TESCO Strategic Analysis - Assignment Example

TESCO Strategic Analysis of the of the School- of the department- of the ID number- of the Name of the tutor- Executive Summary This essay highlights details of the strategic analysis of food retail giant, Tesco. The strategic analysis done in this report can help the company to study the micro and macro environment of the industry in details by using models such as, Porters five forces and PESTEL analysis. The models used for the purpose of environmental analysis can allow Tesco to judge conditions of the rivals in the food retail industry, where it functions. Besides that, financial facts are also presented that can enable the company to review and examine current profitability position and apply changes as per need arises. Several other methods of business, corporate and value chain analysis are discussed in this essay. These can help Tesco to realize its current position in the industry, retain customers, make changes in business strategies and allocate funds accordingly. In addition to that, this essay will also highlight all relevant aspects effectively for a proper understanding of the business position of Tesco. Table of Contents Introduction 4 Q1. Analysis of the external environment 4 1. Micro Environment Analysis – Porters five forces model 4 2. Macro Environment Analysis – PESTEL 6 Q2. Analysis of the internal environment 8 1. Resource Based View of the Company 8 2. Value Chain 10 Q3. – Analysis of stakeholder crisis 12 Details on crisis 12 Q4. – Strategic Analysis 13 1.Business Level Strategy 13 2.Corporate Strategy 13 3. Strategies Suggested for future 15 4.Implementation Techniques and Suggestions 16 Conclusion 16 Reference List 17 Introduction The strategic analysis allows an organisation to recognize and devise ways to fulfil the goals and objectives faster with the available resources. The strategic analysis of Tesco will help to breakdown problems that are faced by it into small and more understandable chunks. It is necessary for the company to focus on analysis of external environment factors affecting it as this can have a great influence on business operations. For the purpose of reacquiring competency against the top grocery brands like, Sainsbury’s, Asda and Waitrose, Tesco needs to conduct strategic analysis at regular intervals (Piercy, 2012). The strategic analysis of Tesco can help it to be more flexible, dynamic and profitable in the long run. Q1. Analysis of the external environment 1. Micro Environment Analysis – Porters five forces model For the purpose of micro-environmental analysis of the industry surrounding Tesco, Porter’s five forces model can be utilised. Fig 1: Porter’s Five Forces model (Source: Barroy and Mosley, 2011) Barriers to the entry- The grocery market of U.K. is primarily dominated by very few competitors. The four major brands that dominate this industry are Tesco, Sainsbury’s, Asda and Safeway. The combined market share of these brands is 70%. The rest of the small brands like, Waitrose, Somerfield and Budgens, holds a very small fraction of nearly 10% of the market share. The last 30 years witnessed transformation of the grocery market into a dominating business of super-market (Barroy and Mosley, 2011). The large chains have increased their power in the form of one-stop shopping centre, improved operating efficiency and major expenditures made in respect of marketing mix. The large grocery stores are gaining such high power that it is difficult for new entrants to enter this market. The new companies also find it difficult to raise sufficient amount of capital as huge amount of fixed costs and exceedingly improved supply chains are needed to commence business. Therefore, there is lack of competition in this industry. Bargaining power of suppliers- The suppliers are not able to influence top grocery chains. This is due to the fact that suppliers based in U.K. are threatened by the ability of large retailers to import their products at much cheaper rates from abroad. Thus, suppliers cannot exercise their bargaining power unnecessarily in this industry. Bargaining power of buyers- As the products are undifferentiated in these supermarkets, consumers have multiple options of switching between various markets. So, supermarkets are all geared up to gain more customers by providing better choices, customised services and low prices for their products. The gradual rise in competition between the top supermarkets has endowed consumers with higher bargaining powers. Threat of Substitutes- Substitution can lead to decline in demand for a product, where consumers prefer to switch to alternatives. With new trends, there are multiple convenience stores that are found to emerge in this grocery based industry. Therefore, customers have alternatives for the purpose of purchasing products from these stores. This trend have forced several large brands in this market like, Asda and Sainsbury’s, to acquire small scale operations and launch Express and Metro stores in cities and towns. Bargaining power of competitors- There is excessive competition among the large players in the grocery market. The demands of consumers are increasing in this market, thereby forcing top grocery stores in U.K. to constantly accelerate the pace of development and bring in innovation to maintain market share and be in a better position than the competitors. 2. Macro Environment Analysis – PESTEL The macro environment factors can be analysed with the help of PESTEL analysis. Fig 2: Political Factors: (Source: Piercy, 2012) Political – The supermarkets in U.K. are influenced by various political factors. This includes tax rate, political stability and legislation. On the other hand, there is encouragement provided from the government to these grocery based retail stores as they generate huge employment opportunities for local people. Technological – Companies like Sainsbury’s tried to improve and modernize services provided to customers through the “Customer First” plan (Sainsbury, 2014). Sainsbury’s decided upon refurbishing 97 stores by introducing advanced technology. They provide discount cards, easy online shopping facilities and personalised services by selling products through their websites. The top groceries are all geared up to apply new technologies and increase their sales. Therefore, the stores like, Asda and Sainsbury’s, are persistently staying ahead in competition by capitalizing on advanced technological trends in an effective manner. Economic – There are number of factors that affect the grocery markets of U.K. The rise in cost of products globally is forcing players in this industry to increase cost of their products. Another factor that is affecting this industry is the credit crunch. With rise in prices of goods, consumers are losing their purchasing powers; they are spending carefully and reducing their investments on unnecessary goods. This is creating loss for the grocery stores in U.K.; this renders them incapable of expanding their business. Other factors like, unemployment, are affecting the economic condition prevailing in this industry. The players in this market have to pay minimum wages that is prevalent nationally to the labour. Thus, in order to stay within their budget, these retailers are hiring fewer employees. Environmental – The big players in the grocery market of U.K. have given emphasis on reduction of carbon footprint. Many of them are gradually trying to curb carbon footprint and contribute more towards the green issue. Companies like, Sainsbury’s and Waitrose, are not far behind in the race of introducing organic products for health conscious consumers. The retailers present in this industry are constantly trying to launch products that are ethically acceptable and at fair prices for the customers. Social – Sainsbury’s, Waitrose and Asda are always trying to introduce healthy food items so as to keep up with demand of consumers. Big players like, Sainsbury’s, regularly train their staffs to maintain friendly relations with the consumers. To sustain the competition, these players are trying hard to be socially acceptable. Legal – There are various rules and legislations of the government which directly impacts the food retail industry. The Food Retailing Commission (FRC) has suggested the set-up of certain enforceable Code of Practice to ban illegal practices followed by the retailers in this industry. The Code of practice will help to curb the unnecessary demands of payments from the suppliers without any prior notice, lower down the intense price wars and monopoly power of retailers. The policies regarding the requirement of license to enter this industry by the government will be reducing the threat of new entrants. The competitors in the grocery industry need to always keep a track of the legal changes. The grocery markets in U.K. are in the maturity stage of product life cycle phase, where established companies need to make right investments in innovation of products and modifications of the production process to gain competitive advantage. Q2. Analysis of the internal environment 1. Resource Based View of the Company Tesco is a multinational retailer of grocery and merchandise with British origin and is headquartered in U.K. The company draws sufficient profits to place itself as the second largest retailer in the world. The resources of Tesco are increasing with the passage of time. The number of stores of Tesco in U.K. has increased significantly to 3,146 from the previous year. The company has 530,000 employees globally and 310,000 staff in the markets of U.K. Tesco has made £72. 4 billion in group sales and £3.5 billion profit in trading before tax (Humby, Huntand and Phillips, 2008). The store types of Tesco are Metro, Express, Extra, Superstore, and the online website of Tesco.com. It offers Non-food retail, Food retail and Home Living Range and Petrol Stations stores. At the same time, Tesco provides personal finance in the form of saving accounts, bonds, insurance, online mortgage, secure investment and finder. The company sells at least 40000 food products in the superstores along with clothing and other non-food line of items. Tesco, on the basis of revenue, ranks third in the global retailing business (Humby, Hunt and Phillips, 2008). From the details of financial analysis of Tesco (Appendix 1), it can be inferred that turnover of the company has fallen from 2012. In 2013, turnover of the company was quite low. Besides that, earning per share of the company has also declined from 35.7 p in 2012 to 33.95 in 2013. This reflects weak profitability position of the company as compared to the last two years. The operating profit of the company had improved in 2012 from 2011, only to decline sharply in 2013. The year 2013 witnessed a sharp fall in net profit of Tesco. Hence, Tesco needs to handle the finances more strategically so as to be at par with other top players in this business. The core competency factors of Tesco are ways in which it handles the finances. The items sold by Tesco are low priced and own brand product of the company. The company attains economies of scale by hiring employees as per need and avoids wastage of money in unnecessary areas. In 2013, market share of Tesco was 30.2% as compared to Asda and Sainsbury’s, whose market share was 17.9% and 16.6%, respectively (Tesco, 2014). The resource base view of Tesco is quite robust and profitable as can be inferred from the above facts. 2. Value Chain Fig 3: Value chain of Tesco (Source: Tesco, 2014) The value chain of the company can be described by explaining the above figure. Inbound logistics- Tesco’s strategic cost leadership management can be witnessed through the agile and lean logistic functions. The company extensively uses economies in scope and the top market position as key bargaining instruments for enjoying very low costs from the suppliers. Tesco also makes it a point to upgrade the system of ordering, vendor list approval and processes within the stores so as to induce efficiency and effectiveness in operations of inbound logistics (Roy, Hilbert and Ghobadian, 2012). Operations management- Tesco competently makes use of Information Technology System (IT), which helps to sustain the low cost based leadership strategy. The company has invested £76 million for the purpose of streamlining operations through third generation Enterprise Resources Planning (ERP) solution, known as the Tesco Digital program. After introduction of this system, profitability of Tesco increased to £550 million, during 2009. In addition, this has also helped in minimising stock of the company (Zokaei, et al., 2013). Outbound logistics- Owing to effective and efficient outbound logistics, Tesco successfully holds the position of leadership in online as well as offline segments of food retail. The various store formats like, Metro, Express, Superstores, Homeplus and Extra, are placed strategically so as to gain utmost exposure in front of customers. These formats are also segmented as per the target population (Payne and Frow, 2013). Marketing and sales- The loyalty based programs like, Clubcard, aids Tesco to dissuade customers from being attracted towards the competitors. The company has even introduced schemes like, Green Living, to provide consumers with relevant advices on issues related to environment, such as, reduction of carbon footprint and food wastage while preparing meals. Services Tesco follows the strategy of differentiation and cost leadership. This can be witnessed from development made in the form of financial services, direct promotion and marketing as well as in several areas of self-service techniques. The company is able to create value chain and maintain the leadership position, despite huge competition prevailing in this industry. Tesco is rightfully the biggest grocery based retailer in the U.K., followed by Asda and Sainsbury’s. The market share of Tesco is 30.6%, Asda- 16.6%, Sainsbury’s- 16.3%, Morrisons -11.1% and others - 25.4% (Appendix-2). In U.K., Tesco is considered as the leader in food retailing business. The annual sales of the company have exceeded $5 billion (Tesco, 2014). Tesco.com is considered as the largest online based grocer in the world with a customer base of almost 1 million and ability to support 250000 orders a week. The company, thus, helped to create immense amount of employment opportunities in U.K and other functional areas. Tesco has around 3146 stores, 2000 vans and 10000 pickers in U.K. In the year 2006, sales of Tesco.com grew by 29.2%. Currently, Tesco continue to dominate the grocery market of U.K by providing quality services to customers (Tesco, 2014). The company has also launched a non-food product line for online users. Tesco opened stores like, Metro and Express, which have contributed in increasing profitability of the company. There were also other technological inventions and changes adapted by the company. These have gradually enhanced the value chain from the time of advent of the company. Q3. – Analysis of stakeholder crisis Details on crisis Stakeholders can be defined as those groups or people who take interest in the process of decision making of the management of any company. They take part in the decision making process and provide their valuable inputs for problems faced by organisations; these inputs can be in the form of ideas or resources. Tesco is fully committed towards all external stakeholders and ensures that they have adequate knowledge about all important business actions. The company maintains healthy relation with all stakeholders and engage them in necessary decisions taken for achievement of the organisational goals and objectives (Corbae, Jensen and Schneider, 2003). This enables the company to identify opportunities and risk as well as assures that the long term strategy adopted is sustainable enough. Nonetheless, this can also be detrimental to the company as too much involvement of stakeholders can make the management difficult to function. Tesco involves stakeholders in taking important decisions in business, but not to an appropriate extent. It is vital for every company to take inputs from the stakeholders like, suppliers, employees, consumers and others. The company had faced strong corporate governance issues in 2008 as the shareholders and stakeholders of the company had felt that Tesco was not disclosing ways in which it met challenges faced in the field of corporate governance. They wanted Tesco to disclose all details in their report regarding strategic, financial and other areas thoroughly. Transparency in the reports of Tesco and better organisational ethics were needed during the period of 2008 (Williamson, et al., 2013). The suppliers of Tesco are not given their due importance because of the fact that Tesco can import their products at cheapest prices from global markets. So, to an extent, suppliers are unsatisfied stakeholders of the company. The company gives least importance to the stakeholders related to it. The major business decisions are taken by the top management, which led to a barrier between the company and the stakeholders. Tesco failed to gather innovative and fresh ideas from stakeholders; this again acted as a disadvantage for growth of the company. Therefore, Tesco was considerably unable to perform in the best manner in terms transparency and corporate social responsibility towards stakeholders of the company. Q4. – Strategic Analysis 1. Business Level Strategy The business level strategy that the company should apply is cost leadership. Every organisation competes with others to draw a large number of customers on the basis of price. Organisations should, therefore, lower the price of products, yet upkeep the above average revenue margin. Tesco can maintain a competitive position by implementing various business level strategies (Haerifar, 2011). The business level strategies can be in the form of cost leaderships and of providing efficient services to customers. The company should reduce cost of the products while maintaining the revenue margin. The reduced prices of products can draw in a large number of customers as well as provide competitive edge to Tesco. As products produced by the top retailers are undifferentiated, it is important for the company to use cost leadership policy to retain and expand customer base. This strategy can be helpful to Tesco as there are a number of competitors in the grocery market, who produce generic and standardised products. Besides that, Tesco should also offer efficient facilities to customers so that competitors find it tough to imitate them, control over overhead and production costs is maintained and research and development costs are highly minimised. The company should reconfigure value chain of the company in order to exercise control over the costs. Hence, by following these generic strategies, Tesco can gain customer preferences. 2. Corporate Strategy For multiproduct firms, strategic analysis begins at corporate level. The large companies generally involve in production of different lines of products and sell them in various countries. This portfolio consisting of various kinds of business are called strategic business units (SBU). The smallest business units of the company are those, which are identifiable and can generate further profit for the company. So, Tesco should continue with different lines of business, so that it can promptly transfer the cash generated from business units with low growth and high profit to that with potential of high profit and growth (Palepu, et al., 2007a). Fig 4: Ansoff matrix (Source: Cravens and Piercy, 2009) The Ansoff’s growth matrix can be used to identify the corporate level strategies for Tesco. As per this matrix, through usage of corporate strategy, the company should be able to continue the process of market penetration. For this purpose, it should carry on with the process of producing new or existing product in the existing market. This can help the company to gain more profit in the long run. The lower prices and Clubcard allow the company to attract more customers and increase sales in the existing market (Palepu, et al., 2007). Again as per the growth matrix, development of new products and market development are necessary for growth of the company. Tesco should continue to open new chains of SBUs to better profitability position of the company for the purpose of market development. The company should discontinue those business units, which do not create profit and instead, spend on those business units that can deliver healthy margins of profit. Another important point mentioned in the Ansoff’s matrix is diversification. It is the strategy applied by companies to expand into new markets and produce new products. This strategy helps the business to expand and can be of two types; such as, related and unrelated diversification. Related diversification is helpful for the company to enter into a related industry, which can be linked to the value chain of the organisation. In addition, this can be subdivided into vertical and horizontal diversification (Hensmans, et al., 2013). The vertical and horizontal integration process is equally useful for the business operations of Tesco. Vertical integration takes place when a large portion of the supply chain of the company comes under one corporation and common ownership. Tesco enjoys benefits of vertical integration and has control over their suppliers. Owing to the Clubcard scheme, the company can identify products that have high sale and those with low sale. After the analysis, demands for lower prices and discounts can be made to the suppliers. The bargaining power of the company gets elevated due to vertical integration shared with the suppliers. The horizontal integration is another strategy that is often used by Tesco. The strategy of horizontal integration takes place when a company acquires units of production, which are competitive or complementary of another company. The horizontal integration by merger can allow Tesco to prevent entry of new players in the market. Through horizontal integration, the company can attain economies of scale and scope along with a strong existence in the retail market (Henry, 2011). Tesco can take advantage of economies of scale by sales of similar products in different geographical areas. It can also attain the position of synergy by dividing resources that is common to dissimilar products. Tesco can gain from the market power by setting up factories overseas and subsequently reducing the cost attached with global trade. Tesco can attain economies of scale by producing more goods. Increase in production levels can enable the company to further avail the cost advantage when production takes place in bulk. Increase in bulk production will reduce per unit cost of the products and increase profitability of the company. The economies of scale can aid Tesco to further attain monopoly of cost, eliminate rivalries in the market and improve profit. Hence, Ansoff’s growth matrix is highly relevant and can be used to gain understanding of the corporate strategy of Tesco (Ulwick, 2007). 3. Strategies Suggested for future For sustaining in the long run, Tesco should undertake calculative steps in all aspects of business. The company should continue opening more SBUs based on their profit making ability and discontinue lines of business that bear loss. Technology factors are also quite vital for Tesco. It should upgrade technology in order to be more competitive, in terms of customer satisfaction. The employment activity should not add to the operational cost of the company. Tesco should hire staffs as per necessity for this purpose. The product improvement in the form of packaging, labelling and presentation is another suggestion for future growth that Tesco should follow so as to attract more customers and enhance sales. Tesco should maintain existing strategies as well as implement new strategies to upkeep a leading position in this business. It should carry out regular forecasting and analysis of business to gain higher control over the future (Ulwick, 2007). 4. Implementation Techniques and Suggestions The Staircase model can be used by Tesco to judge problems related to business sustainability, feasibility and acceptability. Through usage of this model, Tesco will be able to resolve various problems by identifying their unstructured nature, framing, resolving and readdressing them afterwards. The managers of Tesco should use their power of reasoning, intuition and memory so as to resolve all problems to be faced in the future. Tesco can take help of this model to settle the unstructured problem of continuous decline in sales in the U.K. market. The management team and analysts of Tesco should make extensive use of this model for recognizing and solving the problem of declining sales in markets of U.K (Leahy, 2012). Conclusion The strategic analysis of Tesco is necessary for future growth and allocation of funds of the company. The analysis of the micro and macro environment around Tesco will help the company to resolve various problems and shortcomings effectively and increase competitiveness for functioning in the food retail market in U.K. and globally. There are various new strategies that Tesco can introduce, besides the existing ones in order to boost its leadership capability. To increase competitiveness and overcome downfalls in market performance witnessed in 2013, the company should take several steps like, lowering cost of the products, improving technology and producing differentiated products, so as to retain and attract more customers in the long run. It should give importance to needs of the stakeholders by preparing the reports in a more transparent manner and by providing utmost value to their demands. Thus, Tesco is capable of retaining leadership position against the top competitors in retail business, like, Sainsbury’s, Waitrose and Asda, if the business strategies are maintained and analysed at regular intervals. The strategic analysis done in this essay can enable Tesco to evaluate the surrounding environment and apply changes accordingly. Reference List Barroy, S. and Mosley, R., 2011. The employer brand: Bringing the best of brand management to people at work. New Jersey: John Wiley & Sons. Corbae, G., Jensen, J.B. and Schneider, D., 2003. Marketing 2.0: strategies for closer customer relationships. New York: Springer. Cravens, D.W. and Piercy, N.F., 2009. Strategic marketing. New Delhi: Tata McGraw-Hill Education. Haerifar, P., 2011. Performance management in Tesco. Ravensburg: GRIN Verlag. Henry, A., 2011. Understanding strategic management. Oxford: Oxford University Press. Hensmans, H., Johnson, G. and Yip, G., 2013. Strategic transformation: Changing while winning. Basingstoke: Palgrave Macmillan. Humby, C., Hunt, T. and Phillips, T., 2008. Scoring points: How Tesco continues to win customer loyalty. London: Kogan Page Publishers. Leahy, T., 2012. Management in 10 words. New York: Random House Palepu, K.G., Healy, P.M., Bernard, V.L. and Peek, E., 2007. Business analysis and valuation: Ifrs edition. Connecticut: Cengage Learning EMEA. Palepu, K.G., Peek, E., Healy, P.M. and Bernard, V.L., 2007a. Business analysis and valuation: Text and cases. Conneticut: Cengage Learning EMEA. Payne, A. and Frow, P., 2013. Strategic customer management: Integrating relationship marketing and CRM. Cambridge: Cambridge University Press. Piercy, N.F., 2012. Market-Led strategic change. London: Routledge. Roy, P.F., Hilbert, J. and Ghobadian, A., 2012. Strategic management: The challenge of creating value. London: Routledge. Sainsbury, 2014. About Sainsbury. [online] Available at: < http://www.j-sainsbury.co.uk//> [Accessed 22 March, 2014]. Tesco, 2012. Annual Report 2012. [pdf] Tesco Plc. Available at: [Accessed 22 March, 2014]. Tesco, 2013. Annual Report 2013. [pdf] Tesco Plc. Available at: [Accessed 22 March, 2014]. Tesco, 2014. About Tesco. [online] Available at: [Accessed 22 March, 2014]. Ulwick, A. W., 2007. Business strategy formulation: Theory, process and the intellectual revolution. Zurich: IAP. Williamson, D., Williamson, D., Jenkins, W., Cooke, P. and Moreton, K.M., 2013. Strategic management and business analysis. London: Routledge. Zokaei, K., Lovins, H., Wood, A. and Hines, P., 2013. Creating a lean and green business system: Techniques for improving profits and sustainability. Florida: CRC Press. Appendices Appendix-1 (Source: Tesco, 2013) Appendix-2 (Source: Tesco, 2012) Read More