Strategic Analysis for Tesco Plc UK - Essay Example

Strategic Review Report for TESCO Plc UK Task A - Environmental analysis TESCO is one of the leading international retailers in the world. It was started in the mid of 1920s with the trading name TESCO. Since then the company has slowly expanded and marked its presence in different markets and sectors (TESCO). The growth strategy of the company is a long-term strategy based on four key parts: growth in the Core UK business to expand by growing internationally to be as strong in non-food as in food and to follow customers into new retailing services. Knowing this little information about the company, the environmental analysis of the company is done and presented in the forthcoming paragraphs. The analysis is done using different models like PESTLE analysis, Porter's five forces model and BCG matrix. Each one of the model is referred to in a sequence. PESTLE analysis: PESTLE analysis is a useful tool for understanding the "big picture" of the environment, in which you are operating, and the opportunities and threats that lie within it. By understanding the environment in which you operate (external to your company or department), you can take advantage of the opportunities and minimize the threats. (RAPIDBI) Specifically the PEST or PESTLE analysis is a useful tool for understanding risks associated with market growth or decline, and as such the position, potential and direction for a business or organization. Political Environment: Political forces influence the legislations and government rules and regulations under which the firm operates. Every company faces political constraints in the form of antitrust laws, fair trade decisions, and tax programs, minimum usage legislations, pollution and pricing policies, administrative activities and many other actions, aimed at protecting the consumers and the local environment. In 2001, The Department of Trade and Industry (DTI) introduced a Supermarkets' Code of Practice to regulate trading relationships between the four largest UK supermarkets and their suppliers. Tesco is a signatory to the Code and has met its obligations for implementing the Code. The company is committed to maintaining strong mutually advantageous relationships with its suppliers. Economic Environment: Economic factors clearly indicate the nature and direction of the economy in which a firm operates. Every market is unique and consumption patterns change along with the wealth of the consumers in various market segments. For strategic planning all the economic trends at national and international levels have to be considered. Tesco makes a significant contribution to economic activity in all the places in which it operates. Every week over 400,000 staff serves over 30 million customers in 13 countries. The company has to its credit a track record of providing value for customers, creating jobs and training, providing opportunities for suppliers and regenerating deprived areas. The business relationship of Tesco is with nearly 2,000 own-brand primary suppliers in 98 countries. Social Environment: The social environment is an important factor as changes in the values, beliefs, attitudes, opinions and lifestyles in society create potential opportunities for an organization. For a company to grow, it is necessary to take advantage of societal changes. The cultural, demographic, religious, educational and ethnic conditioning of individuals in society affects the social environment. One of the most important values in which Tesco believes is to treat people how it would like to be treated. The company strives hard to achieve this by being a good employer and by playing its part in local communities. People believe that they the company can use its size and success to be a force for good. This challenge is indeed accepted by Tesco with enthusiasm and commitment. Technological Environment: Technological environment means the trends and developments in the technological field that might: improve production, create new product opportunities, and render the existing ones. (Google) As part of the use of advanced technologies, Tesco is committed to minimizing the amount of waste produced and to recycle it wherever possible. The company has got a comprehensive recycling program for its own operations with its own recycling units recycling paper, cardboard and plastic that would otherwise have been disposed of in landfills or incinerated. Legal Environment: Legal factors also have to be considered by any firms before stepping into another country. In recent years, the move toward deregulation, which involves the elimination of many legal restrictions, is significant trend. Due to this, entry barriers are minimized leading to enormous competition among the firms in an industry. Porter's five forces model - Description: The effective formulation of a strategy needs a clear understanding of competition. Competition in an industry is determined not only by existing competitors but also by other market forces such as customers, suppliers, potential entrants, and the existence of substitute products. Understanding the level of competition is important because the level of profits depends to a large extent upon the level of competition. Understanding the sources of competition can help the firm to gauge its own strengths and weaknesses, and to perceive the trends in the industry so that it can position itself optimally for the best returns. Michael E. Porter of the Harvard Business School has developed a framework known as the 'Five forces Model' to help analyze the business environment. The Five Forces as described by Porter are discussed below in the context of TESCO. Threat of New Entrants - The threat of new entrants rises as the barrier to entry is reduced in a marketplace. (Mallon) As more firms enter a market, you will see rivalry increase, and profitability will fall to the point where there is no incentive for new firms to enter the industry. Fortunately Tesco has not got much of this threat. Bargaining Power of Buyers - Buyer power also acts to force prices down. If beans are too expensive in Tesco, buyers will exercise their power and move to Sainsbury. Bargaining Power of Suppliers - The power of suppliers is the suppliers demanding that retailers pay a certain price for their goods. Tesco's market share gives them immense power over suppliers and other retailers. Growing evidence indicates that Tesco's success is partly based on trading practices that are having serious consequences for suppliers, farmers, overseas workers, local shops and the environment. The rivalry among existing players - Degree of Rivalry is the central force, which involves all the other forces. Classical economics predicts that rivalry between companies should drive profits to zero. This is part of the threat of substitutes. For instance, Tesco has competition from companies like Sainsbury that can provide substitutes for their goods. This drives the prices of groceries down in both companies. The threat of substitute products - Fortunately for Tesco, there are few other large supermarket companies. This means the market is disciplined - the supermarkets have a disciplined approach to price set. BCG Matrix BCG Growth-Share matrix is widely used in corporate strategic analysis ((ICMR)). This matrix helps in analyzing likely "generators" and optimum "users" of corporate resources. The BCG growth-share matrix displays the positions of business units on graph of the market growth rate against their market share relative to competitors. 1. Opportunities and Threats - The Board of directors at Tesco have overall responsibility for internal control, including risk management. Appropriate policies that will safeguard the achievement of the Company's objectives are set. Executive management is responsible for identifying, evaluating and managing financial and non-financial risks. From the Key Risk Register, the impact and probability of each risk and the effectiveness of the mitigating controls are assessed. Methods for monitoring each specific risk are then agreed. Accountabilities for managing these operational risks are clearly assigned to line management. Risk assessments are carried out routinely by management throughout the UK and international businesses. Procedures exist to ensure that significant risks and control failures are escalated to senior management and the Board on a timely basis. 2. Critical Success Factors - Tesco, the $33-billion, British retail grocer giant, operates a chain of hypermarket (large discount) stores in Southeast Asia, and the Asian division anticipates roughly 300 percent expansion over the next five years (Basis Inernational). But with the volume of data that the old system was processing already in the gigabytes, Tesco needed BASIS' large file option with its highly recoverable file format. The half-year profits of Tesco had surged 28 per cent to a record 805 million. Tesco's version of the plan divides the business into four sections (Online). Managers are asked to monitor customers, operations, staff and finances using a "traffic light" system where green indicates that targets are being met and red flags a problem. Task B - Resource Capability Analysis In 2005/06, Tesco supported and funded the Institute of Grocery Distributors (IGD) Food Chain Centre which has set up a value chain analysis for various product groups to look at how the company could reduce costs. The study has shown that in the region of 20% of costs in the supply chain are unnecessary and there are opportunities for better working and collaboration for the company to explore. In comparison with European and other supermarkets, Tesco is a loyal customer. It does not chop and change its supplier base, and this ensures commitment from the growers, who are in turn able to offer long-term commitment to their labor force and suppliers. For Tesco partnership with suppliers means much beyond just a business relationship. Giving suppliers a secure and growing market for their products. Providing technical expertise and sharing our knowledge of customers through conferences, events, workshops and producer clubs. Helping suppliers develop new and better products to meet customers' changing expectations. Helping suppliers to promote their products to the customers of Tesco. Establishing and monitoring quality, environmental and labor standards. Helping increase efficiency and reduce costs in the supply chain through innovations such as green trays. Making regular payments, on time. Ensuring that the company operates in accordance with the Supermarket Code of Practice. Giving suppliers the chance to give feedback on what it is like to work with Tesco through a confidential, anonymous Supplier Viewpoint survey. Training buyers in the Ethical Trading Policy and program requirements. The following table gives the financial highlights of Tesco Plc (Reuters). Growth Rates 1 Year 3 Years 5 Years Sales % 8.08 11.44 12.51 EPS % 17.04 16.02 14.48 Dividend % 11.70 12.12 11.48 Revenue Periods 2004 2005 2006 2007 2008 August 13,502 15,143 17,170 20,735 22,631 February 17,114 18,723 22,284 21,906 Totals 30,616 33,866 39,454 42,641 22,631 Note: Units in Millions of GBP Earnings per Share Periods 2004 2005 2006 2007 2008 August 0.06 0.07 0.08 0.10 0.12 February 0.09 0.10 0.12 0.14 Totals 0.15 0.17 0.20 0.23 0.12 Note: Units in GBP Consensus Estimates Analysis # Of Ests. Median Est. High Est. Low Est. Std.Dev. Proj.Pr/Est. Revenue Pr/Sales FY: 2008 24 47,318.50 48,043.00 46,164.60 406.40 0.81 FY: 2009 24 52,143.29 53,918.20 49,517.50 853.96 0.74 EPS P/E FY: 2008 27 24.89 26.60 23.50 0.73 0.19 FY: 2009 27 28.02 30.00 26.30 0.94 0.17 LT Growth Rate (%) 5 12.00 15.00 11.40 1.32 -- Note: Units in Millions of GBP (except for per share items) Preliminary results of the company for 2006/07 - On a continuing* business basis: 2006/7 Comparable Basis 52 vs. 52 weeks for International Statutory Basis 52 vs. 60 weeks for International Group sales (inc. VAT) 46.6bn 10.9% 8.1% Group revenue (exc. VAT) 42.6bn 10.9% 8.1% Group trading profit** 2,478m 11.1% 9.6% Underlying profit*** 2,545m 13.2% 11.8% Group profit before tax**** 2,653m 20.3% 18.7% Underlying*** diluted earnings per share 22.36p 11.6% 10.1% Diluted earnings per share 23.31p 18.5% 17.0% SWOT Analysis of TESCO Tesco is about a strong UK core business. Last year the industry saw some very marginal growth as a whole, however Tesco continued to grow beyond the market by offering better value for money and through getting cheaper. The company also aims to be as strong in non-food as well as in food. The market for non foods (such as clothes entertainment cleaning products) is worth seventy five billion pounds in the UK today. You can see through the growth of their dot.com business which now has over four hundred and fifty thousand users and is the largest grocery online retailer in the world, and through the success of Tesco's personal finance with over 1,5 million customers that they are making some real in roads into non foods. International growth - Tesco has 30% of their stores outside the United Kingdom and plan to make it 45% by the end of next year and also to have the most loyal and committed staff. A brief description of the SWOT of Tesco Plc: Strengths National store network (638 stores) UKs largest food retail purchaser Multiple store formats competing in different sectors Customer focused philosophy Tesco's Brand Opportunities Non-food and Tesco Extra hypermarkets Overseas developing markets in Eastern Europe and Asia Financial Services Tesco Direct Weaknesses Lack of Global Scale Large portfolio ageing stores Threat of takeover Threats UK recession/Price war Entry of Wal-Mart Other competitors Development of Sainsbury's Local A new strength that has been adopted among the staff at Tesco stores is called future, instead of having criteria to meet every store, the strength's, weaknesses, opportunities and threats are discussed with staff in each store and problem are sorted out, making each stores SWOT that little bit different, although the main goals are not ignored. Another ploy on Tesco's behalf to win the customers loyalty it that of vouchers for schools a scheme where one voucher I given for every five pounds that is spent in store, not only does this encourage adults to help their children but will make the children encourage the adults to shop at Tesco's to help their school. Tesco as a company uses clear values to underpin what they do. Their core purpose is based on "Creating value for our customers to earn their life time loyalty. Tesco has invested one billion pounds. Tesco believe that one of they offer the best quality on a broad range of products and believe that they offer the best value. They have invested one billion pounds since 1996 on the campaign to reduce prices to customers and that continues to build as they go in to 2004. They offer outstanding customer service; every customer is offered help at the checkout. Location and convenience is another reason to choose Tesco, they have introduced a staggering 200 in the last two years that stay open 24 hours a day and they plan another 1540 new express stores, which are Tesco mini stores linked on to esso garages and forecourts. Another key difference for Tesco's is that they do not market to the average customer. Instead they use Customer Insight, to drive their actions, and to focus their starting point for all the different strategies. They have Club card segmentation data, which can give a real insight into Customer profiles and their shopping habits. Tesco use the Organics, Finest and Value brands to deliver to customer needs. Their Customer Plan delivers the customer part of their strategy. It's an annual activity plan, and is an agenda for customers with these projects forming part of category plans. It is designed to drive trade, and to improve the shopping experience for customers. Tesco's international business is an incredibly important part of the Tesco business and Tesco future strategy. Tesco will have 130 hypermarkets by 2001, with 45% of space overseas by 2002 and the International sales target was million by 2002, which was met. The way in which Tesco devises its SWOT, is very good, Now all stores will want to have the four goals stated above, these are set out by the directors, but Tesco staff can also help with view point, a questionnaire designed to help the director get an opinion off the staff. Tesco shows what can happen when talk becomes action. Its profits are proof that doing things pays off in the end. One major operation that is carried out in Tesco stores and is saving them millions a year is that of reductions, these are mostly carried out on produce and provisions, such as meat and dairy and ready meals, and also bread and cakes, many of these items have are fresh therefore hold a very short out of code date, when the out of code date come, instead of throwing them away a computer will indicate how many will sell without a reduction and how many to reduce and at what percentage. Task C - Strategic Fit The SWOT analysis of the company that was described above clearly matches to the success factors of the company. The success of the company is clearly its value towards customers and their service. Without such a committed service to its customers, the company wouldn't have survived the test of time without which the company may not have successful as it is today. The national store network of the company was similar to a flagship venture to the firm which surely helped in maximizing the firm's profits unbelievably. Another major factor in which the company is strong is its philosophy which is clearly customer focused. For any business, customers are the main strengths and means of success. Tesco has gained advantage from this fact. Thus, it can be stated that the SWOT is surely compatible with its success factors. Secondly, the customer focused philosophy of the company which is believed to be the major strength of the company allows it to explore and make use of all the available opportunities. Another strength which the company may use is its Brand. Tesco, which started off as a food retailer, later expanded its presence into various other sectors like financial services etc. Even in the other sectors into which Tesco entered, the company was surprisingly successful. This was because of its strengths like the national level network, customer focus, brand value and also the multiple store formats. This obviously makes it clear that the company's strengths are surely helping it to take advantage of all the available opportunities and also at the same time reduce the threats. Strategic Fit can be defined as the matching of both the mission and the strategy of a particular organization to its internal structure and also to the external environment (12MANAGE). The company can take certain measure to improve the global scale and also the ageing stores with large portfolio. References: 1. (ICMR), ICFAI Center For Management Research. Business Strategy. Hyderabad: ICMR, 2003. 2. 12MANAGE. 12MANAGE MAnagement Communities. 5 December 2007 . 3. Basis Inernational. BAsis International. 5 December 2007 4. Bowman, Cliff, the Essence of Strategic Management, Prentice-Hall of India, New Delhi, 1998. 5. Davidson, Mike. The Transformation of Management, McMillan Press Ltd., London, 1995. 6. Ferraro, Gary. P. The Cultural Dimensions of International Business, Prentice Hall of India, New Delhi. 7. Google. Google. 5 December 2007 . 8. Hill, W.L. Charles, Strategic Management, Houghton Mifflin Company, Chennai, 2000. 9. Hunger, David J, Strategic Management, Addison Wesley Longman Inc., Delhi, 1999. 10. Mallon, Chris. Porter's Five forces Analysis. 11. Online, Times. Times Online. 18 October 2004. 5 December 2007 . 12. Porter Michael. E, Competitive Advantage of Nations, the Free Press, New York, 1985 13. RAPIDBI. RAPIDBI. 2 December 2001. 5 December 2007 . 14. Reuters. Reuters. 5 December 2007 . 15. Subba Rao. P, Business Policy & Strategic Management, Himalaya Publishing House, 1999. 16. TESCO. TESCo. 5 November 2007 . 17. Van Horne, James C. Financial Management & Policy, Prentice Hall of India, New Delhi, 2001. Read More