Business Ethics of Tesco - Essay Example

Business Ethics: Tesco 2007 The paper is dedicated to the problem of business ethics. The purpose of this paper is to learn how to make decisions in the sphere of business ethics. As the object of study we have chosen Tesco, UK’s largest supermarket chain. The objectives are: 1) to highlight the current ethical position of the company, comparing it with other organizations in the field; 2) evaluate social responsibilities and ethical impact of its business and marketing strategies; 3) to provide recommendations as to the possible improvements in ethical position of Tesco. It is possible to distinguish several steps in the process of ethical decision making. First, it is necessary to define the issues and explain why they are ethically controversial. Second, one is to identify the stakeholders and explain whose interests are at stake and what kind of interests those are. Third, one is to clarify the ethical values and see what relevant values are in the organization’s Code of Ethics and what moral standards and principles are relevant. To resolve the issue we should understand how organizational values and moral standards can be applied and what impact the resolution may have on the stakeholders. However, it is not enough simply to offer resolutions; they must be made a reality. Implementation of resolutions requires a certain plan of actions, monitoring of the outcomes and assessment of success. Tesco is Britain’s largest retailer occupying 30 percent of the market share. It is followed by Sainsbury’s and Asda Wal-Mart. All the three corporations have similar ethical problems associated with their monopolistic position in the market and low-cost marketing strategy. Tesco is also well-known for its diversification strategy. Their corporate strategy is “an inclusive offer”, which refers to the company’s ambition to appeal to customers with upper, medium and low income in the same stores. As David McCarthy, Citigroup retail analyst put it, “Theyve pulled off a trick that Im not aware of any other retailer achieving. That is to appeal to all segments of the market” (Liptrot 2005). This diversity is expressed even in Tesco’s own brand products, verifying from the up-market “Finest” to a low-price “Value”. The diversification is used in the firm’s six UK store formats, differentiated by size and range products on sale. Initially specializing in food, the company entered such areas of businesses as clothes and consumer electronics, selling and renting DVDs, CDs and music downloads, as well as Internet service consumer telecoms, budget software and consumer financial services. Recently the company has moved into housing market and has its own advertising website Tesco Property Market (Corporate Watch 2004). However, the history of Tesco’s success is tightly linked with the corporate unethical practices. The major issues around Tesco’s business include unfair competitive practices (such as keeping of the undeveloped “land bank”, below-market prices, aggressive store development, which leads to annihilation of the smaller competitors in the convenience sector), unfair trading with suppliers, usage of cheap and child labor in the countries of the Third World, cheating in marketing, breaching planning laws, harm to the environment. It is interesting that at first sight the company operates within the norms of business, using business practices and marketing strategies admitted in the world of big business. Sainsbury’s, Asda, Morrisons, Marks and Spenser, and other companies could use the similar strategies if they had enough resources. Asda being a subsidiary of Wal-Mart is associated with a series of very unethical scandals, which became a result of the company’s low-cost strategy. In fact, the circle seems to be a closed one. The public wants to buy cheap products and it is convenient to buy a wide range of products at the same place, the supermarket chains need to develop and grow. Low-cost is used most effectively for the realization of the services of mass demand, and directs the company at the production and sales of a great number of goods in extensive market. The firm sells its products either at average industry price or even below it. The minimization of the inputs gives possibility to realize a service at a low price. The increase in the sales volume leads to the increase of profitability of the enterprise (Quick MBA 2007). There are several methods of maintaining a low-cost position. One of the approaches is to sell no-frills products, removing any frills and extras. This method is used by Tesco and Asda and was implemented by Sainsbury. However, a no-frills strategy demands the resources to withstand a possible price war with the competitors that may also cut on prices. So Tesco and Asda can afford the strategy, while they are able to lower their prices in an attempt of driving out a weaker no-frills competitor. Another opportunity to implement a low-cost strategy includes both low purchasing prices and cheap distribution channels. The former may depend on the innovative product design, cheap raw materials, or innovative production processes. Low cost-strategy allows Tesco to force out the competitors in the convenience sector. The company needs funds for further development of the chain, which should bring ever more profits. Market expansion and penetration are usual strategies distinguished by Igor Ansoff. Yet, when greed is involved, business ethics always suffers. Tesco is accused of ‘near monopoly” in some towns of the UK. The scandals burst out in the Highland city of Inverness and in St Albans (See BBC News, Scotland 2006 and Stop Tesco 2008). The four major chains in the sector, possessing 75% of the UK grocery market, own large areas of undeveloped land across the UK, with Tesco having the largest land development portfolio. This way the companies stifle potential competition (BBC News, Business, 2007). “The massive land bank built up by the largest chains, especially Tesco, acts as a barrier for smaller chains entering the market”, stated the Office of Fair Trading’s referral of the Grocery Market to the Competition Commission. “Tesco should have to divest some of its current land bank which, if it was all developed, would give the chain a massive 45% of the market compared to the 31% it has now”, was their conclusion (Tescopoly, Our demands, Planning 2007). Breaching of the planning laws became another ethical violation of Tesco. In 2006 an independent BBC investigation revealed that a store in Portwood, near Stockport in Greater Manchester was 20% over the planned size. The store is still in business turning over ₤1 million a week. The building of supermarkets is ruinous for the environment and urban context. So only during the building of a new store in Buckinghamshire there remained 27,000 tones of waste, left in an Area of Outstanding Natural Beauty (BBC News, UK, 2006). Tesco’s activities damage environment. The building of new stores leads to deforestation and distortion of the soil. Tesco stores are the most energy inefficient buildings in the retail sector. Their marketing strategies do even more harm. Transporting cheap products from all over the world supermarket chains contribute to the pollution from aircrafts and lorries. Encouraging their customers to travel by car, they cause additional pollution. Hunting for cheap food Tesco encourages intensive agriculture also having devastating effect on the global environment. Enhanced usage of plastic bags, ending in the landfills, is another problem associated with supermarkets activity (Tescopoly, Impacts, Environment, 2007). In 2006 Tesco announced an Environmental Fund of ₤100 million. They also announced their attempt to build “the greenest store in the world” in Aylsham, Norfolk, made entirely from the recycled materials. It was also promised that Tesco would cut energy consumption per square foot by half by 2010 from the amount used in 2000. However, the fair criticism accused the company of “green washing” in an attempt to improve its reputation (Telegraph 2006). Unfair trading with suppliers both in the UK and abroad caused another ethical scandal with Tesco. “Supermarkets control nearly 80% of the British grocery market and as the most powerful players along most food supply chains are able to dictate terms, conditions and prices to suppliers,– explains Tescopoly (2007). – If suppliers complain, supermarkets can simply move their business elsewhere, and their dominance of the food retail sector is such that there may simply be no one else for farmers to sell their produce to”. As a result thousands of farmers have to leave the industry yearly because of the low prices they receive for their produce. In order to survive, farmers increase prices on products for other retailers. “Having travelled to many countries to meet farmers it was very clear that supermarkets treated all farmers equally  - unfortunately that is equally badly and it was the name of Tesco which came up time and time again. If we are to have a future as farmers and sustainable agriculture then we need to control supermarket power,” writes Michael Hart, chairman of Small and Family Farms Alliance (Tescopoly, Impacts, Farmers 2007). Like in the case with Wal-Mart, Tesco’s low-cost strategy turned out to be based on the low-paid labour and child labour in the countries of the Third World (BBC News, Business 2006; Channel 4 2006). The company denied its connection to the issue, stating that the constant audits conducted at the foreign factories revealed no violations. However, recollecting the situation at Wal-Mart’s factories (See 1 world communication 1999; McCool 2004), it is easy to suppose that Tesco simply closed its eyes to the violation of basic human rights. In May 2007 investors tried to force the issue of ethical trading with suppliers onto the agenda at Tesco’s annual shareholders meeting. Ben Birnberg, a retired solicitor and a secretary at War on Want, made an attempt to force the company to adopt higher standards in its dealing with domestic suppliers and farmers in low-wage countries. Mr. Birnberg won the support of more than 100 shareholders. The resolution was to oblige Tesco “to appoint independent auditors to ensure that workers in its supplier factories and farms are guaranteed decent working conditions, a living wage, job security and the right to join a trade union of their choice.” However, Tesco turned the request down as “not valid” (The Guardian Unlimited 2007). It is estimated that due to supermarket chains activity no independent convenient stores are likely to survive by the year 2015. Meanwhile, diverse forms of retail have numerous social and economic benefits. ‘Small shops are vital for people to access healthy food, in particular disadvantaged groups, and people without cars or with limited mobility’, explains Tescopoly (2007). Chain retailers are damaging to the local economy, social inclusion and local identity, stated the report of the New Economic Foundation in 2005 (Tescopoly 2007, Impacts, Local Shops). People are losing their business and jobs, and the whole community becomes dependent on supermarkets. At last, Tesco and other supermarkets turned out to cheat in their major claims about prices, quality of products, and services. A study of the big six stores conducted by the Grocer in 2006 demonstrated that Tesco kept its customers waiting longest at the checkout, notwithstanding its claim to be the quickest in service. It also turned out that Tesco wasn’t the cheapest of the supermarkets (The Mirror 2006). Besides, the quality of food offered by the supermarket chain is really doubtful. A study by the National Consumer Council (2006) showed that many economy lines in the supermarkets were high in salt, fat and sugar. Most of these food is unhealthy and heavily processed, while supermarkets are not the cheapest source of healthy food. Moreover, it was discovered that the animals and birds for slaughter reared by Tesco, were kept in conditions so poor, that the quality of meat got from the animals cannot be high (Tescopoly, Impacts, Food Poverty 2007). As we can see, Tesco’s ethical issues concern a great circle of stakeholders and affect the economic and social welfare of the whole country. Supermarkets influence the quality of life of separate individuals and entire communities, damage environment. Tesco violates the state legislations and undermines the national economy, forcing farmers and small retailers out of business. What is even more disturbing is the company’s refusal to follow the demands forced onto it by non-profit organizations and investors. The root of the problems is in the corporate culture itself, which starts at the highest level, from chief executives. To improve the situation in ethical sphere it is necessary to alter the attitudes of the people working for the corporations. Code of ethics, created, accepted and supported by the top management is an obligatory condition for existence of business ethics. In the conditions of the enlarged focus on the ethical corporate responsibility codes of ethics have become an integral part of corporate documentation. This document “embodies the ethical commitments of your organization” telling the world “who you are, what you stand for, and what to expect when conducting business with you” (MacDonald 2006). There are certain requirements as to the content of the corporate ethical code. First, of all it should be individual, supporting particular values and goals. Simon Webley (2001) recommends that Preface or Introduction, signed by the Chairman or Chief Executive Officer or both, should set the purpose of the code, mentioning core values important for the top management, including integrity, responsibility and reputation and describing “the leadership commitment in maintaining high standards both within the organization and in its dealings with others”, as well as “setting out the role of the company in the community and end with a personal endorsement of the code and the expectation that the standard set out in it will be maintained by all involved in the organization”. Key areas to include are: A. The Purpose and Values of the Business (financial objectives and the business role in society as the company sees it); B. Employees (the companys policies on: recruitment, working conditions, development and training, health, safety & security, rewards, equal opportunities, diversity, retirement, redundancy, discrimination and harassment, use of company assets by employees); C. Customer Relations (the importance of customer satisfaction and good faith in all agreements, quality, fair pricing and after-sales service); D. Shareholders or other providers of money (protection of investments and proper return, commitment to accurate and timely reports on achievements and prospect); E. Suppliers (accurate settling of bills, cooperation, no bribery, etc); F. Society or the wider community (compliance with laws and regulations, environmental responsibility, the company’s involvement in local affairs, the corporate policy on sponsorship, education and charity); G. Implementation (how the code is issued and used, means to obtain advice, awareness raising examples and training programs for all staff); H. Assurance, reporting and reviews (suggestions on how to know if the code is effective, reporting to the board at least annually, the procedures of reviewing and updating the code) (Webley 2001, Content). However, the existence of a code does not guarantee ethical conduct of the business. Ethical standards must be implemented. To ensure the implementation of ethical resolutions it is necessary to keep to a number of obligatory rules. First of all, top management should behave in accordance with the ethical standards, educate the employees, communicate the moral standards to other stakeholders and regularly check their implementation. The Code of ethics must be endorsed by the CEO or Chairman and integrated into the running of the business. It is necessary to provide all the employees with a copy and listen to their reactions, make management and partners aware of the ethical principles, regularly review and update the code, make staff aware of the consequence of breaching the code, include ethical issues into training programs, reproduce a copy of the code in Annual Report for the shareholders and general public (Webley 2001, Implementation). The outcomes can be monitored through the reactions of the staff members, the rate of customer satisfaction, surveys, and internal reports and self-audits. It is necessary to see if the set targets have been achieved, if all the stakeholders are aware and committed to the ethical standards. At Tesco’s official site it is mentioned several times that the company does have a Code of Ethics for its employees. Unfortunately, it is impossible to find the document online, just as Tesco’s Code of Practice. A supermarket Code of practice was introduced in 2001 by the OFT, after the Competition Commission published its report, revealing 52 kinds of ethical violations. Since 2002, Tesco began preparing annual Corporate Responsibility Reviews, presenting its achievements and plans in the sphere of ethical decisions. However, the review conducted by the OFT in 2004 showed that the Code was not working effectively and recommendations were not followed. The new audits, additional examining the impact on suppliers, were carried out in 2004-2005, demonstrating that little had changed in supermarkets’ practices, while suppliers’ position became weaker. The investigation into the grocery market, continued under public pressure, showed disturbing results (Tescopoly, Code of Practice, 2007). The problem is evident: the government does not see to the implementation of the code. The steps to protect the convenience stores and suppliers are undertaken only under pressure from non-profit organizations and general public. However, it is obvious that the situation cannot stay the same for a long time. A number of strikes against Tesco’s business practices have shown the impatience of the people. Today the reputation of the firm is its major value. People tend to pay much attention to the ethical standards of corporations. The slightest shade of mistrust may cause huge losses for the organization. Moreover, the government is to pay close attention to the issue of business ethics sooner or later. Similar situation has occurred in the United States. Numerous scandals around ethical questions forced the government to introduce severe regulations. State audits and permanent lawsuits cause substantial losses of the companies and sometimes lead to the closure of business organizations. That is why, it is vital to realize the importance of the ethical issues and requirements laid down before the UK supermarket chains. Monopoly is not welcomed anywhere in the world. Very strict measures are taken against monopoly in any sector in Russia. Taking into account potential problems it is preferable to make steps towards improvements. The major recommendation that can be given sounds a bit strange in the world of business: it is necessary to stop pursuing profits and really focus on the needs of the humanity, environment and particular countries of operations. Everything in this world is interconnected. When owners of the corporation see nothing but money, they destroy the world, where their offspring will have to live. Undermining the economy of the country, violating basic human rights and devastating the planet, big business condemns the whole world to the life of low quality. Tesco is the corporation, which ethical standards are far below the level acceptable in a civilized world. Violation of ethical business conduct begins here from the highest levels of management. The improvements can be achieved only in case the chief executives change (or are forced to change) their attitudes and behavioral norms. However, Tesco is not the only supermarket chain with ethical problems. The whole sector is characterized with similar unethical conduct and strategies. Thus it is necessary to change the very essence of the retail business. Ideally, the UK corporations should agree on the general regulations and business conducts. However, this seems impossible in the world of business. Thus ethical business conduct can be achieved due to severe control from the government. References: BBC News. Business. UK firms ‘exploiting Bangladesh’. Dec 8, 2006. Jan 9, 2008. Available at: http://news.bbc.co.uk/1/hi/business/6219274.stm BBC News. Business. 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