External Environmental Factor Analysis of Tesco - Case Study Example

1.0 Context A. External Environmental Factor Analysis In the course of the 2015/2016 operational period, Tesco has been making enough efforts to regain its competitive position and especially in the United Kingdom. To maintain its competitive position, the company has been involved in the simplification of store structures by way of investing in more than 9000 customer-facing roles within the stores (Zhao, 2014). The firm has engaged in the review of more than 33 food categories thereby reducing the overall number of product lines by at least 18% (Tesco, 2015). This has also been made by ensuring to make the ranges easier for customers to conduct their shopping, which has significantly helped to improve on the level of shelf-availability to post high levels of space needed for stocking products that are purchased more frequently (Tesco, 2015). The changes have been made easier by way of delivering a closely-knit supplier partners. The firm has shifted to a rather efficient and sustainable mode of working thereby assisting with an overall reduction product prices. To sustain operations, the firm has been recently engaged in rebuilding of the trust and transparency in regards to different stakeholders as the colleagues, customers and suppliers. Now, more than ever, Tesco is offering customers with a lower; much simpler and stable prices in order to ensure that they can continue trusting Tesco for delivery of the best shopping exercise and at the very best prices. Some of the most notable Tesco’s competitors include ASDA, Sainsbury and Morrison’s together forming the Big Four within the UK retailing industry (Mintel, 2010). The current environment is characterised by lots of rivals that include such international markets like German grocers like Aldi and other forms as convenience stores that have continued to gain lots of popularity given that the current consumer tastes and preferences has enormously shifted towards more trips for fewer items (Mintel, 2010). The sector is characterised by convenience stores that are highly fragmented. The current high unemployment rate in the United Kingdom has continued to play a significant role in how the overall performance of Tesco has progressed over time (Tesco, 2016). This low level of employment has resulted to a reduction for demand for Tesco products hence affected greatly the overall supply and production processes of these items. B. Internal Environmental Factor Analysis Tesco’s business model is indeed organised around three fundamental pillars that include; Customers; Product and Channels. This has been made in effect to allow customers enjoy their shopping experience and at the same time spend fewer trips in doing so (Tesco, 2016). Tesco’s major priority is the customers that are always positioned at the centre and, whose experiences are improved each and every-day. Imminent efforts are made to ensure that customers have the best of the experiences so that in the course of their shopping they can enjoy such aspects related to price; service and availability. The company employs a great deal of channels that include; small and large shops as well as a growing range of online business. An effective liaison is made with the suppliers by the product team to ensure that only quality products are offered to customers (Mintel, 2010). In the 2016 operational period, the company engaged in reviewing its underlying third value in order to make sure that the enormous impact is achieved to override the relatively smaller actions. An intensive marketing campaign has been recently devised to ensure that both customers and employees engage in healthier choices like reducing food wastes at any given moment in time and as a result tackle food poverty with any possible food excesses (Tesco, 2016). The firm’s reputation and brand image remains to be one of the most critical factors for its success. This has been achieved by way of providing proper quality and trustworthy products at very reasonable prices. It can be argued that Tesco maintains an exceptional strategic fit in the entire United Kingdom market as a whole. The major postulation of this strategic fit lies in its rather strong brand image as well as its well-known reputation. Coupled with the economies of scale, the firm has been able to achieve competitive advantages over its immediate competitors (Mintel, 2010). To successfully improve on its position within the market, the firm has made sure to concentrate on private label products, which have a higher profit margin and can assist with the generation of a rather higher degree of loyalty from the customers. It is also crucial to note that the effective utilisation of online distribution channels and trading as a whole will likely assist Tesco to accomplish a higher potential growth in business operations. 2.0 Overview The 2016 financial year has been termed a transformational period for Tesco given that enough efforts have been to strategize the business on a road to recovery. The firm can be seen to have delivered sales that exclude VAT of £48.4B, which is 0.1% increase in comparison to the figures posted in 2015 (Tesco, 2016). This is highly attributed to such aspects as an improvement in like-for-like sales patterns in most of the areas of the Group. Retail operations saw a growth of 39% to £2.6B that was a result of significant reduction in total indebtedness by £6.2B to £15.5B (Tesco, 2015). The level of losses that was posted from joint ventures and associated increased by at least £8B to attain £21B mark, which was a result of high degree of losses from partnership with CRH in China and, also a lower initial level of dunnhumby profitability that is attributed to the restructure of Tesco’s relationship with Kroger in 2015 (Tesco, 2016). The amounts related to diluted earnings per share before exceptional items stood at £8M that also involved a 3% effective tax rate for the Group (Tesco, 2015). The tax rate is deemed to be lower in comparison to the UK statutory rates, which is a result of lower book value in comparison to tax value of property assets that were disposed in the course of the year. Diluted earnings per share prior to exceptional items was 3.4P, which was 17.6% decrease in comparison to 2015 value despite the firm experiencing lower tax charges as a result of high net finance costs (Tesco, 2015). There was a significant shift in the level of net debt by at least £3.371M, which has offered the company a chance to concentrate on production of cash from trading operations while still maintaining efficient capital expenditures, which is set to be fundamental in the protection and strengthening of the company’s balance sheet moving forward. In relation to fixed assets, the firm is vehemently committed towards the increase of ownership of its underlying property and reduce its exposure to index-linked and fixed-uplift inflation. In early 2015, the company experienced an asset swap with British Land as another 2016-based transaction with Phoenix Life Assurance as well as British Airways Pension Fund; an activity that resulted to regaining of sole ownership of 70 large stores as well as two fundamental distribution centres. These acquisitions helped improve on the proportion of freehold property in the United Kingdom as well as the return on investment by at least 6 % (Tesco, 2016). The immediate preparation of the consolidated Group finance statements necessitates that the underlying management should make significant judgments, estimates and assumptions that goes ahead to affect the application of policies as well as reported amount of both assets and liabilities. These estimates as well as assumptions made relate to historical experiences and numerous other factors that are ascertained to be reasonable under specific situations. These estimates and assumptions include; first, in regards to depreciation and amortisation, the Group exercises judgments in order to establish useful lives as well as residual values of intangibles. The assets are depreciated down to their residual values over their immediate useful lives (Tesco, 2016). Recoverable amounts of cash-generating units are based on a higher value in use as well as fair value less possible cost of disposal. In relation to inventories, inventory provision is ascertained in regards to the cases where realisable value from sale of inventory is estimated to be much lower in comparison to the carrying value. Inventory provision is estimated using a number of factors that include; the prevailing sales prices of inventory items; seasonality of the item’s sales profile as well as the losses that are attributed to the slow-moving inventory items (Tesco, 2016). The Group’s operating reporting segments are perceived to be in line with its overall management reporting framework retails operations positioned in different markets are perceived to be sharing similar economic attributes; products and customers as well as supply chain operations. Such fixed assets as property, plant and equipment are pledged as a form of security for the finance lease liabilities (Tesco, 2016). Cash-generating units related to these assets are tested for impairment in the case where indicators of impairment are present at the balance sheet date. Value in use for this class assets are basically computed to the market rent for the stores. Key assumptions for the value in use are extended to cover discount rates, growth rates and possible expected changes in the margins. Revenues are composed of fair value of consideration that is received or receivable for the sale of goods and services within the normal operations of the Group’s activities. Intangible assets like software and pharmacy licenses is initial measured at the acquisition cost of costs that is incurred on a given project and capitalised when particular criterion has been met (Tesco, 2016). Trade receivables are considered to be non-interest-bearing and are formally recognised at their respective fair values and later, subjected to amortisation cost with the use of effective interest rates method minus any possible provision for impairment. 3.0 Ratio Analysis Profitability Analysis The company’s ROCE, asset turnover, net profit margin and gross profit margin for the three-year period between 2014 and 2016 indicates a negative growth. This negative growth is an indication that the firm’s ability to generate profits has continued to dwindle overtime. Liquidity Ratio Analysis Both the current and liquid ratios of the company remain to be negative within the three year period. This is an indication that its overall capacity to meet its short-term obligations has also dwindled and remains poorly positioned in comparison to the industry as a whole. Gearing Ratio Analysis The company’s gearing ratio has increased significantly within the period, which is an indication that it has resorted to enormous adoption of debt funds to finance its overall operations. In essence, the interest cover has decreased over the period, which is an indication that the firm has continued to lose its ability to meet interest expenses due to continued growth of debt position. DuPont Analysis The ROE has decreased over the period, which is an indication that the company has not established stable ways of generating returns for its underlying investors. In fact, the quality of profits has improved over the period meaning that it is the sole driver of return on capital employed. 4.0 Evaluation The rather poor performance of the company over the period can be attributed to intense level of competition from both the Big Four companies like ASDA and other relatively smaller convenience stores operating within the overall retailing industry. In fact, the degree for which the company has faced redundant level of growth explains the rationale behind the recent company’s decision to try and regain the trust and loyalty of its underlying customer-base. The company has re-strategized its business model to prioritize the customer over other stakeholders. This is in a bid to revamp sales growth over this period. The losses can also be as a result of high degree of losses from partnership with CRH in China and, also a lower initial level of dunnhumby profitability that is attributed to the restructure of Tesco’s relationship with Kroger in 2015. References List Mintel, 2010. UK retail industry. Accessed from http://www.mintel.com/presscentre/retail-press-centre/merry-mobile-and-multichannel-christmas-for-uk-retailer Tesco. 2015. Annual Reports and Financial Statements-2015. Accessed from https://www.tescoplc.com/files/pdf/reports/ar15/download_annual_report.pdf Tesco. 2016. Annual Reports and Financial Statements-2016. Accessed from https://www.tescoplc.com/media/264194/annual-report-2016.pdf Zhao, S., 2014. Analysing and evaluating critically Tesco’s current operations Management. Journal of Management and Sustainability, 4(4), pp. 184-187. How Can Accounting Support the Stewardship of Public Value? The concept that refers to public value relates to that which is being undertaken and generated by different agencies as a way of utilising public resources that is attributed to the underlying inputs, outputs and, also the end results, for the mere purpose of achieving an overall desired social outcomes (Breton‐Miller & Miller, 2009). The process that relates to recognising and reporting overall public value is indeed a distinctive type of accountability within the government as a whole. It is crucial to note that public value is determined through a contest given that there is always a disagreement about whatever that should considered being of value to the public. In contrast, underlying public value is established by way of reference to an overall desired social outcome that is portrayed through a democratic process (Breton‐Miller & Miller, 2009). In this regard, the final consideration of value that should be subjected to accountability is indeed an imagined public that is more or less properly developed and that can be fairly-articulated by citizens as being the most important to be realised. Public value happens and is easily measured using across a value chain of a given organisation. It should consist of inputs like staffing personnel levels; outputs as policies and procedures as well as the end outcomes that can include participation in organisation activities. The reason behind measuring public value rests with the truism presumption that; an organisation should always get whatever they report (Bushman & Indjejikian, 1993). Reported information plays a critical role in the ascertaining, which activities would receive attention of decision-makers and those that would not, in any way, receive resourcing altogether. Following this line of reasoning, the overall nature, availability and the quality of data that is utilised for reporting purposes play an important role to accomplish desired level results. Public agencies are called to account for generating value by way of formulating a rather clear and measurable public value account that defines the crucial dimensions of public value that is pursued and depicted in the overall operations of a government agency. The reporting should also be able to enumerate on both the social and financial costs that are incurred in the process. Public value is developed efficiently by way of conducting an exercise of value-formulating imagination in the course of managing of public resources. Strategic management consists of a process that ascertains a match between a manager’s organisation and the overall external environment for which operations are being conducted (Behn, 2001). It is important that public managers engage in a process of understanding and thereafter, diagnosing the underlying external environment for purposes of aligning their internal environment and, also to fit demands and respond to them in a value-creating manner. This is sole reason for why the process that relates to both flexibility and innovation are considered to be necessities of a public sector as a whole. To successfully comprehend the creation of public value, it is important that a manager is able to effectively comprehend task and, also authorising environments. Tasks should be fairly articulated by way of utilising a value-creation imagination since the process involving strategic involvement is attributed to a match between a firm and its immediate external environment for which the organisation conducts its operations (Morgan et al, 1993). The underlying public sector environment is deemed to be complex and dynamic creating a major platform for possible failures. The authorising environment is made up of institutions and individual people for whom an agency can be efficiently held accountable. These external stakeholders are the main source of legitimacy of an overall agency’s operations. It is important that an agency’s operations portray most, if not all, components. A major internationally acclaimed initiative that has been pursued by the International Public Sector Accounting Standards Board relates to the formulation of the International Public Sector Accounting Standards (IPSAS) (Prowle, Harradine, & Latham, 2010). IPSASs are widely used as imminent benchmark for the interpretation of IFRSs within the overall public sector environment. It is crucial to emphasise that IPSASs are currently the second in command for the development and growth of all financial accounting frameworks for most of organisations across the globe; thereby encompassing the government departments as well as their immediate associated agencies and local government. Despite the fact that organisations that is largely encompasses the overall public sector, will possibly differ significantly in both size and functions, for reasons attributed to accounting, they can be deemed to be two-fold (Prowle, Harradine, & Latham, 2010). The first form relates to a supply-funded organisation like government departments like the Labour Department. This type of public sector organisation is characterised by a steady access of funds from the Treasury or Exchequer, is expected to stay within a predetermined resource limit and, also engages in the distribution of funds to Type B organisations. Consequently, the second form relates to trading organisations like the intellectual property office that is characterised by such aspects as solely earning income from numerous sources and is able to sustain a financial viability. It is important to postulate what exactly accounting theory and practices notes in relation to the purpose of statutory financial accounts in general terms and specifically, the public or rather government sector (Morgan et al, 1993). In regards to this sector, there are two main fundamental aspects that have been emphasised over and over again and they include; accountability and stewardship focus and, also the user decision need focus. In relation to the first concept; accountability and stewardship focus; literature that is associated with accountability fails to provide a standard perspective as to the underlying nature of accountability and definitions. Considering the fact that there are different views on fundamental elements of the notion of accountability, it thus goes without saying that there is a dyadic of accountability so that it encompasses the very person that is deemed accountable and the individuals or people for which to be accounted for (Prowle, Harradine, & Latham, 2010). The person that is deemed to be accountable for numerous activities of a public organisation is perceived to be held to account for their immediate actions. Such notable authors as Behn (2001) expound accountability to such other areas as the political; legal; bureaucratic and overall professional accountability. These notions are majorly adopted in the course of examining the underlying annual reports of organisations within the public sector as a whole. Accountability, in most instances, is greatly involved with two crucial features that include; the underlying need for an agent to render a given account of their dealings with stewardship resources and; consequently, the call to submit to a given examination or rather audit of an account by an individual that is considered to be accountable. It is for this reason that a public body for purposes of availing relevant and reliable financial information needed for satisfying the overall needs and interest of the potential users of accounting information (Dawes, 2010). For most cases, accountability is deemed to be the fundamental cornerstone of financial reporting within the public sector. The accountability is thus focused on the belief that the citizenry enjoys a fundamental right to be on the know and, also a right to be able to access openly declared facts that could result to public debate by citizens and their immediate elected leaders. Thus, it can be said that financial accounting and reporting frameworks plays a significant role in the accomplishment of a government duty to be always accountable within a given democratic platform (Prowle, Harradine, & Latham, 2010). In addition to this, it is argued that the importance of accountability in public sector financing accounting is a crucial exercise since it indicates that there is indeed a superiority feeling of an accountability framework over and above the decision usefulness one and that the absence of the a profit intention or market discipline within the public sector ascertains that accountability can vehemently assume even an enormous role. The concept of stewardship within the overall public service is thus closely linked to the notion of accountability. Financial information is indeed one of the fundamental ways for which accountability is communicated and thus, public service entities have the chance to utilise published financial statements as the main driver for portraying their accountability commitment. In regards to user decision need focus, the financial reporting practices model is based on the notion that the overall purpose of financial accounts lies in serving the users of accounts in the course of making decisions by way of availing readily-available information that will be helpful with the entire decision process. For public sector organisations, FASB notes that there are four uses of accounting information that extends to the citizens; the legislative branch that also includes staff; senior members of an organisation’s executive branch as well as the executive branch programme managers (Levy, 2010). According to AASB stipulations, these users include the current and potential investors; funders and financial supporters; lenders; the government and their agencies as well as the public. In considering the needs of users of accounting statement, the IASB clearly notes that the primary users of general purpose financial reporting include the existing and potential investors, lenders and other notable creditors that would formally utilise information to formulate decisions that relates to purchasing, selling or even holding equities. Of particular interest to note, it can be safely argued that the information needs of users of public sector accounts is indeed very different and distinct when compared to the users of financial accounts of entities (Levy, 2010). In assessing the underlying information needs of users of public sector, financial accounts postulates that the major needs of information relates to the legality for which public funds have been efficiently utilised; the on-going financial and operational viability of the public sector organisation; conforming whether the public funds have been adopted in accordance with the already laid-out plan as well as ensuring that the public funds have been successfully utilised in an efficient and effective manner (Prowle, Harradine, & Latham, 2010). It can also be emphasised that the aforementioned aspects, whenever taken together, strongly constitutes the overall requirements, which is associated with accountability and stewardship process. It is common phenomenon within the public sector to analyse the merits of expenditure presumptions through the adoption of utilitarian analysis like the cost-benefit analysis (Levy, 2010). This approach can also be applied to ascertain public sector financial accounting practices given that these are costs that are attributed to the generation of the accounts and overall potential benefits that can be enjoyed from the production and availability of this information. Under this approach, the emphasis is on comprehending that the level of costs and benefits of meeting statutory financial accounting requirements as opposed to possible voluntary disclosures. In this context, benefits would thus mean the overall level of value that is derived from the underlying public sector financial accounts in order to accomplish the overall goal of information needs of users for purposes of decision making. For a clear and successful analysis of stewardship of public value creation, the level of benefits should be at all times insubstantial (Lee & Kwak, 2012). On the contrary, there seems to be little or no information that expounds on the costs of generating statutory financial accounts. However, in the course of preparation of accounts, costs will be attributed to those incurred in the course of accounts generation as well as ones relating to maintenance of accounting systems. To sum up the discussion above, the paper has successfully argued that there should be some form of financial reporting accounting and practices that should be adopted for purposes of stewardship and accountability. There are a great number of accounting boards that include; FASB and AASB, which have come forth to ascertain and emphasise on the need for having an elaboration on the public value creation as well as the adopting such pertinent models to explain the rationale behind the cost-benefit analysis used in utilitarian analysis of resourcing public sector organisations. References List Behn, R., 2001 Re-thinking Democratic Accountability, Brookings Institution, Washington DC. Breton‐Miller, L. & Miller, D., 2009. Agency vs. stewardship in public family firms: social embeddedness reconciliation. Entrepreneurship Theory and Practice, 33(6), pp.1169-1191 Bushman, R.M. & Indjejikian, R.J., 1993. Stewardship value of" distorted" accounting disclosures. Accounting Review, pp.765-782 Dawes, S.S., 2010. Stewardship and usefulness: Policy principles for information-based transparency. Government Information Quarterly, 27(4), pp.377-383 Levy, R., 2010. New public management: end of an era? Public Policy and Administration, 25(2), pp.234-240 Lee, G. & Kwak, Y.H., 2012. An open government maturity model for social media-based public engagement. Government Information Quarterly, 29(4), pp.492-503 Morgan, D., Bacon, K.G., Bunch, R., Cameron, C.D. & Deis, R., 1996. What middle managers do in local government: Stewardship of the public trust and the limits of reinventing government? Public Administration Review, pp.359-366 Prowle, M, J. Harradine, D & Latham R. 2010. Statutory financial accounting in the UK public sector: Relevance and cost? Journal of Finance and Management in Public Services. 10(2), pp. 26-39 Read More