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Tesco Changing Business Environment

Briefly describe and evaluate the changing business environment at Tesco over the last five years using appropriate theories, models and relevant examples.

Introduction

Tesco was been founded by Jack Cohen, on his first day he managed to gain a profit of £1 and sales of £4. Tesco is ranked third in world for largest grocery retailer, with its operations in more than 14 countries. The name “Tesco” had appeared first in 1924, and its first shop was opened in London. In 1947 the company was been listed on London Stock Exchange and in 1948 it opened the first self-service shops for business. First Tesco supermarket was opened in 1956 in Essex. In 1947 Tesco started selling Gasoline. Its annual Turnover in 1979 was around 1 billion pounds. It started its first senior department in 1975 and in 1997 Its first Large stores (extra). Companies main purpose is to create value for customers in order to earn them lifetime loyalty. This strategy made them successful and is now the topmost Supermarket in UK. Tesco apart from being one of the largest retailers for food have also embraced the non food products and expanding on household goods, toiletries, electrical items, clothing etc. One of the most important strategies of Tesco is focus on non food items.

Business environment: Business environment includes of many factors that affect an organisations operation are customers, competitors, stakeholders, suppliers, industry trends, regulations, other government regulation, social, economic factors and technological developments. “Business Environment is the total of all things external to business firms and industries which affect their organisation and operations.” (Bayard O Wheeler, 1968) The business depends on many factors, but it has to act and react accordingly inside as well as outside of factory. Changes that occur within a company is called as internal factors and changes outside the company are called as external factors. This effect the objectives and strategies of the company.

PESTEL Analysis of Tesco:-

PESTLE Political, Economic, Social and Technological factors: analysis measures the market potential and situation, particularly indicating growth or decline Tesco is the giant of all supermarkets due to its UK dominance. Analysis of the marker has shown three main reasons for this. A PESTLE analysis is therefore useful in keeping TESCO up to date with their environmental surroundings, for example, realising in advance that we were heading for a recession would have helped them to plan ahead.

Tesco are scattered everywhere both locally and internationally
They sell to almost every segment of the society
They sell both food and non food items

Political: Politically, the recession is one of the main spectrums that are currently affecting all the countries which may lead to higher numbers of unemployment. As one of the largest and fastest growing retailers more jobs will be available with TESCO therefore helping to reduce the levels of unemployment.

Economic: One of TESCO’s competitive advantages at present relates to their overwhelming physical presence, there are issues about TESCO driving out the competition from other retailers. There are policies as well as laws and regulations governing monopolies and competition which would be identified though an analysis. This is potentially one of the main issues that TESCO’s are faced with. Protecting consumers and ensuring that entrepreneurs have the opportunity to compete in the market economy are important within consumer law. Due to the current state of the economy, many small businesses are failing and many unable to enter the market. Analysis has helped to assess where location wise there is a demand for expansion. The situation is in no way being assisted by the ever expanding TESCO’s chains of store. Under EU law, there is presumption that an organisation with a large market share is dominant. The concerns with this are that quality of products and services will slip and there is a risk of paying higher prices. TESCO to date has not been assessed as posing a risk of exploitation but should bear this in mind. This is the reason why regular or continuous scans making use of the PESTLE analysis will lead to continuous assessments which can ensure that TESCO’s dominance is not in any way exploitative.

Planning permission is an issue that TESCO seriously need to be aware of due to their continued expansion. Planning permission is heavily regulated in the UK. A thorough analysis would help us to identify the relevant laws on planning permission and whether any resistance to planning was on lawful grounds or merely local people’s dissent. It therefore initially assesses the potential success of a store in a new area.

Social: Sociological aspect of the PESTLE analysis involves lifestyle trends, demographics consumer attitudes and opinions, consumer buying patterns major events and influences buying access and trends in the case of Tesco considerations such as the increase in immigration of Eastern Europeans or increase in young professionals. Naturally there is therefore a demand for new goods for example; the career minded professional who is a single person. This has seen a rise in the meals for one or quick microwaveable meals to make cooking quick and easy for those always on the go.

Technological : Technological factors which have perhaps had the most impact on TESCO has been the growth in the use of the internet .Internet has given new shape to new day shopping They have capitalised on the use of online shopping forum Tesco direct and provide a delivery service through their website at www.tesco.com.this has aided the company to cater to a larger segment of people at their convenience.

TESCO’s are also instrumental as a retailer in supporting carbon reductions and have created a £100 million Sustainable Technology Fund for this purpose. They also encourage their customers to make low carbon choices. Yet if TESCO’s did not take their corporate responsibilities seriously in relation to environmental issues it could have face consequences for TESCO’s reputation.

By doing a PESTLE analysis we can analyse the development and the success of TESCO’s in addition to the day to day management of each store in line with strategic decisions. Without knowing what external factors affect the organisation, it is difficult to manage the business in an efficient manner.

Tesco's Business Operations

Understanding thorough various business models, all companies need several business strategies to run their business in a smooth manner. They follow various methods to do so. One of the major is to analysis the strengths weakness of the company along with the opportunities it has and which may arise in future and the threats which they may face.

SWOT Analysis - Strength, weakness, Threat and Opportunities

Strengths

1. Tesco is one of the largest and renowned grocery retailers. The brand name is one of the biggest strengths they possesses. They have diversified into different countries with about 1 million workforces from different backgrounds and different age groups. During the decline of global retail overall sales the company has still shown a growth of 13% within the UK markets and 26% internationally .They have won several retail awards for keeping up their standards and providing best retails services keeping in mind their corporate responsibilities . They are continuously expanding with propositions of opening several stores on an international level.

2. Of the major supermarkets in the UK, only Tesco, The Co-operative, Iceland and Sainsbury's offer loyalty card schemes to customers. Customers can collect two Club card points for every £1 (or one point for €1 in Ireland and Slovakia) they spend in a Tesco store, or Tesco.com, and 1 point per £1 in petrol station (not in Slovakia). Customers can also collect points by paying with a Tesco Credit Card, or by using Tesco Mobile, Tesco Homophone, Tesco Broadband, selected Tesco Personal Finance products or through Club card partners, E.ON and Avis. Each point equates to 1p in store when redeemed or 4p when used with club card deals (offers for holidays, day trips, etc). Club card points (UK & IE) can also be converted to Air miles. Club card points are also converted into coupons which can be redeemed for extra points or cash totals.

3. They use its own-brand products, including the upmarket "Finest", mid-range Tesco brand and low-price "Value" encompassing several product categories such as food, beverage, home, clothing, Tesco Mobile and financial services.

Weaknesses

1. Due to the current economic conditions TESCOs may suffer from the rising cost of living and lower incomes available to the public resulting in less demand for the non essential and mid to high priced items.

2. Due to the ongoing recession TESCOs Finance profit levels were impacted through bad debt, credit card arrears and household insurance claims. This could continue if the market doesn’t see change soon.

3. TESCOs has retained its position as a price leader in UK markets for which they had to reduce profit margins in order to retain the key price points on commercial items.

4. Grocer outlets are not set up to operate as specialist retailers in specific areas of product which can be capitalised on by smaller retailers and things can be sold locally.

Threats

1. Due to the ongoing recession UK and American markets have been affected by economic concerns. Loss of employment and Lower income available will impact and strategic focus may need to change to lower priced basic products with less focus on higher priced brands and luxury products suggesting a change in pricing structure.

2. Due to modern development and constant changes in technology there are a lot of changes to consumer buying behaviours. Requiring further analysis - as technology develops consumer buying patterns change which will result in product areas requiring evaluation constantly to keep up with the demands.

3. Rising raw material costs from both food and non food will impact profit margins overall.

4. Sourcing changes to Far East locations with regards exporting restrictions on some non food product areas will reduce margin rates on products with already low margins.

5. Tesco has always feared the threat of takeover from the market leader Wal-Mart who has both means and motive to pursue such action. Wal-Mart has been a leader especially in the US market for few years now. With its alliance with ASDA in the UK they are one of the nearest competitors.

Opportunities

1. After researching the growth figures and sales of Tesco the statics suggest that TESCO is the third largest global grocer which indicates a level of buying power to ensure mainstream economies of scale.

2. The acquisition of Homever provides the opportunity to develop the brand through Asia, specifically South Korea and further grow International markets for the group.

3. Tesco Direct has been one of the recent and great achievements which has been seen as one of the important tools in increasing the sales margins. The online and catalogue shopping will grow the use of technology, providing the launch pad for larger non food based products with moderate to high margin returns and less focus on sales and margin per foot return to space. The development of such platforms not only help in saving retail space but reach a larger number of people.

4. TESCO mobile have grown ¼ million customers in 2008 and moved into profitable status suggesting further growth and development within this technological area can be developed.

Tesco’s Market Share (Figures based on year 2008-2009) in comparison with the closest competitors ASDA, Morrison, Sainsbury) Fig 1

TESCO’s growth chart over the last five years (2005-2009) showing constant growth in turnover and profit.

Bowman strategy It's another suitable way to analyze a company's competitive position in comparison to the offerings of competitors. Bowman considers competitive advantage in relation to cost advantage or differentiation advantage. There are six core strategic options

Low price / low added value: this option is based on segmentation. Tesco has products that will be suitable for different geographical areas, population or age

Low Price: this option signifies the importance of being the cost leader. The company has to the risk of price war and low margins

Hybrid the Company need to take care of the cycle of reinvestment by keeping a low cost base and low price

Differentiation: Differentiation can be created either with a price premium the perceived added value should be sufficient enough to bear the price premium or without where the perceived value by user yielding market share benefits

Focused differentiation: the company tries to focus on perceived added value to a particular segment which will assure a premium price.

Increased price standard: keeping higher margins in case competitor do not want value risking loosing the market share
Increased price /low values .this option will only work if the company holds a monopoly and has no competitors

Low value standard price: in this option one would lose the market share as the value provided is low at a standard price of the market

Tesco's Steering Wheel (1997)- Key performance indicators :The rationale for the strategy is to broaden the scope of the business to enable it to deliver strong sustainable long-term growth by following the customer into large expanding markets at home – such as financial services, non-food and telecoms – and new markets abroad, initially in Central Europe and Asia, and more recently in the United States.

The strategies and objectives of the company: Tesco has a well-established and consistent strategy for growth, which has allowed us to strengthen our core UK business and drive expansion into new markets.

• To be a successful international retailer: Tesco is focusing on not only a full expansion within the UK but also throughout the world. Currently they have several projects including reopening of retail outlets in countries like China, India, Brazil.
• To grow the core UK business: Tesco wants to provide excellent customer service and value to all customers thought the UK
• To be as strong in non-food as in food. The expansion of hypermarket style supermarkets and the emphasis of sale of non products have increased over the last few years .non food represents a significant profit opportunity I have tried to look at the overall company’s policies and strategies of Tesco to be as strong in non food item like it does in food.
• To develop retailing services - such as Tesco Personal Finance, Telecoms and Tesco.com

• To put community at the heart of what we do: Tesco emphasis on providing value services and to earn life time loyalty. They take initiative in developing the community and making an effort to shape the environment for betterment. The policies they follow include using fair trade policies, creating shared value, social accounting etc. They have close affiliations with charitable organizations like cancer research, race for life etc

The growth of any product sale depends on different aspects. I have visited nearly all Tesco formats and had a view of what Tesco is offering and how the services are provided for the same

Earning Customer Loyalty-

What is in place and how have they improved over the five year – loyalty card , membership

Tesco’s Club card program boasts 10 million active households and captures 85% of weekly sales. It is also a symbol of Tesco’s commitment to their customers as individuals: multidimensional customer segmentation and tailored communications--- as of last June, four million unique quarterly mailings--- prove to Tesco’s customers that they can count on their “local grocer” to know them. Mailings are tailored to the needs, interests, and potential interests of Club Card members. Customers are segmented into cost conscious, mid-market, and up-market segments, which are in turn segmented into healthy, gourmet, convenient, family living, and so on. These sub segments are then segmented further and communications are tailored to each.
Impressively, Club Card coupon redemption is in the 20%-40% range and cost per redemption decreased since the inception of the Club Card Program. By targeting in such a relevant way and treating customers according to their individual behaviors, needs, and desires, Tesco came to understand that a higher-value coupon is not needed when you’ve reached the right person in the right way with a tailored message.
In the five year period following the implementation of the Club Card program, sales have increased by 52% and still grow at a rate higher than the industry average. Store openings and expansions have increased Tesco’s floor space by 150%.
In the online space, tesco.com boasts 500,000 transactions weekly, totaling nearly two billion pounds in sales each year. The profitability, plus the size of the tesco.com business and the number of transactions it completes, makes tesco.com a truly unique online grocery store.

(http://www.loyalty.vg/pages/CRM/case_study_14_Tesco.htm)

Conclusion and recommendation:

After a thorough research of Tesco as a company, its strategies and the turnover and sales figures it can be assessed that the company has been on a constant growth graph. The company is facing few challenges due to recession and constant technological developments however with their strategies they are turning them into opportunities. The company not only is focusing at a diversified and international market but is also doing it in way which will not only benefit it customers and meet the corporate responsibility. They currently also are one of the leaders in the UK market with 30% share and 3rd internationally. Tesco also y launched a new range of cheaper discount goods to stop shoppers deserting, which hit Tesco's top-line sales as shoppers traded down to the new items. Shoppers now buy an average of two items each from the discount range. The launch of the Tesco Club card to encourage shopper loyalty is also been a great advantage. The company should focus on dealing with recession and devising new ways to keep up with the market share than slashing the prices down to meet competition.

Bibliography

References: http://www.tescoplc.com/plc/about_us/strategy/
http://www.businessballs.com/portersfiveforcesofcompetition.htm
http://www.oppapers.com/essays/Tesco/249648
http://www.modelanswer.co.uk/business/help/pestle/tescos.php
http://www.businessteacher.org.uk/business-resources/swot-analysis-database/tesco-swot-analysis/
http://www.tescoplc.com/plc/about_us/strategy/community/
http://www.oppapers.com/essays/Tesco/249648
http://www.guardian.co.uk/business/2009/jun/16/tesco-sales-losing-market-share

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