Tesco Marketing Strategic Analysis - Research Paper Example

Tesco Marketing Strategic Analysis Introduction The food and drink retail sector represents the largest industry in the UK, providing employment for over three million people in primary production, manufacturing and retailing. In 2006 retail accounted for 9.5% of gross domestic product (Datamonitor, 2006). In recent years UK supermarkets have come under increased scrutiny over their treatment of suppliers, particularly of own-label products, yet the development of strategic supply networks has been an integral part of most supermarket marketing strategies for the past decade. The report below provides an insight into the supermarket company, Tesco, with emphasis on its external environment analysis and company’s analysis of resources, competence and culture. Two future marketing strategic options are suggested in regards to the resources based marketing strategies. Tesco is one of the biggest food retailers in the world, functioning around 2,318 stores and has more than 326,000 employees. It offers online services through its subsidiary, Tesco.com. The United Kingdom is the biggest market for the company, where it functions under four signs of Extra, Superstore, Metro and Express. The company vends approximately forty thousands food products, together with clothing and other non-food lines. The own-label products (fifty percent of sales) of the company are at three stages, value, normal and finest. As well as convenience produce, many stores have gas stations, becoming one of the largest independent petrol retailers in UK. Other retailing services offered include Tesco Personal Finance. Industry Analysis: PESTEL Framework Political Factors Operating in a globalised environment with stores around the globe, Tesco’s performance is highly influenced by the political and legislative conditions of these countries, including the European Union (EU). For employment legislations, the government encourages retailers to provide a mix of job opportunities from flexible, lower-paid and locally-based jobs to highly-skilled, higher-paid and centrally-located jobs. Also to meet the demand from population segments such as students, working parents and senior citizens. Tesco understands that retailing has a great impact on jobs and people factors (new store developments are often seen as destroying other jobs in the retail sector as traditional stores go out of business or are forced to cut costs to compete), being an essentially local and labour-intensive sector. Tesco employs large numbers of; student, disabled and elderly workers, often paying them lower rates. In an industry with a typically high staff turnover, these workers offer a higher level of loyalty and therefore represent desirable candidates. Economical Factors Economic factors are of concern to Tesco, because they are likely to influence demand, costs, prices and profits. One of the most influential factors on the economy is high unemployment levels, which decreases the effective demand for many goods, adversely affecting the demand required to produce such goods. These economic factors are largely outside the control of the company, but their effects on performance and the marketing mix can be profound. Although international business is still growing (Appendix 1), and is expected to contribute greater amounts to Tesco’s profits over the next few years, the company is still highly dependent on the UK market. Hence, Tesco would be badly affected by any setback in the UK food market and are out in the open to market concentration risks. Table 1 Tesco: Share of all European food retailers' sales, 2001-2005 (Market watch, 2006) Social/Cultural Factors Current trends indicate that British customers have moved towards ‘one-stop’ and ‘bulk’ shopping, which is due to a variety of changes in social trends. Tesco have, therefore, increased the amount of non-food items available for sale. Demographic changes such as the aging population, an increase in female workers and a decline in home meal preparation mean that UK retailers are also focusing on added-value products and services. In addition, the focus is now towards; the own-label share of the business mix, the supply chain and other operational improvements, which can drive costs out of the business. National retailers are increasingly reticent to take on new suppliers. The type of goods and services demanded by consumers is a function of their social conditioning and their consequent attitudes and beliefs. Consumers are becoming more and more aware of health issues, and attitudes towards food are constantly changing. One example of Tesco adapting its product mix is to accommodate an increased demand for organic products. The company was also the first to allow customers to pay in cheques and cash at the checkout. Technological Factors Technology is a major macro-environmental variable which has influenced the development of many of the Tesco products. The new technologies benefit both customers and the company: customer satisfaction rises because goods are readily available, services can become more personalised and shopping more convenient. The launch of the Efficient Consumer Response (ECR) initiative provided the shift that is now apparent in the management of food supply chains. Tesco stores utilise the following technologies: Wireless devices Intelligent scale Electronic shelf labelling Self check-out machine Radio Frequency Identification (RFID). The adoption of Electronic Point of Sale (EPoS), Electronic Funds Transfer Systems (EFTPoS) and electronic scanners have greatly improved the efficiency of distribution and stocking activities, with needs being communicated almost in real time to the supplier. Environmental Factors In 2003, there has been increased pressure on many companies and managers to acknowledge their responsibility to society, and act in a way which benefits society overall. The major societal issue threatening food retailers has been environmental issues, a key area for companies to act in a socially responsible way. Hence, by recognising this trend within the broad ethical stance, Tesco’s corporate social responsibility is concerned with the ways in which an organisation exceeds the minimum obligations to stakeholders specified through regulation and corporate governance. In 2005 the government has intended to launch a new strategy for sustainable consumption and production to cut waste, reduce consumption of resources and minimise environmental damage. The latest legislation created a new tax on advertising highly processed and fatty foods. The so-called ‘fat tax’ directly affected the Tesco product ranges that have subsequently been adapted, affecting relationships with both suppliers and customers. Legislative Factors Various government legislations and policies have a direct impact on the performance of Tesco. For instance, the Food Retailing Commission (FRC) suggested an enforceable Code of Practice should be set up banning many of the current practices, such as demanding payments from suppliers and changing agreed prices retrospectively or without notice (Mintel Report, 2006). The presence of powerful competitors with established brands creates a threat of intense price wars and strong requirements for product differentiation. The government’s policies for monopoly controls and reduction of buyers’ power can limit entry to this sector with such controls as license requirements and limits on access to raw materials. In order to implement politically correct pricing policies, Tesco offers consumers a price reduction on fuel purchases based on the amount spent on groceries at its stores. While prices are lowered on promoted goods, prices elsewhere in the store are raised to compensate. SWOT Analysis Strengths Strong management team successfully identifying new trends. Increasing penetration in non-food and services. Successful health oriented food range. Increasingly large and profitable business in export markets. Well defined multi-format approach. Local and flexible approach to international markets. Strong brand recognition. Significant marketing expenditure, especially in terms of PR and advertising. Positive consumer response to "Every Little Helps" pricing campaign. Weaknesses Low level of free cash flow. Lateness of international expansion. Dependence on UK market. Reliance on one main retail brand albeit with various sub-brands. Opportunities Further expansion in export markets. Further expansion in non-food and services sectors. Consolidation of position in UK market. Significant potential in emerging markets. Growing penetration and further acquisitions in convenience environment, enabled by Competition Commission ruling regarding convenience retailing as a different industry to 1-stop shop retailing. Expansion of online trading systems in international markets. Potential expansion into property and automotive sales. Threats Increasingly aggressive competitors in home market. Risks in export markets with developing economies. Regulatory factors constraining growth in one-stop shop retailing the UK. Wal-Mart's financial muscle resulting in increasing competition from ASDA. Recovery in Sainsbury's performance. Consumer backlash regarding Tesco's dominance and massive profits. Potential consumer preference for retail outlet variety in the light of "high-street cloning". Further negative PR such as that received as a result of the railway tunnel collapse during construction of the outlet at Gerrards Cross. Tesco: Marketing Strategic Options Generic marketing strategies are characterised by an individual retailer’s response to the industry structure. For giant retailer, such as Tesco, to obtain a sustainable competitive advantage they should follow either one of three generic marketing strategies, developed by Porter. The first strategy of cost leadership is one in which Tesco can strive to have the lowest costs in the industry and offer its products and services to a broad market at the lowest prices. This strategy will be based on the Tesco’s ability to control their operating costs so well that they are able to price their products competitively and be able to generate high profit margins, thus having a significant competitive advantage. If Tesco will use another strategy of differentiation, then it has to try to offer services and products with unique features that customer’s value. Tesco will be able to create brand loyalty for their offerings, and thus, price inelasticity on the part of buyers. Breadth of product offerings, technology, special features, or customer service is popular approaches to differentiation. The last strategy of focus can be either a cost leadership or differentiation strategy aimed toward a narrow, focused market. In pursuing a cost leadership strategy Tesco focuses on the creation of internal efficiencies that will help them withstand external pressures. Therefore, it appears reasonable to think that Tesco will have frequent interactions with the governmental/regulatory and supplier sectors of the environment. In accordance to this framework, while both overall cost leadership and differentiation marketing strategies are aimed at the broad market, Tesco may also choose to confine their product to specific market areas or may choose to offer a smaller line of products to the broad market, thus pursuing a strategy of focus or niche. In other words, Tesco pursues a strategy of cost leadership or differentiation either in a specific market or with specific products. The danger some organisation face is that they try to do all three and become what is known as stuck in the middle. In case of Tesco it is not appropriate, as they do have a clear business strategy with a clearly defined market segment. Future Opportunities and Marketing strategies Implementation Strategy frameworks and structuring tools are important in assessing the business situation. Risk and value trade-offs are made explicit, leading to concrete proposals to add value and reduce risk. Explicit plans for action, including effective planning need to be developed by Tesco as the marketing strategic alternative. From the generic marketing strategies discussed above, Tesco is likely to employ two marketing strategic options of focus on market development though partnerships and diversification through new product development. By entering new markets like China and Japan it can serve as a key growth driver of the company’s revenues and expansion strategy. Tesco's interests in Japan are likely to continue growing in due course, as Asian markets are showing an increase in consumer spending and increased trend towards retailing. These new markets are also demographically high opportunity markets. In the case of Tesco, one of the suggested marketing strategic options is in international alliances with the local retailers in Asian markets. It will be considered as a method of development and may be formed to exploit current resources and competence. By entering into joint ventures or partnerships, in order to gain larger economies of scale and larger market presence, Tesco will draw on the extensive local knowledge and operating expertise of the partner whilst adding its own supply chain, product development and stores operations skills to deliver a better shopping experience to customers. However, given the huge scale, potential and complexities of these markets, Tesco may feel that being the first mover is not necessarily an advantage. The success of the partnership will be related to three main success criteria: sustainability, acceptability and feasibility. Sustainability will be concerned with whether a strategy addresses the circumstances in which the company is operating. It is about the rationale of this expansion-market development strategy. The acceptability relates to the expected return from the strategy, the level of risk and the likely reaction of stakeholders. Feasibility will be regarded to whether Tesco has the resources and competence to deliver the strategy. The changes in the business environment may create demand for new products and services at the expense of established provision. Ansoff’s matrix also suggests that if new products are developed for existing markets, then a product development strategy has to be considered by the management level of a company. In expanding and diversifying Tesco’s product mix, it is also crucial to implement internal development when new products are developed. The nature and the extent of diversification should also be considered in relation to the rationale of the corporate strategy and the diversity of the portfolio. By following the changing needs of the customers Tesco can introduce new product lines. This may require more attention to R&D, leading to additional spending. Retailing industry is experiencing an overcapacity and innovative services and products being the major competitive advantage. Therefore, innovation has to be a major driver for Tesco’s product development. For example, Tesco can develop a portfolio of different store formats in the UK, each designed to provide a different shopping experience. While the majority of Eastern European and Far Eastern outlets are hypermarkets, Tesco can also develop different store types in these markets as well. This value added by the uniqueness will eventually lead Tesco to command a premium price. The management of technological innovation is increasingly involved in marketing strategic decision-making. Tesco have to exploit their internal strengths and minimise their internal weaknesses in order to achieve sustained competitive advantage. Conclusion The success of the Tesco shows how far the branding and effective service delivery can come in moving beyond splashing one’s logo on a billboard. It had fostered powerful identities by making their retiling concept into a virus and spending it out into the culture via a variety of channels: cultural sponsorship, political controversy, and consumer experience and brand extensions. In a rapidly changing business environment with a high competitors’ pressure Tesco have to adopt new expansion marketing strategies or diversified the existing in order to sustain its leading market position in an already established retailing market. The company must constantly adapt to the fast changing circumstances. Strategy formulation should therefore be regarded as a process of continuous learning, which includes learning about the goals, the effect of possible actions towards these goals and how to implement and execute these actions. The quality of a formulated strategy and the speed of its implementation will therefore directly depend on the quality of Tesco’s cognitive and behavioural learning processes. In large organisations as Tesco strategy should be analysed and implemented at various levels within the hierarchy. These different levels of strategy should be related and mutually supporting. Tesco’s strategy at a corporate level defines the businesses in which Tesco will compete, in a way that focuses resources to convert distinctive competence into competitive advantage. Appendix Resource Based View The resource-based view of the organisation originates from Penrose (1959) research, where the organisation is explained as a package of resources. Penrose posits that the development of the organisation is both assisted and limited by management exploration for the superlative usage of on hand resources. Barney (1991) gives a precise and solemn description of this view. Resources comprise assets, capabilities, processes, attributes, knowledge and know-how that are possessed by an organisation, and that can be used to devise and implement competitive strategies. The resource-based view relies on two basic assertions, that of resource heterogeneity, and of resource immobility. If a resource possessed by an organisation is also possessed by a number of its competitors, this resource cannot contribute to competitive advantage. Heterogeneity is the requisite state for obtaining at least temporary competitive advantage. Resource immobility is the required condition for sustained competitive advantage, since competitors would face cost disadvantage in obtaining, developing, and using it compared to the organisation that already possesses it. Several researchers have adopted a resource-based perspective to address the issue of the contribution of technological resources to business value (Wade and Hulland, 2004 and Melville et al., 2004). In their research studies, resources were conceptualized in a multiplicity of fashions. In a literature review of the resource-based view in technological resources research, Wade and Hulland (2004) identify eight such IS resources, which fall into three main categories. The first category, outside-in resources—external relationship management and market responsiveness—are externally oriented and pertain to the establishment of relationships with business partners, and to the understanding of competitors. The second category, inside-out resources—IS infrastructure, IS technical skills, IS development, and cost effective IS operations—are used from inside the organisation to respond to market requirements. Lastly, spanning resources—IS business partnerships and IS planning and change management—involve both internal and external analysis capabilities. A small number of empirical studies have examined the relationship between IS resources and organisation performance. Among those, Bharadwaj (2000) compared the performance of organisations that had been recognized by the magazine Information Week as being IT leaders in their industry to the performance of a control group. She found that organisations with high IT potentials outperformed the organisations from the control group. Most of the researchers who implemented a resource-based view of resources contribution to organisation performance focused on the relationships between resources themselves and business performance. Some researchers have argued that a constraint of resource based view is that “resource based view presumes that resources are always applied to their best uses, saying little about how this is done” (Melville et al., 2004). For example, Clemons and Row (1991) argue that “benefits resulting from an innovative application of information technology can be more readily defended if the system exploits unique resources of the organisation” (p. 289). This disagreement, referred to as the strategic necessity hypothesis, was supported by Powell and Dent-Micallef (1997) who found that IT resources alone do not offer competitive advantages; rather, organisations can gain competitive advantage by leveraging complementary between business and human resources. Bibliography Barney, J.B., (1991). Firm resources and sustained competitive advantage, Journal of Management 17 (1), pp. 99–120. Bharadwaj A.S., (2000). A resource-based perspective on information technology capability and firm performance: an empirical investigation, MIS Quarterly 24 (1), pp. 169–196. Clemons E.K. and M.C. Row, (1991). Sustaining IT advantage: the role of structural differences, MIS Quarterly 15 (3), pp. 275–292. Datamonitor Report, (2003). Food retail industry profile: United Kingdom, January. Datamonitor Report, (2006). Company Profile: Tesco PLC Analysis, October. Datamonitor Report, (2006). SWOT Analysis Tesco PLC, July. MarketWatch, (2006). Company Spotlight: Tesco, Datamonitor, September. Melville N., K. Kraemer and V. Gurbaxani, (2004). Information technology and organizational performance: an integrative model of IT business value, MIS Quarterly 28 (2), pp. 283–322. Mintel Report, (2004). Food Retailing –UK, Retail Intelligence, Nobember. Penrose E.T., (1959). The Theory of the Growth of the Firm, Wiley, New York, NY. Powell T.C. and A. Dent-Micallef, (1997). Information technology as competitive advantage: the role of human, business and technology resources, Strategic Management Journal 18 (5), pp. 375–405. Wade M. and Hulland J., (2004). The resource-based view and information systems research: review, extension and suggestions for future research, MIS Quarterly 28 (1), pp. 107–142. Read More