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Tesco Company Background

Executive summary

This report focuses on Tesco, one of the giant grocery shops in the UK. The essay mainly deals with the general company background of Tesco Grocery Stores. The first part depicts the mission and vision statement of the Tesco and also highlights the ethical, cultural, environmental and social perspectives of Tesco. In the second part of this assignment, the Business Environment of Tesco is critically reviewed through two different strategic models: the SWOT analysis and Michael Porter's five forces. The core competences and sustainable competitive advantage of the company is discussed in the third segment while the strategic development of Tesco over the years underwent many reforms and in the fourth segment some recommendations are given to improve Tesco's new business strategies. The final part of the report maintains the implementation process based on the recommendations given and the monitoring and evaluation of these processes.

1.0 Brief Background of TESCO

Tesco is one of the leading grocery shops in the UK founded in 1924 by John Edward Cohen in the East End of London. The name ‘Tesco', was first used on tea, and was derived from the initials of Cohen's tea supplier, T E Stockwell, combined with the first two letters of Cohen. Tesco Stores Limited was incorporated in 1932. In 1935, Jack Cohen visited the USA and was impressed by the supermarkets' self-service system which enabled more people to be served faster, with lower labour costs. In 1947, the Tesco branch in St Albans, a small shop by 21st century standards (200 square meters) was the first Tesco to be converted to self service, although it didn't immediately catch the public's imagination. In the early 1960's, Cohen lobbied Parliament to have the Retail Price Maintenance (RPM) act abolished, efforts supported by Edward Heath. The RPM allowed manufacturers and suppliers to set the price of goods thus preventing large retailers, who could buy in bulk and had greater buying power, from benefiting from economies of scale and undercutting the prices of smaller shops. To get 'around' this, Tesco offered another incentive to get customers through the doors. These were collected by customers when they spent money in the store, and were then traded for goods in a catalogue with an effective discount.

In 1964, Parliament passed the Resale Prices Act, curtailing RPM, which by 1979 remained in force only on books and pharmaceutical goods. Until the 1970's, Tesco operated on the 'pile it high, sell it cheap' formula Cohen had imported from the USA. However, the market was changing, leaving the company with slim margins and a serious image problem. Under the leadership of Ian McLaren, who succeeded Jack Cohen in 1973, Tesco decided to try something dramatic and different: to become an ‘inspirational mass retailer'. Now Tesco stands far ahead of its competitors because of Tesco's well-organised strategy and quick response to the customers' demand.

2.0 Mission, vision, ethical, environmental and social perspectives of Tesco

2.1 Tesco's mission

Mission is the prime goal of an organisation to achieve the end results. Through minute observation it can be said that Tesco's mission is to improve more opportunities for the customers offering them loyalty cards and convince them to buy the double even in the economic downturn. Tesco takes pride in vast productivity and continuous improvement of the products.

A research by Sufi and Lyons (2003) from the literature shows that most of the writers are agreed upon defining mission statement as: concern for the customers' purpose, identity/ image, differentiation factors, corporate values, products, markets and concern for the survival, growth, profitability, company philosophy and employees and social concern.

Tesco is now a brand name meeting the demands of the customers operating throughout the world.

2.2 Tesco's vision

Vision can be defined as the desired or intended future state of an organization or enterprise in terms of its fundamental objective and/or strategic direction. Vision is a long term view, sometimes describing how the organization would like the world in which it operates to be. Tesco's vision reflects in their slogan Every Little Helps a lot. As a fast growing company it has gone from simply selling groceries to providing anything from loans to mobile phones. By setting out in all these new directions Tesco endeavours to be close to the customers.

2.3 Ethical

Tesco has successfully been maintaining its commitment for being a good neighbour through stores. Tesco created over 24,000 new jobs around the world in 2008 (Tescos's websites). Since 2000 the company is regenerating UK communities venturing partnership with local communities. The other contributions that Tesco is making include supporting local economics, promoting active lifestyles, supplier relations, UK code practice, monitoring animal welfare.

2.4 SOCIAL

2.5 OBJECTIVES

2.6 COMPETITIVE MEASURES

3.0 Environmental analysis: PESTEL FRAMEWORK

Bonn (2001, pp.63-70)states that ‘when review the organisation's environment, it requires an understanding of how different problems and issues are connected with each other and what affect one solution in a particular area would have on the areas'.

Strategic planning effects the organisation in various ways. Since as a supermarket Tesco emerged reforming strategic changes from time to time to have a strong voice in the competitive market. There are different strategies that the company shuffled and reshuffled over the years which can be analysed both externally and internally. To analyse external factors in the context of modern business world PESTAL ANALYSIS has been handy to illustrate Tesco's external environment. PESTAL ANALYSIS includes the aspects such as political, economical, socio cultural, technological analysis. In the following chart they are illustrated:

3.1 Political Factors

Tesco is operating in the UK as well as throughout Europe with around 4000 stores. Because of Tesco's massive performance and noticeable presence in the market, the company is highly influenced by the political and legislative conditions of these countries.

For employment legislations, the government encourages retailers to provide a mix of job opportunities from flexible, lower-paid and locally-based jobs to highly-skilled, higher-paid and centrally-located jobs (Balchin, 1994). Also to meet the demand from population categories such as students, working parents and senior citizens government imposes new regulations which may create mounting pressure on grocery stores like Tesco and it competitors. Tesco understands that retailing has a great impact on jobs and people factors as traditional stores go out of business or are forced to cut costs to compete. Being an inherently local and labour-intensive sector, Tesco employs large numbers of student, disabled and elderly workers, often paying them lower rates. In an industry with a typically high staff turnover, these workers offer a higher level of loyalty and therefore represent desirable employees.

3.2 Economical Factors

Present economic factors are vastly influencing demand, costs, prices and profits. In the ebb and tide of economic downturn, Tesco has reduced price and added value to draw more consumers even when the unemployment rate is high and demand for many goods is decreasing.

These economic factors are largely outside the control of the company, but their effects on performance and the marketing mix can be profound. Although international business is still growing and is expected to contribute greater amounts to Tesco's profits over the next few years, the company is still highly dependent on the UK market. Hence, Tesco would be badly affected by any slowdown in the UK food market and are exposed to market concentration risks.

3.3 Social/Cultural Factors

Current trends indicate that British customers have moved towards ‘one-stop' and ‘bulk' shopping, which is due to a variety of social changes. Tesco has, therefore, increased the amount of non-food items available for sale.

Demographic The adoption of Electronic Point of Sale (EPoS), Electronic Funds Transfer Systems (EFTPoS) and electronic scanners have greatly improved the efficiency of distribution and stocking activities, with needs being communicated almost in real time to the supplier (Finch, 2004).

3.4 Environmental Factors

There has been increased pressure on many companies and managers to acknowledge their responsibility to society, and act in a way which benefits society overall (Lindgreen and Hingley, 2003). Hence, by recognizing this trend within the broad ethical stance, Tesco's corporate social responsibility keeps on working on these vital social issues.

Graiser and Scott (2004) state that in 2003 the government has intended to launch a new strategy for sustainable consumption and production to cut waste as well as reduce consumption of resources and minimise environmental damage. In addition, the focus is now towards; the own-label share of the business mix, the supply chain and other operational improvements, which can drive costs out of the business. National retailers are increasingly reticent to take on new suppliers (Clarke, Bennison and Guy,1994).

Now-a-days consumers are becoming more and more aware of health issues, and their attitudes towards food are constantly changing. In this regard, what Tesco adapts is to accommodate an increased demand for organic products.

3.5 Technological Factors

Technology is a major macro-environmental variable which has influenced the development of many of the Tesco products. The new technologies benefit both customers and the company: customer satisfaction rises because goods are readily available, services can become more personalised and shopping more convenient. Tesco can be applauded for online shopping as its slogan says “YOU SHOP, WE DROP” at the doors.

3.6 Legislative Factors

Various government legislations and policies have a direct impact on the performance of Tesco. For instance, the Food Retailing Commission (FRC) suggested an enforceable Code of Practice should be set up banning many of the current practices, such as demanding payments from suppliers and changing agreed prices retrospectively or without notice (Mintel Report, 2004).

4.0 INDUSTRY ANALYSIS: PORTER'S FIVE FORCES

4.1 Threat of New Entrants

The UK grocery market is primary dominated by few competitors, including four major brands of Tesco, Asda, Sainsbury's and Safeway that possess a market share of 70% and small chains of Somerfield, Waitrose and Budgens with a further 10%. Over the last 30 years, according to Ritz (2005), the grocery market has been transformed into the supermarket-dominated business. Majority of large chains have built their power due to operating efficiency, one-stop shopping and major marketing-mix expenditure. So the possibility of new entrants in the supermarket is very low.

4.2 Bargaining Power of Suppliers

This force represents the power of suppliers that can be influenced by major grocery chains and that fear of losing their business to the large supermarkets. Therefore, this consolidates further leading positions of stores like Tesco and Asda in negotiating better promotional prices from suppliers that small individual chains are unable to match. In return, UK based suppliers are also threatened by the growing ability of large retailers to source their products from abroad at cheaper deals. The relationship with sellers can have similar effects in constraining the strategic freedom of the company and in influencing its margins. The forces of competitive rivalry have reduced the profit margins for supermarket chains and suppliers.

4.3 Bargaining Power of Customers

Porter theorized that the more products that become standardized or undifferentiated, the lower the switching cost, and hence, more power is yielded to buyers Porter M. (1980). Tesco's famous loyalty card - Clubcard remains the most successful customer retention strategy that significantly increases the profitability of Tesco's business. In meeting customer needs, customizing services, ensuring low prices, better choices, and constant flow of in-store promotions enables brands like Tesco to control and retain their customer base.

4.4 Threat of Substitutes

General substitution is able to reduce demand for a particular product, as there is a threat of consumers switching to the alternatives Porter M. (1980). In the grocery industry this can be seen in the form of product-for-product or the substitute of need and is further weakened by new trends, such as the way small chains of convenience stores are emerging in the industry. Tesco has taken the issue seriously. In this case Tesco along with other company like Asda and Sainsbury's are trying to acquire existing small-scale operations and opening Metro and Express stores in local towns and city centres.

4.5 Intensity of competitive rivalry

The grocery environment has seen a very significant growth in the size and market dominance of the larger players, with greater store size, increased retailer concentration, and the utilisation of a range of formats. This highly competitive market has fostered an accelerated level of development, resulting in a situation in which UK grocery retailers have had to be innovative to maintain and build market share. Tesco has so far responded well initiating more products with much better price to dominate the market.

CSF

SAINSBURY'S

ASDA

SAFEWAY

BRANDING

5

3.5

3

IT INTEGRATION

4

3

3

SUPPLIER MANAGEMENT

5

3

4

TOTAL

14

9.5

10

Strong rivalry analysis of UK grocery industry

5.0 iNTERNAL ANALYSIS OF TESCO: Swot analysis

5.1 Strengths

Tesco's strengths are hidden in its massive productivity and supply chain. Every door to store concept is the force that has enabled Tesco to reach beyond customer's expectation. While the sluggish economy is badly affecting the business, small or large, Tesco maintains steady growth and supply even better than before. Loyalty cards have also been strengths of Tesco to encourage the customers into multiple buying. Good reduced price with a bulk of choices has branded Tesco for lowest price with good value.
Increasing market share:
Tesco's general growth and ROI show no sign of abating:
Tesco online:
Brand value: Profits for Tesco's operations in Europe, Asia and Ireland increased by 78% during the last fiscal year.
UK market leadership reinforced: Since acquiring number one ranking in 1996, Tesco has developed a successful multi-format strategy that has accelerated its advantage. Its UK sales are now 71% larger than Sainsbury's.

5.2 Weaknesses

Being a large supermarket, to satisfy customers of all rank, Tesco sometimes sells goods at lowest price that result in huge loss. Tesco's bulk amount of loans is also great concern for the company. Sometimes to lower down the price Tesco involves in bad bargain with the suppliers which causes non conformance to the customers' demand and satisfaction and in many cases products become out of stock for time being.
Reliance upon the UK market:
Debt reduction:

5.3 Opportunities

Some of Tesco's main opportunities are on the internet. No other grocery shops in the UK offer immense opportunity that Tesco can provide. Tesco's online shopping exceeds the remaining competitors in terms of speed, facilities and availability. Thus Tesco opportunity to flourish its wings in the market has been great threat for Sainsbury, Asda and so on. Even the local small businesses are about to be abolished from the scene.
Non-food retail: The growth in Tesco's hypermarket format in the UK means that there are expectations of seeing its 13% share of retail sales climb sharply over the next few years.

Health and beauty: Tesco's UK health and beauty ranges continue to grow, and it is currently the fastest growing skincare retailer in the market.

5.4 Threats

Tesco has changed its threats into opportunities by making sound strategy of cutting down prices on foods. The present recession has widened Tesco's scope to hold the majority of UK grocery market share. But Tesco feels strong rivalry from Sainsbury and Asda as they have come forward with good low price sometimes offer even better quality.

UK structural change could spark a price war:

Overseas returns could fall:

Wal-Mart/Asda challenge: Since the US shopping giant Wal-mart purchased Asda, Tesco's rank as the top UK supermarket has been threatened. Asda can now compete extremely well on price and range of goods. For the moment, Asda is the third largest supermarket in the UK, just behind Sainsbury's and then Tesco. However, Asda closed the gap on Sainsbury's in 2003, leaving the company to directly challenge Tesco's dominance.

International expansion: International growth is expensive. Entering new markets with a new brand requires heavy investment and marketing

6.0 STRATEGIC DEVELOPMENT OF TESCO

6.1 CUSTOMERS

6.2 GROW SALES

6.3 OPERATIONS

6.4 EXPAND ABROAD

6.5 COMMUNITY

6.6 HEALTH AND OTHERS

Tesco is likely to employ two strategic options that are also likely to be primary market objectives of focus on market development though partnerships and diversification through new product development.

7.0 Market Development Strategy:

By entering new markets like China and Japan it can serve as a key growth driver of the company's revenues and expansion strategy. Tesco's interests in Japan are likely to continue growing in due course, as Asian markets are showing an increase in consumer spending and increased trend towards retailing. These new markets are also demographically high opportunity markets.

In the case of Tesco, one of the suggested strategic options is in international alliances with the local retailers in Asian markets. It will be considered as a method of development and may be formed to exploit current resources and competence. By entering into joint ventures or partnerships, in order to gain a larger economy of scale and larger market presence, Tesco will draw on the extensive local knowledge and operating expertise of the partner whilst adding its own supply chain, product development and stores operations skills to deliver a better shopping experience to customers. However, given the huge scale, potential and complexities of these markets, Tesco may feel that being the first mover is not necessarily an advantage. The success of the partnership will be related to three main success criteria: sustainability, acceptability and feasibility. Sustainability will be concerned with whether a strategy addresses the circumstances in which the company is operating.

Product Development: Diversification

Changes in the business environment may create demand for new products and services at the expense of established provision. Ansoff's matrix suggests that if new products are developed for existing markets, then a product development strategy has to be considered by the management level of a company. In expanding and diversifying Tesco's product mix, it is also crucial to implement internal development when new products are developed. The nature and the extent of diversification should also be considered in relation to the rationale of the corporate strategy and the diversity of the portfolio.

8.0 CONCLUSION

In large organizations as Tesco strategy should be analysed and implemented at various levels within the hierarchy. These different levels of strategy should be related and mutually supporting. Tesco's strategy at a corporate level defines the businesses in which Tesco will compete, in a way that focuses resources to convert distinctive competence into competitive advantage.

APPENDIX B

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'fill the gap' strategy would be useful to the company, as has been the case with the UK convenience market, there is the danger of Tesco becoming a serial acquirer, as this tends to reduce earnings visibility and quality