Marketing Strategy of Tesco - Case Study Example

Table of Contents Strategic Direction 2 1 Organic growth 2 2 Market and Product development 2 3 Localized approach 2 1.4 Product innovation 3 1.5 Extending the core 3 1.6 Related and unrelated diversification 3 1.7 Hybrid strategy 3 1.8 Methods of development 3 1.9 Discussion 6 2. Strategic Forces – Globalization 2.1 George Yip’s International drivers 6 2.2 Porter’s Diamond Model 7 2.3 International strategy 10 3. Tescos Strategy in US 10 3.1 Core competencies 10 3.2 Value Chain analysis 11 Bibliography 15 Appendix 17 1. Strategic Directions The concept of grocery retailing was fairly new to the people and hence Tesco initially created the market for this industry. For the first three decades its growth was very slow but steady. It concentrated on market development and product development. Even though they opened the first store in 1929, it was only in 1956 that the first supermarket opened. Hence their strategy was to develop the market first. During this period they could increase their market share without increasing competitive rivalry. This was possible because grocery retail was in the early stages of product life cycle. 1.1 Organic growth Although Tesco concentrated on the core growth of the company during the 50s and 60s, apart from organic growth, they also grew through acquisitions. They increased their market share at low cost as they concentrated in opening stores in and around London. The organic growth represents the long-term strategy of the company and also its core strength and vitality. The number of stores grew and they acquired cost leadership but cost leadership comes with disadvantages (Porter, 1979). Very low cost may take loyal customers away and it may also start losing revenues, which is what happened to Tesco. It then changed its strategy to increase its market share – price reduction and centralized buying. 1.2 Market and Product development Thereafter Tesco concentrated on growth based on four factors. While UK was their core market, they also expanded internationally. Apart from market development, they also focused on product development as they became as strong in non-food products as in food. Besides, they also introduced new retailing services. So their strategy was both market and product development. This is how they penetrated into the market and increased their market share. 1.3 Localized approach In their overseas expansion, they adopted a localized approach where they took into account the local culture, local suppliers and ways of working. They also recognized that each individual was different and hence adopted the multi-format strategy. They focused on a few markets which helped them gain competitive advantage and then find the direction for growth and development. 1.4 Product innovation During the 1990s Tesco concentrated on national market development through product innovation. They attracted and retained customers through different innovative strategies. To retain loyal customers they introduced loyalty cards; to attract a new segment they started online shopping and thereby created differentiation in their service offerings. It was the same market but with the help of technology they could increase their market share by being different. 1.5 Extending the core Another strategy during the 90s was new business development. They formed an alliance with Esso group and operated under the Express Store format through their petrol stations while they sold their fuel through Tesco stores. This was an unrelated diversification strategy where they added to their service portfolio. 1.6 Related and unrelated diversification During the 2000s they entered the convenience stores market by acquisition of T&S stores which added value to their existing profile. They extended their core food retailing into different areas of operation. They diversified into areas as diverse as clothing, electronic goods, financial services and the housing market. This was done strategically as the food market had matured and price war had reduced the profit margins. 1.7 Hybrid strategy In 2007 Tesco’s growth in overseas expansion was strong. The food retail market in developed countries had matured and hence Tesco applied the hybrid strategy (Annexure I) which, ‘seeks simultaneously to achieve differentiation and a price lower than that of competitors’ (Business Strategy, 2002). Tesco gained leadership in all markets it entered – both in market share and market capitalization. They focused on low price with high quality service. This strategy allowed them to identify their core competencies and achieve greater volumes. 1.8 Methods of development Companies can use either generic strategies or alternative strategies to develop and grow. The Ansoff Matrix (Annexure II) is a business strategy model that helps to develop strategies, analyze the existing strategies and markets and determine the risks in growth and development. In other words it focuses on the firm’s present and potential markets and products. The combination of present and potential markets and products can give rise to four different product-market combinations. Tesco’s strategy analysis through the Ansoff Model indicates that 1.8.1 Market penetration In the initial stages of the product life cycle, Tesco followed the simple market penetration strategy as it could leverage its own resources and capabilities. It achieved organic growth through its own internal investment in resources. This is the internal method of development. Tesco used this strategy up to the 1960s. This was important in the beginning as retaining the customers was important. 1.8.2 Product Development Tesco focused on product development after the initial market penetration. The purpose of product development was to utilize the existing infrastructure and resources to leverage economies of scale. Through the use of technology and innovation, they could protect the market share. Tesco achieved growth through product development for the existing markets as well as diversified into new products and services. They entered into the non-food sector and miscellaneous retailing services. It opened multi-format stores and convenience stores. 1.8.3 Market development It also moved towards new markets. They identified new geographical areas both nationally and overseas. It went in for massive overseas expansion and also national expansion. Tesco became the market leader in the UK through internal development. They used the existing competencies for national expansion. This was possible because low risks were involved and they had processes and systems under their control. Since they were already established and had their own customer base, they did not encounter errors. They also formed alliances in the domestic market for new products. They used the external method for market development. They used external resources to increase their market share. This was an oppurtunistic alliance with Exxon Mobil to sell their fuel through Tesco stores and vice versa. This way there was no change in ownership while both derived benefits through this association. Tesco also ventured into various overseas markets like Japan, Turkey, Poland and the US. It developed its international market through external methods. Tesco initially entered US through joint venture with Grocery Works and through acquisition in Poland. Turkey was also through joint venture and Japan through acquisition. This enabled them to have an existing market share instead of creating a customer base. It also was beneficial as their initial costs could be controlled. They could reduce the time needed to get a stronghold in the new market. Each of these methods required a different amount of commitment from Tesco and each yielded different results. It was late in entering China where its rivals were already having a stronghold. 1.8.4 Diversification Tesco diversified into related and unrelated areas equally. They made this strategic move as the food retail market had matured and price war had already reduced the margins in the food market. This was a very risky strategy as Tesco ventured for both product development and market development. Their strategy however did not pose problems because they did not move out of their core competency. They took this risk because they expected that the returns would commensurate with the high risks involved. In their expansion into the US they had related diversification in the form of backward integration. They took their existing suppliers from the UK into the US instead of buying through established local suppliers. Even their unrelated diversification had some synergy with their core business and corporate goals. Because they had a control over the retail grocery market they could take such risks. Their diversification strategy allowed them to have a foothold in the industry and thereby reduce their overall risk. When they found they were unsuccessful in Taiwan, they gracefully exited, without incurring much loss. 1.9 Discussion An analysis through the Ansoff model suggests that Tesco followed the market penetration strategy initially but when they attained the cost leadership, they went in for both product and market development. As they gained confidence they formed opportunistic alliances into both related and unrelated areas. They diversified into various new markets and introduced new products. They also adopted the related and unrelated diversification strategy and mostly they have met with success. The financial figures show an upward trend and positive group performance even in 2007. The trading profit, sales and the earnings per share all show an upward trend from the previous year. Tesco is certainly moving in the right direction but with the competition intensifying in grocery retail in the developed countries, they should concentrate on the emerging economies. It is still early to predict how the US market would unfold but emerging economies are promising. Wal-Mart has a presence practically in every nation and they are the strongest rivals to Tesco. 2. Strategic Forces - Globalization A global market implies increased oppurtunities but also increased threats and increased oppurtunities. The firms have to deal with several institutions or legal/administrative bodies and different forms of association takes place. Hence the international marketing strategy depends on both the external environment and the organizational capabilities. The external environment can be explained by George Yip’s international drivers while the organizational capability can be investigated with the help of Porter’s Diamond Model. 2.1 George Yip’s international drivers There are four factors that drive the internationalization process – the market, the cost factors, the competitive forces and the government factors. The market drivers conform to Porter’s Diamond Model where the demand has become uniform across markets and with lifestyle changes consumers are looking at convenience, packaged, ready-to-eat food and shop in style as well. The retail market is buoyant and the future prospects too are bright. As far as the government forces are concerned, most emerging economies have reduced the trade barriers. Globalization in the food retail industry has been caused by reduction in transaction costs and low barriers to movement in goods and capital (Manning & Baines, 2004). While the major beneficiaries of the globalization of the food retailing industry are the consumers, those who control the supply chain also have the financial benefits. Globalization has received further impetus as labor in developing economies is cheap which helps to achieve economies of scale. Of course there are differences across regions and nations, the logistics in each nation may also differ but as the transaction costs have reduced, it has positively impacted the globalization of the food retailing industry. Intense competition in the industry has been taking place and the globalization is not restricted to the region as suggested by Ghemawat. Even though the retailers may have some standard products across markets, but they have to adapt to local demands and tastes. As Wind and Douglas suggest, even global companies have to adapt to country needs. Tesco too for instance has to stock local food in its stores. Even McDonalds cannot afford to standardize its menu. It may standardize its service delivery and the store ambience but it has to adapt to local tastes. As far as food retailing is concerned, consumer difference does exist and retailers have to adapt a mix of standardized and localized approach. 2.2 Porter’s Diamond Model To understand the dynamic forces that are promoting the globalization of the food industry, Porter’s Diamond Model is very effective. Companies base their decisions on this model to determine their strategies and position. Porter’s Diamond is represented below: Source: Wonglimpiyarat (2006). The four determinants according to this Diamond include the factor conditions, the demand conditions, the related and supporting industries and the firm strategy, structure and rivalry. The analysis of the four determinants in the globalization of the food retail industry is given below: 2.2.1 Demand conditions: Lifestyles have changed and the customers have become demanding. They want ready-to-eat food and snacks, frozen food and also look for an ambience that is congenial to shopping. Hence, the demand is not just for the food but for the place and space as well. With shift in the retail scene, the competition has intensified and as suppliers fight for shelf space, the retailer can demand a higher margin (Collins & Burt, 2003). Retailers are keen to enhance their brand image and channel partnerships can enhance the positioning of the retailers. It is no more just horizontal competition between individual retailers as the focus is no more on the price but on value addition for the customers. Tesco alone generates £11bn sales and their share is about 32% of the total retail market. This demonstrates the demand for such stores globally. Tesco has different store formats depending on the segmentation in that area. Again, to cater to the diverse customer segments, they offer a wide variety of products so that every customer that enters the store finds what he is looking for. 2.2.2 Factor conditions The factor endowments are inputs that have to be upgraded from time to time. Natural resources, demographics, climate and location fall under the category of basic factors while the advanced factors include communications infrastructure, sophisticated skills and research facilities. As far as the food retail industry is concerned the natural resources and climate are not so important. Demographics and location of most countries are conducive to the food retail industry. The basic factors have to be reinforced through the advanced factors. An abundance of factors may undermine the advantages instead of enhancing it. Specialized factors involve heavy investment that is difficult to duplicate and Tesco has invested heavily in most nations where it has extended its reach. 2.2.3 Related and supporting industries The role of supporting industries refers to the threat of substitutes and role of the complementors. This includes suppliers that may themselves be internationally competitive. As the retail brand enhances, the retailer requires more control over the supplies and processes. With retailers expanding across borders, they need to control suppliers’ behavior and protect against quasi-rent seeking activities. This leads to vertical relationship between the retailer and the supplier. Vertical integration leads to control and economic benefits that include continuity of supply, access to management information, open communication, and barriers to market entry (Manning & Baines, 2004). In addition, the retailer can also control the quality of products and delivery schedules. The economic benefits are in the form of reduced logistics, spread of overheads and speed of data flow. 2.2.4 Firm strategy, structure and rivalry This refers to the threat of new entrants, domestic competition and how business is established and organized in that country. The retailers have to follow a different strategy in different locations and also consider the domestic competition. Consolidation has been taking place in the retail sector and the reduced number of retailers has created a market force where the domestic producers can supply to an ever reducing number of customers (retailers). These retailers have a global supply base that has further exerted pressure on the domestic producers. This has led to the development of coordinated global supply chains. The top ten global retailers as on 2002 is laid out in Appendix I (Manning & Baines, 2004). 2.3 International strategy Once the sources of competitive advantage have been identified the international strategy can be formulated. The international strategy comprises of configuration and co-ordination of activities. Retailers now operate from dispersed locations and have also been able to take care of the logistics accordingly. The operations are coordinated centrally demonstrating high coordination in international retiling industry. Deregulation, new technology, reduced transportation costs, debts and concentration of market power in the hands of a few buyers have resulted in a large number of competitive and relatively powerless suppliers face a few large buyers (Vorley, n.d.). Value has been transferred from producers and rural areas to consumers and urban areas. All these factors together demonstrate the strategic forces that are responsible for the globalization of the food retail industry. 3. Tesco’s strategy in the US 3.1 Core competencies In the US Tesco is concentrating on rolling out hard-discount stores and has focused on a particular strategy. It has taken into account the competitive forces in the US and then shaped its strategy. According to Porter (1979), competition need not be manifested only in other players but it could be rooted in the underlying economics. To create competitive advantage firms need resources, capabilities and competencies and understanding these create the core competencies of a firm (Hales & Barker, 2003). Core competencies should be unique to the company, difficult to imitate, can be possessed only by companies with superior performance and gives the company access to a wide variety of markets. Core competencies are built in a company through continuous process of improvement and enhancement and these core competencies lead to the creation of the value chain. Tesco too has been able to create a unique image in several of its strategies. Its sourcing strategy is unique as it has maintained relations with its existing vendors and suppliers even in the US. Another core competency of Tesco is its emphasis on people – its customers and staff. They insist on fulfilling the customer needs and requirements and with this aim, they strive to innovate at all times. They also have a distinctive relationship with their distributors and suppliers. 3.2 Value chain analysis According to Porter, ‘every firm is a collection of activities that are performed to design, produce, market, deliver and support its product. All these activities can be represented using a value chain’ (Hales & Barker, 2003). The table below describes the generic activities undertaken by the firm to produce, transform and add value to the products and services delivered to the customer. New market entrants face threat of entry or entry barriers but Tesco started with hard-discount stores even though top UK retailers like Sainsbury and Marks & Spencer failed in the US market. Tesco is financially strong to withstand the pressures it may face in getting a stronghold. It is choosing underserved neighborhoods in the US locations, where competitors have not yet ventured. Tesco is well established in the global retail industry and hence it adopted the strategy to enter the US market as hard-discount stores. They expect to cut staffing and operation costs as they use pre-packed shelf-ready items. Their strength is the people and they strive to make the workplace a better place to work in. They keep introducing new technology and simplifying the entire process. Innovation and technology helps them to induce efficiencies in their system thereby enabling them to fund price cut. This is the reason they are able to survive price wars. They are using energy consuming cold cabinets and sell pre-packaged salads thereby using technology to innovate. Their strong backward integration gives power to the supplier as well, which in turn translates into benefits for the end consumers. Its operating model is different from the from the conventional US grocery business. It has brought its entire team of partners rather than deal with established local suppliers. Suppliers can exert bargaining power on participants by raising prices or compromising on quality. Tesco did not want to rely on local suppliers because of the fierce competition in the US retail market. This demonstrates that Tesco follows backward integration with its suppliers and this strategy has given it total control over prices, delivery, quality, and information flow is perfect. Tesco has been able to do this because it has confidence on it suppliers’ quality and performance with whom they have been associated for years. Inbound logistics – they apply shrink management and keep a track of the products from the factory to the warehouse to the stores and to the shelf. They sell Fresh & Easy’s own label products that are manufactured by their own subsidiaries in the US. Tesco in the US is unable to offer fresh foods as in the US they are concentrating on selling pre-packed shelf-ready items. Usage of energy consuming cold cabinets is also to gain price advantage over the rivals. Their intention is to gain price advantage by reducing the staff and operation costs. They use their own truck fleet to make single deliveries to the stores against their rivals in the US that rely on separate deliveries from their main suppliers It has product differentiation and brand identity but Tesco lacks local experience. It has not taken into account the local culture which would affect its marketing strategy and the HR policies. Value has been defined by Porter as ‘what buyers are willing to pay’. Firms create value for their customers either by lowering the costs or offering something different from the competitors (Bevan & Murphy, 2001). Tesco has been able to create value for its customers both by lowering the prices and offering something different from its competitors. The value chain analysis thus shows that Tesco’s strength lies in its people and its sourcing strategies. The value chain fits with its generic strategy because it is able to defend itself against the competitive forces. Since suppliers can exert bargaining power by raising prices or compromising on quality, Tesco carried its own suppliers and vendors from UK. Use of technology is helping it to reduce its operating costs while providing differentiation. Tesco can dictate the terms of business and hence has the buyer power. It has entered into 5-year contracts with its buyers which allows it to bargain for better prices which it then passes on to the customers. As far as competition is concerned, Tesco does not find them a threat. Tesco’s closest rivals in the US are Wal-Mart, Ahold and Aldi. Wal-Mart is its main rival in size and power. There is a fight for market share but Tesco has tapped into the underserved areas where Wal-Mart does not have a presence. They will thus be able to lock in buyers who would remain loyal to Tesco. Hence, it follows the differentiation strategy. It also sells products in its own label which gives any retailer an advantage over competitors. Tesco is able to fund price cuts and survive against competition. Since there are no exit barriers, Tesco can at any time wind up from the US. Tesco has gained competitive advantage by its sheer backward integration with its suppliers by carrying its whole system with it to the US, thereby eliminating the purchase from local suppliers. It has product differentiation as it is supplying pre-packaged shelf-ready goods which are not yet offered by any of the US retailers. Tesco’s value chain does not appear to have any weaknesses as it has clearly identified its core competencies and strengths. They also know the strategy of the rivals and have adequately equipped themselves. They have differentiation in several areas from their competitors. Firstly, they have the product differentiation – they offer pre-packed and shelf-ready food. Secondly, their locations – they have opened stores in the underserved areas where rivals are not yet present but may open soon. Thirdly, the prices – with the application of technology and mass merchandising they are able to sell to the consumers at very attractive prices. Fourthly, they use their own fleet of trucks for single deliveries instead of relying on suppliers. Finally, they have carried their own venders and suppliers from the UK which gives them the bargaining power and favorable terms if business with their suppliers. The organizational culture at Tesco is people –centered. They lay emphasis on the people – their staff and their customers. They strive to satisfy their customers and the staff and believe that innovation is the key to success. This is the reason they use technology to introduce innovative products and processes in their offerings to the customers. Bibliography Bevan, J & Murphy, R 2001, The nature of value created by UK online grocery retailers, International Journal of Consumer Studies, vol. 25, no. 4, pp. 279–289 Bhimani, A & Ncube, M 2006, Virtual integration costs and the limits of supply chain scalability, Journal of Accounting and Public Policy, vol. 25, pp. 390–408. 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Sparks, L & Wagner, BA 2003, Retail Exchanges: a research agenda, Supply Chain Management: an International Journal, vol. 8, no. 1, pp. 17-25. Strong, W n.d, Strategic Choices Business & Corporate Level, viewed 9 November 2008, from https://idenet.bth.se/servlet/download/news/26567/FEC024+Seminar+6+Business+Corporate+level.ppt Vorley, B n.d, Food Inc, Corporate concentration from farm to consumer, UK Food Group, viewed 10 November 2008, from http://www.ukfg.org.uk/docs/UKFG_Food_Inc_Summary.pdf Wonglimpiyarat, J 2006, The dynamic economic engine at Silicon Valley and US Government programmes in financing innovations, Technovation, vol. 26, pp. 1081–1089 Annexure A Annexure B Annexure C Read More