Contemporary Issues in Business and Management: Tesco - Case Study Example

Contemporary Issues in Business and Management: Tesco Contemporary Issues in Business and Management: Tesco I. Introduction If there is any industry where increasing costs and tougher competition continues to squeeze a company’s margin and profitability, it would be the retail industry that compels industry player to employ best practices in the business otherwise perish to the competition. The company of discussion of this paper – Tesco PLC is therefore compelled formulate and implement competitive business practice and strategies that would ensure not only its survival in the short run, but also its long-term growth in the future. In the first half of 2011, Tesco’s competitor Sainsbury reported a better sales performance with a sales increase of 1.9% compared to Tesco’s 0.5% sales increase (BBC Business 2011). This recent development in the retail industry is alarming because competitors are beginning to undermine Tesco’s leading position in the market. This development stresses the importance of crafting and implementing a competitive business strategy and improved performance for Tesco’s to regain its market leadership. II. Company Overview: Tesco PLC Tesco is the largest retailer in Great Britain and the third largest supermarket in the world. Its market share in the UK retailing industry is 12.5% and it controls over 30% of the grocery market which is 75% dominated by four major players Tesco, ASDA, Sainsbury and Morrison (Dobson et al 2008). Tesco has 2,440 stores and has an employee of more than 4,000,000 people. Its online grocery store www.tesco.com is recognized as the world’s biggest online grocer in the world. It has its own-label products which accounts approximately 50% of its sale. III. Industry Analysis: PESTEL For any business enterprise to become more responsive to the changing demands of the market, it is imperative that it should be able to define its internal competence and resources and external environment as well so that it can devise a strategy where it can profit and regain its market position. The tools that will be used to define both the internal and external environment of Tesco are PESTEL, Porter’s Five Forces and SWOT Analysis. PESTEL Analysis a. Political factor – the advent of globalization has made competition tougher in the grocery sector. The liberalization of trade allowed other competitors to enter into market to compete with Tesco which contributed to its sales decline. In report by Lyall, “foreign discounter such as Aldi and Lidl combined with an increased domestic rivalries appears to have blunted the edge Tesco had” b. Economic factor – perhaps this is the most significant factor in Tesco’s external environment that contributed much of its underperforming sale in the first half of 2011. In Mintel’s May 2009 survey, it reported that 43 percent of consumers say “trying to add to my rainy day savings/emergency fund” is a priority for this year, up 15 percent from last year (ProgressiveGrocer). This was corroborated by a recent survey conducted by Mintel, where it also reported that consumers today are more price conscious than previous years making it more difficult for Tesco to conduct business (Mintel 2011a). These development in the grocery made consumers to become more receptive more with foreign discounters such as Aldi and Lidl because they are now more price conscious than before. The consumers price sensitivity has affected Tesco because approximately half of its product lines are considered premium brands which are considered pricey compared to foreign discounters. c. Social factors Due to the recent economic crisis, consumers are now scaling down on their luxury expenditures and became more conscious on cost. This shift in consumer behavior affects Tesco because some of its consumers are switching to foreign discounters to save on their grocery purchases. d. Technological factors Technology is an important organizational competence that can enhance a company’s competetiveness. It enhances a company’s competitiveness by being more responsive to customers’ needs and being more efficient. In the case of Tesco, its technological investment in 2009, particularly its in-house designed supply chain application enabled it to increase the availability of its stock and reduced warehouse stocking resulting in the more efficient operation of its warehouse. e. Environmental factors The increasing regulation about the environment brought pressure on the operation of Tesco to be mindful on the ecology. f. Legislative factors If there is any recent legislative factor that has an utmost relevance to Tesco today, that would be the passing of the Tesco Law on October 06, 2011 which has been named after the chain store. The new law states that “supermarkets, banks and other high street stores are now able to offer legal services to their customers” (Wilson 2011). In response, Tesco launched an online legal store offering basic legal services in a cheap and straightforward access to justice to millions of people (Market Watch 2011). This new legislative development provides more opportunity for Tesco to explore other area in the market aside from its core business and can supplement its declining sale to regain its leading market position. IV. Porter’s Five Force Analysis a. Threat of rivalry The threat of rivalry undermined Tesco’s leading position in the market. In a report made by Lyall, she explained that the reason why Tesco fell behind Sainsbury in first of 2011 is due to the “tougher competition from foreign discounters such as Aldi and Lidl, combined with an increase in domestic rivalries” which blunted the edge Tesco once had. b. Threat of substitute products The threat of substitute products to Tesco is low because any attempt to substitute the existing product line can drive the prices down that could hurt all the players in the industry that includes Tesco and its competitors. c. Threat of new competitors The supermarket industry in the UK is oligolo d. Bargaining power of suppliers Threat from suppliers is minimal. In the grocery industry, it is the norm that large supermarkets dictate the price that will be paid to suppliers. The supplier has very little leverage to bargain because if supplier does not agree with the supermarket, supplier will have no retailer to sell its products. e. Bargaining power of buyers The bargaining power of buyers pose a threat to Tesco especially in today’s economic downturn where they are very sensitive to price. In a study conducted by Mintel, it reported that buyers are more conscious about price than they were years ago. It also reported that a mere £10 increase in their weekly shop is already enough for them to switch retailers (2011). Such, Tesco has to maintain its product line to be priced competitively. f. SWOT Analysis Strength Among the food and grocery retailers, Tesco is the third largest grocery retailer in the world. It has 4,331 stores across Europe, United States and Asia. Tesco’s size being one of the leading grocery retailer in the world provides it with the advantage of economy of scale and easy entry into untapped markets (Data Monitor 2010). Tesco’s investment in information technology over the years it to optimize its performance at a peak efficiency. This investment played a significant role in driving the company sales and improved supply chain. Its improvements in “stock management supply chain application in 2009 implemented an efficient ordering systems and introduction of in-store monitoring processes, helped the increased availability of products in stores and reduced warehouse stock . This technological improvement enabled Tesco to become more responsive to customer’s needs while effectively optimizing inventory costs (Data Monitor 2010:5-6). Weakness The product recall in June 2009 in Ireland indicates a lapse in Tesco’s quality control that could cause not only financial drawbacks but could also hurt the image of its brand. The recalled product was the 567 gram cans of Value Beans and Sausage that was found to contain plastics. A product recall was also made with its fresh & easy brand chili lemon flavored pistachio nuts due to the suspicion that they may have been contaminated with salmonella virus (Data Monitor 2010). Opportunities Tesco’s continued expansion of its chain of stores will put the company in a better position once the economic condition improved. It has opened 622 new stores in FY2009 that enhanced its customer reach (Data Monitor 2010). This expansion includes opening chain stores in the international market that includes India which is considered as one of the largest market in the world. Tesco’s online shopping capability enables it to reach 13% of adults who has never shopped online. This untapped market can make a sizeable pool of opportunity in the short term (Mintel 2011b). Tesco can capitalize in this untapped market because it has the largest online grocery store. Its online grocery store can also supplement its lackluster sale performance and regain its leading market position. V. Tesco’s approach to remain competitive in a globalized environment The competition in the retail industry is tough. Especially in the grocery sector where Tesco is competing because margins continue to shrink with more and more players entering the industry that intensified the already competitive environment. In order to survive and thrive, retailers have to add value to their customers otherwise perish in the competition. To add value, discounting which is the usual marketing implement of retailers is not that potent work anymore. This marketing implement has its limits also because if frequently used, retailers will enter in a destructive cycle of cutting each other’s throat through a price war that diminishes margins wrought by excessive discounting. In addition, excessive discounting might negatively affect the image of the retailer as “cheap” and thus, undermining its position to sell at a premium. In the case of Tesco, they employed several unique approaches in adding value to their customers. First is differentiation, or creating new selling proposition that would be differentiate the retailer from its competitors and be successful in the market. Second is the strengthening of the infrastructure of its customer service delivery to enable the retailer to better satisfy its customer as a value adding proposition. With differentiation, Tesco concentrated on the “white space market” when it entered the United States retailing industry. Many experts predicted that Tesco cannot replicate its success in the US retail market because the industry is already saturated. But instead of competing head on with the established retailers such as Walmart, Tesco differentiated itself by offering the added values of good food, good value, convenience and environmental sensitivity to the American consumer (Lowe and Wright 2010). Also, Tesco invested in intangible value adding facilities that would enable it to better serve its customers with enhanced customer service as a value proposition. It invested heavily in technology in 2009 to make it more responsive to customer’s needs and become more efficient. It upgraded its in-house designed supply chain application to be the best in the industry that enabled Tesco to increase the availability of its stock and reduced warehouse stocking resulting in the more efficient operation of its warehouse and ultimately, in a more competitive price coupled with better service. Tesco also added value in terms of service by opening the company’s online retail store www.tesco.com which is recognized as the world’s biggest online grocer in the world. It has its own-label products which accounts approximately 50% of its sale. It is no wonder why Tesco is considered as UK’s second largest retailer and the third largest retailer in the world because it constantly think and rethink of ways to add value to its customer to make the company competitive. VI. Conclusion The sliding of Tesco behind one notch that made it second to Sainsburry in the market is caused more by external factors such as the economic slowdown that consumers are holding back their buys especially in premium items. This has affected Tesco because approximately half of its product line are considered to be premium brands and a little pricey. In the long run however, Tesco’s internal capabilities will enable it to regain its market position. It has the distinct advantage of having the most number of stores in UK not to mention having one of the most sophisticated technological infrastructure to become responsive to customers when the economy gets better. This prospect is validated by BBC, the same news organization that reported Tesco’s underperformance compared to Sainsbury. It redeemed Tesco by stating that “Sainsburys may have pipped Tesco at the post in terms of growing UK sales, but for overall prospects Tesco remains the darling of the sector"  (BBC Business 2011). Bibliography DATAMONITOR: Tesco Corporation (2010). Tesco Corporation SWOT Analysis, 1-9. Dobson, Paul W.; Chakraborty, Ratula (2008). Buyer power in the U.K. groceries market. Antitrust Bulletin, 53(2), 333-368. Lowe, Michelle; Wright, Neil (2010). Case Study, Tesco: from domestic operator to multinational giant. MarketWatch (2004). Tesco: no frills legal services. MarketWatch: Global Round-up 3(8), 98-99. Mintel (2011a). Online Grocery Retailing - UK - September 2011 online. Available from: http://oxygen.mintel.com/sinatra/oxygen/display/id=545492 Mintel (2011b). Pricing and Promotions in Food - UK - May 2011 online. Available from http://oxygen.mintel.com/sinatra/oxygen/search_results/show&/display/id=545239 Mules, Rachel (2011). Supermarket Wars. BusiDate (4), 2-4. ProgressiveGrocer (29 December 2010). Mintel Predicts 2011 Consumer Trends online. Available from http://www.progressivegrocer.com/top-stories/headlines/supplier/id31828/mintel-predicts-2011-consumer-trends/ Wilson, Charles (2011). Battle of the Aisles. Credit Management, 20-21 Read More