The Principle of Competition for Tesco - Case Study Example

Tesco Strategic Review Report Executive summary This report shows some of the competitive forces that affect Tesco’s in some markets. It starts by introducing the overview of the forces in operation within the market. In a nutshell, the report explains porter’s five forces in operation in the market i.e. Threats of new entrants, substitute products or services, Bargaining power of the buyers (customers), Bargaining power of suppliers and Rivalry among the existing firms. Furthermore, the life cycle of the industry is also mentioned which include: introduction stage, growth stage, maturity stage and declining stage. It concludes by providing the effects of a bad reputation on the company’s performance. The report ends by offering some recommendations on what the top management should do so as to manage various stakeholders. The report comprises of four sections; introduction, body, conclusion and recommendations. Introduction The principle of competition is managing the level of competition. It becomes easier to perceive competition as in a narrow and pessimistic manner. Although one may sometimes hear managers complaining to the contrary, steep competition in a particular industry is neither bad luck nor a coincidence. Furthermore, in the struggle to get a larger market share, competition is not only exhibited in the other players. Instead, competition within the industry is deeply rooted in its fundamental economics, and existence of competitive forces that go beyond the conventional competitors in a certain industry. Suppliers, customers, substitute products, and potential entrants are all players that may be less or more prominent or active depending on the industry. According to Porter (1979), competition within an industry mainly depends on five forces i.e. power of suppliers, buyer’s power, threats from new entrants, rivalry within the industry and presence of close substitutes. The combined strengths of all these forces dictate the ultimate profits to be earned within a given industry. The competitive forces TSCO Company The strongest competitive forces define the level of profits to be earned in certain industry, therefore, they are of great significance in formulating TESCO’s strategy. For instance, even a company that has a strong position in a given industry without any threat by potential entrants will earn little profits if it is faced with a lower-cost or superior substitute product­- as the top vacuum tube manufacturers and coffeemakers have learned to their distress. In such scenarios, surviving with the substitute product is a leading strategic priority (Porter, 2002). Diverse forces take on the importance, in determining the level of competition in every industry. Each industry has a basic structure, or a set of technical and fundamental features, which leads to these competitive forces. Any policymaker who needs to position his/her company to manage industry environment or to have an influence over that environment in favor of the company has to learn what influences the environment. In order to understand the forces of competition within a given industry, strategists have to analyze the underlying structure of the industry in terms of five forces as shown Threats of new entrants Firms that are making many profits will attract new firms that are motivated to make huge profits. This leads to entrants of new firms which will finally reduce the level of profits being earned within the industry. Motivated by huge profits earned by Tesco, Sainsbury also moved into the non-food area and came up with cookware and home products. Unless Tesco create entry barriers to block new entrants, the abnormal profits earned before will decline towards zero in a perfect competitive market. Some entry barriers to the market include government policy, absolute cost, switching costs and economies of scale. Threat of substitute products or services. The presence of products separate from the common product limits increases the tendency of customers to switch to substitutes. For instance, taped water might be regarded as coke’s substitute, while Pepsi is the similar product to that of a competitor. Enhancing the marketing activities of tap water shrinks the pie for both Pepsi and Coke, while extensive Pepsi advertising is likely to increase the consumption capacity of all soft drinks, notwithstanding while offering Pepsi a bigger share at the expense of Coke. Bargaining power of the buyers (customers) It is the buyers ability to pressurize the firms, which also has some effects on the sensitivity of the consumers to any change in price. Firms can reduce the buying power of the consumers by employing loyalty programs. The buyers bargaining power is high if he/she has several alternatives. Tesco launched clubcard system as a way of maintaining the Loyalty of the customers Bargaining power of suppliers Suppliers of labor, raw materials, services like expertise and components to the firm can be a source of power over the firm especially in a case where there are few or no substitutes. Suppliers may decline to cooperate with the firm or charge high prices for distinctive resources Rivalry among the existing firms For several industries, the amount of competitive rivalry is the main determinant of competitive advantage of the industry. Some of the potential factors include competition between offline and online companies, ratio of firm concentration and viable competitive advantage through innovation. In this case, there has been high level of rivalry between Tesco and Sainsbury especially during the pricing of their services Industry life cycle All the industries experience the same life cycle just like any normal human being who is born, grows, and reaches maturity stage then eventually declining towards death. Even though firms may be in the same industry, they experience different stages of lifecycle. The strategic plan of a firm is largely influenced by the life cycle stage at which a firm is at a particular point in time (Charles Hill, 2012).The increase in sales of a given industry in a certain period of time is used to chart its life cycle. The different stages of life cycle of an industry include: Introduction stage-an industry is an infant at this stage and there is development of new product and the firm may be alone in the industry. A firm in this stage uses a focused strategy to target a small segment of customers. Marketing in this stage is intended to explain the uses of the product to the consumers Growth, stage-this stage, requires a good amount of capital. Marketing is intended to differentiate the company’s products from those of the competitors. The industry is undergoing product standardization at this stage. The firm has been successful in the market and the increase in demand increases sales growth Maturity stage-there is slowing growth as the industry approaches growth stage where the expansion in sales is equal to the growth rate of the economy. Late entrants to the market bring about competition, therefore, marketing majorly stresses the unique features of the product. Innovations in this stage are not radical like before and may be only change of formulation or color to stress the newness or improvements to consumers. Declining stage-this is an inevitable stage especially if the innovation of the product never kept pace with the competitors. Sale is starting to decrease in this stage and there is a shake-out in the industry since those firms that didn’t quit during maturity stage exit the industry. Consolidations and mergers are experienced since firms want to remain competitive. Internal strategic analysis of TESCO Tesco’s internal analysis aims at investigating the internal capability having in mind the positioning of other competitors lime Sainsbury in the area in which they position their activity, therefore, ascertaining the relative position of the company in the market as compared to the position of its competitors in the marketplace (Certo, 2008). Ackoff (2001) argues that it is no longer about saying, “we know how to do this," but it is all about how to do it better than others on particular markets. The objective of internal analysis is to determine the strengths and weaknesses of the company and its unique capabilities Company’s strengths are its features that put it on a higher position as compared to its competitors, which offers it a competitive edge (for instance big financial resources, strong chain of distribution, possessing patent rights, a high degree of usage of the production competences, etc.) The company’s weaknesses are its features that put it on a lesser position as compared to its competitors (e.g. high cost of production, obsolete technology, rigid organizational structure, lack of negotiation capabilities with its customers, faulty management, etc.) According to Wood & Wood ( 2002), the core competency of the company signifies a capability of a distinct, exclusive resource it has a competence at which the business succeeds and which signifies a competitive advantage, an important success factor. The internal strategic management allows TESCO’s top management: To identify company’s strengths and weaknesses entirely and of its several strategic fields of activity To allow effective comparison of the strengths and weaknesses of the company with those of the competitors To allow an appraisal of the comparative position of the company in comparison to the best company profile enforced by the competitor’s position and the external environment. Allow the establishment of the strategic potential of the company in terms of possible or existent competitive edge in relation to competitors The following analysis of the company’s internal potential will allow the company to appreciate true sources of existing competitive advantage and to ascertain ways in which it can strengthen an existing advantage or to come up with a new one (Cole, 2003). Strategic analysis of the resources As far as this analysis is concerned, wide range of data and information concerning the company’s is collected in the first stage, entirely and at each segment. It can be achieved through systemization of the key aspects of the company’s resources, for concealed analysis, for various activity lines in the company as shown in the table below The importance of internal analysis stands in the fact that: It allows for some aspects that are really weaknesses to be identified having the competitors in mind and relation to environmental requirements, stressing the fact that action has to be made if the company is to reduce the gap between its current performance and the one that is brought about by the environment It allows for some aspects that are strengths to be identified on the basis on which the company will have to build its strategy or merge its position. Strengths and weaknesses identification in strategic resource analysis is an essential action, but it is not enough one when it is done the internal strategic analysis, since it does not allow estimation to be done concerning their importance in the strategic plan and these key resources cannot be put in rank according to their strategic importance (Bryson, 2003). Strategic analysis of the competencies of the Company In many instances, the success of TESCO in some market segments of strategic activity majorly depends not only in its advantages on a certain line of business, but also on a series of aspects relating to the entire company. Generally, at the company level, there are three categories of competence when it comes to a strategy i.e. necessary competence, additional competence and fundamental competence (Dess, 2005). Additional competencies-it is related to the existence of the company but not to the company’s line of business. For instance, companies that keep their own accountancy are less competent in accountancy, correspondingly in wage plans and labor law. All these competencies are spread within the organization, they enhance good management, and in few instances they can contain in a value source for both the company and the clients, therefore becoming elements of competitive advantage Necessary competencies-this is mostly related to the organization’s line of business. So as to deploy an activity in any business line, all the organizations that need to take part to that line of business should have some totally needed capabilities (technical facilities, right qualifications, labour force and some structure of costs). Fundamental competencies-given by those distinctive or very rare advantages which the organization has in its particular line of business. For a company to have fundamental competence, it does not need to invest in research and development and does not need to integrate all the activities. Fundamental competence comes a result of a distinctive body of knowledge that the company owns and from its ability to integrate and coordinate its various structures using this knowledge ( Bracker, 2000). A strategic analysis of the competencies allows the formation of a universal portfolio of competencies, which forms the base for validating the decisions of employing competences relating to the environment every segment of strategic action under analysis. An effective competency management portfolio will allow to achieve competitive advantage by employing competitive advantage which are explicit to certain business line, where competitors does not have this competence. The financial analysis Several scholars (Bryson, 2003, Certo, 2008 & Z., 2013) believes that the financial policy of the company is not seen as a factor of competitive advantage but seen as a constraint. This approach from a strategic point of view can be dangerous in the long run, having in the close connection between the share markets and the finances, the rising dynamic, the pricing strategy, and the portfolio strategy. The competitive risk and financial risk are closely related to each other. The financial analysis signifies one of the widely used way of assessing the performance of a company making a ratio between the financial resources it owned and the results. A number of productivity indicators are put into consideration in this analysis e.g. Profitability indicators-the economic profitability ratio of TESCO, commercial profitability ratio, stocks’ profitability, assets profitability ratio, etc. Indicators concerning the financial balance-immediate liquidity ratio, general liquidity ratio, the international financial liquidity ratio, etc. Indicators concerning debts and claims-the period of recovery of debts, degree of global indebtedness, the degree of indebtedness, etc. The major challenge relating financial analysis comes as a result of challenges in obtaining detailed and important information concerning the competitors. The publication of company’s audited accounts in comparison with various indicators does not offer enough information, especially when it comes to organizations having several segments of strategic activities (Rawlins, 2008). External stakeholder issues that face a company TSCO like other several companies is faced with various challenges during its business operations. Most of the challenges are concerned with how the businesses engage with the stakeholders and the impacts they cause to their businesses. In order to maintain their reputation and have a good relationship with various stakeholders, Stanwick, (2008) believes that companies have to engage in socially responsible activities to avoid being in lock heads with them. The following are some of the issues that are regarded as being of high concern to various stakeholders and also of high importance to most of TESCO Company. These include: Economic and environmental restoration Climate change, which include adaptation and management of carbon risk. The change to lesser-carbon economy, which include the role of renewables Independent ethics and safety monitors Frontier operations i.e. hydraulic fracturing, deep water drilling and oil sands Risk management Contractor and employee safety Recruitment and retention Diversity and inclusion Performance and reward Impacts of external stakeholder issues on the corporate reputation of a company Several companies in the present time can no longer disregard the demands of those who are not the stakeholders, but instead should strike a balance between the needs of various stakeholders, including the entire public, the communities in which they operate and the employees so as to protect its reputation. In the wake of financial crisis, the attitude towards business has been huge, therefore there is a sense that everybody is watching and scrutinizing one another. There is no doubt that reputation has a long term effect on health performance a company. At the event that the company is not sensitive to stakeholder involvement, a reputational risk can occur thus can have some great financial consequences to the company ( Wood & Wood, 2002). Negative publicity from the media relating to recalling of a product or an accident can lead to decrease in sales, which in turn affects the liquidity of the company. At that point of time, banks and investors may take fright, withdrawing accessibility to more capital and putting additional pressure on the balance sheet. In the long run, reputational risk can cause a lot of damages as organizations pursue to rebuild brands and restore the confidence of various stakeholders. Future profits therefore largely depend on a good company reputation, which forms a major competitive advantage Stakeholder engagement This is the process of listening, exchanging of information and learning from various stakeholders with the aim of building trust and understanding on matters of mutual interest. Reasons for engaging with stakeholders Stakeholders can have an influence on the success or failure of an organization at different levels (e.g. have an effect on the company’s operational license, reducing company trust etc.) The main objective of stakeholder engagement is to create a better understanding of stakeholders view on important issues and, therefore, building relationships with key persons. Nonetheless, with time, more concrete business value can be seen from the relationships. Ferrell & Fraedrich, (2012) proposes that the value of stakeholder engagement can be realized through the following: It enables making of informed choices by creating business intelligence and reducing or avoiding risks. It eventually provide a stable environment for the business and the entire society It develops and expands market opportunities by promoting ownership of issues and makes organizations to manage issues arising in the market It builds reputation and brand equity. It builds trust within the organization and enhances social cohesion. In addition, it bridges different perspectives together for innovation and creativity CSR and Company Reputation The common link between CSR and company performance is through the aspect of reputation, reputation shows firm’s success in meeting the expectations of various stakeholders. Good reputation enables a firm to charge superior prices, increase their accessibility to capital markets and attract investors and better applicants. Furthermore, the more a firm contributes to social welfare of the society, the better its reputation (Wigfield, 2010). Reputation, which is similar to brand awareness, assists in brand differentiation and finally an organization gain or lose its competitiveness. Definitions associated with CSR Corporate philanthropy An activity above and beyond what is required of an organisation and which can have a significant impact on the communities in which a company operates. Social disclosure Refers to the company’s performance in providing information on societal initiatives undertaken by the firm. To the extent that corporations provide data on their societal programmes, they are responding to societal needs and expectations regarding social disclosure Company’s environmental record Pro-social positioning of many firms is identified with their Pro-environment policies that affect air and water. This increasing concern with environmental issues is explained through (1) the influence that consumers’ environmental concerns have on product offering, (2) the multidimensional character of these issues Workforce diversity Percentage of women and minorities on the board and/or in the organisation are perceived as aspects of a company’s humanistic contribution to equality in the workplace Financial health and tendency Raters attempting to judge a company’s social responsibility to grow generally recognise the importance of that company’s financial health. Provide evidence to support the view that profitability of a firm allows and/or encourages managers to implement programmes that increase the level of CSR. The financial angle, however, is not enough to judge the level of CSR. Community involvement Companies that score highest for their community involvement appear to make more charitable contributions, encourage more employee volunteer programmes, and have greater local economic impact. Tesco’s Corporate Level Strategies These are some of the strategies that the company adopted in conducting its unit activities broken down into departments and individual activities. Tesco uses corporate level strategies to give guidelines especially to managers to follow during their operations in the business. Corporate level strategies entails the coordination of all the individual units within the organization and the managers and supervisors are tasked with the responsibility of allocation of resources to various activities. Another form of corporate level strategy adopted by Tesco Company is integrated strategy. This strategy includes cost leadership where the organization compete for a wide customer basing on the price. Pricing is based on the internal effectiveness so as to gain a margin that will sustain above average revenues and costs to the consumers so as to allow the customers purchase the company’s products and services. Continuous efforts by Tesco to reduce the costs relating to its competitors is vital so as to be a cost leader. This comprise of building effective state of art facilities that makes it very expensive for competitors like Sainsbury to imitate and also reducing costs of R&D and cost of sales. Low-cost/ Differentiation strategy Tesco adopts the use of both strategies so as to adopt into changing environment, learn new technologies and become more effective especially in leveraging key competencies across product lines that enables the company to produce differentiated products. Diversification strategy The company adopted the strategy of diversification to nonfood areas like consumer electronics, discount cloths, DVD sales and rentals, consumer financial services, internet services data plans, consumer dental plans and consumer health insurance. Tesco seriously built in these product segments private labels. For instance, in introduced brands like “F+F” and Cherokke in clothing, Digilogic and Technika in electronics and other labels ranging from TVs to DVD players and computers. Tesco’s Growth strategies Like any other company, Tesco plans to increase its business operations and profits. This is largely contingent on other factors like competition, financial resources and and government regulations. The following are some of the strategies adopted by the company Market penetration-the company markets the same products on the same market by increasing the market share through price reduction Market expansion- (market development) entails selling same product in a totally different market Product expansion-adding new features to a product and commonly used when there is introduction of new technology Conclusion Understanding the competitive forces operating in a specific market, and their basic causes show the profitability of the industry. This provides a framework for influencing and anticipating competition and profit level over a given period. Industry structures that are very healthy should be a major concern to a policy maker as their organization’s own position. Understanding the structure of a particular industry is also important to real strategic positioning. As we have seen, protecting against the competitive forces operating in a certain market is and shaping them to the advantage of the organization are critical to strategy. According to Certo et al (2008), a company that has a pro-social agenda has a great marketing tool that shape and build its the status of its reputation, make a difference in the market place and offer a competitive advantage to the company. In the current business environment, organizations that endure are those who manage their major relationships very well and work on their reputations. Making your company be distinctive and improve the perception in the society is one of the greatest strategies that are highly rewarding. Nonetheless, only a regular, believable input to a cause can create a brand equity and image. Therefore, corporate philanthropy has to be very strategic. A socially responsible organization acknowledges that it is operating in a shared environment which is characterized by a shared impact of the relationship between a firm and other various stakeholders. These stakeholders are also affected and can also affect the achievement of the objectives and goals of the organization. Thus, stakeholder relationship management lies at the centre of CSR and involves the establishment of a well-established two-way with various stakeholders, as well as knowing their business expectations and what they are able to pay for meeting their expectations (Wigfield, 2010). Knowing the perception of the public towards the organization and their expectations is important in designing the objectives of communication and strategies aimed at strengthening relationship with concerned stakeholders. Support from stakeholders towards the business is based on their interaction and relationship with the brand as well as the way they view the organization and its brands. In order to manage stakeholder relationship and its reputation properly, the company has to adopt CSR as an integral part of its mission and vision and also communicate this to various stakeholders. Research has shown that knowledge has a bad effect on the cynicism level of a person. This is an indication to marketers that one of the major things they should consider is to put emphasis on the awareness of CSR activities and their benefits to their consumers. By increasing knowledge level, they can reduce the level of skepticism, therefore, achieving a positive behavioral response. Corporate communication and marketing initiatives should concentrate on maximizing tools that are designed notify consumers and makes them be more informed (Ackoff, 2001). Recommendations In order to have effective stakeholder management, the following features of stakeholder management should be followed. i. The top management should recognize and monitor actively the concerns of various stakeholders, and should also properly take their interests into account during decision making process. ii. All the managers have to carefully listen to stakeholders and openly communicate with them concerning their respective contributions and concerns, and also pertaining the risks that they assume as a result of their involvement with the organization iii. Policy makers should implement modes and processes of behavior that are complex to the capabilities and concerns of every stakeholder iv. Leaders within the organization should appreciate the interdependence of rewards and efforts among various stakeholders, and should endeavor to achieve a fair distribution of burdens and benefits of organizational activity among them, taking into consideration their respective vulnerabilities and risks v. Managers have to cooperate with other individuals, both in private and in the public sector, in ensuring that harms and risks arising from corporate activities are reduced and, properly compensated if they must. vi. The management should avoid activities that might endanger human rights or leads to risks which, if not properly understood, would be unacceptable to concerned stakeholders. vii. Managers must appreciate the potential conflicts between their own role as organizational stakeholders and their moral and legal responsibilities for stakeholder’s interest, and must solve such conflicts through appropriate reporting, open communication, third party review and incentive system. 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