29932770 strategic-management-of-tesco-supermarket

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29932770 strategic-management-of-tesco-supermarket

  1. 1. Strategic Management of TESCO supermarket: PESTEL analysis,Porters 5 Forces analysis, Critical success factors, SWOTAnalysis, VALUE CHAIN analysis, TESCOS strategic options,Core Competences & Cultural Web.I INTRODUCTIONThe food and drink retail sector represents the largest industry inthe UK, providing employment for over three million people inprimary production, manufacturing and retailing. In 2003 retailaccounted for 9% of gross domestic product (Datamonitor, 2003).In recent years UK supermarkets have come under increasedscrutiny over their treatment of suppliers, particularly of own-labelproducts, yet the development of strategic supply networks hasbeen an integral part of most supermarket strategies for the pastdecade. The report below provides an insight into the supermarketcompany, Tesco, with emphasis on its external environmentanalysis and companys analysis of resources, competence andculture. Two future strategic options are suggested in regards tothe resources based strategies. 1
  2. 2. Tesco is one of the largest food retailers in the world, operatingaround 2,318 stores and employing over 326,000 people. Itprovides online services through its subsidiary, Tesco.com. TheUK is the companys largest market, where it operates under fourbanners of Extra, Superstore, Metro and Express. The companysells almost 40,000 food products, including clothing and othernon-food lines. The companys own-label products (50 percent ofsales) are at three levels, value, normal and finest. As well asconvenience produce, many stores have gas stations, becomingone of Britains largest independent petrol retailers. Other retailingservices offered include Tesco Personal Finance.2.0 INDUSTRY ANALYSIS: PESTEL FRAMEWORK2.1 Political Factors Operating in a globalized environment with stores around theglobe (Tesco now operates in six countries in Europe in addition tothe UK; the Republic of Ireland, Hungary, Czech Republic,Slovakia, Turkey and Poland. It also operates in Asia: in SouthKorea, Thailand, Malaysia, Japan and Taiwan), Tescosperformance is highly influenced by the political and legislativeconditions of these countries, including the European Union (EU). 2
  3. 3. For employment legislations, the government encouragesretailers to provide a mix of job opportunities from flexible, lower-paid and locally-based jobs to highly-skilled, higher-paid andcentrally-located jobs (Balchin, 1994). Also to meet the demandfrom population categories such as students, working parents andsenior citizens. Tesco understands that retailing has a greatimpact on jobs and people factors (new store developments areoften seen as destroying other jobs in the retail sector astraditional stores go out of business or are forced to cut costs tocompete), being an inherently local and labour-intensive sector.Tesco employs large numbers of; student, disabled and elderlyworkers, often paying them lower rates. In an industry with atypically high staff turnover, these workers offer a higher level ofloyalty and therefore represent desirable employees.2.2 Economical FactorsEconomic factors are of concern to Tesco, because they are likelyto influence demand, costs, prices and profits. One of the mostinfluential factors on the economy is high unemployment levels,which decreases the effective demand for many goods, adverselyaffecting the demand required to produce such goods. 3
  4. 4. These economic factors are largely outside the control of thecompany, but their effects on performance and the marketing mixcan be profound. Although international business is still growing(Appendix A), and is expected to contribute greater amounts toTescos profits over the next few years, the company is still highlydependent on the UK market. Hence, Tesco would be badlyaffected by any slowdown in the UK food market and are exposedto market concentration risks.2.3 Social/Cultural Factors Current trends indicate that British customers have movedtowards one-stop and bulk shopping, which is due to a variety ofsocial changes. Tesco have, therefore, increased the amount ofnon-food items available for sale.Demographic changes such as the aging population, an increasein female workers and a decline in home meal preparation meanthat UK retailers are also focusing on added-value products andservices. In addition, the focus is now towards; the own-labelshare of the business mix, the supply chain and other operationalimprovements, which can drive costs out of the business. Nationalretailers are increasingly reticent to take on new suppliers (Clarke,Bennison and Guy,1994; Datamonitor Report, 2003). 4
  5. 5. The type of goods and services demanded by consumers is afunction of their social conditioning and their consequent attitudesand beliefs. Consumers are becoming more and more aware ofhealth issues, and their attitudes towards food are constantlychanging. One example of Tesco adapting its product mix is toaccommodate an increased demand for organic products. Thecompany was also the first to allow customers to pay in chequesand cash at the checkout.2.4 Technological Factors Technology is a major macro-environmental variable which hasinfluenced the development of many of the Tesco products. Thenew technologies benefit both customers and the company:customer satisfaction rises because goods are readily available,services can become more personalised and shopping moreconvenient.The launch of the Efficient Consumer Response (ECR)initiative provided the shift that is now apparent in the managementof food supply chains (Datamonitor Report, 2003). Tesco storesutilise the following technologies: • Wireless devices • Intelligent scale • Electronic shelf labelling 5
  6. 6. • Self check-out machine • Radio Frequency Identification (RFID).The adoption of Electronic Point of Sale (EPoS), Electronic FundsTransfer Systems (EFTPoS) and electronic scanners have greatlyimproved the efficiency of distribution and stocking activities, withneeds being communicated almost in real time to the supplier(Finch, 2004).2.5 Environmental FactorsIn 2003, there has been increased pressure on many companiesand managers to acknowledge their responsibility to society, andact in a way which benefits society overall (Lindgreen and Hingley,2003). The major societal issue threatening food retailers hasbeen environmental issues, a key area for companies to act in asocially responsible way. Hence, by recognizing this trend withinthe broad ethical stance, Tescos corporate social responsibility isconcerned with the ways in which an organization exceeds theminimum obligations to stakeholders specified through regulationand corporate governance. (Johnson and Scholes, 2003) Graiser and Scott (2004) state that in 2003 the government hasintended to launch a new strategy for sustainable consumption and 6
  7. 7. production to cut waste, reduce consumption of resources andminimise environmental damage. The latest legislation created anew tax on advertising highly processed and fatty foods. The so-called fat tax directly affected the Tesco product ranges that havesubsequently been adapted, affecting relationships with bothsuppliers and customers2.6 Legislative FactorsVarious government legislations and policies have a direct impacton the performance of Tesco. For instance, the Food RetailingCommission (FRC) suggested an enforceable Code of Practiceshould be set up banning many of the current practices, such asdemanding payments from suppliers and changing agreed pricesretrospectively or without notice (Mintel Report, 2004). Thepresence of powerful competitors with established brands createsa threat of intense price wars and strong requirements for productdifferentiation. The governments policies for monopoly controlsand reduction of buyers power can limit entry to this sector withsuch controls as license requirements and limits on access to rawmaterials (Mintel Report, 2004; Myers, 2004). In order toimplement politically correct pricing policies, Tesco offersconsumers a price reduction on fuel purchases based on the 7
  8. 8. amount spent on groceries at its stores. While prices are loweredon promoted goods, prices elsewhere in the store are raised tocompensate.3.0 INDUSTRY ANALYSIS: PORTERS FIVE FORCES3.1 Threat of New EntrantsThe UK grocery market is primary dominated by few competitors,including four major brands of Tesco, Asda, Sainsburys andSafeway that possess a market share of 70% and small chains ofSomerfield, Waitrose and Budgens with a further 10%. Over thelast 30 years, according to Ritz (2005), the grocery market hasbeen transformed into the supermarket-dominated business.Majority of large chains have built their power due to operatingefficiency, one-stop shopping and major marketing-mixexpenditure. This powerful force had a great impact on the smalltraditional shops, such as butchers, bakers and etc. Hence,nowadays it possesses a strong barrier for new companies whodesire to enter the grocery market. For instance, it becomes ratherdifficult for new entrants to raise sufficient capital because of largefixed costs and highly developed supply chains. This is alsoevident in huge investments done by large chains, such as Tesco,in advanced technology for checkouts and stock control systems 8
  9. 9. that impact new entrants and the existing ones. Other barriersinclude economies of scale and differentiation (in theprovision of products or services with a higher perceivedvalue than the competition) achieved by Tesco and Asda seenin their aggressive operational tactics in productdevelopment, promotional activity and better distribution.3.2 Bargaining Power of Suppliers This force represents the power of suppliers that can beinfluenced by major grocery chains and that fear of losing theirbusiness to the large supermarkets. Therefore, this consolidatesfurther leading positions of stores like Tesco and Asda innegotiating better promotional prices from suppliers that smallindividual chains are unable to match Ritz (2005). In return, UKbased suppliers are also threatened by the growing ability of largeretailers to source their products from abroad at cheaper deals.The relationship with sellers can have similar effects inconstraining the strategic freedom of the company and ininfluencing its margins. The forces of competitive rivalry havereduced the profit margins for supermarket chains and suppliers. 9
  10. 10. 3.3 Bargaining Power of CustomersPorter theorized that the more products that become standardizedor undifferentiated, the lower the switching cost, and hence, morepower is yielded to buyers Porter M. (1980). Tescos famousloyalty card - Clubcard remains the most successful customerretention strategy that significantly increases the profitability ofTescos business. In meeting customer needs, customizingservice, ensure low prices, better choices, constant flow of in-storepromotions enables brands like Tesco to control and retain theircustomer base. In recent years a crucial change in food retailinghas occurred due to a large demand of consumers doing themajority of their shopping in supermarkets that shows a greaterneed for supermarkets to sell non-food items. It has also providedsupermarkets with a new strategic expansion into new markets ofbanking, pharmacies, etc. Consumers also have become moreaware of the issues surrounding fairer trade and the influence ofwestern consumers on the expectations and aspirations of ThirdWorld producers. Ecologically benign and ethically soundproduction of consumer produce such as tea, coffee and cocoa isviable, and such products are now widely available at the majorityof large chains. 10
  11. 11. 3.4 Threat of Substitutes General substitution is able to reduce demand for a particularproduct, as there is a threat of consumers switching to thealternatives Porter M. (1980). In the grocery industry this can beseen in the form of product-for-product or the substitute of needand is further weakened by new trends, such as the way smallchains of convenience stores are emerging in the industry. In thiscase Tesco, Asda and Sainsburys are trying to acquire existingsmall-scale operations and opening Metro and Express stores inlocal towns and city centres Ritz (2005).3.5 Bargaining Power of CompetitorsThe grocery environment has seen a very significant growth in thesize and market dominance of the larger players, with greater storesize, increased retailer concentration, and the utilization of a rangeof formats, which are now prominent characteristics of the sector.As it was mentioned above, the purchasing power of the food-retailing industry is concentrated in the hands of a relatively smallnumber of retail buyers. Operating in a mature, flat market wheregrowth is difficult (a driver of the diversification into non-foodareas), and consumers are increasingly demanding andsophisticated, large chains as Tesco are accruing large amounts of 11
  12. 12. consumer information that can be used to communicate with theconsumer Ritz (2005). This highly competitive market has fosteredan accelerated level of development, resulting in a situation inwhich UK grocery retailers have had to be innovative to maintainand build market share. Such innovation can be seen in thedevelopment of a range of trading formats, in response to changesin consumer behaviour. The dominant market leaders haveresponded by refocusing on price and value, whilst reinforcing theadded value elements of their service.4.0 CRITICAL SUCCESS FACTORS After a close evaluation of the external analysis of the groceryindustry and SWOT analysis presented in Appendix B, it is crucialto consider internal operational effectiveness of Tesco in the formof identifying critical success factors of the company within thefood retailing sector.4.1 Branding and ReputationThere are companies that have always understood that they wereselling brands before the product. Tesco is a brand and alsoserves as the core strategic advantage. The company wasspreading like wildfire transforming the generic into the brand-specific, largely through carefully branded packaging and the 12
  13. 13. promotion of an “every penny counts” environment. The companyhas a strong brand image, and is associated with good quality,trustworthy goods that represent excellent value.The product and service development processes of the companyhave been substantially re-engineered, to facilitate bettermanagement of product lifecycles and more efficient delivery ofwide ranges of products to customers. Product activity hasfocused on enhancing core ranges and introducing qualityproducts. Tescos innovative ways of improving the customershopping experience, as well as its efforts to branch out intofinance and insurance have also capitalized on strong brandreputation.The company is also very successful in terms of customer loyaltydue to its loyalty cards system and its general approach tocustomizing services to the needs of every customer. This is trulyevident in terms of tremendous growth of on-line sales where thecompany has a strong platform to further develop this revenuestream. After considering the fact the nowadays majority of peoplehave less time for shopping, Tesco employed this on-line systemsand now became the biggest online supermarket. 13
  14. 14. 4.2 IT Integration Today companies act in an increasingly dynamic and complexenvironment, giving more difficulties making forecasts andadapting themselves to the continuous changes. In order to beable to compete in this kind of world, it is necessary to innovate atan extraordinary speed, continuously improving the products,services and processes. For Tesco operations have becomenecessities rather than luxuries. Systems that control stock, keepall the stock and deliveries records and analyse businesstransactions are the lifelines of the company. It can also be saidthat IT has risen beyond its traditional support role and taken up acentral role in business strategy formulation.Extranet system employed by the company, enables Tesco to usethe Internet to create proprietary and customised information flowsbetween the company and its business partners. The systemconnects business partners online behind virtual firewalls, bringingmore flexibility, scalability, extensibility and integration across thedistribution channels. Extranet also helps to extend the keyinformation on business partners throughout the supply chain andfacilitate collaborative relationships with partners. Marketexchanges hold the promise of extending Tescos reach, delivering 14
  15. 15. buyers to their virtual doorstep from around the world. Otherexamples of the most efficient technological advances that supportdaily business operations of Tesco are wireless devices, intelligentscale, electronic shelf labelling, self check-out machine and radiofrequency identification (RFID) systems. This technology is aneffort to maintain Tescos ability to handle an increase inproduct/service volume while controlling costs; it also enables tobe innovative and market oriented.4.3 Supplier ManagementTesco, like many other grocery chains companies, sources itsgoods from overseas manufacturers who are more competitive onprice and volumes. For many years Tesco has been supportingBritish jobs and expertise by encouraging large branded suppliersto develop exclusive production facilities. But in recent years thecompany has realised the need to look abroad for products nolonger available in UK, bud tried to do it through long-establishedUK partners. The foods continued to be heavily UK-based due tothe very successful range of prepared foods.As a major retailer selling diverse product range, they work withmany different suppliers around the world, with employees frommany different cultures and ethnic groups. Therefore, it is the 15
  16. 16. company policy and companys main approach to have uniquerelationships with suppliers. Applying advanced technology in itscommunications and cooperation with the suppliers, the companyaims to control the work of its suppliers and heavily relies on theirefficiency. The direct suppliers use a number of sub-contractedsuppliers, selected to be best in class in their country. Tesco hasestablished close relationships with the contractors believing thatregular and long term orders promote the investment necessary toimprove conditions in the supply chain. Being an international company, Tesco develops various suppliermanagement programmes to survey key suppliers and franchiseesatisfaction. The company also takes part in the Ethnical TradingInitiative.The table presented below gives a strategic comparative analysis,comparing Tescos successful factors discussed above with thesame factors of the main competitors in the UK grocery industry.The scores have been give with the scale from 0 to 5 CSF Sainsburys Asda Safeway Branding 5 3.5 3 IT Integration 4 3 3 16
  17. 17. Supplier 5 3 4 Management Total 14 10.5 11 The results highlight that the main threat is potentially comingfrom Sainsburys that possesses a strong brand name and iscarefully selects and controls its suppliers. 5.0 ANALYSIS OF RESOURCES, COMPETENCE ANDCULTURE5.1 SWOT AnalysisTesco is the top grocer and leading retailer in its home market ofthe UK. Pitched at the broad middle mass-market, it hasmaintained its position through a clear focus, well targeted productoffer and excellent record both in product and format innovation.Tesco also leads the world in online grocery retailing. In the UKthe company concentrates on running grocery superstores, c-stores and an online service. Elsewhere the focus is usually onhypermarkets. In 2003, the groups trading record around Europeand UK has been outstanding. The full SWOT analysis of Tesco is presented in Appendix B,summarizing the key issues from the business environment and 17
  18. 18. the strategic capability, including resources and competence, ofthe company that are most likely to impact on strategydevelopment5.2 Core CompetenceSuperior performance, according to Johnson and Scholes (2003),has to be determined by the way in which companys resourcesare deployed to create competence in the organisational activities.Core competencies are activities or processes that criticallyunderpin the companys competitive advantage. The primarytarget for the company is to recognize that competition betweenbusinesses is as much a race for competence as it is for marketposition and market power. Therefore, the goal for Tescomanagement is to focus the attention on competencies that reallyaffect competitive advantage.The competence leads to levels of performance from an activity orprocess that is significantly better than competitors.Benchmarking may help in understanding performance standardsand what constitutes good or bad performance. However, it will becrucial for Tesco to look at the generic level. Core competencesmay be embedded deep in Tesco at an operational level in thework routines. The framework developed by Prahalad and Hamel 18
  19. 19. in the 1990s suggests that over time companies may develop keyareas of expertise which are distinctive to that company andcritical to the companys long term growth (Drejer, 2000; DeToni, and Tonchia, 2003). In the case of Tesco the areas ofexpertise are most likely to develop in the critical, centralareas of the organisation where the most value is added to itsservice and its delivery. For example, trust in the Tesco brandlies at the heart of these services and in 2003 the number of retailservice accounts rose by 36%. Some 50,000 new serviceaccounts per week are being opened and Tesco sees these areasas long term businesses with the potential to build real scale.Financial services have also been launched internationally in forexample Hungary and Korea (Datamonitor Report, 2003;MarketWatch, 2004).Through a long period of operations, core competencies of Tescohave to be rather fixed. Prahalds and Hamels approach statesthat core competencies should change in response to changes inthe companys environment and be flexible and evolve over time.Therefore, Tesco needs to adapt to new rapidly changingcircumstances and opportunities, so its core competencies will 19
  20. 20. have to adapt and change. The example of this was when thecompany has launched its loyalty card and went into banking. Core competences framework suggests three factors, which canhelp to identify core competences: Provide potential access to a wide variety of markets :enables the creation of new products and services. Fro instance,Tesco has established a strong leadership in food retailing industry.The core competence that enabled Tesco to enter retailing of foodand non-food products was a clear distinctive brand propositionthat had a focus on a properly define market segment. Tesco isrecognized as the company, providing the most customized andefficient service, based on a good customer relationshipmanagement. Makes a significant contribution to the perceived customerbenefits of the outcome: delivers a fundamental customerbenefit. In order to identify core competences in a particularmarket, the question of - why is the customer willing to pay more orless for one product or service than another- needs to beaddressed. For example, Tesco have been very successful incapturing the leadership of the retailing market. This shows thatTesco designs and implements effective supply systems and 20
  21. 21. deliver an efficient "customer interface". Tesco was the first UKgrocer to launch a loyalty card and has been the most effective.Palmer (2004) claims that until recently, it was the only grocer touse the information to mail customers every month.Difficult for competitors to imitate highlights the need for a corecompetence to be competitively unique. This indicated theimportance of product differentiation. For example, for many yearsup to 2003 (In 2003 Tesco has been recognised a leading UK foodretailer) Tesco had a very strong position within the retailingindustry. It had a different approach to the service concept,providing good corporate reputation and introducing new premiumquality products (MarketWatch, 2004).Applying this framework to Tesco shows that the company in orderto be successful has to base its business strategy on thesecapabilities. Capabilities result from Tescos ability to combine andexploit these resources in uniquely different ways. In the externalenvironment, the intensity of competition is not completely underthe retailers control, however, to compete effectively Tesco have toidentify its core competences and use them for companysadvantage. 21
  22. 22. 5.3 Cultural WebCultural web theory application (The cultural web theory is also aneffective analysis for management in order to represent theunderlying assumptions linked to political, symbolic and structuralaspect of the company) is a useful tool in considering the culturalcontext for Tescos business. Culture generally tends to consist oflayers of values, beliefs and taken for-granted actions and ways ofdoing business within and outside the company. Therefore, theconcept of cultural web is the representation of these actions takenfor granted for understanding how they connect and influence thestrategy (Veliyath and Fitzgerald, 2000; Johnson and Scholes,2003). It is also useful to understand and characterise both thecompanys culture and the subcultures in adaptation of futurestrategies. Culture can be analysed through the observations of how thecompany behaves, including routines, rituals, stories, structuresand systems. This presents the “clues” about the taken-for-granted assumptions. Tesco has a very friendly and supportingapproach in the routine ways that staff at Tesco behave towardseach other, and towards those outside the company that can makeup the ways people do things. The control systems and 22
  23. 23. measurements are constantly under the management review tomonitor the efficiency of the staff and managers decisions. Therituals of the companys life are the special events, corporategatherings, which Tesco emphasises what is particularly importantand reinforce the way things are done. On-going meetings andcommunication at every level of the companys hierarchy representa strong internal environment.6.0 TESCOS STRATEGIC OPTIONS: GENERIC STRATEGIES Generic Strategies are characterised by an individual retailersresponse to the industry structure. For a giant retailer, such asTesco, to obtain a sustainable competitive advantage they shouldfollow either one of three generic strategies, developed by Porter. 23
  24. 24. The first strategy of cost leadership is one in which Tesco canstrive to have the lowest costs in the industry and offer its productsand services to a broad market at the lowest prices. This strategywill be based on the Tescos ability to control their operating costsso well that they are able to price their products competitively andbe able to generate high profit margins, thus having a significantcompetitive advantage. If Tesco uses another strategy ofdifferentiation, than it has to try to offer services and productswith unique features that customers value. Tesco will be able tocreate brand loyalty for their offerings, and thus, price inelasticityon the part of buyers. Breadth of product offerings, technology,special features, or customer service are popular approaches todifferentiation. The last strategy of focus can be either a cost leadership ordifferentiation strategy aimed toward a narrow, focused market. Inpursuing a cost leadership strategy Tesco focuses on the creationof internal efficiencies that will help them withstand externalpressures. Therefore, it appears reasonable to think that Tescowill have frequent interactions with the governmental/regulatoryand supplier sectors of the environment. In accordance to thisframework, while both overall cost leadership and differentiation 24
  25. 25. strategies are aimed at the broad market, Tesco may also chooseto confine their product to specific market areas or may choose tooffer a smaller line of products to the broad market, thus pursuinga strategy of focus or niche (Porter, 1980). In other words, Tescopursues a strategy of cost leadership or differentiation either in aspecific market or with specific products.The danger some organisation face is that they try to do all threeand become what is known as stuck in the middle. In case ofTesco it is not appropriate, as they do have a clear businessstrategy with a clearly defined market segment. 7.0 MARKET OBJECTIVES AND STRATEGIESIMPLEMENTATION Strategy frameworks and structuring tools are key to assessingthe business situation. Risk and value trade-offs are made explicit,leading to concrete proposals to add value and reduce risk.Explicit plans for action, including effective planning need to bedeveloped by Tesco as the strategic alternative. From the generic strategies discussed above, Tesco is likely toemploy two strategic options that are also likely to be primarymarket objectives of focus on market development thoughpartnerships and diversification through new product development. 25
  26. 26. Market Development Strategy: Joint Developments and StrategicAlliancesBy entering new markets like China and Japan it can serve as akey growth driver of the companys revenues and expansionstrategy. Tescos interests in Japan are likely to continue growingin due course, as Asian markets are showing an increase inconsumer spending and increased trend towards retailing. Thesenew markets are also demographically high opportunity markets.In the case of Tesco, one of the suggested strategic options is ininternational alliances with the local retailers in Asian markets. Itwill be considered as a method of development and may beformed to exploit current resources and competence. By enteringinto joint ventures or partnerships, in order to gain a largereconomy of scale and larger market presence, Tesco will draw onthe extensive local knowledge and operating expertise of thepartner whilst adding its own supply chain, product developmentand stores operations skills to deliver a better shopping experienceto customers. However, given the huge scale, potential andcomplexities of these markets, Tesco may feel that being the firstmover is not necessarily an advantage. The success of thepartnership will be related to three main success criteria: 26
  27. 27. sustainability, acceptability and feasibility. Sustainability will beconcerned with whether a strategy addresses the circumstances inwhich the company is operating. It is about the rationale of thisexpansion-market development strategy. The acceptability relatesto the expected return from the strategy, the level of risk and thelikely reaction of stakeholders. Feasibility will be regarded towhether Tesco has the resources and competence to deliver thestrategy.Product Development: DiversificationJohnson and Scholes (2003) believe that changes in the businessenvironment may create demand for new products and services atthe expense of established provision. Ansoffs matrix alsosuggests that if new products are developed for existing markets,then a product development strategy has to be considered by themanagement level of a company. In expanding and diversifyingTescos product mix, it is also crucial to implement internaldevelopment when new products are developed. The nature andthe extent of diversification should also be considered in relation tothe rationale of the corporate strategy and the diversity of theportfolio. By following the changing needs of the customers Tesco 27
  28. 28. can introduce new product lines. This may require more attentionto R&D, leading to additional spending.The retailing industry is experiencing overcapacity and innovativeservices and products being the major competitive advantage.Therefore, innovation has to be a major driver for Tescos productdevelopment. For example, Tesco can develop a portfolio ofdifferent store formats in the UK, each designed to provide adifferent shopping experience. While the majority of EasternEuropean and Far Eastern outlets are hypermarkets, Tesco canalso develop different store types in these markets as well. Thisvalue added by the uniqueness will eventually lead Tesco tocommand a premium price. The management of technologicalinnovation is increasingly involved in strategic decision-making.Tesco have to exploit their internal strengths and minimise theirinternal weaknesses in order to achieve sustained competitiveadvantage (Although a competitive advantage is the goalinnovators want to achieve, the ability to create platform(s)depends on how they could manage the innovation. Nevertheless,it does not mean that the innovator has to possess all requisitecapabilities, the important thing is the ability to organise and usethe capabilities of others in order to create a business platform). 28
  29. 29. 8.0 CONCLUSION The success of the Tesco shows how far the branding andeffective service delivery can come in moving beyond splashingones logo on a billboard. It had fostered powerful identities bymaking their retiling concept into a virus and spending it out intothe culture via a variety of channels: cultural sponsorship, politicalcontroversy, consumer experience and brand extensions. In a rapidly changing business environment with a highcompetitors pressure Tesco have to adopt new expansionstrategies or diversified the existing in order to sustain its leadingmarket position in an already established retailing market. Thecompany must constantly adapt to the fast changingcircumstances. Strategy formulation should therefore be regardedas a process of continuous learning, which includes learning aboutthe goals, the effect of possible actions towards these goals andhow to implement and execute these actions. The quality of aformulated strategy and the speed of its implementation willtherefore directly depend on the quality of Tescos cognitive andbehavioural learning processes.In large organizations as Tesco strategy should be analysed andimplemented at various levels within the hierarchy. These different 29
  30. 30. levels of strategy should be related and mutually supporting.Tescos strategy at a corporate level defines the businesses inwhich Tesco will compete, in a way that focuses resources toconvert distinctive competence into competitive advantage.APPENDIX BSWOT ANALYSIS: TESCO Source: Mintel Report, Datamonitor Reports, Tesco CaseStudiesStrengths Increasing market share: Tesco holds a 13% share of the UKretail market. Its multi-format capability means that it will continue 30
  31. 31. to grow share in food, while increasing space contribution fromhypermarkets will allow it to drive a higher share in non-food.Tescos general growth and ROI show no sign of abating: Inthe UK, Tescos late 2002 investment into West-midlands basedconvenience store group T&S was billed as the most aggressivemove into the neighborhood market by a big-name retailer so far.The deal has turned Tesco into the countrys second biggestconvenience store chain after the Co-operative Group, and thecompany also plans to open up 59 new stores in the UK this year.Tesco has grown its non-food division to the extent that itsrevenues now total 23% of total group earnings. Tescosinternational business segment is growing steadily, and ispredicted to contribute nearly a quarter of group profits over thenext five years. If geographical spread continues to grow, this willensure Tescos continued regional strength. Insurance: In fiscal 2003 Tesco Personal Finance reached themilestone of one million motor insurance policies, making it thefastest growing motor insurance provider ever. The groups instant travel insurance allows Clubcard holders to buytheir holiday insurance conveniently at the checkout. Petinsurance now has over 330,000 cats and dogs covered, while the 31
  32. 32. life insurance policy followed on from the success of last year,when it was voted The Most Competitive Life Insurance Provider inthe MoneyFacts Awards 2003. Tesco online: Tesco.com is the worlds biggest onlinesupermarket and this year the group had sales of over £577million, an increase of 29% on last year. Tesco online nowoperates in over 270 stores around the country, covering 96% ofthe UK. With over a million households nationwide having usedthe companys online services, the company has a strong platformto further develop this revenue stream. Brand value: Profits for Tescos operations in Europe, Asia andIreland increased by 78% during the last fiscal year. The companyhas a strong brand image, and is associated with good quality,trustworthy goods that represent excellent value. Tescosinnovative ways of improving the customer shopping experience, 32
  33. 33. as well as its efforts to branch out into finance and insurance havealso capitalized on this. UK market leadership reinforced: Since acquiring number oneranking in 1996, Tesco has developed a successful multiformatstrategy that has accelerated its advantage. Its UK sales are now71% larger than Sainsburys. Also the Competition Commissionsreport makes it very difficult for a competitor to challenge its scaleand has effectively scuppered Wal-Marts chances of stealing UKleadership. Therefore, Tesco is in an enormously strong positionin its domestic market.WeaknessesReliance upon the UK market: Although international business isstill growing, and is expected to contribute greater amounts toTescos profits over the next few years, the company is still highlydependent on the UK market (73.8% of 2003 revenues). Whilethis isnt a major weakness in the short term, any changes in theUK supermarket industry over the next year for example, like theMorrisons group successfully purchasing the Safeway chain couldalter the balance of UK supermarket power, and affect share.Debt reduction: Tesco is not expected to reduce its debt until atleast 2006. Tesco has a large capital expenditure program mainly 33
  34. 34. due to its huge investment in space for new stores.Since its expansion is so aggressive, Tesco has little free cash forany other operations. Signs point to serial acquisitions: With an enterprise value of£23 billion, Tesco clearly has enormous firepower. Also, itsproduct range is vast and almost any acquisition can be justified,particularly in the UK. While fill the gap strategy would be usefulto the company, as has been the case with the UK conveniencemarket, there is the danger of Tesco becoming a serial acquirer, asthis tends to reduce earnings visibility and quality.OpportunitiesNon-food retail: The growth in Tescos hypermarket format in theUK means that there are expectations of seeing its 13% share ofretail sales climb sharply over the next few years. It can use itsfootfall and low cost structure together with improvedmerchandising skills to add another leg to growth. Equally, itsgrowth overseas will further increase earnings and scale, takingTesco onto the virtuous circle of growth. It is estimated thatTescos non-food sales will double over the next four years. 34
  35. 35. Worldwide it has sales of £7 billion in non-food, some 23% of thetotal. Its aim to be as strong in non-food as we are in food, nolonger sounds like the consultancy-speak that it once did, and theyare getting there using the basic tenets of value, choice andconvenience that have been so successful in food. Around half ofnew space opened in the UK last year was for non-food and theresult has been to increase its market share from 5% to 6% and itsoverall share of UK retail sales has increased by 100 basis pointsto 12.8%.The companys telecoms venture is the latest stage in its strategyto develop popular retail services. It has repeated its approach inbanking, by capitalizing on its brand. Health and beauty: Tescos UK health and beauty rangescontinue to grow, and it is currently the fastest growing skincareretailer in the market. The company has a volume market-leadingposition in both toiletries and healthcare and is number one retailerin the baby goods markets. Across all health and beauty rangesTesco continues to invest in price to deliver the value customershave come to expect and this year invested £27 million on healthand beauty pricing alone. The company now has 19 stores withopticians and nearly 200 stores with pharmacies. 35
  36. 36. Further international growth: Tesco now operates in sixcountries in Europe in addition to the UK; the Republic of Ireland,Hungary, Czech Republic, Slovakia, Turkey and Poland. It alsooperates in Asia: in South Korea, Thailand, Malaysia, Japan andTaiwan. Seven years ago, its International sales were £770million. Now, they are nearly 10 times larger, at almost£7 billion, with profits of £306 million. In the current year, Tescowill add 2.5 million square feet to sales area and could well enteranother major market. Growing internationally has forced Tesco tobecome serious about hypermarkets and this has had seriouslypositive implications for growth in the UK. Tesco has formed astrategic relationship with US supermarket, Safeway Inc, to takethe tesco.com home shopping model to the US. Telecoms are thelatest stage in its strategy to develop popular retail services. It hasrepeated its approach in banking, by capitalizing on its brand. In2004 the company plans to enter the Chinese market, as China isone of the largest economies in the world with tremendousforecast growth and will present many opportunities for Tesco.Threats UK structural change could spark a price war: The pricefollowers in the UK market are about to become aggressive 36
  37. 37. investors in price, Safeway because of new ownership andSainsbury because of new management. Morrison is reducingSafeways prices by up to 6% and Sainsbury is bound to see lowerprices as one of the basic changes necessary to drive its recovery.With both Asda and Tesco committed to price leadership, this couldresult in a step down in industry profitability. Overseas returns could fall: The buy case for Tesco ispredicated around investment overseas driving higher groupreturns as each country moves past critical mass. This might nothappen, either because of economic conditions, competitor action,or failure in Tescos business model. It also could come as aconsequence of an aggressive move into a larger market, such asChina or Japan.Wal-Mart/Asda challenge: Since the US shopping giant Wal-martpurchased Asda, Tescos rank as the top UK supermarket hasbeen threatened. Asda can now compete extremely well on priceand range of goods. For the moment, Asda is the third largestsupermarket in the UK, just behind Sainsburys and then Tesco.However, Asda closed the gap on Sainsburys in 2003, leaving thecompany to directly challenge Tescos dominance. 37
  38. 38. Tesco is well aware of this, and has so far been quick to keep upwith price cuts or special offers at Asda. Wal-mart may also decideto wield its buying power more heavily in the UK, and this couldspell the end of Tescos brand dominance in the future. International expansion: International growth is expensive.Entering new markets with a new brand requires heavy investmentand marketing, as well as land prices (which are currently low) andextra distribution and operation expense. Tescos debt mayincrease before it begins to decline. Korea is contributing a good proportion of Tescos internationalprofit growth. If profits continue to grow in this way, Korea willprobably represent one-third of Tescos international profits in2003. Korean consumer spending is currently quite low, andcoupled with the countrys current unrest, and Tescos largeinvestment, this represents a high risk area for Tesco to bank on.APPENDIX CVALUE CHAIN 38
  39. 39. Primary Activities (Currently, Adds value (+), losses value (-), Potential to addvalue (P+))Inbound logisticsInbound logistics are placed at the first stage of the value chain asthey possess the earliest opportunity to create value. Therefore,the elements of this stage are considered to be upstream activities.The logistical tasks, in this case, include the receipt of goods fromsuppliers, storage of goods, handling & transportation of goodsinternally and placing the products on the shelves. Tesco tries tomaintain the level of consumer choice in store (+), whilst improvingthe efficiency of its distribution system (+). In applying a qualitycontrol procedure concerning damaged goods and products, itprovides an excellent opportunity to reduce costs unfairly incurredby the company, therefore preventing these costs being passed onto the consumer (P+).OperationsThe production element of Tesco activities are service orientated.Hence, operations could be the second upstream opportunitiesthat enable services and products to be provided, tasks such asopening every day in accordance with trading hours, maintaining 39
  40. 40. the shelves, and the stock (+). In order to obtain futurecompetitive advantage Tesco has to consider expanding further interms of operating hours in those places, where it does not occuror opening new Metro and Express stores (P+). However, thismight be restricted by law or planning councils, which is essentiallytakes away competitive advantage (-).Outbound logisticsThe third stage of the value chain is the outbound logistics that isconcerned with delivering the product to the customer. Tescocurrently adds value in its home delivery service (+). However,other tangibles that have to be improved are those of parkingfacilities, trolley collectors, till staff and systems to gain competitiveadvantage, if executed more efficiently than competitors, they willadd value by saving the customer time (+), whilst increasing theturnaround (+). Adding value could be achieved through theimplementation of a trolley deposit system, keeping them tidy andenabling customers to get to and from the premises quicker, aswell as making these facilities readily available and quicker toobtain (P+).Marketing and sales Marketing and sales are placed under downstream elements of 40
  41. 41. the value chain. Clubcard gives further discounts and loyalty forthe customers (+). However, Tesco may also decide to attractmore customers by advertising via radio, local newspaper andnational TV eg the “lower prices” advertising campaign or morediscounts offers (+). With a more customer sophistication andtheir awareness of ethical business practices, it may give thecompany some constraints in terms of selling environmentallyfriendly products (-). In return, Tesco can take it as an advantageand provide customers with more of the recycling points andinclude information in their advertisements, adding value forcustomers who will believe that by choosing to shop at Tesco,people are helping the environment (P+).Support ActivitiesCompany Infrastructure Planning and control functions are the ones that account toprovide the continued focus on the costs and cash control of thecompanys operations (+). And departments such as profitprotection whose main jobs are to reduce shrink. The companyhas now increased its staff count who are involved in upgrading itsanti-fraud software (infrastructure/technology, interdependence),and installing new security systems which aim to reduce internal 41
  42. 42. theft, an expense the customer will now not have to cover in theprice of their purchases (+).Human resource management HRM is regarded as up and downstream activity, coveringeverything from recruitment to management development. Thecompany aims to increase the number of training schemes andfurther develop its recruitment programmes so to pass on to thecustomer the benefits of a well recruited, well trained staff, not thecosts (+). Tesco continues to invest in customer service (+), wheretraining is also linked directly to pay, so the staff are motivated tolearn, and are encouraged to improve their approach to customersand service provision quality. (P+).Technology development It is a downstream activity and is the ability to provide newinnovative product ranges/ solutions that anticipate customerneeds. It also remains a key competitive advantage, adding value,as Tescos brand name gives the product vitality (+). However,installation and capital investment is a long term process andneeds total commitment of the staff. But who will be responsiblefor the service provision and the floor personnel? (-). 42
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