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SWOT analysis and PESTEL analysis OF Tesco

Table of Contents

Introduction

The strategic plan developed by organisations must be responsive to the business environment and to the strengths and weaknesses of the organisation. In this paper two techniques that are often used for environmental scanning are applied on Tesco PLC. These techniques consist of the PESTEL analysis and the SWOT analysis.

Environmental Scanning in the Strategic Planning Process

Hunger and Wheelen (2002) divide the strategic planning process into four key stages, which comprise the following: scanning of the external and internal environment, development of strategies, implementation of strategies, and evaluation of actual results in line to the strategic targets set. The scanning of the external and internal environment is important in order to identify key factors that help in the development of sound strategies (Hunger and Wheelen, 2002, p. 12). For example, an examination of the business environment can help in the identification of opportunities and threats that affect the organisation.

PESTEL Analysis

Political

The UK government has recently adopted a tax measure that affected Tesco. In 2011 the UK government increased the VAT rate from 17.5% to 20% with the aim to increase government revenue by £13 billion per year (BBC, 2011, n. p.). Crossley et al. (2009, p. 3) contend that an increase in the VAT rate leads to lower customer spending. Therefore, an increase in the VAT rate negatively affected the sales revenue generated by Tesco. Sales revenue is the key source of income of the organisation and thus it holds a substantial effect on profits (Atrill, 2009, p. 33).

The UK government has also proposed to adopt a fat tax with the aim to control obesity and limit the medical problems associated with it (The Guardian, 2011, n. p.). Such measure can adversely affect the sales revenue of certain products retailed by Tesco. Tesco is responding to such a threat. Indeed, in 2014 Tesco launched a "brand new healthy food range" (Tesco, 2014, n. p.).

Economic

The UK economy is showing positive signs of recovery from the financial crises. Higher economic growth rate was forecasted and the gross domestic product was estimated to be 2.7% higher than the pre-crises peak (BBC, 2014, n. p.). A growth in economy is a positive sign for Tesco because it results in a growth in the supermarket industry, which is the main industry in which Tesco operates. When there is an economic recession, which is the opposite of economic growth the rate of unemployment increases. This results in lower disposable income in the hands of the British people. Therefore, customers will decrease spending and will shift to products of a lower price (Mankiw, 2012, p. 97).Therefore, recovery from the economic recession stimulates revenue growth for Tesco.

Social

The number of elderly people is increasing in the UK due to the baby boom generation. In the past years there was a decrease in the birth-rate and an increase in the life expectancy of people (Independent, 2010, n. p.). This led to a shift in the tastes of individuals which should be taken into account by Tesco. For example, the adoption of online shopping by Tesco for grocery products is an approach that takes into consideration the mobility issues that elderly people face. Eastmen and Iyer (2004, p. 208) examined the perception of elderly people to the use of the Internet. These scholars found that elderly people view the Internet favourably and are willing to use it. This research also suggested that elderly people with a high income are generally more in favour to the use of the Internet and are interested to acquire products online (Eastmen and Iyer, 2004, p. 208). Therefore, Tesco has positively responded to this social change.

The literature says that the customers' opinion of an organisation can quickly change due to changes in the quality and price of the company's products, shopping service provided to customers and competitive moves (Kotler and Armstrong, 2010, p. 163-165). This highlights the importance that the corporate strategies should be responsive to the business environment. For example, in 2013 Tesco was accused of the horsemeat scandal. Horse-related puns were identified in Tesco's burgers and the organisation was accused of not providing the good quality products claimed in their advertising campaigns (Pratley, 2013, n. p.). This scandal affected negatively the perception of customers on Tesco, which resulted in a decline in sales (Neate and Moulds, 2013, n. p.). Tesco needs to respond to such scandal, which adversely affected its image.

Technology

Technology is critical for the supply chain management of Tesco. Retailers like Tesco develop supply chain management systems in order to attain competitive advantages and enhance cost efficiency (Tan, 2001, p. 41). Johnson et al. (2005, pp. 132 - 133) posit that the most effective competitive advantages are those that are difficult to imitate by competitors.These are reflected in the core competencies of the organisation (Johnson et al., 2005, pp. 132 - 133). Tesco needs to be very attentive to technological advancements because these may be an opportunity for the firm. For example, mobile technology helped to improve Tesco's distribution service because customers can selected their preferred wine through their mobile (Tomlinson and Evans, 2005, n. p.).

The management of Tesco needs to be attentive for disruptive technologies, which occur frequently in retailing. For example, the introduction of e-grocers led to a disruptive wave in the supermarket industry (Wessel and Christensen, 2012, p. 7). Disruptive technologies result from an innovation in technology that is initially incapable of reaching the performance of the present technology. Therefore, customers value the present technology more than this new technology. However, a niche in the market arises where the disruptive technology is more convenient to customers. Therefore, such technology will appear unattractive to large well established organisations, like Tesco. On the contrary small firms will regard a disruptive technology as an opportunity to enhance the market share (CIMA, 2009, pp. 1 - 2). These small firms will utilise the technology in order to " meet the standards of performance expected by the bulk of the market" (CIMA, 2009, p. 2). Therefore, over time the disruptive technology will increase in popularity and will be more valuable to customers than the present technology (CIMA, 2009, p. 2). This will thus negatively affect organisations that have not used this technological opportunity.

Environmental

In the press substantial emphasis is made on global warming and the consequences associated with it. For example, the increase in average temperature is leading to a melting of the Arctic ice and it is envisaged that by 2040 there will be an ice-free summer (National Geographic, 2007, n. p.). Such facts are leading to higher emphasis on environmental sustainability. Tesco is adopting a number of measures that are aimed to protect the environment. For example, Tesco is committed to diminish the consumption of energy and utilisation of greenhouse gases (Tesco, 2014c). Management claimed that when they are doing store adjustments they are taking into account such environmental factors. For example, in Thailand the organisation has invested £3.1 million on 49 stores in order to provide energy savings of approximately £2 million (Tesco, 2014, c, pp. 44 - 45).

Legal

There are a number of laws that affect Tesco because the organisation markets a wide number of products and services. For example, as regards the agricultural products the UK government is reforming the common agricultural policy. The government is revising the way direct subsidies will be allocated to farmers (Gov.uk, 2014, n. p.). Such measures can lead to lower subsidies, which affect the ability of farmers to meet the agricultural standards set by Tesco and the prices agreed with organisations engaged in the supermarket industry. Winnett (2012, n. p.) contends that significant fines can be imposed on firms like Tesco if such organisations force agricultural suppliers to sell at a price which is lower than costs.

Tesco is also engaged in financial services products like credit cards, savings, loans and mortgages (Tesco, 2014a, n. p.). The Financial Services Act (2012) was recently implemented in the UK (Noked, 2013, n. p.). Three new governing bodies resulted from this act, which consist of the " Financial Policy Committee, the Prudential Regulatory Authority and the Financial Conduct Authority" (Noked, 2013, n. p.). The Prudential Regulatory Authority adopts a micro-perspective and is responsible that organisations engaged in financial services products operate in adherence to relevant regulations (Noked, 2013, n. p.). The Prudential Regulatory Authority seeks to decrease the negative effects arising from " disruption to the continuity of financial services", which may be influenced by the way financial services organisations operate or their failure (Noked, 2013, n. p.).

SWOT Analysis

There are two different types of strengths and weaknesses, which arise from financial and non-financial factors. A SWOT analysis on these factors is helpful to direct the organisation in developing the right strategies (Johnson et al., 2005, p. 150). Kaplan and Norton (1996, p. 8) posit that when evaluating the performance of an organisation one needs to look at "financial, customer, internal business process, and learning and growth" perspectives. Therefore, in order to evaluate Tesco in depth it is important that both financial and non-financial factors are considered.

Financial Strengths and Weaknesses

Figure 1: Profitability Ratios

Adapted from: Reuters (2014, n. p.)

The gross profit margin measures the relationship between the gross profit and sales revenue (Atrill, 2009, p. 77). A higher gross profit margin means an increase in selling price and/or better cost efficiency in purchase or production costs (ACCA F7, 2009, p. 409). The gross profit margin of Tesco is substantially lower than that of the industry average. This reflects a financial weakness because competitive firms are able to generate higher gross profit from sales.

The operating profit margin examines the relationship between the operating profit and sales revenue. A higher operating profit margin implies better operational performance in terms of controlling operating expenses (Atrill, 2009, p. 76). The operating profit margin of Tesco is lower than that of the industry average, which implies that the operational performance of competitive firms is better.

The net profit margin examines the net profit in relation to sales. This ratio measures the overall profitability of the organisation (ACCA F7, 2009, p. 410). The net profit margin of Tesco exceeds that of the industry average even though the gross profit margin and operating profit margin of Tesco are lower than those of the industry average. This means that there are non-operating items, which are strengthening the profitability of Tesco in relation to sales. An examination of the latest financial statements of Tesco reveals that the firm was able to diminish the losses from discontinued operations by £562 million leading to a 3942% increase in net income from 2013 to 2014 (Tesco, 2014b, p. 69). Therefore, overall the profitability of Tesco is stronger than that of competitive firms.

Figure 2: Liquidity Ratios

Adapted from: Reuters (2014, n. p.)

The current ratio evaluates the ability of the current assets to cover the current liabilities. In the supermarket industry the current ratio is often low because the inventories of a supermarket are fast moving and are quickly turned into cash (Atrill, 2009, p. 86). Indeed, the current ratio of Tesco is lower than one. The current ratio of Tesco is lower than the industry average, which implies that the liquidity of Tesco is weaker. The quick ratio also supports this notion. The quick ratio is similar to the current ratio but it takes into account the liquid assets and not the current assets. Inventories are excluded from the liquid assets because these take longer time to be translated into cash (Atrill, 2009, p. 87).

Figure 3: Leverage Ratio

Adapted from: Reuters (2014, n. p.)

The long-term debt to equity ratio determines the financial risk of the organisation. If the ratio is higher than 50% it implies that the organisation is a high-geared company and the financial risks are high (Brealey et al., 2011).The industry average holds a higher long-term debt to equity than Tesco, which implies higher financial risks. This does not necessarily mean that competitive firms are in a weaker position than Tesco provided that the firm holds a strong financial health (Pike and Neale, 2003). The net profit margin of Tesco and the industry average is low, which implies a high risk of generating losses during adverse trading periods. The liquidity ratios are also fairly low both for Tesco and the industry average. Therefore, the high leverage puts Tesco and competitive firms in a higher risk of passing through financial distress. Tesco is in a lower financial risk due to a lower long-term debt to equity ratio.

Figure 4: Interest Cover

Adapted from: Reuters (2014, n. p.)

The interest cover ratio is helpful to evaluate the long-term solvency of the organisation. The interest cover shows the ability of the organisation's profit before interest and taxation to cover the interest expense arising from long-term borrowings (McKenzie, 2003, pp. 213 - 214). The interest cover of Tesco is substantially lower than that of the industry average, which means that the long-term solvency of Tesco is weaker than that of competitive firms.

Overall the financial health of competitive organisations is better than that of Tesco as indicated by the stronger liquidity and long-term solvency. This impacts on the firm's ability to keep core competencies. Such aspect is examined in further depth in the next subsection.

Non-Financial Strengths and Weaknesses

The brand name of Tesco is considered one of the strongest in UK (Bokaie, 2008, n. p.). Huang and Huddleston (2009, p. 975) posit that such a strong brand name was facilitated by developing innovative high quality products. Furthermore, the ability to introduce new high quality products every year increase the customer base and customer loyalty (Huang and Huddleston, 2009, p. 976). However, in the PESTEL analysis it was noted that the horsemeat scandal damage the brand name of Tesco. Neville (2013, n. p.) posits that despite the horsemeat scandal Tesco is still the best retail brand in the UK. Consultants say that there is still a large gap between Tesco's brand value of £7.2 billion and the second placed organisation, which is Marks and Spencer with a brand value of £4.3 billion (Neville, 2013, n. p.).

An examination of the market share of Tesco in the supermarket industry shows that the firm is facing problems despite such a strong brand image.

Figure 5: Market Share

Source: BBC (2014a, n. p.)

The financial crises has shifted the minds of the customers to value which increased the importance of discount chains, such as Aldi and Lidl. The importance of large superstores located outside the city centre also diminished. Tesco also became too focused on profits (BBC, 2014a, n. p.). Such factors resulted in a decline in the firm's market share as shown in Figure 5.

Tesco is engaged in a number of international markets, such as Thailand, Ireland, Hungary, China and Malaysia (Tesco, 2014b, p. 6). The literature highlights a number of benefits that an organisation can attain from international trade, which can result into strengths. International trade can help the organisation achieve "economies of scale", achieve managerial expertise and help to decrease risk through diversification (Eiteman et al., 1999, p. 482). Lower business risk stemming from diversification can aid Tesco to decrease the overall financial distress risk stemming from the high leverage of the organisation. Furthermore, these benefits can help Tesco sustain its competitive advantages like a strong brand image.

Opportunities

The PESTEL analysis helped to identify a number of opportunities for Tesco. For example, the economic recovery in the UK shows signs that the supermarket industry is growing. However, Tesco needs to work hard in order to obtain the benefits from this opportunity. Matsa (2011, p. 2375) posits that the switching costs of customers in the supermarket industry are low. This means that customers can easily switch from one store to another (Matsa, 2011). Furthermore, Meyer-Waarden and Benavent (2009, p. 345) found that loyalty programs like the ones provided by Tesco are often ineffective in order to retain customers. Therefore, the main two factors that can attract and retain customers are product quality and good prices. Tesco holds considerable experience in the supermarket industry in the UK. Such experience was also expanded in non-food products. Management claimed that they can utilise this experience to enhance the financial performance of the organisation by investing in opportunities in international markets (Tesco, 2014b, p. 2).

Threats

There is intensive competition in the supermarket industry and price wars are occurring frequently. For example, Morrisons have announced that it will provide discounts amounting to £1 billion in the next three years (Poulter, 2014, n. p.). The aim of these discounts is to compete with discount chains like Aldi and Lidl, which as noted above are attaining a growth in market share (Poulter, 2014, n. p.). Organisations operating in the supermarket industry cannot afford to lower prices considerably because the net profit margin of these organisations is low. As shown in Figure 1 the net profit margin of the industry average amounts to 1.94%. This means that £1.94 net profit is derived from every £100 of sales (Atrill, 2009, p. 410). A lower price can force the organisation to generate losses. Tesco holds an advantage over competitive firms because its net profit margin is higher by 1.07% as indicated in Figure 1. Therefore, Tesco can afford more to lower prices.

As noted above the economic recession changed the spending habits of customers and decreased the importance of large super stores. Such change in customer habits was a threat for Tesco because the organisation has invested heavily in large super stores. Indeed, in 2013 Tesco reported lower sales in the UK, which was partly due to the dependence on such stores (Wood and McCarthy, 2014, p. 121). Tesco responded by decreasing the " store space expansion strategy" and focused on enhancing the "existing store portfolio's appearance" (Wood and McCarthy, 2014, p. 121). However, as noted in Figure 5 the market share of Tesco decreased in the past years. Therefore, such an approach is not effective to sustain the firm's market share.

Review of Tesco PLC

Tesco is facing serious threats that are weakening the leadership in the supermarket industry that the organisation holds in the UK. Furthermore, the financial health of competitive firms is better than that of Tesco. Tesco needs to respond to these threats and utilise its main strength, which consists of a strong brand name in order to sustain its competitive advantages.

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