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SWOT analysis and PESTEL analysis OF Tesco (September 2014)

Introduction:

The modern grocery business environment is, as Metzger (2014) proffers, a complex environment in which there are ever-changing dynamics relating to customer desires, external economic factors, and issues surrounding supply. Without thorough analysis, changes can be difficult to understand; it is imperative, therefore, as Kotler et al. (2013) comment, that businesses possess a robust business model. Rapid technology change involving products, processes, or uses means that changes are likely to occur increasingly quickly (Tushman and O’Reilly, 2002). Accordingly, organisations must be aware of all of these dynamics if they are to retain competitive advantage.

One means of evaluating competitive advantage is through the use of tools such as SWOT and PESTEL analysis. The former appraises the internal factors – strengths and weaknesses – and external factors – opportunities and threats – relevant to the success of a business venture (Kotler et al., 2013). PESTEL analysis forms a framework through which an examination of critical elements to a market may take place, considering the political, economic, social, technological, environmental, and legal components of a strategy (Collins, 2010). In undertaking SWOT and PESTEL analysis of Tesco plc, this essay not only provides information about the supermarket giant, but also comments on the macro-environmental factors that affect its day-to-day management, and thus scrutinises the firm’s strengths and weaknesses. Additionally, the economic model, Porter’s diamond theory (1990), is considered in terms of understanding how location plays a critical role in a company’s success.

Overview:

Tesco is the leading retailer in the UK (Retail Economics, 2014) and one of largest food retailers in the world (Brand Finance, 2014). It operates over 6,780 stores globally and employs over 500,000 people in 12 countries, including the UK, the Republic of Ireland, Hungary, the Czech Republic, Slovakia, Turkey and Poland in Europe, along with Japan, China, Malaysia, South Korea and India in Asia (Tesco, 2014). Tesco has five distinct, named formats in the UK: the hypermarkets, Tesco Extra; Tesco Superstores, which are large supermarkets; mid-size, urban supermarkets, Tesco Metro; Tesco Express, neighbourhood convenience stores; and Homeplus, which is a non-food superstore (Tesco, 2014). Additionally, Tesco operates an online shopping business, as well as subsidiary businesses, such as Dobbies (plant centres) and One Stop, which are small convenience stores designed to counter their competitors, Spar and Costcutter (Tesco, 2014). Each follows a set format designed to maximise both customer experience and business profits (Metzger, 2014). Whilst the company has historically sold mainly food products as well as non-food products such as clothing and electrical appliances, it has also increasingly diversified from this core market (Blythman, 2012). The result is that Tesco plc now also provides services such as Tesco Finance, mobile telephone services, own-brand tablets and other hardware, as well as insurance services (Wood and Gibbs, 2014). These have not detracted from the core business but rather complement it; accordingly Tesco has developed into a multi-platform international retailer (Wood and McCarthy, 2014).

Environmental influences:

Though Tesco is the UK’s dominant grocer (Retail Economics, 2014), it is faced with growing competition from its rivals and has suffered from falling profit margins, the replacement of its CEO, and the rise of discount supermarkets such as Aldi and Lidl (Ruddick, 2014). In assessing the external factors that most evidently have the potential to impact upon the business, it can be advanced that there are nine primary external forces that Tesco must constantly monitor (Schiraldi, Smith and Takahashi, 2012). These are:

These are important for a number of reasons. Competitors are, as Fernie and Moore (2013) note, direct business rivals and therefore if they gain market share, a firm loses competitive advantage. Given its present size, Tesco enjoys the benefits of economies of scale in its contractual discussions with both its suppliers and distributors (Blythman, 2012). If Tesco’s trading position is weakened by its competitors, it faces losing existing economic advantages such as these, which could reduce profit margins (Kotler et al., 2013). Though Tesco enjoyed strong profits for a lengthy period, the combination of management factors and the global recession has dealt the company a significant blow (Stevenson, 2014). Tesco is still dependent upon creditors and global finance for its store expansion ambitions and thus it is, as Ruddick (2014) suggests, imperative that it keeps the confidence of both creditors and the market or it may face higher borrowing costs.

Customers and employees are, as Clarke (2012) asserts, the backbone of any successful corporate organisation; accordingly, Tesco must ensure that it always makes both of these groups of people feel valued so that they, respectively, demonstrate brand loyalty and give of their best to the firm at all times. Further, changing social habits within purchasing decisions and the increased prevalence of ethical shoppers means that Tesco has increasingly sought to position itself as a community champion (Piercy, Cravens and Lane, 2010). This can also be an important consideration in issues pertaining to the obtaining of planning permission for new developments. Though front-line staff may interact more with customers, only through ensuring that it possesses a competent management structure can Tesco hope to ensure that its business is always steered in the right direction (Fernie and Moore, 2013). To do so, it must continue to attract high quality graduates and business analysts into management positions.

Having outlined the pivotal importance of these primary external forces, it is necessary, from a business analysis perspective, to comment on the key external forces, opportunities, strengths, and threats that the company presently faces.

Tesco’s place as a highly valuable brand, as recognised globally as companies such as Pepsi and Toshiba, is a substantial strength, for it has a well-established brand image and a long-standing reputation for both quality and value for money (Brand Finance, 2014). The company’s continuing growth strategy is to broaden the scope of the business (Hall, 2011) and this aim is bolstered by its present market position. Critical to its success in this arena is its relationship with its suppliers and, as Blythman (2012) postulates, Tesco has high expectations of its suppliers wherever they are in the world. Through further developing its existing partnerships with suppliers, the company aims to build ever-stronger relationships with their suppliers, get the best value for customers, and give its customers confidence that Tesco maintains good standards throughout its supply chain (Wood and McCarthy, 2014).

Industrial analysis: PESTEL framework

Political factors:

Tesco’s worldwide presence means that its performance is influenced by global political factors. These include specific acts of legislation, tax rates, and the political stability of the countries in which it operates (Koen, Bertels and Elsum, 2011). Given ongoing financial instability in the world, governments are increasingly encouraging the retailer to create job opportunities for local people (Rosethorn, 2009). This is an important consideration, for the employed have greater disposable incomes and thus, by supporting employment, Tesco is also increasing demand for its products. In addition, by creating a range of working opportunities from lower-paid, flexible hour, to highly skilled, and higher paid positions, Tesco is ensuring that its workforce is diversified and representative of the wider population, including key population categories such as students, elder citizens, and disabled persons (Rosethorn, 2009).

Economic factors:

Many political changes result in concomitant changes in the economy. It is important for Tesco to be aware of such policies because changes in corporation tax, interest rates, or factors that affect the general availability of finance could have a negative effect on the company’s performance (Fernie and Moore, 2013). In the UK, for instance, if business rates were heightened for out-of-town shopping areas – as part of the government’s commitment to reinvigorating the high street – Tesco could face a scenario in which they could not readily and profitably expand their business (Wood and McCarthy, 2014). Mindful of such situations, diversification and internationalisation have become key corporate strategies pursued by the company.

As a further consequence of declining household incomes and disposable income levels, Tesco has also had to rethink the balance of its products. It is interesting to note, as Clarke (2012) comments, that over the last five years there has been a greater proportion of advertising by Tesco highlighting its value brands rather than those marketed as more luxury items.

Social/cultural factors:

Changing shopping patterns have, as Piercy, Cravens and Lane (2010) suggest, been affected by changes in working lives and the increasing number of young single professional people, as well as lone elders. This has resulted in retailers needing to change the way that they operate and package products. This has been reflected by Tesco developing a greater range of meals-for-one, Tesco’s Finest products, ‘value’ ranges, the expansion of local stores which serve small communities and neighbourhoods, and the growth of its home-delivery network (Thompson et al., 2012). Such initiatives have meant that Tesco has proactively responded to the desire of its customers to save time and energy.

In addition, customers are increasingly well informed and aware of health concerns (Clarke, 2012). The result of this is that their demands as to the nutritional content of food are intensifying on an almost day-to-day basis. Tesco has responded to this through better food labelling, increases in the proportion of organic produce and making the origin of its products easier to trace (Piercy, Cravens and Lane, 2010). By repositioning itself as a consumer champion, Tesco is showing that it shares the same concerns and values as its customers and, by so doing, keeps its business model relevant to the needs of its consumers (Kotler et al., 2013). This has the advantageous consequence of boosting customer confidence and loyalty in the brand.

Finally, an analysis of developing sociological features shows a marked rise in young professionals and working women (Blythman, 2012). Both of these factors have led to noted declines in the amount of time that households spend on main meal preparation in the UK, as Blythman further notes. Tesco has responded to this by making microwaveable meals readily available – and through so doing has ensured that its products remain relevant to this growing demographic.

Technological factors:

Technological advances have afforded new opportunities for Tesco. Two distinct innovations can be noted. The development of online shopping has seen customer satisfaction rise as a consequence of the ease of online shopping and the fact that products can be delivered to the home (Ma, Ding and Hong, 2014). Secondly, the increasing use of self-service checkout points in stores has proved to be easy and convenient for customers, and works to reduce labour costs (Tushman and O’Reilly, 2002). In addition, and since 2000, Tesco has invested a considerable amount on progressing energy efficiency, with the result that Tesco is well on course to meet its long term environmental objective to dramatically reduce its carbon footprint (Fernie and Sparks, 2014).

Environmental factors:

There has been increased pressure on many companies to address issues of corporate social responsibility and for them to show how their operations benefit overall society (Blythman, 2012). As a global business, Tesco has made a clear commitment to a corporate governance responsibility to becoming a zero-carbon business by 2050 and helping customers to reduce their carbon foot print by 50% by 2020 (Tesco, 2014). Indeed, a core Tesco value is to minimise the waste produced in each store which, given the increasing social conscience of consumers, once more means that Tesco is making its corporate message resonate with the wider concerns of customers (Blythman, 2012).

Industry analysis:

Threat of new entrants:

The UK supermarket sector is fiercely competitive; whilst the ‘big four’ still dominate the sector, the rise of Lidl and Aldi has shown that new entrants can make headway in this sector (Ruddick, 2014). It is thus imperative for Tesco to take account of this growing threat to its business model it if wishes to keep its competitive advantage (Piercy, Cravens and Lane, 2010).  

Supplier power:

Supplier power is an important factor in the negotiation of contracts and prices (Fernie and Sparks, 2014). As already noted, Tesco presently enjoys economies of scale in its negotiations with key suppliers. However, if it were to lose its market dominance, the balance of power could tip in favour of the suppliers, which would see an increase in the cost of products to Tesco. This would, in turn, have an impact upon the company’s profit margins (Fernie and Sparks, 2014).

Buyer power and threat of substitution:

As Felgate, Fearne and Di Falco (2011) posit, satisfying the buyer is key to the success of any business. Buyers can shop wherever they wish and thus it is important that Tesco offers a competitive and pleasant shopping experience if it is to maximise customer loyalty. Tesco has moved to insulate itself against the threat of buyer substitution by rewarding customer loyalty through cheap petrol promotions, cheap car insurance, and the introduction of its Clubcard scheme (Felgate, Fearne and Di Falco, 2011).

Porter’s diamond theory:

Factor conditions:

Tesco has achieved competitive advantages through its resources and capabilities, including skilled labour, product innovation, and technological competence (Ruddick, 2014). Tesco also sells food and non-food products; in so doing, the retailer offers a range of differentiated products to appeal to the widest possible ranges of demographics and socio-economics.

Demand conditions:

A demand condition is a major factor in Porter’s theory (1990). The production range depends on product demands. Tesco has, during the financial downturn, positioned itself carefully to promote its ‘value’ ranges whilst still attracting higher-spending customers through its ‘Finest’ range (Clarke, 2012). The growth in popularity of its non-food products also shows how diversification is increasingly important to the firm’s overall financial health (Stevenson, 2014).

Purposes of SWOT analysis:

SWOT analysis is used to examine the strategic fit between the internal and external environments in which a company operates (Collins, 2010).

SWOT analysis for Tesco:

Strengths:

Tesco is a well-known brand in the UK, for some years posting consistently satisfactory profit results (although profits are presently in decline), and it is a FTSE Top 100 employer (Stevenson, 2014). A second strength is that it has a large number of loyal customers (Thompson et al., 2012). In addition, through the marketing and promotional policies alluded to above, it is clear that Tesco is continuing to widen its appeal to further sectors of the population.

The development of Tesco online is a third strength from which Tesco benefits, as noted by Ma, Ding and Hong (2010). That Tesco has a strong platform for the development of revenue through online shopping mechanisms reflects changes in consumer attitudes to shopping – as Koen, Bertels and Elsum (2011) note, online buying is a substantial growth area. Finally, Tesco benefits from having a loyal staff who are proud to work for the firm (Rosethorn, 2009). As a consequence they work hard, represent the brand well and present a united and professional front that impresses customers.

Weaknesses:

In 2014 Tesco has announced profit warnings and its CEO resigned (Ruddick, 2014). In addition, it faces greater competition, especially from discount supermarkets such as Aldi and Lidl (Metzger, 2014). This is a pronounced concern for Tesco because, despite its portfolio diversification, it is still overly dependent upon its largest market, the UK (Stevenson, 2014). Given continued economic uncertainty within the UK and Europe (further exacerbated by concerns relating to Scottish separatism) it can be argued that the UK market is not as eco-politically stable as was hitherto the case (Ruddick, 2014). Though individual sector results have been strong, with profit warnings in the UK market it could be argued that Tesco has overly diversified and that as a result it has ‘taken its eye off the ball’ of its core business (Ruddick, 2014). This is clearly reflected in shareholder dissatisfaction, which can be key to investment sources (Stevenson, 2014). 

Future opportunities:

Tesco now operates in 12 countries outside the UK (Tesco, 2014); it has reconciled its non-profitable ventures, such as the Fresh & Easy group in the US and instead focussed on its Asian markets, as they offer a significant long-term profitability opportunity (Wood and McCarthy, 2014). In addition, Tesco’s entry into the mobile phone, digital entertainment, and finance sectors are growth areas within the global economy which offer Tesco vast profit possibilities (Wood and Gibbs, 2014).

Threats:

In addition to the threat posed by Aldi and Lidl, Tesco has, in 2014, lost market share (Ruddick, 2014). Further, the link between Wal-Mart and Asda could, in the longer-term, threaten Tesco’s UK dominance, given Wal-Mart’s greater global reach and superior economies of scale with suppliers (Schiraldi, Smith and Takahashi, 2012). In addition, there are increasing signs of profit margin tightening within the UK grocery sector, which could affect Tesco’s mid- to long-term profit levels (Ruddick, 2014).

Conclusion:

This essay has provided a clear and concise overview of Tesco’s present business model and the external market environments it operates within. In analysing the strengths and weaknesses of the current business, attention has been drawn to the threats from competitors, and other external factors such as the global economic downturn. It has been shown that Tesco has proactively reacted to these threats and that it has adapted its business model to take account of factors such as changing demographics and differing levels of disposable incomes (Metzger, 2014).

It is suggested through the analysis proffered that the company should continue to diversify, whilst ensuring that it keeps a steady focus on its core business. Further, it is imperative that Tesco keeps abreast of development within the discount supermarket sector, especially given the extent of recent growth which Lidl and Aldi have enjoyed (Thompson et al., 2012). It is also suggested that Tesco should continue to advance the benefits of its loyalty card as a means to further enhance customer loyalty in the highly competitive UK supermarket sector. Indeed, in acknowledging that success is not static, and that all components of their business, from suppliers to employees to customers, Tesco has demonstrated that it has the ability to rise beyond the primacy of its primary global competitor, Wal-Mart.

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