Factors Influencing Corporate Strategy: UK Supermarkets

Tesco Plc

Corporate Strategy

The definition of corporate strategy has changed over the years. In the past it was deemed to be a set of internal plans and policies designed to enable a business to succeed in the pursuit of its aims and objectives (Pettigrew et al 2002). Robert Grant (2004, p.7) in his study stated that the implementation of successful strategy could not happen until the business managers had appraised the available or required resources, have an in-depth knowledge of the competitive environment they operated within and the whole team had agreed upon the objectives. More recently, the understanding of corporate strategy has been extended to include external forces and thus it can rely upon the definition statement made by Collis and Montgomery (1997, p.5) which observes that: –

“Corporate strategy is the way a company creates value through the configuration and coordination of its multimarket activities.”

The purpose of this paper is to promote further understanding of the factors that influence corporate strategy within a particularly competitive industry sector. For this purpose the supermarket retail sector has been chosen for analysis. To assess how these factors impact upon the market players, the Tesco organisation has been used a focus for a case study. The reasoning behind this particular choice is that Tesco Plc has maintained a position of industry dominance, despite strong competition from other players, including Asda and Sainsbury

Retail Industry – Supermarkets

During the course of the past four or five decades the Supermarket has taken a progressively increasing share of the grocery retailing market, with their store size and low prices driving local and independent stores in increasing numbers. In 2005 the organisations had reached a position where collectively their revenue accounted for approaching two thirds of total UK grocery sales. in Supermarket sales now account for around nearly two thirds of total grocery sales in the UK and were having an increasing impact in other retail sectors. However, as can be seen from the breakdown of the supermarket sales in grocery products, there is a considerable amount of competition between the supermarket players (see table 1).

Table 1: Supermarket grocery sales 2005

(Source: BBC News 2006 and company reports)

As can be seen from the above Tesco’s leads the industry sector by a considerable margin in terms of percentage. Furthermore , despite the intensity of competition that is focused upon around a dozen competitors, in revenue terms Tesco’s sales are almost equivalent to the sum of their three closet rivals, which gives them a commanding lead in terms of the number of consumers that are attracted to their stores.

Tesco operates a total of 3,262 stores internationally, including 1,988 located throughout the UK. Employing in excess of 450,000 people globally, the business has so far achieved a market leadership position in four other countries as well as the UK and is currently considering expanding its operations in the US. Similarly, in line with other retailing organisations, the business is expanding its home delivery and Internet presence through the development of its online retailing website. (www.tesco.com).

As Hill and Jones (2007) identify in their research into the subject of strategic management, the key drivers change and the market players have to respond positively to these changes. The supermarket industry is no exception to this rule.

Initially supermarket organisations were driven by the need to create a competitive advantage. In essence this is achieved when the business reaches a position “ “whenever it outperforms its competitors” (Pettigrew et al 2002, p.55), but as Grant (2004) observes, ultimately it needs to build upon that advantage, thereby reducing the opportunities for others to compete. Grant (2004, p.30), Collis and Montgomery (1998, p.65) state that competitive advantage can be gained through cost or differentiation, either of which return greater value to the consumer. However, competitive advantage is also relevant to the business marketing process, where it is important for the organisation to “understand its consumers and the decision processes they go through” (Kolter et al 2004, p.29). However, advantage in this area is also achieved by a better understanding than that of competitors

Consumers also drive the industry as has been seen through recent years. Initially the consumer determinant was for lower prices, wide range of selection, convenience and to a lesser extent the ability to do a one-stop shop, hence the development of the supermarket and out of town hypermarket locations, where all the weekly shop could be performed at one time. They have achieved the objective on price through a strategy of low cost and strategy through a process of low cost and the offering of substitute products (Hill and Jones 2007), which as a side effect, has also enable d the businesses to achieve a level of power over suppliers that has forced such organisations to address their own internal issues in order to remain economically viable. However, more recently consumer demands have changed and the emphasis has now moved to other areas of importance. These include the need for quality, customer service and “organic” and environmentally friendly products. Similarly, with the advent of concerns regarding the natural environment supermarkets are having to respond to these changes as well.

To address consumer issues human resource management has also become an important driver in the industry development. The majority of researchers believe that the manner by which a business manages their HR resources has a significant impact on strategy (Collis and Montgomery 1998, p.163) and (Grant 2004, p.144). Thus the supermarket organisations have devoted a considerable amount of effort to increasing motivation and satisfaction within their workforce. The more successful organisations, such as Tesco’s and Asda have created the appropriate style of leadership and team building that has helped them achieve success in this area (Pettigrew et al 2002, p.285). As Hills and Jones (2007) have identified, the better the abilities of management and leaders in dealing with HR management, the easier it is to get a corporate strategy accepted and implemented.

Technological developments have also brought about a change in the supermarket retailing industry. By incorporating these within all aspects of the supply chain, such as using new software and Internet systems that enable a closer control of stock, this has “set the overall context of competition for all firms in the industry” (Porter 21004, p.142). It has also enabled organisations such as Tesco’s to continue to maintain their position within the industry.

As the supermarkets have increased size and market share, so there have found themselves being increasing subject to the constraints of external forces being exerted upon them for the political and legislative stakeholders(Porter 2004, p.56 and Collis and Montgomery 1998, p.68). For example, the competition commission has often stepped in during the past few years to halt development of new stores on the grounds that it would be detrimental to fair competition. Similarly, as a result of the increasing concerns being expressed regarding health and environmental issues, the supermarket has be driven to introduce new “health” and “organic” brands and, as part of the brand management process, to increase the level of product knowledge in respect of these issues that appears upon the packaging. Therefore, all of these external issues are now having to be borne in mind during the planning of the strategy process.(Pettigrew et al 2002, p.190).

In essence, at present the critical success factors for the industry can be identified as relating to three specific areas. The first of these is the efficient management of its supply chain, where the effective performance of each part is important to the smooth running of the whole (Porter 2004, p.311). Secondly, the quality of its products and customer services and effective marketing of the brand is important in order for the business to maintain both its market position and competitive advantage. Thirdly, is the effectiveness of its change management strategy. In this later respect it is essential that there is a “continuous interaction between strategy formulation and strategy implementation in which strategy is constantly being adjusted and revised in light of experience” Grant (2004, p.17).

All of these factors are important to the industry players in that there form the vital elements that enable the maintenance of the business main objective, which is to continue to add value for the business stakeholders (Hills and Jones, 2007). The structure of an organisation, how it manages its resources and the relationship that it builds with employees and customers are key elements in a business that is seeking success and profitability. The level to which each organisation can achieve the harmonisation of all these factors will determine both the competitive advantage and the position that the organisation holds with the industry. As will be shown in the following section, Tesco’s has been consistently achieving a position of successfully incorporating all of these elements into their corporate strategy.

Tesco Case Study

During the past five years, and before this period, Tesco’s have based the main thrust of their corporate strategy on Porter’s “cost leadership.” By concentrating upon ensuring that all aspects of the supply chain were cost driven, thereby lowering unit price, the business has been able to maintain its policy of reduce prices to the consumer whilst at the same time ensuring that it has the funds and ability to invest in the new technology needed to maintain this advantage (Porter 2004, p36). In terms of the former, this can be evidenced by the fact that, as one of the current advertising campaigns states, there are able to maintain a price advantage over all of their competitors across a wide range of their products.

Even given that, partially because of the business cycle, which can be said to have reached a level of some maturity (Hills and Jones 2007), together with the constraints that have been placed upon the industry by political, regulatory and legislative forces, the same low cost strategy is being maintained as the Tesco’s organisation seeks to enter and make an impact upon other market segments, for example fashion, home products and finance. For example, the current range of prices throughout all of these non-core products are still promoted using the organisation’s brand marketing message of “every little helps,” which indicates that the consumer will receive the same approach to low prices as has been offered within the grocery retail segment of the business revenue.

However, as will be noted from their website^[1], the business has taken info account the other factors that are important to the cusses of corporate strategy. For example, the human resources management policies are prominent in terms of the employee importance to the business, as is the relationship that the business is maintaining within both its suppliers and consumers, mainly through the increasing use of technology.

Another import element of Tesco’s success has been its ability to manage change. As Porter (2004, p.21) suggests, different stages of the business life cycle can bring about change, as can the movement of the consumer demands and aspirations (Collis and Montgomery 1998, p.3). Tesco’s has respond quickly top both of these areas of change rapidly and in an efficient manner (Porter 2004, p.71 and Grant 2004, p.382). In the former instance, as indicated, it has moved into other market segments, and in terms of the latter, it has introduced new brands, including those that concentrate upon the environmental and health issues being raised by consumers and to address the issue of quality, where it now includes a “Tesco’s finest” range. However all of these moves have been performed whilst still maintaining a dedication to the core business strategy of cost leadership.

As can be seen from the following graph, during the course of the past five years, as witness to the success of the Tesco corporate strategy, the business has consistently outperformed the FTSE 100 and the shares of its nearest UK quoted rival Sainsbury. The only time there was any near convergence of the two supermarket chains share value was earlier this year, and this was because of potential bidders showing an interest in Sainsbury, not related to their performance.

Conclusion

As has been shown during the course of this research, Tesco’s have consistently led the UK supermarket retailing sector of the business during the course of the past few years. This has been achieved by the implementation and maintenance of a successful corporate strategy, which has enabled the business to maintain a competitive advantage despite strong competition from other industry players.

In reality this success, which has been evidenced from the financial performance, has been achieved by their turning this strategy into a unique business culture, which as Hofstede et al (2004) has created a situation where the business is seen to have, has resulted in the:-

“…the collective programming of the mind that distinguishes the members of the group or category of people from others”

Anther major element of the organisation’s success is the effectiveness of the way in which they manage change, being able to respond appropriately and rapidly to anything that poses a threat to the business future. There is little doubt that as long as the management remain focus on these strategies, that the business will maintain its present marketplace position.

References

Collis, David J and Montgomery, Cynthia A (1998). Corporate Strategy: A resource Based Approach. McGraw Hill. US.

BBC News (2006). Tesco’s market share still rising. Retrieved 19 November 2007 from http://news.bbc.co.uk/2/hi/business/4694974.stm

Faulkner, David and Campbell, Andrew (2006). The Oxford Book of Strategy: A Strategy Overview and Competitive Strategy. New ed. Oxford University Press. Oxford, UK.

Grant, Robert (2004). Contemporary Strategy Analysis. 5^th Edition. Blackwell Publishers. Oxford, UK.

Gregory, David (2005). Supermarkets and Standards. Presentation, UK. Retrieved 27 September 2007 from http://www.odi.org.uk/speeches/apgood/Agric_in_Africa_05/apgood_nov23/index.html

Heavens, Andrew (2005). E-commerce soars by 88%. Times Online. Retrieved 25 September 2007 from http://business.timesonline.co.uk/tol/business/industry_sectors/retailing/article417278.ece

Hill, C.W.L. & Jones, G.R. (2007). Strategic Management Theory: An Integrated Approach. (7th ed) Houghton Mifflin. Boston, US.

Hofstede, G. Hofstede, G.J.(2004). Cultures and Organizations: Software of the Mind. New York: McGraw-Hill.

Kelly, Sean. (2005). Customer intelligence From Data to Dialogue. John Wiley & Sons Ltd. Chichester, UK.

Lucas, R. Lupton, B. Mathieson, H. (2007). Human Resources Management in an International Context. London: CIPD.

Pettigrew, Andrew M. Thomas, Howard and Whittington, Richard (2002). The Handbook of Strategy and Management. Sage Publications Ltd. London, UK.

Porter, Michael E (1985). Competitive Advantage. The Free Press. New York. US.

Porter, Michael E (2004). Competitive Strategy: Techniques for Analysing Industries and Competitors. The Free Press. New ed. The Free Press. New York, US.

Survey (2006). The UK’s Best Online Shopping Experience 2006. www.blastradius.com. Retrieved 26 September 2007 from http://www.blastradius.com/ukshopping2006.pdf

Tesco (2007). Tesco at a glance. Retrieved 27 September from http://www.tescocorporate.com

^[1] http://www.tescocorporate.com/page.aspx?pointerid=3DB554FCAE344BD88EEEEFA63D71B831