Tesco is a Britain based international food retailer and one of the leading food retailers in the world. The company operates several stores of over 2300 worldwide and about 1900 stores in the United Kingdom (Datamonitor, 2004: 4). The company originally sold food but has with time changed and diversified into other products and services. Tesco plc sells clothing, books, household appliances, flowers, CD/DVD/mini-discs, household equipment, hi-fi, wine, apparel, and so many others. It is currently involved in consumer electronics, telecoms, financial services, internet services, home, health and car insurance, and software among others (Tesco plc, 2009).
The initial strategy was based on “Pile it high, sell it cheap”, but this changed with time to a different strategy that has enabled the company to maintain a competitive advantage in the market or stay on top of the best-performing companies’ list. These achievements and growth over the past decades have been due to the company’s image and strategy transformation (Tesco Corporate Strategy, 2009). This company developed a strategy in 1997 that has since enabled it to expand to new markets and even become the market leader in different markets outside the UK in which they operate.
Tesco Company operates under the following brand names; small grocery stores under the brand name; Tesco metro, big supermarkets under the brand name; Tesco Extra, petrol and gas stations under the brand name Tesco Express, Tesco.com (for online sales), and others such as Tesco Homeplus, Tesco Superstores, and Tesco One-stop. Tesco plc has expanded to other countries such as Poland, Czech and Slovakia in Central Europe, and even to Ireland and Asian (Japan, South Korea, China, Thailand, among others) countries (Tesco plc, 2009)
From the information given, it is evident that Tesco has had successful operations and management since its establishment and still has aims to be one of the top companies in the future. The following management report aims to show a strategic analysis of Tesco plc to determine the effectiveness of the current strategy and the company’s current position and where it seeks to develop in the future. Emphasis will be on the internal and external environments, SWOT analysis, and identification of any challenge in the current Tesco strategies. The recommendation will be made on an appropriate strategy based on the analysis to handle the challenge for future success.
Tesco’s Mission-Objectives-Strategies and Tactics
The aim of the company is long-term and sustainable growth and to remain competitive in the market. In order to achieve such an aim, the company has to consider strategies that can enhance diversification, differentiation, entry into new markets, and expansion generally. Tesco has a strategy that has been shown to be effective since 1997. “Tesco has a well-established and consistent strategy for growth” (Company Profile, 2009). This strategy has enabled the company to strengthen its businesses at home, that is UK markets and to expand to new markets outside the United Kingdom.
Tesco’s strategy has the following objectives: To expand the businesses in the UK which is the center/core of the business, to be successful in international retailing and be the leader, to grow and be strong in non-food operations as in food operations, to expand retailing services, for example, Telecoms, Tesco Personal Finance, and Tesco.com, and to consider the community while doing business (Company Profile, 2009)
Tesco’s strategy has an underlying principle which is to diversify the scope of the business to ensure that there is consistent long-term growth. By this, it follows customers into large expanding markets both at home and in other countries determining customer needs and what the company can provide. Tesco currently sells non-food products apart from food products, offers financial services, offers telecom services, and is involved in several different businesses as had been noted in the profile. Tesco has also expanded to several markets in Europe, Asia, and Ireland and even to the USA where entry was done in 2006. This strategy has been the basis of Tesco’s success since 1997 with the new businesses created under it being profitable, competitive, and making Tesco the market leader in newly entered markets (Company Profile, 2009).
Political Economic Social Technological Legislative Environmental Analysis
a) Political Factors
Tesco operates to an international level which means that the political and the legislative conditions of different countries in which it operates affect its performance and will always affect its performance. Retailers are always required by the government to provide a mix of jobs opportunities in order to meet the demand for different people in a population (Johnson and Scholes, 2003: 55). Tesco’s employees consist of the disabled, students, elderly workers who are considered and paid at lower rates (Tesco strategic management).
b) Economic Factors
One major factor that influences the demand, prices, profits, and costs are the economy. Economic factors are therefore of concern to Tesco but are out of the company’s control. Cases like a recession for example the one going on globally are out of the company’s control. Unemployment which leads to low demand for goods and services is another economical factor that can affect the company (Johnson and Scholes, 2003: 57).
Tesco’s expansion has enabled it to get profits from international business and is expected to get more from these businesses, but the amount of profits from international businesses is still lower than those obtained from the local market, which means that Tesco depends on the local market making it vulnerable to any slowdowns in the UK market (Datamonitor, 2004).
c) Social/Cultural Factors
Factors such as demographic changes, social trends, and people’s culture affect the company. Social trends such as when people tend to shop at one place can create an opportunity or loss (Lindgreen and Hingley, 2003: 336). The development of one-stop stores by Tesco was due to the social trend in Britain that people developed in order to capture customers (Lindgreen and Hingley, 2003: 336). The difference in cultural attitudes to shopping is also another factor. According to Lowe, this prevented Tesco from entering into the US markets before due to the cultural trend of customers being brand-oriented and their own brand being considered inferior, while in the UK development of own labels was very strong(2009: 1).
Demographic changes such as more youth or aging population also affect the company (Clarke and Guy, 1994: 18). The strategy to broaden the scope of business caters to this as the company can create more retail services according to the changing population. Tesco has one of aims to expand its non-food operations to the food operations’ level which response to the type of goods demanded by customers (Company Profile, 2009).
d) Technological Factors
Tesco has had technological developments which have benefited the company and the customers. Technology enables convenient shopping and ready availability of goods and services for customers hence customer satisfaction (Graiser and Scott, 2004: 11; Cox and Betan, 1999, 79). Tesco developed an online shopping strategy that enabled consumers to shop for groceries through the internet. Tesco also has electronic shelf labeling, radio frequency identification, wireless devices, self check out the machine and intelligent scales that improve the company’s operations and provision of services.
e) Environmental Factors
One major threat to companies in the environmental issue of not acting socially responsible (Graiser and Scott, 2004: 12). Tesco’s strategy has one objective to consider the community while doing business. This means that corporate social responsibility is not ignored and therefore it acknowledges its role in society. The company’s corporate social responsibility considers doing more than the required to the stakeholders as specified in corporate governance and regulations (De Toni and Tonchia, 2003: 952). Tesco is on the other hand, liable to government legislation and regulations on the environment which aim at reducing environmental damage.
f) Legislative Factors
It is quite obvious that government policies and legislation can not be avoided by any company. These affect Tesco’s performance depending on the legislation’s effect on the company operations. Legislations supporting the banning of important company practices for example changing agreed prices without notice and demanding payments from suppliers can affect Tesco’s performance directly (Mintel Report, 2004).
Government policies for monopoly control can also affect Tesco considering the fact that Tesco has strong competitors and may consider product differentiation. License control requirements that limit entry into such a sector for the company to solve such competition problems could affect the company (Myers, 2004; Mintel Report, 2004). Pricing policies are also a threat to the company.
Porter’s Five Forces
a) Threat of New Entrants
There are no threats from new entries. The manner in which the leading grocery stores have developed over time into large supermarkets and promoted one-stop shopping among other developments discourages new entries into the market. The operations which have advanced with the use of technology to offer services and handle customers also pose a threat to newcomers (Ritz, 2005: 38; Meyath, Fitzgerald, 1994: 67). New investors cannot raise enough capital for the developed supply chains and large fixed costs. Tesco and other companies already at the same level have made huge investments in the advanced technology used in control and check-out systems that cannot easily be reached by existing companies and any new entries.
b) Bargaining Power of Suppliers
Because of their rankings in the world, their size, their developments, and tactics of operation, companies such as Tesco, ASDA, and Sainsbury among others have higher bargaining power over their suppliers. Due to this reason, UK-based suppliers fear these large retailers since they have the ability to get supplies from outside countries at a lower price (Armstrong and Brown, 2006: 45). Tesco is therefore in a position to negotiate improved promotional prices than small companies in the same industry.
c) Bargaining Power of Buyers
Tesco has developed different strategies to help attract and retain buyers. The company developed a loyalty card (club card) that has since improved the businesses’ profitability. The company also developed strategies such as ensuring low prices, customizing services, constant flow of in-store promotions, and meeting consumer needs. Currently, Tesco has its customers retained and attracts more. Consumer behavior, preferences, social patterns, and cultural loyalty, however, could change this and make the company have very low bargaining power over the consumers if appropriate management steps are not taken at the right time (Thompson and Martin, 2005: 139).
d) Rivalry amongst Existing Firms in the Industry
Tesco has so many rivals (competitors) but very few are top in the market. Tesco is ranked fourth in the world as one of the best retailer businesses Lowe, 2009: 4) with companies like ASDA, Wal-Mart, and Carrefour above it. These are companies that are retailers like Tesco and have expanded to international levels just like Tesco.
According to Kaplan and Norton (2006: 70) Internal analysis involves analysis of the strengths and weaknesses of the company (). The internal environment consists of the organization’s business strategy, its core values, technology, the people it employs, and the businesses (Armstrong and brown, 2006 74).
Tesco plc has a marketing strategy that draws customers of all levels. An “inclusive offer” (Tesco Corporate Strategy, 2009) is a phrase used by Tesco to describe its aim to appeal to low, middle, and upper-income consumers. By this Tesco ensures all segments in the market are captured.
ASDA’s marketing strategy, on the other hand, is focused on value for money and this reduces the chances of attracting up-market customers yet it sells up-market products. Sainsbury’s implemented a new customer-focused strategy almost similar to Tesco’s after being replaced by the company as the dominant company in the market. Sainsbury had an image of a high-priced middle-class supermarket that could not attract lower-income customers (Tesco Corporate Strategy, 2009).
Tesco plc does not focus on maximizing shareholder value as the usual corporate mantra but considers customer value as a way to ensure successful operations and sales. It has a mission statement which states that “Our core purpose is, ‘To create value for customers to earn their lifetime loyalty. We deliver this through our values, ‘No-one tries harder for customers, and ‘Treat people how we like to be treated” (corporate strategy).
Tesco plc has a strategy that is four-pronged. The company does grocery retailing in the UK home market which forms the core of its businesses. It is innovative and since its establishment has managed to expand to a level where it is the leading food retailer in the UK markets. An example of a way in which it has managed to expand and continue growth is through the large-scale operation of the store sector that has been normally ignored by other chain supermarkets (Flavián et al, 2002:126-129).
Tesco plc has diversified into other business areas apart from food retailing and has widely expanded on this section. In 2004, Tesco was considered a competitive threat to street chains dealing with consumer electronics, media products, clothes, health and beauty products, and so many other products that Tesco sells.
Tesco has own-brand non-food products with increasing ranges for example the finest and non-food value ranges (Flavián et al, 2002:126-129).
Apart from non-food sales, Tesco also offers retailing services such as telecoms, utilities, and personal finance in which it has also taken the lead. Most ways of entering these markets are through joint ventures with companies in these described sectors. Tesco’s management is effective and implementation of its strategies is effective since many supermarkets in the UK have done similar things that Tesco does but have never made profits as Tesco.
Diversity in Tesco is also evident in its expansion to international levels which began in 1994 and has since improved with several stores established in Asian, European, and Ireland markets. The latest entry in the US market happened in 2006. International contribution to its revenues however is still very low. In 2005 February, Tesco’s international operations only accounted for 20% of sales. International expansion also previously focused on markets with weak retailers like in the Far East and central Europe rather than already developed markets like in the US (Flavián et al, 2002:126-129).
Based on the information above, it is quite evident that Tesco has the strengths, weaknesses, opportunities, and threats that will be discussed below.
These include: Reinforced UK leadership, Increasing market share, brand value, Tesco online and flexibility, which is shown by the formats under which it operates, that is the express, extra, home plus, and others.
a). Increasing market share: Tesco has a very strong position in the local market. The company is ranked number one retailer in the UK and only has three international retailers above it. Tesco has a domestic market share of 31.4% as compared to the previous year of 30%. The competitors have a low market share although some have shown some improvements. William Morrison Supermarkets holds 11.1% from 11.3%, Asda had 16.6% which was unchanged and J. Sainsbury PLC had 15.7% from 15.5% in the previous year (Dow Jones Newswires, 2009). Tesco’s UK retail sales also grew by “9.1%, including a like-for-like increase, including petrol, of 4.3% (3.0% excluding petrol)” (Tesco plc, 2009)
b). Reinforced UK leadership: The performance in this domestic market is also being strengthened by current expansion actions. In 2008/9 the company opened new sales areas totaling 2 m square feet. This involved store extensions for extra. The company also opened 125 new express stores and 21 new superstores increasing the number of stores in the domestic market. Tesco aims to open a new sales area of the same amount as the previous year (Tesco plc. 2009).
c). Tesco online: The Company is the biggest online company that has reported profits through online sales. In 2004 for example, the company had over £577 million sales which was an increase of 29% from the previous year
The company has so many online stores (more than 270) with more than one million households putting it in a position to be able to develop it further (Datamonitor, 2004).
d). Brand value: Tesco has built its reputation over time with a good brand image associated with quality, excellent value, and trustworthy goods. This attracts and retains its customers making the company increase improve in its revenues as evidenced in its progress over years referred to in appendix 2 and 3.
According to the above analysis, Tesco has only one weakness; Reliance on the UK market. Returns indicated that the international markets still contribute very little of the company’s revenues (Appendix 1) that if the domestic market would be affected the company would experience reduced market shares.
These include expansion on international growth, non-food retail, and online service provision. Online provision of services has been noted to have been the most successful and additionally, the company is the biggest online company offering grocery sales services. International markets have not been exploited and this is shown by Tesco’s trend of expanding to these markets. Tesco deals with so many nonfood goods and offers services in the nonfood section that gives the company a large area of operation to exploit.
- Fall of non-UK returns: As has been noted, Tesco depends on the UK market for most of its revenues, and any fall in these returns pose threat to the company’s success.
- Challenge from competitors (Innovation by other supermarkets). Tesco does not have a lot of competitors but similar companies could rise due to innovation.
A Strategic Challenge to Tesco
After an evaluation of the external and internal analysis and SWOT analysis, it is important to identify the key success factors and challenges. Tesco has the following success factors: Retailing of services, non-food business, core United Kingdom business, Information Technology integration, effective supplier management, international growth, and an “inclusive offer which is used to appeal to all customers, that is, low, medium and upper-income customers (Tesco Corporate Strategy, 2009).
Tesco however can face certain challenges in the market. Dependency on the domestic market may lead to the company’s failure hence a drop from the current competitive market. This is unlikely based on Tesco’s flexibility in the market and ability to adapt to changes. One challenge however is competition from similar retailer companies. Tesco is ranked fourth after three retailer companies that obviously offer competition. These companies as had been mentioned are; ASDA, Wal-Mart, and Carrefour. There are other retailer companies that could arise due to innovations and reach Tesco if it fails to maintain a competitive advantage (). BP plc, the Big Food Group plc, and others have been noted as top competitors of Tesco plc (Datamonitor, 2004: 14).
Maintaining a competitive advantage of strategic position means being at a position where the businesses can operate to gain profits. Loss of a competitive advantage can lead to loss of customers and is also an indication of reducing market share as well as failure. Tesco plc aims to have long-term growth which means it has to find new strategies to ensure it is at the top of the market as it is currently and even improves in its performance.
Strategic Options/Potential Alternative Strategies
There are three generic strategies that can be used by a company to ensure competitive advantage. These strategies according to Porter are: Market a differentiated product, focus on or dominate a market niche and be the low-cost producer (Colley et al, 2004 8; Potter, 1980; 36).
In the marketing of a differentiated product, a company may choose to differentiate its product based on the diversity of the product line, based on quality so that its products are sufficiently high in quality to command a premium price, based on product reliability, and by offering features that the competitors do not have (Colley et al, 2004 9).
The second strategy is to dominate a market niche. In this case, the company chooses a specific market niche in which to compete for example; a company may select the highest price segment or the lowest cost market segment. The company can also choose to market a restricted line of utensils or clothes other than marketing a full line of its products. A company can as well choose a geographic place in which to operate by restricting its distribution to a specific area.
Striving to be the lowest producer means a company’s competitors cannot be able to produce the same products at a lower price than the company. One of the advantages of this strategy is punishing the competitors by lowering prices to a level where they will have difficulty meeting (Colley et al, 2004, 9). In most cases, company managers implement all three generic strategies for fear of failure, but one strategy is enough for maintaining a strategic position in the market (Colley et al, 2004:9).
Proposed Future Strategy
Tesco plc already uses the strategy of marketing differentiated products. The company already sells non-food products. Tesco plc has several markets and a variety of products and services which gives the company the freedom to choose which market niche to dominate. Already the company dominated the UK food retail market but changed its retail operations to include non-food products. Based on the company’s strategy of long-term growth objectives, which are to expand to international new markets, and improve non-food business, this strategy would not make the company achieve its goals. It may only make it a successful international retailer (Johnson, 2002: 57).
Tesco has one challenge that could bring it down, that is competitors. Based on the three strategies described above, one appropriate strategy that Tesco can therefore implement and ensure a competitive advantage in the retail industry is striving to be the lowest producer in all its businesses. This will enable the company to have control over prices among other advantages of the low cost of production. The strategy objectives should therefore consider ways of achieving a low cost of production.
Key Implementation and Change Factors To Consider in Managing The Strategic Development
Many organizations fail not due to bad change strategies but due to poor planning, or lack of plan and clear communication. In order to ensure successful change, managers should ensure the objectives of the strategy are defined, the employees with skills needed to ensure its success are trained and communication done at all levels. Efforts of those involved in the success of its implementation have also to be rewarded. Change management, therefore, requires awareness of workplace evolutionary trends and knowledge of human behavior (Heathfield, 2009; Drejer, 2000: 208).
A theoretical framework should be developed to strengthen the change; risk assessment should be conducted before implementation and plans on how to reduce or do away with any possible risks drawn, and the strategic mission, objectives, and vision for the change clarified. A strategy’s management should not end with its implementation but should continue based on visions set to help the organization achieve its goal (Heathfield, 2009; Lynch et al, 2003:45; Finch, 2004: 189).
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Table 1. Tesco’s progress over years
|52/3 weeks ended:||26 February 2005||28 February 2004||22 February 2003||23 February 2002||24 February 2001||26 February 2000||27 February 1999||28 February 1998|
|Profit before tax (£m)||1,962||1,600||1,361||1,201||1,054||933||842||760|
|Net profit (£m)||1,366||1,100||946||830||767||674||606||532|
|Earnings per share (p)||17.72||15.05||13.54||12.05||11.29||10.07||9.14||8.12|
Table 2. Growth on 2008 (for the 53 weeks to 28 February 2009)
- Group sales (including VAT)-15.1%
- Underlying Group profit before tax-10.1%
- Group profit before tax-5.5%
- Underlying diluted earnings per share-11.0%
- Diluted earnings per share-2.6%
- Dividend per share-9.7%
|Group sales (£m) (including value added tax)||59,426||58,588||51,773|
|Group revenue (£m) (excluding value added tax)||54,327||53,552||47,298|
|Underlying Group profit before tax (£m)*†||3,128||3,093||2,846|
|Group profit before tax (£m)||2,954||2,920||2,803|
|Underlying diluted earnings per share (p)**||28.92||27.02|
|Dividend per share (p)||11.96||_||10.90|
|Group enterprise value (£m) (market capitalisation plus net debt)||35,907||_||37,656|
|Return on capital employed||13.0%‡||_||12.9%§|