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Internal and External environmental analysis of Tesco

My organisation for this assignment is Tesco. It is leading food and grocery retailers on the planet. The aim of this essay is to analysing the micro business environment, Identify the core resources and competences of the organisation, Evaluate the organisation’s strategic choices and justification of the strategy of the company. I have used Strategic evaluation tools such as PESTEL, SWOT and others. Tesco is among the biggest food retailers in the world with returns in surplus of £54 billion in 2009 and over 470,000 workers. It has 4,331 stores in 14 countries.  The company’s Head Office is based in Hertfordshire, UK and operates mainly in the USA, Europe and Asia(www.tescoplc.com ). PESTEL Analysis (J. L. Fowle, September ,1993), analyses the vibrant and erratic environment in which company operates by classifying the forces that have the most influence on its performance, Influences Company has, to achieve strategically success. Porter’s Five forces can also be used to analysis competitive environment. However these forces becomes interrelated at some times. And its Tesco’s vision to expand globally, encouraged me to use PESTEL forces analysis rather than any other model.

Political decision has always been at watch by companies like Tesco. China is one of the world most profitable market, worth over 1.3 billon, Now it has open it door for world and encouraging Western companies. Tesco has managed to signed agreement in 2009 to set up thought-out series of joint ventures for development of shopping malls in i.e. Anshan, Fushun and Qinhuangdao(http://www.fas.nus.edu.sg/ ).By end of 2010 18 more hypermarkets are expected to open in China(http://www.investis.com/ ).  Such rises of Tesco’s international business segment are predicted to account the company’s profit for one quarter. In 2004 immersion of 10 further countries into the EU took place, encouraging trade between Western and Eastern European countries(http://www.eu-27watch.org/ ).Helped Company to enter into new market, and increase its market share across Europe.

Economic forces are of great concern to any company as they impact directly on the buying behaviour of its customers. The UK economy was officially declared under recession in 2008, the government’s was successful in minimising the rises in unemployment by considerable reduction in interest rates during 2009 (www.euromonitor.com ). This has given rise in spending power of English people,but both sales value and margins are effected as consumers are not or less likely to divert their spending on more of premium or high value goods. According Maslow hierarchy of need consumers would be at top of Basic need. (http://www.ict-learningnow.com). But retailers like Tesco would still be benefited, as their low price strategy would encourage its customers to shop from Stores and cook and dine home rather than spending more on restaurants(www.guardian.co.uk ).  As we all know that food is the last thing that customers will sacrifices .  The percentage of overall consumer spending on food has risen over the years.

Social forces are quite obvious as Man is Social Animal. An analysis has proven that the UK has the Baby Boom generation and latest medical facility by NHS Trust has reduced the death rate too(www.statistics.gov.uk ).This means that more retired people eats less and less spending power. It’s not expected of them to travel to supermarket for shopping and at the age of 65 internet literacy level go down, But it is still assumed that online shopping is and would be the only convenient way of shopping for older age people.  The ageing population is discouraging for the food retailers older people tend to eat less. Company still have to bear in mind the ineffective and expensive small deliveries. However taste and preferences of consumers should always bear in mind when strategies are framed. As mentioned on Economical forces, high value goods would be avoided but the standard of leaving would have great influence.

Technological is crucial for success. Supply chain management is very crucial for success for any retail company like Tesco. It would be great challenge to maintain it and achieve competitive advantage. Online grocery retailing has steady growth, the statics shows that 60% of young people in UK uses internet for their shopping(www.statistics.gov.uk ).Mobile shopping has also proven to be of great influence for retail industry. Many web applications such as Cortexica Vision Systems’ Wine application for iphone was used by customers of buying wine online. Such innovative ideas or product has to be kept in mind while budgeting for Research and development(www.cortexica.com ). Loyalty programs good example of successful implication and making wise use of information generated by using information technology. This helps Company in decision making which would prevent its customers going to its competitors(C. Humby, T. Hunt, T. Phillips, 2004).

Environmental safety and climate change was always on key agenda of Tesco plc since 2000(www.tesco.com ). Greener Living Scheme of Tesco advice its customers how to reduces food waste and all other environmental issues which will reduces carbon footprint. Reusing and Recycling bags and other product are always encouraged by Tesco.

Legislative actions influences the company to an great extant. Change in % of income tax or sales tax charged to customer would bring in change in buying behaviour of customers in retail industry as whole. In UK minimum wage rate has gone up to 15.5% which would force Tesco to revise its Labour budget. And VAT is expected to go up by 15%,this would affects Non-food sector of the industry(www.lowpay.gov.uk ).

Question 2 Core recourse and Core competence

Tesco focus is usually on hypermarkets. Here I refer to SWOT analysis of Tesco in detail, briefly explaining the key issues from the strategic capability and the business environment discussed earlier, including resources and competence. This would impact in Strategy development process. Strengths talk about the core resource and weakness needs strategic attention. Core competence is mention below.

Tesco’s strengths are, Tesco is ranked 3rd largest grocery retail company in the world.  The company held 30.7% share of the UK grocery retail market in 2010 (Euromonitor, 2010). Financial performance of the company has not heavely affected by the recession, it has show growth at all levels of business, this underlines company’s Strategic capabilities. Data on Datamonitor (2010) shows £ 54billion turnover recorded , which is 14.9% more than 2008. This would be the result of strategic choice of customization of product as market demands. In last decade company’s efficiency in performance growing. Tesco’s strategy aims deliver products and services at affordable price, suits to customers’ needs and maintain quality standards. Last year’s online sales was up by 50%. (Tesco, 2010).

There is no perfect market, and so every company has some weaknesses. Tesco has it too. Tesco have being struggling to perform in 2009-2010 compare to its previous performance and that of it rivals too. Tesco’s value lines has booked losses due to company’s strategy of delivering cheaper products. It’s competitors like Sainsbury’s and ASDA gained competitive advantages by providing quality product at reasonable price ( Mintel 2010).Company still depend on UK retail market for generating major revenue almost up to 75%, as UK is still not declare out of recession (Tesco, 2010). This would be major setback for geographic diversification strategy.

Study of core competence means to understand the activity or process which may be of considerably performed well to achieve competitive advantage. However, it will be crucial for Tesco to look at the generic level. (Datamonitor Report, 2003; MarketWatch, 2004).

Core competences framework suggests three factors, which can help to identify core competences three factors are suggested on framework, they are Provide potential access to a wide variety of markets, makes a significant contribution to the perceived customer benefits of the outcome, difficult for competitors to imitate, helps in creation of new products and services, identifying new market and product differentiation. (MarketWatch, 2004). This framework shows that Tesco should frame its strategies on their capabilities.

Value Chain Analysis describes the categories of activities within and around an organisation, which together create a product or service. Its primary activity helps in understanding internal environments within business. It is strategic evaluation tool for value adding processes that distinguishes weaknesses and strengths(Audrestsch, 1995). The value chain of Tesco has been demonstrated in the following diagram:

Fig 6: Value Addition in Value Chain of Tesco

Inbound Logistics: The overall cost leadership strategic management of Tesco is exhibited in its lean and agile inbound logistics function. According to Abeysinghe (2010), the Tesco has managed ti utilised it current market position and economies of scope to increase their bargaining power from its supplier and achieve low cost. The company always manage to upgrade it all inbound logistics system to increase the efficiency and effectiveness for it operations. Operations Management: Tesco has been praised by a number of supply chain management critics for its effective use of IT systems that facilitate the company’s low cost leadership strategy.  According to Tesco (2010), the company has invested heavily in it streamline operations, it is using Digital program of third generation ERP solution. Introductions of this system helped company in achieving high profitability by £550 million in 2009 and also helped in minimisation of stock levels within company and stores.

Conclusion

The above analysis concludes that Tesco is leading Retail In UK. Company have achieved this my pursuing both cost leadership and differentiation strategies. Lean and Agile supply chain management was mastered by Tesco and made best use of it to competitive advantage over its rival and achieving cost leadership. Tesco has used its Information Technology wisely and strategically. The core competencies of Tesco have been seen to be aligned with the business environment, therefore highlighting a positive future outlook for the company.

Question 3 Evaluating company’s strategic choice.

Any Strategic decision come from Strategic management, BOD or CEO. Strategic Business Unit analysis of tesoc plc would help in understand the strategic choice. Tesco has various Strategic Business Units, they are Food, Non-Food, Personal Finance, Telecom, Insurance and Tesco website itself (http://www.tescoplc.com). Understanding of this SBUs helps the development of business level strategies. Tesco has highest market share in UK and established itself in Europe, Asia and USA, in less than two decades under the leadership of Terry Leachy since 1997. Tesco always had tough competition for it rival like J Sainsbury’s and ASDA.

The strategy clock is the tool that represents different positions in the market where customers have different requirement in terms of value for money. These positioning also represents a set of generic strategies for achieving competitive advantage. According to strategy clock Tesco has been using hybrid strategy .It has always offered lower price for its product and services. In fact it has special ‘value line’ for Food and NON-food SBUs which offers good at very cheap price. In mid-1990s company saw major change. Tesco made a dramatic shift in strategy. It significantly increased the size and number of its stores, dropped the ‘pile it high, sell cheap’ stance and began offering a much wider range of merchandise. It has also targeted poorly run operations in competitors portfolio of businesses in different countries and improve it global strategy of expansion. Its expansion in UK and different country itself suggests that it has enhanced benefits to customers together with low price whilst achieving sufficient margins for reinvestment to maintain and develop bases of differentiations. Tesco has managed well in Sustaining Competitive advantage. It can do so because of huge market share it has. This means Tesco has more bargaining power over its supplier than any other competitors. Going through annual reports of Tesco plc, it had strategy of targeting different SBU at all time and once achieved, Sustaining it by brining different cost cutting strategies, i.e. introduction of new technology in supply chain, stock management, price controlling and so forth for reducing cost. These further lead to sustain differentiation based advantage. The better margin gained by charging low price initially helped to generate cash flow and reinvest in scheme like ‘Tesco Clubcard’. From which more data of customer buying behaviour was collected and more customised product were introduce.

And above of its strategies, “to be successful international retailer” was of great priority. Referring to weakness in SWOT analysis, one of the Weakness Company has is core dependence on UK market. I have belief that Company have started thinking UK Market as Cash cow according to BCG Matrix. UK market is Mature, Tesco has great market share and now they are at point that growth of Tesco would be slow, unless they come up with new market segments or new SBUs. Company need new innovations to do so. Where else International market is still a ‘Question Mark’ according BCG matrix. They have penetrated china’s, other Asian and European market ( http://www.tescoplc.com ).

But yet to lead the market or not having significant market share. Tesco’s International strategy is

Be flexible – need to be flexible as need of different market are unique .

Most of Asian market tends to sell small amount of fresh prodtucts every day. Hypermarket formats don't get together with needs of local customers, so Tesco's penetrated into the Japanese market with the view if acquisition of cheap supermarket.

Act local mean that should have it operation of all kind in and with local market .

Maintain focus - should not lose its focal of understanding customers needs and customers view of value for money. Because it takes long time and great effort to be recognised as a local brand

Develop capability - developing skill among local people, process and systems and would increase capability. Investing people would add value and helps in aching strategically success.

Build brands – Value can be added by brands, it give boost to long term relationship in foreign market. That’s what they have done in china, Company added word Legou after Tesco i.e. Tesco Legou and than renamed all the stores in China.

Question 4 and Conclusion

Tesco is big company with billions of $ in pocket. It has travelled really far to satisfy the shareholders expectations. It would be rude of mine to suggest a strategy for their future success. However as our question 4 required to suggest a strategy, i would suggest the strategy, which tell how to enter and to have competitive advantage. I am believe that Company is on right path for internationalisation. Tesco didn’t do well initially when it started in US and its pogress in India is Quit slow infact they would not be haveing their own store but Cash and Carry ( http://www.tescoplc.com ).

I believe that company should use Mergers and Acquisitions method of pursuing strategies. Reasons of Acquisitions and mergers are given below(Mergers, acquisitions, and corporate restructurings  By Patrick A. Gaughan 2007 ):

Speed of entry: Markets are changing rapidly and so is taste and preference. To to be successful in any foreign market, this strategy of merger and acquisitions with local companies will speed up the development.

Competetion in the foreign market from other western companies i.e. Wal-mart, Carrefour. Should Encourage Tesco to merger or acquire.

Share value of Tesco is high and if they acquire Strategic Leaders from foreign market with lower share price(due to exchange rate). This would double the speed of Market as well as product development and reduce the time for capturing huge market .

Exploitation of strategic capabilities will encourage foreign company to merge.

Cost efficiency.

Tesco will obtain new capabilities by acquisitions.

It also fulfil the stakeholders expectations of growth.

Tesco should apply strategy of acquisitions and Merger for rapid growth. Tesco should very careful in selecting market, it should use PEST framework to compare different market and select the most suitable and easy and quick to enter. Company should Identify and Evaluate Strategic leaders in Asian as well as North American market. This will benefit company in acquiring more market share in less time.

Than Tesco should use the technology push innovations, this means Tesco can use information technology and systems it processes to develop the market and establish brand name. This would be little bit expensive as special budget for research and development should be made.

Tesco should also adopt decentralised strategy in country like India, where local corner shops have more influence on local community. Now decentralised strategy will allow local store managers, scattered across the many different region of India, to make their own purchasing and supply decisions.

Above where the strategy i believe that Tesco should pursue in order to acquire more market share in less time. This strategy also stand in line with its corporate responsibility and company’s VALUES.

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