Tesco: What Should It Do Next - Assignment Example

Tesco and the supermarket industry in the UK Contents Contents 2 Question 3 Strategic Purpose 3 Question 2 4 Industry Analysis 4 Question 3 6 Resources and Capabilities 6 Question 4 8 Business and Corporate Strategies 8 References 10 Question 1 Strategic Purpose Tesco Plc is a well known name in retailing industry and is located in United Kingdom. They are mainly general merchandise and multinational grocery retailer. In the initial stage the firm focused only on selling groceries but in later stage it diversified into many areas. Tesco currently is involved in books retailing, electronics, furniture, clothing, software, financial services, toys, telecommunication services, DVD rentals, music downloads and internet services (Gilbert, 2014). In UK market Tesco occupies a strong market position within supermarket industry. Tesco was originally founded by Jack Cohen way back in 1919. It was firstly established as a chain of market stalls. The name of this firm had appeared first during a shipment purchase by Cohen in 1924. Tesco’s first store was incorporated in Burnt Oak in 1929. The business in later stage expanded rapidly and summed up to 100 by 1939 across the country (Guardian News, 2014). During the starting phase of the business main aim of the firm was to strengthen its market position as a grocery retailer. Tesco Plc in current scenario is regarded as the second largest retailer in terms of earned revenue margins. The company has been able to secure high profit margins and expand its operations across 12 countries due to its competencies. Tesco believes in creating a difference for customers and hence implements innovative strategies (Ruddick, 2014). The firm possesses diversified product range and offers them to customers at least market price. They create a difference by providing quality products to target market at reasonable prices. Tesco has implemented “good, better and best” policy in all its operations. If the company did not exist then UK market would have lost on a profitable supermarket chain. On the other hand, customers would not have been able to purchase low price quality products if Tesco was not invented (BBC, 2014). Question 2 Industry Analysis Five forces model is an appropriate framework for analyzing industrial conditions of a particular firm. This model represents certain forces such as bargaining power of suppliers, threat of new entrants, bargaining power of buyers and threat of substitutes, and intensity in competitive rivalry. It has been outlined in figure 1. Figure 1: Five Forces Model The threat of new entrants mainly in food retail industry is relatively low. There is a need for lump sum investment particularly in this segment so as to achieve competitive position. Some large retail firms such as Asda, Morrison, Sainsbury’s and Tesco has acquired desirable market share in this industry. New entrants in retail industry have to develop innovative strategies in order to offer quality products at much lower prices (Ruddick, 2014). On the other hand, government takes sufficient resources and time in order to establish supermarkets and this proves to be a major obstacle for new entrants. Threat of substitute products is also low in relation to this industry. This is because existing retail firms are offering wide range of products to customers and there is no scope for any kind of substitutes. The competitive rivalry intensity is high in grocery and food retail industry. Tesco witnesses tough competition from certain direct competitors like Sainsbury’s, Morrison, Asda and Waitrose. These firms majorly compete on certain factors such as price, promotion and products. Within the same time period competitors of Tesco has expanded on their respective market share. Asda holds market share percentage of 16.6%, Morrison occupies 11.6% and Sainsbury’s possesses 16.1% of market share. The slow market growth clearly states that the industry consists of intense competition (Thomas, 2014). This in turn poses major challenge on Tesco’s operations in terms of sustaining its position as a market leader. Bargaining power of buyers is high in context of retail industry. When the products being offered by firms are more standardized in nature there is less switching costs involved. Customers can easily shift to other brands or retail firms that offer better products. It can be stated that customers are majorly attracted towards those firms that offer low priced products (Spary, 2014). Tesco has been able to implement a differentiation strategy by reducing product prices to a minimum. The same strategy can be easily implemented by other retail firms and this proves to be a threat for Tesco. There are wide ranges of retail chains that are available in UK market and it enhances customer choices. They are able to compare product features or prices and then select a particular one. On basis of all these elements it can be stated that bargaining power of buyers are high (Schrage, 2014). In retail industry bargaining power of suppliers is low. There is a wide base of suppliers present in this industry and comparatively large supermarket chains are relatively less. Suppliers mainly aim towards providing quality products to all its clients and sustain contractual agreements. The loss of commercial contracts with such big retail chains will disrupt their entire operational procedure. This strengthens position of famous retailers like Tesco, Sainsbury’s, Morrison and Asda. The overall negotiations undertaken by firms with all these suppliers are positive so as to obtain low prices from providers (Geller, 2014). All these forces indicate that the firm is greatly affected by buyer’s bargaining power and competitive rivalry in the industry. Question 3 Resources and Capabilities Tesco is a retail chain. Since long Tesco has retained leadership position in retail market and is counted among the top three super market chains. The top 3 super market chains together count for 73% of UK’s grocery market turnover (Ruddick, 2014). TESCO’s success factors have long been about using internet to drive its sells. Tesco has been using the internet and technology to drive sells long before it was a common practice. Tesco was used to using customer research, loyalty and analytics program for its marketing and operational edge. Tesco had launched loyalty program back in 1995 and that was a key turning point for the industry. Tesco became the market leader in UK by claiming 30% of the total market share by being able to effectively address to the demands of the customer (Schrage, 2014). In case of analytics Tesco was considered to be the pioneer and leader only after AMAZON and many other companies like Wall mart tried to emulate TESCO’s model. However with the changing times it seems that TESCO hasn’t been able to sustain the competitive advantage that its data analytics once gave the company. Its customers are getting disillusioned. The shoppers are now days questioning whether the loyalty programs benefit the retailers more than the shoppers. The customers do not love the gimmicks of the loyalty card and all those technical things. Instead what the customers want is a simple shopping experience that gives them benefit in terms of real time savings which is measurable. The problem it problem it seems is the fact that TESCO and the other big retailers have become too big are inventively headed for a failure. Companies like Aldi and lidi are eating into the market share of the retail giants. The pressure is coming from these new retailers as they are eating into the market share of the giants by offering steady discounts. These discounts are being loved by the customers who are flocking in numbers to these stores in order to save money in a time of continued recession. Further pressure for the brick and mortar retail stores is coming from brick and mortar stores as structural changes are sweeping the market with many retailers going online with their a-la carte and driving away the demand (Ruddick 1, 2014). Now days customers no longer wants to visit stores and wants to save money and time by shopping from the convenience of their home or workplace. As such the online retailers are raking in the money by means of increased sales while the retailers are standing to lose. Tesco’s strength lies in the fact that it is a very big retailer. It has a global foot print (Tesco plc. 2014). In UK Tesco is the market leader. Due to the long years that it has spent in data analytics it has a large collection of customer data which it can effectively use to its advantage. However Tesco has a serious weakness. Surprisingly its weakness is the same thing that is its strength. The biggest weakness for TESCO is its size. It seems that Tesco has become too big to sustain itself. Another weakness of TESCO is the fact that it has diversified too fast and into unrelated segments which it does not understand well. Thirdly TESCO invests a lot in data analytics and technology and thus does not provide the customers much discount which is a negative point and will affect it seriously in context of the big discounts given by Aldi and other smaller retail stores (Butler, 2014). Applying VRIO framework to Tesco, one can list that the data analytics is the resource of the company that is costly to imitate and is rare. This is the thing that enabled the TESCO to become a market leader at one point in time. What TESCO needs to do is to use that data that the company has to effective use and use it for gaining strategic advantage. It can also focus on cost cutting initiative because being the market leader it can do it most effectively. It has to also bring the disgruntled customers back to its stores. Question 4 Business and Corporate Strategies BCG Growth Matrix The BCG growth matrix comprises of four segments such as cash cow, dog, question mark and star which has been elaborated in figure2. Figure 2: BCG Matrix As per figure2, activities of Tesco can be divided into four segments on basis of relative market share and business growth rate. High street shops of Tesco can be regarded as cash cows. Though the firm has acquired 30% market share in this region but the growth has been relatively weak. Online operations of the firm fall under star segment because it is considered to be largest online grocer in UK. Blinkbox of Tesco is referred to as question mark since it faces intense competition from Netflix, Sky and iTunes (Wood, 2014). On the contrary, Fresh and Easy which is one of the US based operations of the firm is a dog. This is because it acquires small market share and operates within a low growth market. The problem that is plaguing TESCO other than the accounting scandal is its big size. Everyone feels TESCO has become too big and is bound to fail. To understand why this is so one must appreciate the fact that TESCO has simply grown too fast in the years, it has accumulated too much debt in the balance sheet and is not being able to sustain itself. The result is that Billions have been wiped off from TESCO’s market value and its brand has taken a battering. TESCO’S sale is declining rapidly and is not able to change itself along with changing pattern of business (Grimsey, 2014). TESCO is losing because it has lots of fixed costs tied with the large no. of stores that it operates. IN comparison to TESCO and the other big retailers the smaller chains are gaining fast. This is because the smaller chains have less fixed costs tied to them. Another profitable venture is the online stores which do not have any fixed costs associated them (Tesco plc. 2014). What Tesco must do is to reinvent its business by reinventing its strategy. IN fact it is in the middle of a price war which the smaller companies have started in order by giving big discounts and luring in the customers (Felsted and Aglionby, 2014). TESCO may have to sell some of its stores if it wants to return to profitability and wants to compete with the smaller parts. More importantly TESCO must cut debts from its balance sheet. If Tesco does not urgently do something them 10 years down the line TESCO as a company may cease to exist (Butler and Farrell, 2014). References BBC., 2014. Tesco: what should it do next? [Online]. 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