Strategic Management Analysis on Tesco - Case Study Example

Strategic Management Analysis on Tesco Tesco, based on revenue, is the third largest grocery and general merchandising retailer in the world. In 2014, total 3,378 retail stores of Tesco were in operations in the UK alone fetching annual revenue of £43,570 million. Over two-third revenue of Tesco comes from the UK operations alone; however, for last couple of years its trading profits are under severe pressure (Tesco Plc., 2014). Tesco has failed to preserve its market share in spite of aggressive loyalty cards (Clubcard) promotions and customization strategies. Employing digital technology to developing analytics capabilities has always remained strength of Tesco; however, surprisingly, it appears to have become somewhat irrelevant in the current environment (Schrage, 2014). The paper attempts to explore several facets of Tesco that include not only strategic purpose of the company but also its resources and capabilities spearheading business and corporate strategies in reference to other industry players. Vision and Strategic Purpose Tescos vision statement emphasises on to be innovative so that it becomes "the shop of choice for customers, the place people want to work, a business that communities welcome and the retailer in which every shareholder wants to invest" (Vision and Strategy). Tesco new Core purpose states: "We make what matters better, together" (Core Purpose and Values, 2014). Their value statement can be stated in the following lines: Trust and respect are the main thrust areas at Tesco to recognising their employees efforts that in turn, will help develop a new customer base. Tesco has also devised new value for its existence: "We use our scale for good" (Core Purpose and Values, 2014). Tesco clearly takes into account the fact that it now touches lives of millions of people owing to its large scale of operations. Having recognised this fact, the company aims at behaving responsibly towards society. In 2012, the company initiated ‘the Building a Better Tesco’ plan aimed at investing in six critical areas of business: Stores & Formats, Service & Staff, Price & Value, Range & Quality, Clicks & Bricks and Brand & Marketing. Industry Analysis Porter’s Five Forces Analysis Porter’s five forces analysis can provide a good account of the competitive environment of retail industry in the UK. Threat from Substitute Products and Services Grocery retail market is mostly full proof from the threat of substitute products. Collective consumption of food items either remain steady or increase with incomes. Even non-food items experience little substitution effect. On the contrary, Tesco being a large chain of retailing shops can become a threat to non-food speciality shops such as garment and clothing shops due to reduced disposable income of people in the difficult economic environment. Threat from New Entrants In recession, new entrants always find difficulty in entering the market and compete with established players. It is important to note that other than Tesco, Sainsburys, Asda (under Walmart), The Co-operative Food and Morrisons are major retailers in the UK encompassing almost 80% of the total food spending (Farfan, 2014). Most of these companies are operating in the UK for last several decades and any new entrant will take considerable time and resources to establish its foothold in the UK market. As such, to secure environmental and other legal clearance from the local government is a significant barrier for any new entrant. Competition among Existing Players Competition among existing players in retail industry is extremely high. The competition on price, product variances, and promotional aspects goes full swing among major players throughout the year. When market is in slump, the competition becomes extremely fierce to grab higher market share from each other. Monaghan (2014) asserts that prices in UK shops are falling at rapid rates in recent months due to fierce rivalry among players. It is obvious that Tesco as a leader in the retail market faces a formidable challenge from all the players. Bargaining Power of Buyers Buyers bargaining power has considerably gone up in recent years. Convenient online sites offer now much wider opportunities to buyers that include product choice and deeper price discounts. Customer (buyer) has certainly become a king in retail industry and wants not only excellent quality but the most lucrative price. However, this is applicable to all supermarket chains regardless of how large they are! In the current scenario, no retailer can afford to charge a single penny more to its buyers as it is likely to lose loyalty from the customers. Bargaining Power of Suppliers Suppliers enjoy fairly low bargaining power as they cannot sell their products across the country without the help of supermarket chains; only supermarket chains are capable of providing them large markets across the nation. This simply means that large chains of retailers can get the lowest possible price for their bulk buying; in this process, suppliers lose their bargaining power to a considerable extent. Resources and Capabilities Identifying Key Resources and Capabilities Collis and Montgomery (2008) argue, "competitive advantage, whatever its source, can be attributed to the ownership of a valuable resource that enables the company to perform activities better or more cheaply than competitors" (para. 7). In other words, these are critical success factors (CSF) in company’s armoury to creating a competitive edge. The creation of Tesco Clubcard has been one of the most innovative ideas of ‘90s providing an edge over competition and making Tesco one of the leading retailers in the UK. Clubcard helped Tesco gather all necessary details about shopping habits of its customers through which the company was able to predict consumer trends and formulate its business strategies. However, now, Clubcard strategy does not seem to have been working effectively – at least for the last two years for Tesco sales have been consistently falling and profit plummeting (Ruddick, 2014). The main culprit appears to be online sales taking customers away from Tesco. Internet sales as a proportion of total retail sales are on upswing. In January 2007, the online sales constituted only 2.7 % of the total sales that increased to 11.1% in January 2013 – a stupendous rise by any account (Rhodes, 2014). Over and above, Aldi and Lidl, the two German Chains, have been offering aggressive discounts on a wide range of products further affecting sales of Tesco (Butler, 2014). Company-owned Labels –A Differentiation Strategy While Tesco itself is an established brand across the UK, the company has developed own labels on many food items it sells. Developing own labels is certainly a sustainable resource that helps create customers’ loyalty towards food products that the company sells; it helps create a competitive edge for Tesco over its rivals. Human and Innovative Resources Human resource is another important factor for Tesco that it cannot ignore. Tesco is in the service industry and dedicated workforce is the essential requirement to satisfying the needs of customers and so far the company has harnessed its human resource effectively. Clubcard has been the major innovation of the company in the past. Business and Corporate Strategies When Clubcard is analyzed from the view point of VRIO analysis, it is amply clear that though it is valuable, rare to a certain extent but not costly to imitate (Barney, 1991). Moreover, Clubcard has failed to create value for Tesco in the changed environment; Clubcard is unable to generate sustained competitive advantage. Source: http://www.strategicmanagementinsight.com/tools/vrio.html It is true that Clubcard has played a crucial role in developing Tesco a dominant retail player in the UK in the past. However, the things have changed a lot since then. Currently, increasing numbers of people are resorting to online sales due to lucrative discount offerings and convenience in online buying. Moreover, customers get straight – across-the-board discounts from Aldi and Lidl that compensate them more than what Clubcard can ever offer. In the recessionary economic environment, it is obvious on part of common consumers to get lured by Aldi and Lidl and online offers. In the changed circumstances, it is important for Tesco to determine whether it is worthwhile to invest its valuable and scarce resources in Clubcard, especially when its cost to the company is stupendous – over £500 million a year (Butler, 2014). In the recent year, Tescos trading profit on the UK operations was £2191 million (Tesco Plc., 2014). This means the Clubcard maintenance cost is almost 23% of the profit; that is too significant to ignore. The point is that buyers are more impressed and influenced by over-the-board discounts that can save them good money now and instantly. Creating Own Brands – a Long-term Sustainable Option Tescos own brand creations such as ‘Finest’ and ‘Everyday Value’ are good strategic decisions for sustainable competitive advantage over rivals. Brand creation serves as a differentiation strategy to promoting company products. As per VRIO analysis, brands are not only valuable, rare and costly to imitate but they derive good value for the company in the long-run. Owned label sales constitute almost one-half of Tesco sales in the UK. Through sustained efforts, the company needs to bring more products under the company-owned label. Training to Company Staff – a Long-term Strategic Initiative On matters related to HR. Tescos core value is outstanding, "Treat people as you like to be treated” (MacLachlan, 2009). Trained staff is a valuable resource necessary to service customers most effectively. Tesco is giving utmost importance to it and have already provided training to 250,000 employees. Training is never a one-time initiative rather it is an ongoing process making staff adaptive to ever-changing external environment. Innovation – a Crucial Corporate Strategy Tesco encourages innovative ideas to enhance customer experience. Tesco is on its way to refreshing 450 Express stores in 2014/15 and will be refitting 160 large stores. For ease and convenience, Tesco is introducing 80 family dining areas, 50 coffee shops and 110 bakeries. While giving priority to food, remodelling will involve significant changes to space and layout. Tesco has initiated moves that will establish stronger partnerships with suppliers. It is entering into two-year contracts with all suppliers. Strategic partners are now provided with even longer contracts ranging from 3-5 years (Montague-Jones, 2014). In another innovative effort, Tesco has launched a portal for its suppliers that will help them about customers buying trends and plan their production programmes accordingly (Tesco Plc. 2014). Having realised a need to have online presence, Tesco began offering direct sales in 2012 covering a wide range of products. In many of the product lines, the company offered as much as 50 percent discounts showing its intention to fight back with other online retailers. Each product carries a Buy from Tesco tag unlike a third party tag with eBay online. The real impact of how this online selling strategy of Tesco contributes to its bottom line and the market share will be known only in a year or two. References Barney, J. B. (1991). Firm Resources and Sustained Competitive Advantage. www3.uma.pt/filipejmsousa/ge/Barney,%201991.pdf [Accessed 27 December 2014] Butler, S. (2014). How Aldi’s price plan shook up Tesco, Morrison’s, Asda and Sainsbury’s. http://www.theguardian.com/business/2014/sep/29/how-aldi-price-plan-shook-up-tesco- morrisons-asda-sainsburys [Accessed 27 December 2014] Building a Better Tesco (2014). Tesco Plc. http://www.tescoplc.com/index.asp?pageid=282#tabnav [Accessed 27 December 2014] Collis, D. J. & Montgomery, C. A. (2008). Competing on Resources. https://hbr.org/2008/07/competing-on-resources [Accessed 27 December 2014] Core Purpose and Values (2014). Tesco Plc. http://www.tescoplc.com/index.asp?pageid=10 [Accessed 27 December 2014] Farfan, B. (2014). 2011 Worlds Largest UK Retailers. http://retailindustry.about.com/od/largesteuropeanretailers/a/united_kingdom_uk_2011_worlds_largest_retailers_biggest_retail_chains.htm [Accessed 27 December 2014] MacLachlan, (2009). HR the conscience of Tesco, says HR director. http://www.cipd.co.uk/pm/peoplemanagement/b/weblog/archive/2013/01/29/hr-the- conscience-of-tesco-says-hr-director-2009-11.aspx [Accessed 27 December 2014] Monaghan, A. (2014). Fierce competition sees prices in UK shops fall by 1.8% in September. http://www.theguardian.com/business/2014/oct/08/competition-prices-uk-shops-fall- almost-2pc-september [Accessed 27 December 2014] Montague-Jones, G. (2014). Tesco to alter supplier deals as it goes bigger and bolder on innovation. http://www.thegrocer.co.uk/channels/supermarkets/tesco/tesco-to-go-bigger-and-bolder-on-innovation/357298.article Accessed 27 December 2014] Schrage, M. (2014). Tesco’s Downfall Is a Warning to Data-Driven Retailers. https://hbr.org/2014/10/tescos-downfall-is-a-warning-to-data-driven-retailers/ [Accessed 27 December 2014] Tesco Plc. (2014). Details of our financial performance over the last five years. http://www.tescoplc.com/index.asp?pageid=30 [Accessed 27 December 2014] Vision and Strategy (2014). Tesco Plc. http://www.tescoplc.com/index.asp?pageid=12 [Accessed 27 December 2014] Rhodes, C. (2014). The retail industry: statistics and policy. www.parliament.uk/briefing-papers/sn06186.pdf [Accessed 27 December 2014] Ruddick, G. (2014). Clubcard built the Tesco of today, but it could be time to ditch it. http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/10577685/Clubcard- built-the-Tesco-of-today-but-it-could-be-time-to-ditch-it.html [Accessed 27 December 2014] Read More