Marketing Fundamentals - TESCO - Essay Example

Marketing Fundamentals Competition by definition means 'a test of skill or ability'. Indeed, it is true for any individual as well as for any organization that competition encourages one to do more. At times it leads to some untoward incidents between two rivals as well, but overall, competition isn't necessarily bad. Coke has Pepsi. Toyota has Nissan. Tesco has Asda. Procter & Gamble has Unilever etc.. No business proliferates in isolation; the business demands employees, customers and a supply and distribution chain. And if there happen to be more than one organization into the business of similar kind or offering similar products and similar segments of customers, there's competition. Porter's Five Forces analysis helps the marketer to contrast a competitive environment. It has similarities with other tools for environmental audit, such as PEST analysis, but tends to focus on the single, stand alone, business or SBU (Strategic Business Unit) rather than a single product or range of products. TESCO is UK's largest retailer, having around 1900 stores in UK alone and more than 2700 stores employing over 370,000 people worldwide, with group sales crossing m 37,070 worldwide at the end of financial year 2005. An international retailer of food, non-food and retailing services, Tesco currently operates in the China, Czech Republic, France, Hungary, Japan, Malaysia, Poland, Republic of Ireland, Slovakia, South Korea, Taiwan, Thailand, Turkey and the UK. Michael Porter's Five Forces have become a yardstick for assessing industry profitability. They are; Buyers'/customers' power Suppliers' power Rivalry among competitors Threat of new entrants Threat of substitute products Threat of New Entrants Bargaining Power of Bargaining power of Suppliers Buyers Threat of Substitute product Customers' bargaining power: Buyer power acts to force prices down. I apples are too expensive in Tesco, buyers will exercise their power and move to Sainsbury. Fortunately for Tesco the market has a disciplined approach at the moment which stops the competitors from destroying each other in a profit war. Growing competition within the retail supermarket has forced TESCO to diversify in many other areas and products including overseas ventures. While it is true that nearly 80% of group sales and profits come from the UK business, it is equally true that the buyer now has more options in the form of Asda/ Wal-Mart and Sainsbury. Suppliers' power: This is the power wielded by suppliers demanding that retailers pay a certain price for their goods to sell. Large supermarkets like Tesco have the overwhelming advantage over the small shopkeepers - they dictate the price they pay the supplier (while the small shopkeeper has to make adjustments as demanded by suppliers) If the supplier does not reduce the price, they will be left with no retailers to sell to, Tesco and the other large supermarkets will have all the customers. Tesco buys its own brand products from suppliers. All products are supplied to Tesco in a finished state. The suppliers buy the raw materials for their products from a variety of other suppliers, producers, growers or farmers and then process the product in some way to produce the finished product that Tesco sells. So, Tesco does not buy directly from any primary producers, growers or farmers. But now there is a general perception gaining the ground that it is squeezing the value out of its supply chain. For the moment this might not matter to its customers and shareholders who, it seems, are happy enough with its "pile it high, price it low" approach. But the supermarket chain needed to look at positioning itself so that, if perceptions did start to change significantly, it did not get its fingers burnt. Competition: Holding a number one position in the retailing business in UK for quite a while a now, TESCO has started feeling the heat of growing competition from the likes of ASDA and Sainsbury the number two and three respectively. As of June 2006, Tesco has 31.1% of the UK grocery market while ASDA's share is 16.4%, followed by Sainsbury's 14.7%. While the operating profits of TESCO for the year 2004 was m 1526 (an increase of m229 over 203), this margin was m1694 (an increase of m168 over 2004). These are the alarm bells for TESCO with Wal-Mart making all out efforts to push ASDA using innovative penetrating marketing strategy. Threat of new entrants: The field is getting more competitive with the new entrants like Morrisons and Waitrose establishing and broadening their marketing space. Waitrose, for example, while admittedly aiming to attract a very different sort of customer, had proved highly successful in positioning itself as a "caring" supermarket when it came to sourcing of its products. Threat of substitute products: Classical economics deduces that rivalry between companies should drive profits to zero. This is part of the threat of substitutes. Sainsbury has come out with reasonable substitutes for the products of Tesco. This has been driving the prices of groceries down in both companies. Tesco, Asda, Sainsbury and other supermarket chains together put up considerable barriers to entry. Anyone starting up a new supermarket chain has barriers imposed on them, implicitly or explicitly, by the existing supermarkets. Sainsbury, in particular, has been making giant strides in capturing the marketing space. Sainsbury has started eating up the ground of ASDA. This is disturbing news for ASDA, which has launched a charm offensive after a confidential survey revealed increasing hostility to the American-owned supermarket group Wal-Mart). As the company faces losing its position as Britain's number two supermarket to Sainsbury, a recent research revealed that a range of groups, from suppliers to council planners, found Asda too aggressive. Many believed it had taken on too closely the mantle of its US-owned parent, Wal-Mart. Need for Competitor Analysis From the strategic planning point of view, competitor analysis is very important for any company's long-term survival. There was a time couple of decades ago when the management of one company used to make it sure that there be no mention of its rival during discussions as it would give unnecessary mileage to its rival. No more. Now the trend has reversed and companies do much more research in understanding the rival and take pride in listing the advantages that their product has over the rival's. Competitor analysis has several important roles in strategic planning; To help understand the management their relative competitive advantages as compared to rivals. To generate understanding of competitors. To plan strategies for future. To help forecast the Return on Investments. In making SWOT analysis of the company. If the company is planning to enter a new business, then barriers to entry into this field. Frederick the Great said, "It is pardonable to be defeated, but never to be surprised."1 This effectively meant - go to war fully prepared i.e. know the competitor well. Therefore, by knowing our Competitors we may be able to predict their next moves, exploit their weaknesses and respond to their strengths. A starting point to analyze the industry is to look at competitive rivalry. If entry to an industry is easy then competitive rivalry will in all probability be high. If it is easy for customers to move to substitute products then again rivalry will be high e.g. in finance and insurance fields besides Tesco and Asda there are a number of companies. This gives rise to cut-throat competition. Of course it all works to the advantage of customers only. Generally competitive rivalry will be high if: There is little or no differentiation between the products on offer. Competitors are approximately the same size of each other. Competitors adopt similar strategies and believe in the game of one upmanship. It is costly to leave the industry i.e. stakes are such that it is difficult to exit. PESTLE Analysis PESTLE Analysis is a popular method of examining the many different external factors affecting an organization - the outside influences on success or failure. This is a simple technique which can be used in a fairly sophisticated way, particularly when it is combined with Risk Analysis, SWOT Analysis, and expert knowledge about the organization and its external factors. This type of analysis, in general, must create a good overall picture of the external impacts on an organization by breaking them into useful, and obvious categories. PESTLE Analysis is normally used to help organizations identify and understand the external environment in which they operate and how it will operate in the future. These factors may be differentiated in six ways: P - Political - The current and potential influences from political pressures. The political impacts can be local, national or international. This may involve many governments. For instance, Tesco might have to deal with British governments, the EU and the Chinese politics simultaneously. One politically wrong move could jeopardize the market in many regions. Tesco has also received good amount of state patronage in UK on account of understanding of the political equations and planning the moves accordingly. E - Economic - The local, national and world economy impact. Fluctuations in the stock market, tax rates etc can seriously affect the bottom line of a company like Tesco. Keeping good investor relations becomes all the more important when general public has a stake in any. After becoming Tesco PLC from Tesco Stores (Holdings) in 1983, Tesco became a public company and since then it has been sharing good amount of its profits with investors. Competition spans international borders. Hence, costs and pricing decisions are also affected by fluctuations in the exchange rates of different countries' currencies. Strategies are accordingly formulated by the company, to match its own capabilities with the opportunities in the marketplace, in order to accomplish its overall objectives. S - Sociological - The ways in which changes in society affect us. On the societal front Tesco states, "One of our most important values is to treat people how we would like to be treated."2 With this in mind Tesco makes a significant contribution to communities through its charitable giving and community-based education programmes. In the UK Tesco is partnering I CAN, a UK charity that helps children with speech and language difficulties, to sponsor the Chatterbox Challenge. Children across the UK choose a rhyme, song or story while family and friends sponsor them to perform it aloud. This year, Chatterbox Challenge raised over 150,000 for I CAN. Similarly in Turkey, Tesco Kipa stores held first aid training sessions in stores and schools. These have been attended by 25,000 children and adults since 2002. Keeping the workforce in good humor by providing them with adequate benefits and considering them as an inseparable part of the organisation helps in resolving the disputes quickly. Human resources, in case of a service providing company like Tesco are indeed very crucial because they are the real interface with customers. For a competitive edge the company must plan for its human resources as well, because a competitor will always be on the lookout for dissatisfied quality people from rival company/ies so that it can get a twofold advantage. Through headhunting, it gets competent people while depriving the rival company of their services. T - Technological - How new and emerging technology affects the business. Understanding one's strengths and making fullest use of the opportunities makes a sound script for a success story. Be it in the case of making use of IT technology, opening of new stores or going global Tesco has done it all quite successfully. Tesco started computerized check out counters as early as 1982 and this stride continued with opening of www.tesco.com and its online operations. Also Samsung-Tesco chain last year equipped shopping carts and baskets in its 69 stores with RFID chips, the better to trace customers' movements and create a more efficient market layout. Samsung Tesco has spent about $800,000 on its RFID systems, of which $300,000 was subsidized by the South Korean Government. L - Legal - How local, national and world legislation affects the business. Respecting the law of the land while making efforts for business proliferation helps a company in maintaining working relationship with the respective governments. Tesco, for example, does not support testing on animals for cosmetic or household purposes and therefore does not carry out such tests on their own-brand products or the ingredients in them. Testing on animals in some countries may be perfectly legal but some countries consider it illegal and unethical. The EU has also set a provisional timetable for banning all animal testing for the purposes of developing new cosmetics. Adhering to such legal limits helps Tesco in keeping the controversies out. In fact Tesco also contributes 10,000 a year to the Fund for the Replacement of Animals in Medical Experimentation (FRAME), which seeks to end animal testing. Tesco has also shown its commitment in upholding basic Human Rights and supports in full the United Nations Universal Declaration of Human Rights and the International Labour Organisation Core Conventions. E - Environmental - The local, national and world environmental issues. Continuously monitoring the environment and following the leads is key to a successful business. Continuously studying the different aspects of environment (social, political, legal, technological, etc) and taking corrective and adaptive steps accordingly helps in growing of an organization. Quality improvement also benefits a company's long-run performance. In the services sector, quality is immediately felt by the customer e.g. while taking round of the hyper store (of Tesco). If competitors are improving quality, then a company that does not invest in quality improvement will likely suffer a decline in its market share, revenues, profit, and customer goodwill. In order to care for the environment Tesco's unique integrated farm management system, called Nature's Choice, ensures that their fruits, vegetables and salads are produced to high safety and environmental standards. Nature's Choice standards include the following: Rational use of plant protection products Pollution prevention Protection of human health Responsible use of energy, water and other natural resources Recycling and reuse of resources Wildlife and landscape conversation and enhancement "Winners don't do different things, They do things differently"3 This statement gives full credit to strategists of successful enterprises. Strategic decisions provide a direction in which the organisation is to move. Organisation's mission and objectives find a reflection of strategists. Tesco has a long term strategy for growth, based on four key parts: growth in the Core UK, to expand by growing internationally, to be as strong in non-food as in food and to follow customers into new retailing services Basic steps in the marketing planning process: In the planning process we take decisions about things to do in future. One important thing to be decided or identified is the objectives to be accomplished. In essence a plan or a predetermined integrated pattern of future activities is drawn up. This requires an ability to foresee, to visualize, looking ahead purposefully. The marketing mix is probably the most crucial phrase in marketing. The elements are the marketing 'tactics'. Also known as the 'four Ps', the marketing mix elements are price, place, product, and promotion. Tesco has so far listened and responded not only to customers but to a wider range of stakeholders - staff, suppliers, investors, and non-governmental organizations and planned its marketing strategies accordingly. Wal-Mart on the other has enough money power as it is the number one Retailer in the world, but its aggressive ways are sometimes not liked by peoples and governments which earns it a bad reputation. ASDA, Wal-Mart's largest overseas subsidiary, accounting for almost half of the company's international sales, has therefore a long way to go before actually grabbing the number one slot in UK. Resources: 1. Marketing Teacher, 'Five Forces Analysis', http://www.marketingteacher.com/Lessons/lesson_fivefoces.htm (accessed on Aug 19, 2006) 2. Quick MBA: Strategic Management, "Porter's Five Forces: A Model for Industry Analysishttp://www.quickmba.com/strategy/porter.shtml (accessed on Aug 19, 2006) 3. TESCO, Every Little Helps, http://www.tesco.com/ (accessed on Aug 20, 2006) 4. ASDA, Part of Wal-Mart Family, http://www.asda.co.uk (accessed on Aug 20, 2006) 5. Sainsbury's, Try Something New Today, http://www.sainsburys.co.uk/home.htm. (Accessed on Aug 19, 2006) 6. Wal-Mart, http://www.walmartfacts.com/FactSheets/ (Accessed on Aug 20, 2006) 7. Marketing Virtual Library, http://www.knowthis.com/tutorials/principles-of-marketing.htm. (Accessed on Aug 20, 2006). 8. Phillip Kotler, 'Marketing Management' 2nd Edition, Prentice Hall Inc, 1972. Read More