Strategic Analysis of Tesco PLC

Table of Contents

1. Introduction………………………………………………………………………………..3
2. Macro Analysis: PESTEL………………………………………………………………….3
   • Political factors………………………………………………………………………..4
   • legal factors……………………………………………………………………………4
   • Economic Factors………………………………………………………………………5
   • Social Factors………………………………………………………………………….5
   • Technological factors………………………………………………………………….6
   • Environmental factors…………………………………………………………………6
3. SWOT analysis of Tesco…………………………………………………………………..6
4. Porter’s Five Forces Framework…………………………………………………………..8
   • Threats of entry ………………………………………………………………………9
   • Bargaining Power of Suppliers………………………………………………………10
   • Bargaining Power of Buyers………………………………………………………..10
   • Threat of Substitutes…………………………………………………………………11
   • Intensity of competitive rivalry……………………………………………………..11
   • Tesco’s Competitive edge Through Technology: Resource Based………………..12
5. Tesco’s Stakeholders Analysis……….…………………………………………………..13
6. Tesco’s Strategic capability………………………………………………………………14
7. Core Competencies and Environmental Opportunities………………………………….16
8. Recommendations……………………………………………………………………….17
9. Conclusion……………………………………………………………………………….17
10. References………………………………………………………………………………..19

1. Introduction

Tesco is one of the largest retailers in the world. It operates in 14 countries and employs more about 520,000 people. The retail company serves millions of customers weekly and enjoys a great deal of profits and revenues. The group sales of the company ewer estimated at £72 bn. in 2012. The revenue enjoyed by the company in UK is £42.8 bn. which indicates a growth of 5.0% in revenue from the previous year. On the other hand, the trading profit of the company in UK is £2,480m which indicates a 1% growth in the trading profit of the company. This success is ought to the company’s unique strategy and operations.

This paper will examine the company’s business environment issues in depth. In the paper, a good analysis of the business environment will be carried out so as to determine the determinants of the company’s success. This analysis and evaluation will include the examination of the company’s external and internal factors such as PEST factors, SWOT analysis and organisational objectives. In this case, the company’s objectives will be analysed in relation to its mission and vision statements. Purpose of an organization is one of the business environment issues that guide the operations and success of the business. Another business environment issue that will be analysed which relates to Tesco is the company’s stakeholders. Tesco’s stakeholders will be analysed using the PI matrix. The paper will also evaluate the weaknesses and strengths of the company. The paper will also examine the core competencies of the company including physical and human resources.

2. Macro Analysis: PESTEL

The company is faced with external factors which may affect its marketing planning and operations. These factors include: Political, Economic, social, technological, environmental and legal factors. These factors affect the marketing activities and objectives of the company in different ways as shown below.

• Political factors

There are various political factors affecting the company’s retail business. One of these factors include EU trade bloc. This economic union allowed for free trade between UK and other European countries using a common currency – Euro. This move therefore reduced barriers to trade. This affected the local retailers and customers of UK industry and boosted international trade in retail products by opening international markets.

UK is also enjoying a stable political environment. This is an essential factor in international business since a politically stable environment provides a good environment for business to be carried out harmoniously and smoothly. UK government under the leadership is enjoying a good business relationship with other countries. For instance, there is a good external political relationship between UK and other European countries such as Spain, Germany and France.

• Legal factors

UK’s Intellectual property law, licensing and tax rate system also affect the retail industry in UK. By retaining the intellectual property rights, TESCO Company can develop technologies and innovations suited for its business. This leads to heavier commercialization of its products and develops an innovation culture within the company. This leads to improved product quality and brand loyalty. The UK government is committed to the development of the retail sector since UK is highly reliant on commodities (Dixon and O’Mahoney, 2010). TESCO Company is a retail company and is therefore in a good position to benefit from the government’s efforts to boost the retail sector.

• Economic Factors

Generally, UK benefits from good macroeconomic fundamentals (Szalay, 2011. Businesses are benefiting from the growth in the economy boosted by the flourishing of the country’s retail industry. As the overall economy grows, businesses boom and the retail industry also grow. Other sectors of the economy need computers in their operations and the growth of those sectors therefore form a basis of improved markets for computers. The growth in the economy of UK is therefore a positive economic factor that influences the marketing strategies of Tesco.

The lending rates in UK are also low compared to other countries while the savings interest rates are high; hence investors earn more returns on their investments. This is because rates of borrowing will be low and the interest earned in from savings is high. Since savings affect investments, higher interest on savings will lead to more funds for investments by TESCO Company (Carbaugh, 2011). UK’s economy is also largely dependent on commodities. The manufacturing industry is therefore well established for TESCO to engage in its retail business.

The exchange rate for UK is also favourable since it is becoming stronger against other currencies.

• Social factors

The development of the UK’s social Inclusion Initiative boosts the social standing of UK in General. Through initiative, a society is created in which every member of the society is valued, individual differences are treasured and the contribution of every member of the society appreciated. UK Companies have a role to play in this initiative and each company is expected to uphold a social policy which enables it to care for the welfare of the society during its operations. TESCO being part of the UK social circle as per the requirement of the Social Inclusion Initiative is ought to maintain a good social standing in the society and respect the society’s interests while undertaking its marketing activities.

• Technological factors

Technology is often subject to change. Technological issues are very dynamic with new systems and innovations coming up very often. Retail industry is one of the industries that face the highest dynamism and change. Social Marketing is one of the most important innovative inventions of the retail industry. The use of personal computers has also boosted retail business in the UK, making exchange easier, effective and efficient.

• Environmental factors

The environment within which TESCO conducts its business is a conducive one. There is little environmental pollution and degradation as the government of UK sets appropriate environmental policies which makes the environment sustainable for good business conduct. The company is also engaged in keeping the environment sustainable. The competitive environment of the market is also kept in a sustainable manner. All competitors are conducting their businesses are in an environmental friendly manner. This has enabled the business to operate its business in an effective manner which has allowed the company to meet its customers’ needs.

3. SWOT Analysis of Tesco – SWOT matrix
   • Strengths

One of the most important strengths of the company is Customer focus and customized brand build-up. The company pursues strategies which are meant to meet the needs of customers. This is important because customer satisfaction enables the company to increase its market share through increased customers and customer loyalty. The second strength of Tesco is competitive pricing and cost strategy. This ensures that existing customers are retained and new ones are attracted to the company. Tesco is also adaptable to changing technologies and is good at standardization of products.

• Weaknesses

Tesco has poor cultural management yet cultural management is a necessary aspect of any international business. The company also has a large workforce which requires large remuneration expenses. This influences negatively on the profitability of the company.

• Opportunities

One opportunity of Tesco is its economies of scale which allows for large quantity customization, reduced prices and expansion. This is specifically important in international expansion. The company also has a potential of growth in new cities in UK. This is due to its market share and customer loyalty. The UK also has a large number of retail customers. Increased retail customers and high demand enables the company to operate profitably through increased sales..

• Threats

The main threat of Tesco Retail Company is stiff competition from companies such as J Sainsbury and Morrisons. This competition drives prices down and reduces profitability of the company. There is also an emergence of new competitor strategies which influences the profitability of the company negatively. Taxation by UK Government is also another threat to business in UK. Financing taxes in UK may drive down profitability and reduce the company’s competitiveness in the UK retail market.

4. Porter’s Five Forces Framework

According to Porter (2008), Porter’s five forces theory is a theory of analysis and business strategic management used to analyze industries and markets so as to determine the competitiveness and attractiveness of the market. Therefore, these forces determine industry profitability (Grundy, 2006). The five forces of competition as suggested by Michael Porter can be illustrated in the figure below

Fig 1: Porter’s five forces of competition (Johnson, Scholes and Whittington, 2005).

According to Grundy (2006), Porter’s five forces model summed up microeconomic theory into five major aspects as shown in figure 1 above. Grundy also implies that competitive rivalry influences all the other forces. This is illustrated by placing ‘competitive rivalry’ at the center of the box. In the case of retail industry in UK, opening up the industry to EURO market has allowed for entry of foreign firms into the industry. This has increased competitive rivalry. Therefore, all the other four forces will play a part in the analysis of UK’s retail industry. Grundy also ascertains that the five forces model forecasts the long-run rate of return in a given industry. The UK retail industry’s returns and profitability can therefore be analyzed using the five forces of competition.

• Threats of Entry

First, Roy (2006) says that the threats of new entrance in the industry depend on the size of barriers erected by existing firms in the industry and the threats expected by the existing firms from potential entrants. Some of the barriers that can be used by existing firms include easy access to resources such as human capital, economies of scale, political influence, etc. The potential entrants on the other hand can react by using such possibilities as financial resources, bargaining power and understanding the curve effect of mass production (Roy, 2006). Opening of EURO zone to the retail industry in UK, and internationalization of businesses have destroyed the barriers to entry set by existing firms. For instance, EU has opened ways for foreign firms to have an easy access to UK resources which were previously controlled by companies in the retail industry. Reduced tariffs occasioned by the introduction of European Union and international market policies in the retail industry have also led to increased financial strength of foreign firms which will lower the barriers to entry and hence may lead to increased competition in the industry. As a result, the profitability of the industry has reduced. Roy (2009) also asserts that existing firms may be faced with threats of technological changes and the limited realization of new options. As a result, new entrants cause pressure on capital, prices and costs within the industry. This leads to increased competition within the industry.

• Bargaining power of Suppliers

Roy also recognizes bargaining power of suppliers as another fundamental component of the five force model. This occurs as a result of increased independence of suppliers in the UK retail industry. Suppliers often protect companies pricing and lobbying. To suppliers, the industry as a whole is less important than the customer. However, the products delivered by suppliers are very essential to the buyer. In this case, substitutes are limited. The existing suppliers will therefore increase prices and reduce product quality. In the case of the UK retail industry, international business environment increases such a bargaining power for the local suppliers because substitutes will increase, thus increasing the costs of purchase by retail companies. Due to suppliers’ switching costs, entry of substitute suppliers will limit the power of the existing suppliers in the industry.

• Bargaining Power of Buyers

Another competitive force that can be used to analyze an industry is the bargaining power of buyers. Roy (2009) suggests that buyers have the power to influence pricing and demand high quality and performance in the industry. This results in different strategies set by the industry participants regarding to costs and profits. Therefore, with increased competition posed by new retail firms entering the market may offer low prices due to buyer’s bargaining power. This will make the companies to follow the same trend or lose customers. Reduced prices and loss of customers will therefore reduce the profitability of the local companies and increase operation costs due to increased competition.

• Threat of substitutes

Roy (2009) also recognizes threat of substitutes as an important component of Michael porter’s forces of competition. Roy explains that the existence of substitute products in the market enables consumers to find alternatives. Substitutes in this case do not refer to similar products but different ones which can be used in place of the existing products. The determining factors in the trade of substitutes include buyer switching costs, relative price of substitutes, level of product differentiation, the ease of substitution and the amount of substitute products available in the industry. The competitive free trade market in the UK allows entry of firms with high economies of scale and low costs. These companies will then offer substitute products with lower prices. Entry of more firms will also lead to increased number of substitute products. These factors will lead to increased competitiveness in the market and eventually cause reduced profitability of the existing firms.

• Intensity of competitive Rivalry

Finally, Roy holds that rivalry in the industry is also a determinant competitive force in industry analysis. According to him, the intensity of competitive rivalry in the market is the core element of competitiveness in any industry (Gitman & Daniel, 2009). The performance of rivals in the market will be determined by competitive advantage due to innovation, internet marketing competitions, marketing strategies and costs, strength of competitive strategies and flexibility and adaptation to change. There is an increased competitive rivalry caused by the increased entry of firms into the UK retail industry. This is largely due to the fact that UK retail market is open to international competitions. This competition has led to a more effective use of human resources which often leads to increased innovation. Higher levels of innovation by rival firms from foreign companies have led to relatively lower competitive advantage of companies in the local UK retail industry.

• Tesco’s Competitive edge Through Technology: Resource Based

Finally, Porter’s diamond of national advantage identifies factor endowments as one of the factors which drive competitive firms to gain competitive advantage. Insurance firms may benefit a lot from investment in technology and innovations. A retail firm like Tesco may therefore come up with innovations and technology in its business so as to benefit from technology and innovations of the insurance sector abroad. Similarly, retailers nowadays are becoming technologically and innovatively competitive. Retailers such as Tesco and Wal-mart are competing in the international market with the use of innovative and technological strategies. Tesco (2012) suggests that in order to meet its core value of providing products which add value to customers, innovation should be part of its business operations. The company provides several innovative services including online shopping. These endowments on innovation and technology are mainly found in well established and developed economies such as UK. Tesco has improved its technologies in retail business so as to take advantage of the benefits of these innovation and technological opportunities in UK and abroad in order to gain a competitive edge. Competitive advantage is realized because a firm is able to improve the quality of its services and products through innovation and technology, and that is what Tesco has managed to achieve.

 

 

5. Tesco’s Stakeholders analysis

The stakeholders of a company are the persons who have an interest in the operations of the company, whether directly or indirectly. In order to create value for its stakeholders, a company needs to identify the most powerful and influential stakeholders (Marshall and Brown, 2003). Identification of the stakeholders’ levels of influence, power and predictability is important.

The company’s most influential stakeholders are employees, creditors, suppliers, local communities, shareholders and customers. The most influential stakeholders of the company are those with low predictability and high power. These stakeholders are mainly customers and shareholders. The main objectives of Tesco are to maximise the interests of the shareholders and to achieve customer satisfaction. From the company’s strategy, it is clear that the customers are given the first priority in the company’s operations. The company provides good customer service and ensures that the needs of customers are met so as to attain customer satisfaction, loyalty and retention. This indicates that the customers have high power in the company (Hitt, Ireland and Hoskisson, 2005). Their predictability is also low; it is difficult to predict the actions, interests, beliefs, attitudes and perceptions of customers.

Employees are also important stakeholders in the company. Tesco ensures that the employees are able to deliver good services to the customers. In order to motivate the employees to perform better, the company provides good remuneration packages and trains them and develops their skills. In its 2012 annual report, Tesco (2012) suggests that more staff reflect better services. One of the most significant aspects of the company’s business investments is the high level of staffing and training in every UK store. Tesco is also planning to offer more good jobs and careers, planning to create 20,000 new jobs within the next two years. This new staff is intended to deliver higher levels of customer service. The customers will be able to receive good services from more staff in the company stores during busy times. They will also benefit from greater staff expertise and enhanced services. The company intends to create jobs for determined young citizens who are currently unemployed.

6. Tesco’s Strategic Capability

To ensure that the Tesco improves its competitiveness or maintains its competitive advantage in the UK retail market, the company engages in various strategies. There are several strategies available for any international business, and Tesco may use any of the strategies in future. The chosen strategy should be in line with the company’s core values (Worthington and Britton, 2003). The core value of Tesco is to create value for customers and to earn their lifetime loyalty. Therefore, the company has therefore chosen strategies which add value to customers and increase their loyalty.

Tesco’s 2012 annual report highlights the strategies of the company in executing its businesses. The company’s main strategy is customer focus. Most of the strategies used by the company involve attempts to attain customer satisfaction. Some of these strategies include: giving customers the best shopping trip, refreshing the company’s stores for customers and staff, online transaction capabilities, growth in the international market, concurring new markets, providing best retail services for customers and being dedicated to the community. These strategies are implemented in a systematic order with each department playing a participatory role in achieving the objectives of the company.

Tesco’s first priority is to give customers the best shopping experience and set a good standard in UK (Tesco, 2012). The company committed £1 billion in 2012 to improve the customers’ shopping trip. The company focused on improving the most important elements that matter to customers in their shopping trips. These elements include: service, price, variety, quality, store environment and availability. In order to provide the best services, the company employed more staff who are qualified and committed to customer services. Review of Tesco value has also been initiated to improve the Tesco brand products, adding more quality and innovations. A price reduction was also launched in 2012 and was named “The Big Price Drop”. This involved the investment of over £500 million to reduce the prices of over 3,000 products.

In order to create value for its customers, good strategies which the company has used are: leveraging core competencies and internal development. These are both diversification strategies which create value for customers and shareholders. In regard to diversification, Tesco uses different diversification strategies in the international and the domestic market. In the domestic market, the company has used internal development and leveraging core competencies. Internal development functions work well alongside leveraging core competencies. Both strategies create synergy within the organisation, hence creating value for both customers and shareholders.

The strategy of leveraging core competencies forms glue that binds the business together (Dess et al., 2010).  It also increases new business growth and enhances learning in the firm so as to increase employees’ skills that helps them improve their customer service, hence creating customer value and increasing their loyalty. Leveraging core competencies also enables the company to coordinate diverse production skills which result in production of quality and desirable products which create value for the customers. The strategy also integrates multiple types of technologies which may lead to value creation for customers through production of quality products and good customer services.

7. Core Competencies Vs Environmental Opportunities

While it is clear from the environmental analysis of Tesco Plc that the company has a lot of opportunities to grow, there is also a need to look at its core competencies and relate them to the external opportunities. This will enable us to determine if the company is able to use its strengths to take advantage of the external opportunities to improve its operations and gain competitive advantage in the market.

First, let us look at the core competencies of the company which may be considered as the company’s strengths. The most useful competence of the company is large number of well-motivated and skilled staff. There are about 520,000 employees of the company who are trained and developed regularly to enable them meet the needs of the company’s customers (Tesco Plc, 2012). These employees offer good service to the customers at all times and produce the best quality goods for them. Another competency of the company is large economies of scale. This enables the company to sell more to the market and cut on costs (Mulcaster, 2009). The third competency is the good relationship the company maintains with suppliers and customers.

These competencies are used by the company to take advantage of the environmental opportunities in many ways. First, the company has used its economies of scale to sell more products to emerging economies such as Asian countries. The emerging markets are an opportunity for the company which has been explored using large economies of scale (Mulcaster, 2009). The company’s good relationship with suppliers has also enabled it to get raw materials at good discounts which enable the company to cut on its costs and take advantage of marketing opportunities available for the company. This also enables the company to reduce its prices in order to reduce the impact of the threat of competition in the retail industry.

8. Recommendations

Despite the fact that Tesco is the UK’s leading retail brand and the second best in most of its international markets in terms of market share, it is clear that the company still needs to improve some of its operations to operate better in its business environment. For instance, the company’s sales volume has been declining in UK over the past few years. This is due to the company’s concentration in customer satisfaction rather than sales increase. Another possible reason is the economic problems encountered in UK in 2012. The company needs to improve on its sales increase in UK which has already dropped to 0%. This can be done by improving the production activities of the company.

Other than focusing on improved quality and reduced prices of commodities, the company should also increase the quantities. Furthermore, the company needs to cut on production costs where necessary so as to deal appropriately with the deteriorating economic conditions in UK. The company also needs to take advantage of the declining value of the country’s currency to increase its exports and invest in new international markets (Henry, 2008). Due to the increasing balance of payment deficit, the country’s currency has declined in value. As a result, exports have become cheaper for other country’s hence the international demand has increased for UK products.

9. Conclusion

Tesco’s business environment is seemingly conducive, making the company successful in its business operations. The main purpose of Tesco is to increase customer satisfaction and larger market share in both the UK and international markets. The internal and external environments of the business have played crucial roles in determining the success of the company. First, the company’s employees have played an important role in providing the best services to customers so as to improve their satisfaction. Other stakeholders who have contributed to the success of the business include shareholders, customers, creditors and suppliers. It is clear from this analysis that Tesco’s customers are the most powerful and least predictable, that is why the company’s main strategy is to satisfy them.

The nature of national environment which affects the company’s operations is an appropriate one involving mixed economic system and competition. The retail market is a competitive one which has led Tesco to produce quality products and reduce its prices to low levels. The government and other regulatory authorities also regulate the activities of the company through such mechanisms as subsidies, taxes, pricing policies and other mechanisms. However, due to the poor economic conditions of UK and concentration in attainment of customer satisfaction, the company’s sales volume has reduced in the recent past. This can be improved through enhanced productivity strategies and increased quantity of products.

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