Pestel Factors For Tesco To Consider Marketing Essay
Using appropriate Strategic Management tools and models, critically analyse and evaluate Tesco's current strategic position as at 2010 (include any SBU's in your analysis).
Your analysis should include as a minimum
The product market mission of the company
The basis of competition
The activities and resources of the company
The culture of the company
The stakeholders of the company
A comparison with competitors in the same industry
Question 2 - What is their current strategy? Generate, using appropriate strategic models, three appropriate strategic options for the company to trade successfully over the next five years.
Models you could use here include Porter's Generic Strategies, Ansoff's matrix, Bowman's Strategy Clock, VRIO.
Question 3 - Assess, using suitable criteria, the three strategic options and determine the most appropriate one for the company to follow. Include some suggestion of implementation and timescales.
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Tesco SWOT Analysis
Tesco UK Store Portfolio
Tesco Financial Performance 1998-2011
Tesco New Vision and Strategy 2011
MANAGING STRATEGY (BLB 20058 - M) INDIVIDUAL CASE STUDY ASSIGNMENT
Tesco plc is a global grocery and general merchandise retailer based in Cheshunt, United Kingdom. It is the third-largest supermarket retailer in the world measured by revenues (after Wal-Mart and Carrefour) and the second-largest measured by profits (after Wal-Mart)Global Powers of Retailing, Deloitte, 2010). Tesco is listed on the London Stock Exchange and is a constituent of the FTSE 100 Index.
This paper will critically analyse and evaluate Tesco's current strategic position as at 2010/11 and will focus on the UK market. The definition of strategy "Strategy is the direction and scope of an organisation over the long term which achieves advantage in a changing environment through its configuration of resources and competences within a changing environment to meet the needs of markets and to fulfil stakeholder expectation" from (Johnson et al.,2005)
Tesco UK operations
Tesco's UK stores are divided into six formats, differentiated by size and the range of products sold. These are Tesco Extra stores are out-of-town hypermarkets that stock Tesco's entire product ranges. Tesco superstores are large supermarkets, stocking groceries and a much smaller range of non-food goods. Tesco Metro stores are sized between Tesco superstores and Tesco Express stores. They are mainly located in city centers, the inner city and on the high streets of towns. Tesco Express stores are neighborhood convenience shops, stocking mainly food with an emphasis on higher-margin products alongside everyday essentials. They are found in busy city centre districts, small shopping precincts in residential areas and small towns.
Tesco financial performance and share price has increased. The Profit before tax has risen from £760 million to £3,535million in 12 years, in the same period it has increased its share price from 8.12p to 33.10p, with a turnover now reaching £67,537 million. (See Appendix 1)
Tesco have secured a powerful retail identity by making their retailing concept appeal to the mass consumer market via a variety of channels and moving the high street into one of its own stores. Technika is a brand name for Electronic products sold exclusively through-out Tesco Stores. The Technika range currently includes Televisions, MP3 Docking Stations, Computer Peripherals, DVD and Blue-ray Players, DAB Radios. Tesco operates mobile phone, home phone and broadband businesses. These are available to residential consumers in several countries and are sold via the Tesco website and through Tesco stores.
Their other business include Garden Centers, they purchase Dobbies Garden Centers for £155.6 million on 8 June 2007, a banking arm called Tesco Bank which offers credit cards, loans, mortgages, savings accounts and several types of insurance, including car, home, life, pet and travel. In 1974, Tesco began selling 95, 97 and 99 RON (a fuel developed by Greenergy of which Tesco is a shareholder) petrol on a retail basis from forecourts at most superstore and Express locations. More recently, Tesco has diversified into biofuels. In 2008 Tesco acquired a small I.T. support company called The PC Guys and were able to launch Tesco Tech Support Teams of Advisors were put into all Extra stores with the sole job role of answering technical questions on Tesco's range of electrical products.
As of 2010 has started funding Film Making, Record Label, Video-on-Demand, Gold Exchange, Tesco Tyres and Your Beauty Salon.
The Internal Environment
In a fast moving retail business environment with powerful competitors' Tesco need to adopt new expansion strategies or diversify the existing in order to sustain its leading market position in an already established retailing market. The company must constantly adapt to the fast changing circumstances. The resources of Tesco can be classified as assets and competencies, These assets can be further classified as can and cannot be imitated by competitors. Tesco's competencies have an advantage if they cannot be imitated.
The value chain is a concept from business management that was first described and popularized by Porter (1985). Value chain is defined as 'a chain of activities for a firm operating in a specific industry.'
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Products pass through all activities of the chain which gives the products more added value than the sum of the independent activity's value. Tesco has adopted this method with many of its products. For example, Tesco store formats have developed to attract more customers, they have done this by having stores in a range of sizes in different locations. Within this they have Tesco Extra stores which are usually located out of town and offer greater choice and the prices are discounted for bulk purchases, compared to Tesco Express stores which are situated in busy city centre districts, small shopping precincts in residential areas and small. Due to small store size, and the necessity there is an emphasis on higher-margin products to maximise revenue per square foot.
Investment in information technology has helped organizational processes, Tesco has used this to its advantage by not actually purchasing or building a telecoms network, but instead has pursued a strategy of pairing its marketing strength with the expertise of existing telecoms operators. In 2003, Tesco Mobile was launched as a joint venture with O2 and since has over 2 million UK customers are using this service.
Using the same strategy in 2004 Tesco broadband, an ADSL-based service delivered via BT phone lines. This was launched in partnership with NTL. Other collaborative partnerships have been with the RBS with the launch of Tesco Bank.
Tesco's culture can be analysed through the observations of how the company behaves, including routines, rituals, stories, structures and systems. Tesco has a very friendly and supporting approach in the routine ways that staff at Tesco behave towards each other, and towards those outside the company that can make up the ways people do things. The control systems and measurements are constantly under the management.
Tesco was one of the first retailers to introduce a customer loyalty programme. They offer the Clubcard, which gives two Clubcard points for every £1 they spend in a Tesco store, or Tesco.com. This allows them to monitor the efficiency of sales and become 'customers for life.'
On-going meetings and communication at every level of the company's hierarchy represent a strong internal environment. These methods have been effective and have added value as they have enhanced the product and the customer perception is that they are getting a superior product of a specific quality at a competitive price.
The External Environment
The latest grocery share figures from Kantar Worldpanel show the UK top five retailers, Tesco, Asda,Sainsbury's, Morrison's and Co-Operative, Tesco are sill considerably ahead of their main rivals, with only Sainsbury's having made a slight gain in the past year. See Appendix 2 for a full list of Tesco's UK Store Portfolio.
12 Weeks Sales to Jan 2010
12 Weeks Sales to Jan 2011
Table adapted from: http://www.marketresearchworld.net
PESTEL analysis describes a framework of macro environmental factors used in environmental scanning. It is a part of the external business analysis when doing market research and gives a certain overview of the different macro environmental factors that the company has to take into consideration.
PESTEL factors for Tesco to consider include:
E.g. EU enlargement, the euro, international trade, taxation policy in the UK and overseas
E.g.UK and world interest rates, exchange rates, national income, inflation, unemployment, Stock Market
E.g. ageing population, attitudes to work, income distribution, social enterprises
E.g. innovation, new product development, rate of technological obsolescence
E.g. global warming, environmental issues, Carbon footprint
E.g. competition law, health and safety, employment law
To assess the industry attractiveness Porters Five-Force Analysis is used. This analyses the microenvironment.
Porter states that, Suppliers, Buyers, Potential Entrants and Substitutes are all factors that drive an industry to Competitive Rivalry. These will help Tesco monitor changes in consumer behavior, adopt a policy of continuous innovation and attract new customers. Factors affecting this strategy are bargaining power, threat of entrants and threat of substitutes.
Tesco is able to use the Strategic Business Units effectively be establishing interconnections between the PESTEL and the Five Force Analysis. Tesco can use these generic strategies to compete in the marketplace, regardless of the context of industry (Porter, 1980). Note that companies that are successful at making use of the cost leadership strategy are often positioned to capitalize on a value proposition, which emerges from their low cost emphasis. These companies typically focus their efforts on value-oriented customers in the market. Tesco Value products are focused on providing value-oriented customers with products that are indeed value-for-money, relative to competitive offerings. An emphasis on cost leadership in this sense can act as a form of differentiation.
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Freeman (1984) defined the stakeholder as "any group or individual who is affected by or can affect the achievement of an organisations objective. The main stakeholders for Tesco are the Customers, Tesco staff teams hold Customer Question Time meetings in which Staff hear customers' views on everything from how they are being served in the stores to the role of Tesco in their local community. Staff - Tesco Staff give their feedback through the Viewpoint staff survey, Staff Question Time sessions and our Staff Forum process. One of Tesco's core values is to "treat people how we like to be treated", and it is applied to their supplier relationships. Tesco Investor Relations team regularly meet analysts from the financial institutions, which invest in and represent the company shareholders and Tesco senior staff regularly meet with non-governmental organisations to understand and respond to issues and concerns.
Critics of Porters five forces analysis suggest it is too limited, but it can be supplemented with other models like SWOT, which give a wider worldview of the specific industry. Together with the internal assessment the SWOT Analysis concludes that Tesco's main strength include having the capability to turn resources into advantages, a strong balance sheet, a sustained increase turnover and trading profit, which allows them to have a strong cash flow position. The internal weaknesses that Tesco exhibits are perception of low quality (Tesco value brands) and globally it is considered a foreign brand.
Tesco's current threats are that they have new and existing competition in the form of Asda, Sainsbury's, Morrison's and the Co-operative. The Far East has low cost brands, which could leave Tesco with extremely high competition for customers and resources. The world is currently going through an Economic recession, this uncertainly makes it harder for all consumers to spend their money. The external SWOT Analysis states that Tesco has the opportunities to exploit its position and they can do this by Developing their brand awareness globally, building on their Non-food offers with higher margins and to consider Diversification into New Markets. (See Appendix 3 for a SWOT analysis of Tesco)
From the analysis conducted it can be concluded that Tesco continues to hold a very strong position in the grocery retail industry, where companies are required to pursue both cost leadership and differentiation strategies on a regular basis. Tesco has been able to achieve both with the help of a lean and agile supply chain management, along with the strategic use of information technology. The core competencies of Tesco have been seen to be aligned with the business environment and its core strategy, therefore highlighting a positive outlook for the company.
On 10 May 2011, Tesco published the New Vision and Strategy for Tesco. See appendix 4 for full text.
The Vision is for Tesco to be:
Most highly valued by the customers we serve, the communities in which we operate, our loyal and committed staff and our shareholders
A growth company
A modern and innovative company
Winning locally, applying our skills globally
The new 7-point strategy:
To grow the UK core
To be an outstanding international retailer in stores and online
To be as strong in everything we sell as we are in food
To grow retail services in all our markets
To put our responsibilities to the communities we serve at the heart of what we do
To be a creator of highly valued brands
To build our team so that we can create more value
Tesco's 'Steering Wheel' strategy was used to enable the company to emerge as the largest retail chain in the UK. Leahy named the strategy he wanted to adopt as 'The Tesco Way' which, comprised of the company's core purpose, values, principles, goals and the balanced scorecard. Tesco adapted the balanced scorecard approach to meet its own requirements renaming it the Steering Wheel which had four quadrants - operations, people, customers and finance.
Porters Generic Strategies
Porter's Five Forces Model is a useful early step in analysing the environment. It enables Tesco to decide which of the five forces is the most significant to the SBU under investigation. It also helps to come to a conclusion regarding the attractiveness of the SBU and of specific markets or segments within it.
If three or more of the 'forces' are 'high' then, according to Porter, the industry can be thought of as being unattractive, there may be some segments of the industry that are more attractive than others, e.g. those experiencing rapid growth.
Porters Five Forces Model may be applied to Tesco's current strategy, including an investigation of the threat of substitutes from other supermarkets, buyer power in relation to grocery purchases, grocery supplier power, and the power of the customer at the tills.
Supplier power is an important part of the Porters five forces model. Suppliers demanding that retailers pay a certain price for their goods use supplier power as tool. If retailers do not pay the price, they do not get the goods to sell. However, large supermarkets, like Tesco, have a considerable advantage over the small shopkeeper-they can dictate the price they pay the supplier. If the supplier does not reduce the price, they will be left with a much smaller market for their produce.
Tesco, Sainsbury, Asda and other supermarket chains put up considerable barriers to entry. Anyone entering the supermarket industry has barriers imposed on them, by the existing supermarkets. For instance, Tesco may have cornered the market for certain goods; the new supermarket will not be able to find cheap, reliable suppliers. Tesco also has the advantage of economies of scale. The amount it pays suppliers, per-item, is a lot less than the small shopkeeper. It achieves this, partly, through buying large volumes of goods. A small supermarket chain or shopkeeper can only buy a relatively small volume of goods, at greater expense.
Porter's five forces model provides a "bottom line" way of understanding a company. It considers economic rivalry to be of central importance, and suggests Tesco should concentrate on factors affecting the company's profit in a systemic model defined by that rivalry.
Bowman's Strategy Clock
Bowman's 'Strategy Clock' is based upon the work of Cliff Bowman. It is another way to analyze a company's competitive position in comparison to the competitors in the same market place. As with Porter's Generic Strategies, Bowman considers competitive advantage in relation to cost advantage or differentiation advantage. There are six core strategic options:
Adapted from www.marketingteacher.com
Option one - low price/low added value - Likely to be segment specific
Option two - low price - Risk of price war and low margins/need to be a 'cost leader'.
Option three - Hybrid - Low cost base and reinvestment in low price and differentiation
Option four - Differentiation -Without a price premium - Perceived added value by user, yielding market share benefits , With a price premium -Perceived added value sufficient to bear price premium
Option five - Focused differentiation - Perceived added value to a 'particular segment' warranting a premium price
Option six - Increased price/standard - Higher margins if competitors do not value follow/risk of losing market share.
Option seven - Increased price/low values - Only feasible in a monopoly situation
Option eight - Low value/standard price - Loss of market share
By concentrating their efforts on the first 6 options Tesco have the ability to have a distinct advantage over their competitors. Tesco need to get this strategy to fit in with its current strategy. Porter (1985) suggested ways in which the centre can add value: firstly by acting as a portfolio manager and secondly the centre is the expert in developing and implementing control systems and facilitating the transfer of skills between different business units, by sharing the activities of the company.
Bowman's Strategy Clock is a very useful model to understand how Tesco compete in the marketplace. By looking at the different combinations of price and perceived value, Tesco can choose a position of competitive advantage. This is a powerful way of looking at how to establish and sustain a competitive position in a market driven economy. By understanding these eight basic strategic positions, Tesco can analyze and evaluate their current strategy and determine if adjustments might improve their competitive position.
Ansoff's Matrix - Planning for Growth
This well known marketing tool was first published in the Harvard Business Review (1957) in an article called 'Strategies for Diversification'. It is used by marketers who have objectives for growth. Ansoff's matrix offers strategic choices to achieve the objectives. There are four main categories for selection. Ansoff's matrix is one of the most well know frameworks for deciding upon strategies for growth.
Ansoff's Product/Market Matrix
Adapted from www.marketingteacher.com
Market Penetration - Existing products are marketed to Tesco's existing customers. This means increasing revenue by, for example, promoting the product, repositioning the brand, and so on. However, the product is not altered and new customers are not sought.
Market Development - Existing Tesco product range is marketed in a new market. This means that the product remains the same, but it is marketed to a new audience/buyer. Exporting the product, or marketing it in a new region, are examples of market development.
Product Development - This is a new product to be marketed to existing customers. Here Tesco develops and innovates new products to replace existing ones. Such products are then marketed to the existing customers. For example in the brand new car markets where existing models are updated or replaced and then marketed to existing customers. Johnson and Scholes (2003) believe that changes in the business environment may create demand for new products and services at the expense of established provision.
Diversification - This is where a completely new product is introduced to customers. There are two types of diversification, namely related and unrelated diversification. Related diversification means that the company remains in a market or industry with which the company is familiar. For example, a soup manufacturer diversifies into cake manufacture (i.e. the food industry). Unrelated diversification is where we have no previous industry nor market experience. For example a soup manufacturer invests in the rail business.
Ansoff's matrix's main advantage is that it can take very complex scenarios and allow for a quick and easy assessment. However, its over-simplistic two by two design does not account for the complexities of real-world markets or product decisions. This means it is a good first step for Tesco to develop a broad strategy, however a detailed market, product and customer assessments will need to be carried out. This is a weakness of the Ansoff's matrix.
Retailers, such as Tesco should follow either one of three generic strategies to gain sustainable and competitive advantage, as developed by Porter.
The first strategy of cost leadership is one in which Tesco can strive to have the lowest possible costs in the industry and offer its products and services to a broad market at the lowest prices. This strategy will be based on the Tesco's ability to control their operating costs so well that they are able to price their products competitively and be able to generate high profit margins, thus having a significant competitive advantage over their competitors.
If Tesco uses another strategy of differentiation, than it has to try to offer services and products with unique features that their customers value. Tesco will be able to create brand loyalty for their products and services. There is empirical evidence to support the differentiation strategy (Pearson, (1999). Hall (1980) investigated sixty-four American companies and the findings of the study revealed that companies following a differentiation strategy had superior performance compared to those companies that were not following the same.
The last strategy of focus can be either a cost leadership or differentiation strategy aimed toward a narrow, focused market. In pursuing a cost leadership strategy Tesco, focuses on the creation of internal efficiencies that will help them withstand external pressures.
The danger some organisation face is that they try to do all three and become what is known as stuck in the middle. According to Porter (1980), a company's failure to make a choice between cost leadership and differentiation essentially implies that the company is stuck in the middle. There is no competitive advantage for a company that is stuck in the middle and the result is often poor financial performance (Porter, 1980). In the case of Tesco, it is not appropriate, as they do have a clear business strategy with a clearly defined market segment.
Perhaps a major limitation of the generic strategies is that they may not provide relevant strategic routes in the case of fast growing markets (Lynch, 2003). It is important to conduct other analyses like PESTEL analysis to analyse how the generic strategy being employed by a company should change in accordance with external factors. Other useful analyses would include SWOT analysis, analysis of the key success factors etc.
From the generic strategies discussed above, 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 as Mintzberg (1985) has stated strategy formation walks on two feet, one deliberate, the other emergent. It would be difficult to predict timescales, the timescales to be adopted would be different for each of the strategies employed and would depend on the partnerships and diversifications that were employed by Tesco.
Bowman C and Faulkner D, (1997), Competitive and Corporate Strategy, Irwin, London
Freeman, R. E (1984). Strategic Management: A Stakeholder Approach, Boston: Pitman.
Global Powers of Retailing (2010). Deloitte. http://www.deloitte.com/assets/Dcom-Australia/Local%20Assets/Documents/news-research/Press%20releases/Global%20Powers%20of%20Retailing/Global_Powers_of_Retailing_2010_report.pdf. Accessed 18 May 2011.
Hall, W. K. (1980), Survival strategies in a hostile environment, Harvard Business Review, September/October.
http://en.wikipedia.org/wiki/Tesco, accessed on 20 May 2011
http://marketingteacher.com/lesson-store/lesson-bowman.html. Accessed on the 12 May 2011
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http://www.tescocorporate.com/plc/about_us/our_vision_strategy/. accessed on the 10 May 2011
http://www.tescocorporate.com/plc/about_us/our_vision_strategy/. accessed on the 10 May 2011
Johnson, G, Scholes, K, Whittington, R (2008) Exploring Corporate Strategy, 8th Edition, FT Prentice Hall, Essex
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Of Strategies, Deliberate and Emergent Author(s): Henry Mintzberg and James A. Waters Source: Strategic Management Journal, Vol. 6, No. 3 (Jul. - Sep., 1985), pp. 257-272 Published by: John Wiley & Sons
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Tesco's Vision and Strategy ( http://ar2011.tescoplc.com/chief-executive's-review.html) accessed on 30 May 2011
Tesco UK operations: http://www.marketresearchworld.net/index.php?option=com_content&task=view&id=3786&Itemid=77. Accessed on the 30 May 2011
Tesco's Financial Performance 1998-2011
Tesco is listed on the London Stock Exchange under the symbol TSCO.
All figures below are for the Tesco's financial years, which run for 52 or 53 week periods to late February. Up to 27 February 2007 period end the numbers includes non-UK and Ireland results for the year ended on 31 December 2006 in the accounting year. The figures in the table below include 52 weeks/12 months of turnover for both sides of the business as this provides the best comparative.
52 weeks ended
Profit before tax (£m)
Profit for year (£m)
26 February 2011
27 February 2010
28 February 2009
23 February 2008
24 February 2007
25 February 2006
26 February 2005
28 February 2004
22 February 2003
23 February 2002
24 February 2001
26 February 2000
27 February 1999
28 February 1998
Tesco UK Store Portfolio 2011
As of 26 February 2011, at the end of its 2010/11 financial year, Tesco's UK store portfolio was as follows:
area (sq ft)
area (sq ft)
Tesco SWOT Analysis
Diverse ranges of products
Open 24 hours a day
Strong Cash Flow Position
Increase turnover and trading profits
Strong Balance Sheet
Leading Supermarket Chain
Capabilities to turn resources into advantages
Develop brand awareness globally
Market shift to globalisation
Health awareness growth -GM crops
Innovation & Alliances
Low cost brand growth
Non-food - offers untapped new markets with higher margins
Perception of low quality
(Tesco value brands)
Lack of local knowledge of customers and culture
New & existing competition
Volatility in Price of raw materials
Market shift to globalisation
Far-East low cost brands
Extremely high competition for customers and resources(Adapted from 'Corporate Strategy' Lynch,2003)
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