Resources and Capabilities Issues of TESCO - Case Study Example

Strategic Management Analysis Exam Contents Contents 2 Introduction 3 Strategic Purpose of TESCO Plc 3 Industry Analysis for TESCO Plc 4 Porter’s Five Force Model 4 Resources and Capabilities issues of TESCO 7 VRIO Framework 7 Identifying Critical Success Factors 7 Porter’s Value Chain Model 9 Business Strategies of TESCO Plc 11 The Strategy clock 11 BCG Matrix for TESCO Plc 12 Strategic Fit or Drift 13 Conclusion 13 Reference List 14 15 Introduction TESCO Plc is a UK based multinational retailer of grocery and general merchandise. TESCO is the third largest retailer in the world in terms of profit whereas by revenue, it is second largest. This cosmopolitan superstore has its global presence in more than 12 countries across Asia, America and Europe since 1919. With headquarter in Cheshunt, the UK operations of TESCO is sub divided into six different systems according to the size and variety of products sold. These are, TESCO Extra, TESCO Superstores, TESCO Metros, TESCO Express and TESCO Home. Apart from these retail chains of supermarkets, the company also operates in the areas of restaurants, financial services, petrol stations, telecoms, photo processing, film making etc (Samy, Odemilin and Bampton, 2010). However, the main area of concern for TESCO Plc is general merchandising in which the company accounts for more than 30% of the UK market share (Pitt and Koufopoulos, 2012). In this paper, the strategic purpose of TESCO Plc will be analysed in the light of evaluating the present condition of UK retailing industry. Resources and capability issues will also be discussed in order to understand business and corporate strategies taken by TESCO Plc (Myers, 2004). Strategic Purpose of TESCO Plc Strategic purpose of TESCO Plc is highly reflected in the mission and vision statements adopted by the company. The company has identified the need of all essentials in day to day life of a family and has brought all such requirements under one roof. The mission of TESCO is to create value in the customers’ life in order to ensure lifetime loyalty. In 2014, the company has taken a strategic purpose of shifting its icon from a product sales company to a full scale mechanization products company. The vision statement of TESCO consists of five elements such as the company’s aspiration to expansion of business around the world, to grow its business and capture opportunities from all sources, to exercise existing skills in global market village and most importantly, to earn trustworthiness and loyalty from all its stakeholders. Such mission and vision direct the company to aid value in the to their business process as well as in the lives of customers. The values acknowledged by TESCO Plc such as to understand customers and treat them how they desire to be treated and integrating all the employees to drive them towards providing excellent services to the customers highly reflect the company’s mission and vision. (TESCO, 2014). Industry Analysis for TESCO Plc In order to analyse the nature of retailing industry for TESCO, Porter’s Five Force Model should be incorporated. Porter’s Five Force Model Threats from New Entrants The UK retail market is dominated by few strong competitive firms which constitutes for more than 70% of the market share. TESCO is one of such major players. Rest 20% is captured by small superstores such as Somerfield, Waitrose and Budgens (Mañez, 2006). However, with the transformation of local groceries into well structured supermarkets over the past 30 years, the survival of local groceries, butchers and bakeries have radically come down to 10%. Huge investment capability, potential of raising capital, established supply chain, infrastructure and technology used by TESCO Plc and other established retail markets, have created barrier for the new entrants to enter the industry. Economies of scale and degree of differentiation exercised by TESCO and its contemporaries have also created strong barriers for new firms to enter the industry (Moore, Bruce and Birtwistle, 2007). Threats from Substitutes General substitution is possible if the customer is always tend to switch to a better or newly innovated alternatives. For grocery market, substitutes are mostly characterised by launching of new products as per the trends. Hence, the industry suffers from high threats from substitutes. In order to control such threats from substitutes, TESCO’s strategy is to take over small scale units and open up Metro and Express in local areas and city centre. Figure 1: Porter’s Five Force Model for TESCO Plc Bargaining Power of Buyers The buying pattern of food-retailing industry is concentrated on a definite group of purchaser, the size of which is relatively small. The sophisticated customers in the matured UK market constantly seek for quality products at a competitive cost. Hence, such increasing and complex consumer behavior along with existence of dominant market leaders resulted in high bargaining power of the buyers which pushes TESCO Plc for continuous innovation and value addition through refocusing on its price and product (Moore, Bruce and Birtwistle, 2007). Bargaining Power of Suppliers Suppliers’ bargaining power is relatively low for food-retailing industry. As there exists a limited number of market dominants in food-retailing industry, the suppliers keep their price at a competitive level due to the fear of losing potential and big customers. Apart from that, the company also gets newly launched foreign products at a very small price in the time of promotional activities. This further enhances the company’s bargaining power (Moore, Bruce and Birtwistle, 2007). Competitive Rivalry Though small in number, TESCO faces strong competitive rivalry from Wal-Mart, Carrefour, Home Depot as well as from Asda, Sainsbury’s, Morrison and Safeway. However, TESCO’s continuous effort to improve customer relations has helped the company to gain customer loyalty in the highly competitive market (Ritz, 2005). Figure 2: UK Market Share of TESCO Plc and its major Rivals (Pitt and Koufopoulos, 2012) . Resources and Capabilities issues of TESCO Identifying resource and capabilities are very important for a firm to maintain its sustainability in the industry. Resources are all the assets available to the organization and capability shows the organization’s capacity to exploit such resources in their business operations. In order to understand the capability issues associated with TESCO, VRIO Framework should be analysed. VRIO Framework VRIO Framework analyses an organization’s capability of identifying the resources which are critical for the success factor of the organizations and its capacity to utilise such factors. Identifying Critical Success Factors Critical Success Factor refers to the critical elements which are necessary for a company for achieving its mission (Finch, 2004). Critical Success Factors for TESCO can be attributed as, Branding and Reputation, Information Technology Integration and Supplier Management. The Question of Value Considering the Value factor, TESCO has been successful in creating value in the mind of customers as well as in their process of operation. Customers derive the value from the strong brand image of TESCO. TESCO’s step by step investment in building brand image and associating the customers with quality and trustworthiness about the organization’s products. Product and services are substantially re engineered and product life cycle is better managed for making the shopping experience more happening which further enhances the values taken by TESCO Plc (Anon, 2004). The Question of Rarity and Imitability In case of Rarity and Imitability, the main strength of TESCO is the Information Technology of the company. Be it intranet or extranet, IT integration is a necessary operation for TESCO from both the perspective. Intranet is mainly required for the purpose of controlling stocks, managing inventory, controlling supply chain and administering billing and other finance related issues for their global operations. Extranet augments tailored flow of information between the company and its stakeholders. Such integration through virtual firewalls makes the company’s operations scalable and transparent. Application of IT such as intelligence scale, electronic shelf labelling, self check out machines, radio frequency identifications have highly contributed towards Tesco’s efficiency for handling product volumes, controlling costs and concentrating more into innovations which are really rare in any other competitive firm and costly for other organizations to imitate it (Anon, 2004). Figure 3: VRIO Model for TESCO Plc The Question of Organization Considering the organization’s capability to manage all these resources, it is understandable that as a result of excellent communication with external and internal environment, strong supply chain management, technology used and capacity to add value in the customers’ mind indicates TESCO’s ability to exploit the available resources to the full extent (Palmer, 2008). Porter’s Value Chain Model The success story of TESCO is highly based on the resource and capabilities available to the company. Resource and Capability analysis of TESCO can be best described through Porter’s Value Chain Model. Primary Activities of TESCO according to Porter’s Value Chain Model are, Inbound Logistics Due to the long established relationship between Tesco and its suppliers, the company enjoys economies of scope through arranging right product at the right outlet in right price, quantity and quality in accurate time with latest technology used in ordering system and strong bargaining position with approved vendor list (Dekker, 2005). Operations TESCO’s service oriented activities are a part of their strategic low cost leadership. In 2009, the company invested more than £76 million to establish TESCO Digital Programme, a third party ERP solution for streamlining its operations which had resulted in £550 million increase in profitability in 2010 (Kaplinsky, 2004). Outbound Logistics Efficient management of outbound logistics helps the company to maintain its leadership position in industry. Outlets and store formats are planned to attract maximum number of customers. In order to obtain customer satisfaction and long term loyalty, emphasis is given mainly on queuing management and parking facilities so that customers are attracted by quick and efficient services. (Dekker, 2005). Marketing and Sales The company put huge importance on maintaining public relations and promotional activities in order to enhance customer satisfaction. Promotional activities are planned according to the size of outlets and financial status of the consumers in the concerned area. TESCO does everything to ensure come back of every people irrespective of social classes. Providing scheme vouchers, time to time discounts are some of the sales and marketing activities run by TESCO (Kaplinsky, 2004). Figure 4: Porter’s Value Chain Model for TESCO Plc (Kaplinsky, 2004) Service Service procurement is efficient for TESCO Plc due to their adoption of dual strategy of cost leadership and differentiation. More customers are attracted as a result of product diversification and for further customer satisfaction self service kiosks, direct marketing and promotional activities are established. Supporting Activities are, Company Infrastructure Company’s focus on cost and cash control in a planned way and strong employee management system leads to built strong infrastructure for TESCO. Establishment of ERP solutions, EPOS billing system are some of the examples company infrastructure (Dekker, 2005). Human Resource Management Starting from recruitment to management development, TESCO involves strong employee management through applying relevant trainings, motivation and learning programs, customer management programs etc. For HRM, TESCO strives for optimizing cost; it does not play in a minimizing model (Kaplinsky, 2004). Technology Development In this downstream activity, TESCO gains competitive advantage through application of anti fraud software, installation of latest security and billing system, ERP solutions, intelligence scale, electronic shelf labelling, Radio Frequency Identifier etc (Dekker, 2005). Procurement TESCO gives emphasis on procuring point of sale marketing materials. Effective procurement management is very important for the company due to its continuous requirement of buying goods and services at an optimum cost for their diverse marketing across 13 countries for which TESCO spends more than £5 billion annually (Dekker, 2005). Business Strategies of TESCO Plc The Strategy clock Figure 5. Strategy Clock for TESCO Plc The Strategy clock suggested by Bowman shows a company’s competitive position within the industry which further explains the extent of company’s strategy formulation. According to the company’s position in this clock, TESCO keeps its price level low for the purpose of attracting more consumers but the company never compromises on quality. Rather it tends to keep low margin TESCO still leads with strong financial position due to their large number of loyal customer base. TESCO also focuses on reinvestment that shows a hybrid position in the clock. However, TESCO differentiates itself from their major competitors with a very low price offered to the customer along with their value added services (Toni and Tonchia, 2003). BCG Matrix for TESCO Plc Figure 6: BCG Matrix for TESCO Plc (Ritz, 2005) The Growth Matrix suggested by Boston Consulting Group, TESCO secures the position of Star which indicates high market share (more than 30%), high growth rate and the company’s position to generate sufficient cash flow from the existing business so that they can diversify their business into other industry segments. However, the business position of TESCO Plc in Asian market remains a question mark (Ritz, 2005). Strategic Fit or Drift Figure 7: Strategic Drift of TESCO Plc Strategic fit or drift shows the degree of company’s alignment along with the changing nature of industry and strategies formulated by the company itself. Recently, TESCO is experiencing a strategic drift in the UK market as a result of their shifted concentration in European and Asian market which in turn has resulted in a decline in sales by 1.2% during 2012-2013 (The Telegraph 2014). Hence, the company has started concentrating on their existing UK market by taking a overhauling strategy, rather than expansion (BloombergView, 2014). Conclusion After answering all four questions, it can be inferred that though TESCO Plc is encountering small imbalances in their UK market, with support from the loyal customer base, strong potential of relevant marketing plan and supply chain management, the company will definitely continue to maintain their leading position in the future global marketplace. Reference List Anon, 2004. Case study IV: Tesco implements the business engine network to gain full control of its IT project portfolio. Journal of Database Marketing & Customer Strategy Management, 12(1), pp.66-73. BloombergView, 2014. Being Tesco Stinks, but the Shopping Is Great. [Online] Retrieved from: [Accessed 23 December 2014]. Dekker, H. C., 2005. Value chain analysis in inter firm relationships: a field study. Management Accounting Research, 14(1), pp.1-23. Finch, P., 2004. Supply chain risk management. Supply Chain Management: An International Journal, 9(2), pp.183-196. Kaplinsky, R., 2004. 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