkets, consumers are particularly price sensitive and they have no particular preference for the stores (Kotler, 2008). Threat of suppliers: The suppliers of the food industry include food processors, small farmers, manufacturers and agricultural cooperatives. The bargaining power of suppliers is a function of their concentration and size. It also depends on cost of switching and power of backward integration. With rise in bargaining power between the retailers and the suppliers, companies begin to enjoy greater power in the price competition and their profit margins sore. In case of major food retailers, it has been observed that suppliers experience low bargaining power as most retailers maintain good relations with the suppliers (Palmer and Quinn, 2005). Threat of new entrants: The threat from new entrants in food retail markets is low as setting up a new supermarket chain involves huge capital investment. Moreover, existing major players in the market enjoy economies of scale, which makes it considerably difficult for new entrants to compete. Apart from this, regulations of the planning authority also restrict capacity of new entrants for opening stores in desired locations. The dominant market players have already placed themselves in strategic positions and it is expensive to find vacant spots (Doherty, 2000). Internal Strategic Analysis Financial Appraisal Figure 1: Key financial indicators (Source: Morning Star, 2014) The above chart shows key financial indicators of Tesco over the last ten years. The parameters of gross margin, operating margin, net margin and return on equity have been considered for conducting the analysis. Figure 2: Gross profit (Source: Author’s creation) The graph above shows the gross profit margin of Tesco over the last ten years. It can be seen from the graph that the company had maintained a steady profit margin even during the period of recession. Yet, during the latest year, profits have shown a slight fall. The values of the operating margin also imply that as of 2012, the company had a large proportion of revenue left for meeting the fixed costs. However, in 2012, this has shown a slight fall compared to previous year. Similarly, net margin of the company has also been increasing till 2009, when it had suffered a fall. After this point of time, net margin had shown considerable improvement. Finally, in terms of returns on equity, it is seen that the value had peaked during 2008, following which it had shown signs of volatility. Analysts of the company had blamed weak conditions in the market as chief reason for the fall in profit in recent times. Yet, it is strongly believed that the company has been able to maintain modest profit even during times of economic distress. Strong performance of the organization during difficult economic times in U.K. can be attributed to its strong international performance outside U.K. Weak economic conditions in Europe is particularly affecting performance of the organization and can be attributed to marginal fall in the profits. Resource Appraisal Resource based view of a firm focuses on internal capabilities of the organization to frame strategies, which can provide the firm with competitive advantage (Jan, 2002). The internal capabilities of the firm help in formulating strategies whereby it can compete in the external environment (Porter, 1979). In case of Tesco, it has been observed that the organization has emerged as a dominant player in the market, even though most of its competitors, like, ASDA and Sainsbury’s, have almost similar resources. This implies that better management practices of the company and market expertise has helped to outshine the competitors. Grant (2005) had described that resources of a company can be divided into tangible and intangible resources (Porter, 2008). The tangible resources of Tesco include wide variety of shops and chain of networks that had been introduced over the years, the large number of employees and the wide range of products that is offered (including its private labels). On the other hand, intangible resources of the company include the brand image, the huge financial profits and the knowledge gathered about market (Needle, 2010). Porter (2008) had pointed out that core competencies of a company are very useful for determining its critical success factors. One of the strategic capabilities, which have provided Tesco with competitive advantage over competitors, is low cost efficiency achieved by the company. The economies of scale enjoyed by the company have ensured a low cost advantage. In terms of market share, it has been observed that Tesco is the most important player, which endows it with scale economies in operation. Researchers such as, Perman and Scouller, had pointed out importance of scale economies in distribution and food marketing strategy (Jeffes, 2008). The core competency of the company can also be derived from the first mover advantage it had enjoyed in certain aspects. The company had employed a number of ways in order to devise strategic capabilities (Johnson, Scholes and Whittington, 2008). For instance, the Clubcard system that was launched by Tesco has been a first of its kind, which had resulted in higher sales. Similarly, home shopping experience launched by the company in 1996 was also a first, which had provided it with more market share. Even in terms of portfolio diversification and internationalization strategies, the company had been the first mover. This also ensured beneficial returns. The major competitors of the company, like, Sainsbury’s and ASDA, have been followers of Tesco’s strategies (Kreutzer and Lechner, 2008). Value Chain Analysis Concept of value chain that is used as a major tool in strategic management was also developed by Porter. The value chain involves inbound and outbound logistics of the company; operations; service; and marketing and sales (Kapferer, 2012). In case of Tesco, it has been observed that heart of operational efficiency of the company comes from efficient management of logistics. Fresh food depots set by the company had been successful in handling multiple products at different temperature ranges. The product lines are tracked by the EPOS system, which helps in continuous monitoring. Cumulative sales made by the company are updated on the TPE on an hourly basis (Harris and Ogbonna, 2001). The use of internet technology has allowed the organization to interact with suppliers in an efficient way, which in turn has enhanced profits. In terms of inbound logistics, regional distribution strategies of the company have reduced the costs of operation. In terms of operations, Tesco had adopted a customer-centric strategy mainly by following a number of practices like, Clubcard and customer complaints resolution desks, which have effectively helped to resolve customer complaints and establish good relations with them. In terms of the process, “Operations Checkout” that was introduced by the company in 1970s had promoted centralized purchasing so as to reduce costs. The wide category of stores like, express, convenience, extra, superstores and metros, have improved efficiency of operations. Finally, brand image created by the company and its active promotional measures have fixed the company as the top market player. The selling personnel and staff of the company are well trained in order to appropriately handle customer satisfaction (Tesco Plc, 2012). Business Ethics The ethical issues faced by an organization are important in shaping up the business strategies adopted. The corporate governance followed by an organization is crucial for creation of the best practices which can provide the company with a competitive advantage in the long-run. The board members who are responsible for maintenance of corporate governance of the organization ensure that best practices are followed by the company. The success of most organizations in contemporary times depends on effective management of the stakeholders. Tesco has a large number of stakeholders including farmers, customers, employees and investors. Tesco have been involved actively in enhancing corporate social responsibility by concentrating on benefits of its shareholders. The company has launched ethical and fair trading practices and community programs in order to benefit the farmers and society as a whole. Tesco has made sure that suppliers comply with the standards that are set by the company. According to the normative theory of organizational ethics, group decisions are crucial for prosperity of the organization. Even so, in case of Tesco, it has been observed that financial benefits of the company are stressed upon exclusively (Jones, Comfort and Hillier, 2007). Tesco has appeared to focus heavily on the policies of fair trading in order to buy and sell the products responsibly. This has been done to ensure that customers are correctly aware of products that they are buying and conditions under which these are manufactured. This also lets the customer to know whether they are being treated fairly or not. The ethical structure followed by the company is not a linear one and depends on a cyclical framework that enabled continuous development on multiple dimensions (Tesco Plc, n.d.). The basic structure of ethical practices is presented in the following diagram. Figure 3: Ethical Standards (Source: Tesco Plc, n.d.) One of the challenges that are being faced by the company is coordination with the suppliers across multiple geographies. As some of the suppliers belong to poorer countries, they are unable to meet the ethical trading practices. This situation can, however, be improved by way of framing proper support programs with the suppliers (Tesco Plc, n.d.). Since the global financial crisis, it has been observed that underlying growth of the company has lagged behind that of its main competitors, ASDA and Sainsbury’s. In 2011, Tesco declared that it could not achieve the planned target of growth. Industry experts have pointed out that performance of the company on the home front has been neglected, which had slowed down growth process. Clubcard, one of the most important tools used by Tesco to communicate with its customers, has recently failed to maintain the same rapport with them. The impaired dialogue with this particular group of external shareholders can be attributed as one of the reasons of weak business performance (Tesco Plc, 2012). Tesco has primarily relied on the concept of creating value for customers for the purpose of gaining their trust. It has introduced the concept of “steering wheel”, which allows the company to publicly declare the areas of focus for increasing transparency to stakeholders (Smith, 2010). This strategy allows involvement of the stakeholders in decision making process, thereby enhancing trust of stakeholders on the organization. This type of practices improve image of the organization and promotes loyalty of customers. Over the years, Tesco has particularly focused on strengthening its CSR practices. One of the reasons that can be accounted for this focus is that CSR for most companies implies a PR mechanism that propels organizational reputation in the right direction. The research of Jones has shown that marketing aspects of CSR have become the main area of focus for food retailers. In this regard, it can also be argued that communication of CSR practices to the external shareholders is also equally important for success of organization (Hess, Rogovsky and Dunfee, 2002). Strategies and Recommendations The ongoing analysis has revealed that Tesco have maintained its position as a market leader in the U.K. food retail market. From analysis of the external environment, it can be seen that external factors have a strong influence on business development. Moreover, weak economic conditions in the European markets have impacted sales of Tesco since 2010. This is evident from marginal decline in the profit margins. In order to sustain its position in the market, the company must constantly find innovative ways whereby it can maintain its low cost leadership strategy. The low cost will allow the company to charge lower price from customers, which in turn will raise customer loyalty. It has been already established that economic position of the UK economy has weakened since the period of recession. This implies that in the future, price factor will play an extremely important role for determining positions of firms in the market. This recommendation is feasible because Tesco has the largest market share, thereby ensuring economies of scale. This will enable Tesco to provide higher discounts compared to most of the competitors. Once this is implemented, there is an increased probability for the company to attain higher market share. The second recommendation for the company from analysis of the macro environmental conditions is that Tesco should focus more strongly on organic food segments. This recommendation is suitable because analysis of social conditions in U.K. has indicated that there is a rising tendency among people to eat healthy and organic food. This trend implies that if Tesco focuses on regular food items, then there may be a probability for it to lose the market share. If the company implements special discounts in the organic and healthy food segments, then there is a high potential for the sales to increase in future. The R&D team of the company must come up with innovative ways in which this goal can be achieved so that market position of the company in the long-run remains sustainable. From analysis of the industry, it has been revealed that bargaining power of the buyers can pose a threat to the company as buyers can easily switch to other retailers if they are provided with better products at a lower price. In this regard, it can be said that maintaining consumer loyalty for the brand will be crucial for the forthcoming years. Increased promotional activities can help the company to improve brand popularity in the market as well as alter perceptions among the customers. This type of a market penetration strategy can result in achievement of higher market share in the market. Sustainable development is a major issue for growth of a company in the long-run. So, it can be argued that companies that promote sustainable practices are ones, which will emerge as successful in the future. The U.K. government has been placing additional stress on environmental issues in the recent years. This signifies that policies concerning reduction of carbon emission can be a suitable recommendation for the retailing giant, Tesco. This will not only improve brand image of the products to customers, but also improve sustainability of business development in the long run. This type of a strategy can be implemented in two ways. One of the ways is to improve existing stores, rendering them more energy efficient. In addition, new stores that are to be opened by the company in the near future must apply energy efficient methods so that environmental issues can be minimized. The second way of doing this is by using energy efficient vehicles in transportation of products from supplier distribution points to the stores. This will result in reduction of overall carbon footprint of the company, making it one of the organizations that employ clean technology in transportation. Finally, from the section on corporate social responsibility of the business and organizational ethics, it can be concluded that the company has been suffering from few issues relating to communication with the customers. It has to be admitted that Tesco has been directing greater focus on development of better corporate practices in the recent years. This has mainly emerged from the realization that CSR practices basically provide a thrust to reputation of the firm. In 2011, however, it was observed that communication with customers had weakened. In order to overcome this difficulty and maintain its position as the market leader in forthcoming years, re-establishing the link with potential customers will be a crucial factor. Hence, final recommendation of this report is that innovative changes in the Clubcard system must be made so as to establish an effective communication with the customers. This recommendation is suitable because loss of touch with the customers in U.K. has mainly resulted in fall of the business prospects. This situation can prove to be a major hurdle in way of long-term business growth as Tesco can lose its market position to the competitors. This recommendation is feasible because, as discussed above, Tesco has always proved itself to be the first mover in innovative aspects. The company can employ its vast marketing knowledge to come up with added benefits on the Clubcards like, heavier discounts, in order to attract more customers. The implementation of this recommendation can improve communication with the customers and enhance sales of the company in the U.K. Reference List Dawson, J. A., 2001. Strategy and opportunism in European retail internationalization. British Journal of Management, 12(4), pp. 253-66. Doherty, A. M., 2000. 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