Macro and Micro Environmental Factors in the Organization of Tesco - Case Study Example

A critical analysis the impacts of macro and mirco environmental factors to the organization of Tesco and the marketing mix decisions. All organizations are open systems; they exist within a dynamic and complex environment having a variety of interchanges with it, both receiving inputs and outputs. Companies try to control the nature of their output but very few of them can control more than a few of the inputs they receive. Hence organizations try to predict, in future, the changing environment in which they are working and in result they make strategies to combat such changing environment. Successful organizations tend to such things and hence positive results follow. The organization that I have chosen is TESCO, which is a well diversified company working in many different ventures and has created a great deal of value in the eyes of their customer. Company Profile Tesco runs more than 2,300 supermarkets, hypermarkets, and convenience stores in the UK (where it is the market leader in food retail), Ireland, Central Europe, and Asia. Its operations include convenience and gasoline retailing (Tesco Express), small urban stores (Tesco Metro), hypermarkets (Tesco Extra), and financial services through Tesco Personal Finance. A global leader in online grocery sales, it owns a 35% stake in US grocery chain Safeways Grocery works. It is the leading online grocery store and it is now expanding its business with a TV channel and a "retail based education institution”. Environment Analysis The environment may be divided into three layers: the macro environment; industry or sector; competitors and markets. All these layers interact with each other within themselves. When considering the macro-environment factors for TESCO the basis of analysis to be used is the PESTEL analysis. This model uses broad headings such as: Political, Economic, Social, Technological, Environmental and Legal; to analyze an organization’s macro-environment. Macro-Environmental Analysis Political Each and every company in which TESCO operates has a different political risk because of the fact that different countries have different political policies which can be either beneficial or can be harmful for TESCO’S operations. For TESCO to operate in different countries, the political influence depends upon the stability of the current government. TESCO Lotus in Thailand has delivered strong growth during the year 2008-09 despite Thailand’s weakening economy and the uncertainty involved with the stability of the Thai government. TESCO’s operation in UK, Ireland and few other countries; with respect to competition have been continuously scrutinized by the competition authorities. TESCO’s management has kept itself up to date with respect to any changes in the political uncertainties and have kept them in mind when developing their long-term strategies. TESCO has remained cautious to future changes and has engaged itself with governmental and non-governmental organizations to keep ahead with respect to any dynamic changes. TESCO’s recent political donations in the form of sponsorships to many different parties and trade unions would also favor them in reducing any political risk that could have materialized. Economic Economic environment includes interest rates and exchange rates, as well as general state of the economy in which an organization operates. Organizations need to know the economic prospects and inflation rates for a particular country in which it operates and hence tailor a strategy to overcome any risks that might arise. The economic downturn recently has deteriorated TESCO’s performance a bit as the company while operating in the U.S.A, was unable to keep up the pace of growth against its demanding development objectives. During this economic strain, when consumers were also feeling the pressure, TESCO was one of the companies to lower its prices and introduce affordable goods for its customer. Globally the economic recession has struck every business and individuals as well, but TESCO has produced favorable results. The testing economic conditions all over the year 2008-09 have resulted in some increase in bad debt levels and fraud for TESCO. Sales Growth in Europe slowed down in the second half of the year reflecting the major economic recession. Besides this economic downturn inflation has also played a part in reducing the sales growth for TESCO in Europe. There has been an appreciation of different currencies, hence creating an exchange loss for TESCO over the year 2008-09, if this pattern continues the exchange loss might even increase, e.g. appreciation in the price of Euro over the year 2008-09. Social Socio/cultural influences include any particular changes in tastes, lifestyles, demographic make-up of a population, etc. TESCO has operated successfully in many different countries having people with different tastes and cultures. TESCO has operated in countries where people have had knowledge about the business because of its worldwide name and image. TESCO has tend to increase customer’s attitude towards leisure and work. TESCO has usually opened its stores, hypermarkets which are either in the city or very near to the outskirts of a city; this strategy has helped them to obtain customers as the stores and hypermarkets, etc are situated in thickly populated areas. If TESCO is to open up in a particular country it also has to look at the level of education, the distributable income and the consumerism of that particular country. Technological These may include changes in retailing methods, changes in production methods (e.g. greater use of automation) and greater integration between buyers and suppliers via computer link-ups. The management should also keep itself up to date with respect to rapid changes in technology and hence adapt to such changes. TESCO has adapted to changes in the technological environment to keep itself as a profitable and a competitive organization. TESCO, in recent years has used such technologies and has advanced its operations, it has introduced innovative technology which has allowed them to electronically check-in bread and milk deliveries at their depots, thus eliminating paperwork and reducing human administration. Check-outs have been another critical issue for sales in any supermarket or hypermarket, TESCO has also introduced new checkout technology for its store, this has made the checkout process more fast and accurate, around 25% of TESCO’s UK customer transactions are through self-service checkouts. TESCO has wide controls in place to maintain the integrity and efficiency of its IT infrastructure and these IT systems are shared from their international operations to ensure consistency of delivery. Environmental Physical environment is important for logistical reasons, as a source of resources and because of increasing regulation. Companies are under immense pressure to incorporate environmental measure into their short and long-term strategies so as to protect the environment which is exposed to the hazardous activities being carried out by organizations. TESCO has always strived to reduce its energy usage in stores, transportation, waste management and any particular event that is harmful to the society. A Corporate Responsibility committee is present within the company to ensure the company’s adherence to reduce environmental issues. There are strict product safety processes and regular management reports. TESCO works in collaboration with its suppliers to ensure mutual understanding of the standards required. It also monitors developments in areas such as health, safety and nutrition in order to respond appropriately to changing customer trends and new legislation. Over the past few years TESCO has continued to introduce proposals to save energy and lower its carbon footprint in all their operations worldwide. Since 2006-07 TESCO has reduced 21% of their stores carbon intensity. TESCO has opened their greenest store in Manchester with a carbon footprint lower than 70% below than that of a typical store in 2006. It has also increased its capital investments as a step to reduce environmental threats. Energy consumption fell by 8% in 2008-09 despite the fact that the business grew. TESCO has also introduced Green club cards, encouraging their consumers to recycle. Tesco Malaysia became the first country outside the UK to launch green Club card points to encouraging its consumers to use lesser carrier bags. TESCO took the initiative to be the first retailer in the world to carbon label products with 100 products labeled in the UK already and many more to be launched. TESCO has also been awarded with the Sustainable management award in South Korea. Legal The legal environment cover influences such as taxation, employment law, monopoly and other laws and legislations affecting a company. TESCO has set up compliance committee to ensure that the organization complies with the relevant legal rules and regulation. As in previous years, TESCO is fined for selling out of date food items which are strictly against the public health and safety law. Micro Environmental Analysis Micro environmental analysis would include factors that would affect the industry or sector in which an organization operates. Porter’s five forces techniques can be used to analyze the micro environment in which an organization operates. Porter’s Five Forces Model The immediate business environment of firms producing similar goods is called the industry. Micro environment considers factors which are within the industry. The Porter five forces model elaborates that industry attractiveness depends on five factors: Threat of New Entrants New entrants into a market, bring extra capacity hence intensifying competition. The major threat from any new entrant would be that the new entrant would grab an existing company’s market share, hence driving him out of the market. Threats from new entrants can be reduced if the barriers to entry into a particular industry are strong. The supermarket industry requires huge capital investment but that alone cannot be used as a barrier to entry into a particular industry. Competitors usually respond by counter attacking to new entrants in a particular industry. Wal-Mart planned to open 4 small-format grocery stores in Arizona in response to TESCO’s entry to the U.S.A with their Fresh and Easy format. Certain other barriers to entry are; Economies of Scale; where unit costs of a company are lower because of the learning curve factor. TESCO has the advantage of having a good learning curve, but this factor would differ if TESCO is to operate in new countries/markets. Product Differentiation; this is achieved via good brand image and customer loyalty. TESCO, over the years has created this image around the globe, hence it can open up in new markets as a result of this product differentiation. Access to Distribution Channels; TESCO can create this barrier for new entrants by having dedicated distributors like Toyota, but this factor can be used against TESCO when it is to open in any new country. Threat of Substitute Products This threat is across or within an industry, close substitutes reduce the profit margin of the competitors e.g. Petrol for Diesel, etc. TESCO has many different competitors which can pose such threat to them, like Sainsbury in the UK, Trader Joe’s in the U.S.A alongside Wal-Mart. Bargaining Power of Customers Powerful customers can force price cuts or quality improvements. TESCO is in a retail business and as such would not have any customers which would have a greater bargaining power such as to reduce the price of a particular product. The only reason that can increase the bargaining power of customer is the fact that competitors of TESCO such as Sainsbury or Wal-Mart offering either high quality goods or offering better prices. Bargaining Power of Suppliers Suppliers’ power to charge higher prices can be influenced by; The degree of switching costs The presence of any supplier controlling prices The uniqueness of the product offered TESCO and Sainsbury have great bargaining power with their suppliers as they purchase a very larger proportion of the suppliers’ total sales. A monopoly supplier of a vital component will be able to exert huge bargaining power e.g. huge fashion house have strong brand image and are in a powerful position to charge higher prices(Versace, Dior, etc) Competition Many competitors can intensify competition in a particular industry. It would usually depend upon; Number and strength of competitors; TESCO having quite a few competitors especially in UK and the U.S.A. If Buyer’s can switch easily between suppliers, competition is high If the exit barriers is high, companies will hang on until forced out. Marketing Mix – TESCO The main function of marketing is to satisfy customer need profitably through an appropriate marketing mix. Marketing mix comprises product, price, place, promotion. Marketing mix is an important and strategically important concept. The 4P’s element in the marketing mix act substitutes for each other, hence they must be integrated e.g. higher quality of any particular product would lead to higher selling price being sought for it. TESCO marketing mix in USA under the Fresh and Easy title is; Product Product element shows the product that a particular company is about to sell. TESCO, entered the USA market with a business well diversified from their core activities, under the brand name of Fresh and Easy, TESCO opened up a grocery store to sell up grocery related products, proper branding was done under the Fresh and Easy label to make customer aware of the presence of a different brand. Fresh and Easy was not profitable initially when it was launched in 2007 in the U.S.A. later on it provided favorable results and it is expected that by the mid of year 2010 it would turn around as a good profitable venture. Price TESCO approached an aggressive pricing strategy to grab its market share. It went on to give its customers ready meals i.e. selling high value meals at fraction of the normal cost. This pricing strategy would be considered Penetration Pricing i.e. to charge lower prices than that of competitors to achieve early market share. Place Place deals with how product is distributed and how it reaches its final customers. Fresh and Easy had to absorb heavy distribution cost as they had to build their own independent distribution channels. Logistics are an important feature as they determine the efficiency of the distribution system i.e. a warehouse close-by would make it easy and fast to make the product quickly available for the customer. Promotion Promotion is one factor of the marketing mix over which a company usually enjoys greater control. Promotion helps in increasing the knowledge and know-how about the product within its customers. Fresh and Easy had to face huge promotion expenses just to promote its brand, creating better brand awareness among customers by designing their stores in a unique way and avoiding the use of traditional media outlets. Besides all this, they have created their green stores which show their corporate responsibility and environment friendliness. This marketing mix strategy has contributed positively for Fresh and Easy. Marketing mix is the set of controllable variables and their levels that the firm uses to influence the target market. These are product, price, place, promotion. Tesco has a well-established and consistent strategy for growth, this is a way in which it has strengthened its UK business and has created ways to expand into new markets. TESCO is considered a market leader in many countries in which it operates except U.S.A. TESCO has kept its image up by showing the whole world that is a socially responsible firm, this has led TESCO to achieve many awards too. TESCO has invested too much in climate change at Manchester University, this seems that it has invested too much in environmental issues whilst there are other areas which require major investment e.g. the new market i.e. U.S.A which would require major investment to prosper in future. References: Annual Report and Financial Statements 2009 www.tescoplc.com/annualreport09 Top of Form Dymsza, William A. Multinational Business Strategy. New York: McGraw-Hill, 1971. Bottom of Form Heidingsfield, Myron Samuel, and Frank H. Eby. Marketing and Business Research. Modern management series. New York: Holt, Rinehart and Winston, 1962. Top of Form Kerin, Roger A., and Rob ORegan. Marketing Mix Decisions New Perspectives and Practices. 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