Corporate Strategic Review on TESCO - Essay Example

Corporate Strategic Review on TESCO Introduction Founded in 1924, Tesco has indeed come a long way since its first-opened store in Burnt Oak, Edgware. Today, 79 years after it was founded by Sir Jack Cohen, TESCO is Britain's leading food retailer. Tesco started off with self-service supermarkets in the US during the 1930s. After a few years of operations, Tesco management then realized that selling a wider variety and larger stock volumes, and employing fewer staff dramatically lowered product prices. This was the start of great things for the company. Even as everything else crumbled into pieces during the war, Tesco was at the onset of its prosperity, thriving in the midst of adversity. It was in the 1940s when Tesco came to Britain to introduce self-service stores, About 20 years after, Tesco had become a familiar name, not only for groceries, but also for fresh food, clothing, and other household goods. In 1964, Tesco's innovativeness was put to a challenge when the British government imposed the Resale Price Maintenance System, a law that mandates all retailers to charge a set price for their products. However, Tesco found a way through it and introduced trading stamps so that it could bring lower prices to its customers. Customers collected these stamps as they purchased groceries and other items. By 1960, Tesco was in control of 212 store chains in north England, and 144 more in 1964 and 1965. By 1970, Tesco was a household name, known for its grocery products at very competitive prices. It was at this time when Tesco decided to broaden its customer base and make its stores more attractive to a wider range of customers. Tesco decided to concentrate on developing bigger superstores at the outskirts of the town, on selling a broader range of goods, and on providing quality shopping environment and customer service. Tesco likewise ventured into selling petrol at very competitive rates in 1974, opening its first filling station at its major sites. These changes earned more customers and greater profits for Tesco, and in 1979, its annual turnover reached 1 billion for the first time. Tesco has built its 100th superstore by 1985, and in 1987, it announced a 500 million plan to build 29 more stores. By 1991, the success of its petrol filling stations earned for the company Britain's biggest independent petrol retailer. In the 1990s, the company built on its success by developing new store concepts and new customer-focused initiatives. Tesco broke new ground in food retailing by introducing, in 1995, the first customer loyalty card, which offered benefits to regular shoppers whilst helping the company discover more about its customers' needs. Other customer services followed, including grocery home shopping, Tesco Direct for catalogue shoppers and the Tesco Babyclub for new parents, as well as the launch of Tesco Personal Finance a joint venture with the Royal Bank of Scotland. Tesco continued its winning streak in the new millennium. In January 2003 Tesco completed the acquisition of 870 T&S Stores in the UK; 450 of these stores will be converted to Tesco Express in the next three to four years. Moreover, Tesco opened in Taiwan in 2000 and, in May 2002 its first store in Malaysia in a joint venture with Sime Darby Sdn Bhd. In July 2002, Tesco acquired the "HIT" chain of hypermarkets in Poland. This acquisition added 13 hypermarkets to the Polish business, giving it a market leading position. By the end of 2002/03 Tesco had 45 percent of its space overseas, market leadership in 6 of its 10 countries, and was profitable in 8 out of 10 markets. Porter on Tesco Using Porter's Generic Strategies, this approach of Tesco shall be evaluated and assessed. It will also be subjected to the five industry forces such as: Entry Barrier, Buyer Power, Supplier Power, Threats of Substitute and Rivalry. Tesco can be categorized in Porter's Generic Strategies as belonging to the Broad Industry- as it targets an economy of scale whose product line is extensive (Reichheld and Sasser, 1990). Moreover, the standard banner of Tesco had been on its affordability thus, placing it on the Low-cost strategy. There are five advantages of this approach as outlined by Porter: In the entry level, Cost Leaders has the ability to cut price in retaliation and deters potential entrants. Second, they have the ability to offer lower price to buyers (Hessan and Whitely, 1996). Moreover, they are better insulated from powerful suppliers. Fourth, they can use low price to defend against substitutes. And lastly, they can are better able to compete on price. Porter's Generic Strategies Target Scope Advantage Low Cost Product Uniqueness Broad (Industry Wide) Cost Leadership Strategy Differentiation Strategy Narrow (Market Segment) Focus Strategy (low cost) Focus Strategy (differentiation However, Tesco despite being the dominant chain store in UK have yet to contain market competition as other companies such as J Sainsbury continues to share a large chunk of consumers that Tesco also targets (Porter, 1998). In fact the statistics below proves that J Sainsbury have kept up with the competition by substantially sustaining the gap between the market leader. All of whom had been strategically positioning themselves in the market to get a bigger share of the market. Rank 2000 Company & Operations Sectors Sales 99/00 Sales 98/99 Sales 97/98 1 Tesco Plc Grocers 16,958,000 15,835,000 14,971,000 2 J Sainsbury Plc Grocers; DIY; mixed goods 13,570,000 13,184,500 12,682,000 Thus, while Tesco dominates the market, it does not have the capacity to control the marketplace because of the close competition that the other companies offer (Tesco.com, 2005). Moreover, the ability to cut back prices to deter competition may only be possible if the rival companies are small. In terms of size, the other companies are actually on a head to head contest with the other corporations. Competitive advantage would thus be fought in the ability of the companies to provide high-quality products on cheaper prices without compromising profitability. Thus, importing agricultural products on countries that can provide it at a much cheaper price would provide the optimum advantage for Tesco in terms of lowering the cost in the supply chain (Porter, 1998). Feasibility, Acceptability and Suitability Analysis Tesco works on such a wide range of customers thus supermarkets respond to customers' demands through low prices are essential for families on a budget. Low prices are also good for the economy supermarkets have played an essential role in contributing to low inflation (Tesco.com, 2005). The feasibility and acceptability of providing such substitutes would be the core dilemma of importing agricultural products aside from the employment issues that it may trigger. However since all imports of agricultural and food items are subject to the sanitary and phytosanitary regulations of the EU as well as certification requirements specified by the UK veterinary and plant health authorities, there can be no question on the quality of the imported products. The problem lies in increasing this market. Packaging the imported agricultural products to suit the needs of the UK market by selling the expected quality at an affordable price can do this. In this stage, the firm seeks to achieve growth with existing products in their current market segments, aiming to increase its market share. Penetrating this market this market and expanding it to include the loyal followers of the Tesco groceries would greatly boost the company and the customers of the imported products. The Implementation Process would entail a great cost for Tesco but only in the short run. Moreover, the cost can be covered by the reduction in prices that they can get from the imported materials. For more convenience, the processing would also take place in the country where the product had been imported (Porter, 1998). This would then result to the cost reduction that can propel the marketing campaign on the benefits and the affordability of the imported products. TESCO's Approach to Strategic Management Strategic Management plays the most critical role in TESCO's dominance of the UK's retailing. In 2002 sales in the core UK market have grown by 7.9% and underlying operating profit by 6.9% reinforcing their position as the number one food retailer in the UK . In fact the growth seems to be soaring by the new developments such as the opening of 62 new stores in 2002 adding a further 1.4 million sq ft, acquiring 1,202 T&S Stores, a leading convenience retailer, giving TESCO an additional 1.8 million sq ft. This brings the total number of stores in the UK to 1,982 (Tesco.com, 2005). This overarching progress though was not attained over time but is a product of a thorough and a premeditated examination of market trends and strategies that sought to revolutionalize the retailing industry in the UK. Thus, this allowed TESCO to rise in the retailing industry and is now generally regarded as the primary model of strategic planning in retail management (Porter, 1998). At Tesco Michael Porter led the team for Project Future - now recognised as one of Terry Leahy's major contributions to their continuing dominance of the Grocery sector. In the words of Phil Clarke project Future brought about the "most dramatic change in working practices and the way in which stores are led in Tesco's history". The realised benefits of some 40 million of savings and revenue growth were considered almost as important as the change in culture (Moncrieff, 1999). The project scope covered redesign of in-store processes, new approaches to store management and the introduction of a Balanced Scorecard (known as the Steering Wheel) tailored to each store. Strategic Management Style in the Long-term Tesco's strategic management style is simple: use Porter's Generic Strategy as a guide. Product differentiation and affordability has indeed brought retailing for Tesco on new heights (Markides, 1996). By developing this kind of strategy coupled with customer convenience, the company was able to produce economies of scale: the entire consumer populace is their target market. At Tesco, the mission and objective is clear- attain market dominance by cultivating the customer loyalty to the company. Thus, aside from the strategies mentioned earlier, they have also launched environmental preservation projects that answer the growing concern for the environment (Hamel and Pralahad, 1996). Tesco has a comprehensive recycling programme for customers and its own operations. There are recycling banks at over 500 of our larger stores, and Christmas card and carrier bag recycling facilities too. The step change programme has delivered 230m of new efficiency savings this year and over 600m in the past three years. This year saw great progress with Primary Distribution, allowing Tesco to take control of product from the factory gates to distribution centres, improving efficiency and delivering cost benefits that reinvest in customer initiatives (Tesco.com, 2005). All products have now been transferred to Continuous Replenishment system. This has delivered substantial benefits to the business and reduced the time it takes for a product to get from supplier to shelf. Customer convenience has also been one of the keys of Tesco's strategic management plan. Moreover, they have developed several market designs to keep their customers satisfied. For instance, they created different types of stores that seek to cater to the different needs of the UK market. They have four different store formats in the UK: Extra, Superstore, Metro and Express. Further, they Tesco does not rest on just building these types of store but also strives to maintain and expand it. In 2002, Tesco have invested over 150m into the Refresh programme to help serve customers better and improve availability, operations and store environment. A quarter of Superstores have received the customer-focused improvements in key areas including car parking, trolleys, signage, counters and availability. Express offers customers the chance to stock up on shopping at their convenience at a diverse range of locations, from inner city stores such as Maida Vale, London, to villages like Yateley in Hampshire. Although on a smaller scale than larger supermarkets, it will provide a broad but carefully selected range of essential everyday products (Hessan and Whitely, 1996). In the stores that convert to Express, customers will benefit from lower prices, improved service, better fresh food ranges and store environment, as well as better availability, quality and choice. This will also allow Tesco to accelerate their growth in the 20bn convenience market while continuing to run the remainder as OneStop Shops. However, the profitability and growth always goes with the development of the human resource personnel. The human capital after all, continues to be the single most important capital in businesses. Thus, recognizing that they are an essential element to the success and future of providing quality differentiated services at affordable prices, Tesco had also a set of principles that promotes the growth and convenience of its employees. The Tesco Values are a set of principles that describe two work ethics such as: 'Treat people how we like to be treated' and 'No-one tries harder for customers'. Also, employee benefits such as childcare voucher scheme and Shares in Success, where staff with more than a year's service will be eligible for free shares has been devised. Conclusion Tesco is well on top of the retailing, as well as the Internet shopping industry today. Seventy-nine years after it was founded, Tesco is now well on its way of becoming an international brand. Adding up to its laurels, Tesco's e-retailing arm is one of the most revered dot com shopping initiatives in the 1990s. However, with the continuing upsurge of internet technologies and the emergence of strong competitors, Tesco needed the help of Porter in improving their strategic management and corporate strategy. The company implemented Porter's Generic Strategies which targets a broad market and aims to present customers with products at a low cost for a given level of quality. The industry sells its products at average industry prices to earn a profit higher than that of rivals, or below the average industry prices to gain market share. In the event of a price war, the firm can maintain some profitability while the competition suffers losses. Even without a price war, as the industry matures and prices decline, the firms that can produce more cheaply will remain profitable for a longer period of time. Although, Porter provided Tesco a comprehensive strategic management model to serve as a guide in achieving the company's goal in being the largest retailer in U.K, Porter's model can still be considered limited at some extent: (a)Consumers, competitors and suppliers are not similar therefore they should not interact and may contradict each other. (b) Barriers might be created because the source of value is structural advantage. (c) Letting participants inside the market plan for the behaviors of their consumers might result to low performance and uncertainties in the market. Works Cited Hamel, Gary and Pralahad, C.K. Competing for the Future. Harvard Business School Press, 1996. Hessan D. and Whiteley R.. Customer Centered Growth: Five Proven Strategies for Building Competitive Advantage. Cambridge, MA: Perseus Books, 1996. Markides, Constantinos C. A Dynamic View of Strategy. Sloan Management Review, pp.83-92, 1996. Moncrieff, James. Is Strategy Making a Difference Long Range Planning 32, no.2, pp.273-76, 1996. Porter, Michael E. Competitive Advantage : Creating and Sustaining Superior Performance. Harvard Business School Free Press, 1998. Reichheld, F. F. & Sasser, W. E, Jr. Zero Defections: Quality Comes to Services. Harvard Business Review, 68 (September-October), 105-111, 1990. Tesco.com (2005) Tesco.com Retrieved May 24, 2005, from Read More