Finance, Funding And Legislative Frameworks For Success

Published:

This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.

The Case Study Assignment on Tesco aims at understanding the detailed business and strategies of the UK Retail giant Tesco. The study gives a detailed overview of the Tesco Group, their strategies, their growth plans, ability to mitigate risks, the financial performance and plans. The analysis uses the application of GST framework in Tesco and the Balanced Scorecard approach to review the risks and opportunities faced by the company. The Financial Analysis gives a detailed analysis of the financial performance of the company. Based on the study done, the report puts forward the recommendations, which the Group can adopt to achieve long-term growth.

Tesco Plc

TESCO Group is into retailing business with its operations spread across "UK, China, the Czech Republic, Hungary, the Republic of Ireland, India, Japan, Malaysia, and Poland, Slovakia, South Korea, Thailand, Turkey and US" (Tesco, 2010). The group is also into retail banking and insurance services as Tesco bank. The major shareholders of the company are Black rock, 5.24%, Legal and General Investment Management, with 3.71% ownership of the issued share capital of the company. Tesco is one of the leading retailers in the world, with over 5000 stores operating globally employing 4,72,000 people. Tesco believes that their success depends on their customers and employees.

Growth Strategy

Tesco Strategy is based on five main elements: "to become a successful international retailer, to grow core UK business, to be strong in non-food as food, develop retailing services, to put the community as priority" (Tesco, 2010). The strategy to diverse is the basis for the growth recently (Chairman's Statement, 2010). The company aims to become zero-carbon business by 2050, reducing carbon impact of the products in supply chain by 30% in 2020 and helping customers to half their own carbon foot print by 2020.

Tesco has been able to sustain during recession by investing in customer offer, infrastructure and employees. Despite the challenging economic conditions, Tesco has been able to grow in sales and profits in Asia. The strategy adopted by Tesco has helped them to sustain in the global economic downturn.

Employment Policies

The success of Tesco depends on the commitment and the skills of its employees. The employee strength of Tesco is 4,72,000. Continuous training is provided to ensure that the employees understand the group's customer service objectives and are working toward achieving them. Tesco is an equal opportunities employer. Internal communications help to ensure that the employees are well aware of the activities of the group. Employees are encouraged to get involved in the financial partnership through profit-sharing scheme(Share in success), Savings related share option scheme ( Save as you earn) and partnership share plan.

General Systems Theory & Tesco

According to Ludwig Von Bertalanffy the General Systems Theory states that in order to understand an organization as a whole we must know the parts an relationship between them (Singh, 2009). In an organization, the system components are people and the departments arranged to in highly complex ways to evolve subsystems or super systems, which follows a hierarchical ordering. The functioning of one component of a system is dependent on the other and hence is mutually interdependent. An organization system is also interdependent. "There is no component within the organization that can actively exist without depending on other parts. The main characteristic of system is that they have high permeable boundaries allowing flow of information in and out" (Miller, 2009; Skyttner, 2005). Different system methodologies have some cybernated thinking for problem solving. The steps are as follows

Plan what the system should do

Register what the system has done

Work out difference between plan and register

Explain the cause of difference between plan and register

Control to minimize the difference

The design will be to choose between alternate solutions

Anthony's Triangle

Anthony has provided a useful taxonomy of planning and control decisions which is often presented in the form of a triangle. Decisions at the base of the triangle are related control of operations. Then comes the information required for Tactical Decision making. On the top of the triangle is the information required for strategic decision-making. A considerable amount of data are generated within the organization, and need processing and analyzing. The data are summarized into information as they move up the organization and for strategy decisions, there is a need for externally sourced information, (Thompson, 1993). Operation level systems include Transaction Processing systems. Management Information Systems form the information's systems for Tactical Decision Making and Executive Information Systems provide the data for Strategic Decision making. For a company like Tesco, the Transaction Processing systems can be Order processing, Material Movement and control, where as the Management Information Systems relate to regional sales analysis, inventory management, profitability control and the Executive Information Systems include Sales trend forecasting, Operating plan, Profit planning etc.

Tesco - Balanced Scorecard Approach

The Group has adopted a Balanced Scorecard approach, to manage the business called Steering Wheel. This unites the Group' focus on customers, people, operations, finance and community. The Balanced Scorecard Approach helps business to be operated on a balanced basis with regard to all stakeholders. The concept is that if the customers and staff are given preference along with efficient operations, then the shareholders expectations will be surely met through output in sales, profits and returns (Key Performance Indicators, 2010). In terms of Customer focus, Tesco considers the attributes like customer service, waiting times, the pricing policy, the availability, the variety and the customer loyalty factors. In terms of financial perspective the growth in sales, profit and investments are given high priority. When it comes to employees, Tesco makes sure that all employees get equal opportunities, a good work culture, ensuring a good mentor and also mutual respect. In terms of operations, they look for zero defects, on time delivery, cost reduction and time management. They focus on community activities through actively supporting local communities, ethical sales, caring for the environment, providing more choices for the customers and creating more employment opportunities.

Risks and Opportunities

As part of five-part strategy Tesco has diversified and hence diversification and pursuit of growth has reduced the risks. The Board discusses the strategy issues in every board meeting and spends two full days a year to review the Group's strategy. The Executive committee discusses the strategic issues on a regular basis. Tesco has structured programmes engaging with all stakeholders.

Specific risk factors

There are financial services risk associated with Tesco bank such as the company may not perform according to the strategy, as it is susceptible to economic downturn affecting consumer spending. The strategy of continuous acquisition and development of sites are stretching targets but the performance is monitored and reported regularly. The failure to compete with competitors on areas of price, products, range, quality and service has an adverse effect on the company's business. Failure to protect the reputation and brand could result in loss of confidence and trust. Emotional loyalty has helped them diversify into new areas like retail services and non-food and the stakeholders are involved in every phase to get their opinion and ensure that the strategy reflects them.

Financial Analysis

Studies show that TESCO has a well-established strategy for growth, strengthening the core business and venturing into new markets. Their business has adapted to the local market with the help of local management teams finding ways to lower the costs. (Tescoplc Annual Report and Financial Statements 2010). The strategies like international sourcing, Discount brands in seven markets, F&F clothing intend countries and Club card they have been able to leverage the business globally. Through diversification and new products and services, TESCO is aiming at sustained growth (A Business for a New Decade). In 2000, the contribution to global GDP was 8%, which rose to 53% in 2010. 65% of the selling space is outside UK. During 1990' s the growth of Tesco had slowed down resulting in lower profit margins. In early 1990's Tesco went for a major change competing with Asda on price (Tesco's Steering Wheel Strategy, 2010). In 1997, Terry Leah took over as the CEO and he wanted Tesco to be Value Retailer. He adopted the Balanced Scorecard approach, which aims at steering business and people. Tesco plans to invest in new products for long term growth and at the same time improving returns and tangible benefits for shareholders (2008 Tesco Report Complete, 2008).

 

2010

2009

2008

2007

ROCE =

EBIT(Operating profit)

10.91%

19.48%

22.65%

23.68%

Total assets - Current Liabilities

Gross Profit Margin =

Gross profit

8.10%

7.76%

7.67%

8.12%

Revenue

Net Profit Margin=

Net Profit

4.10%

3.97%

4.50%

4.45%

Revenue

Acid Test Ratio=

Cash and cash equivalents + Short-term investments + Trade and other receivables

26.29%

20.91%

12.78%

17.83%

Current liabilities

From the above financial results it can be seen that the return on capital employed has regularly come down from a high of 23 % in 2006 to 10 % in 2010. This was due to the fact that Tesco has started earnestly with the diversification of its business from its core food retail to more growth oriented Personal finance, retail clothing etc in the UK and going for overseas expansion in Korea, China and India. The investments in this business had started in 2008 and this is the reason why the returns of Tesco's capital employed has going less, as more capital is being put into new business which ahs not yet started giving the results. But the growth of this peripheral business has been better than the market growth even during the recession and when consolidation has occurred it is felt that the ROCE will start increasing to an industry standard of up to 20 % and more. It is also to be noted that the ROCE reduction in 2009 was not due to the recession but due to the increase in the investments.

The gross profit margin and the net profit margin have a steady marginal growth over the past five years and it is seen that most of this profit is coming from the core area of food retail business. The margins are better than the competition and industry standards of food retailing. Considering the changes of the economic conditions which happened in 2009 it can be seen that although the gross profit margin has remained roughly the same in 2009 comparing 2008 the net profit margin had come down by 50 basis points. The net margin reduced as a result of reduction in the overall profit margins on the products sold or rather the increase in the revenues from lesser profitable products which sold more than the high priced products. The customers brought less of costly high margin products and substituted with low cost, low margin products which brought the net profits down. But it can be seen that last year there has been a recovery inline with better consumer confidence and increased spending.

The acid test ratio which signifies the liquidity position of a company or (the current assets available with the company being able to provide for the current liabilities) has increased from the dip in 2008 which was as low as 12 % to last years 26 %. It was in 2008 that the company had invested its cash and convertibles in buying up Tesco Personal Finance and bringing it to the Tesco Group. It can also be seen that in 2008 Tesco had a variety of short term and log term liabilities combining to 9.7 billion pounds which was invested in Tesco personal finance and the foreign entities. In the year 2009 and 2010 Tesco brought down the overall debt from the 9.7 billion to 7.9 billion and the aims are to reduce it by a further 0.4 billion. This should increase the liquidity position of the company in the short term as well as the solvency position.

General economic conditions

Considering the general economic conditions over the past 10 years it can be seen that Tesco has well managed it business even considering the recession. Over the past 10 years the interest rates have been steady for up to 2008 where due to the recession was dramatically reduced to induce more spending. While the inflation has remained very steady over the 10 years but is expected to increase in the next year. The personal disposable incomes were gradually rising but in 2008 were almost abruptly wiped out due to job losses, lack of availability of credit, lesser interest rates on personal savings etc. Considering the interest rates, inflation and the personal disposable incomes it can be seen that there has been sudden fluctuations due to the arrival of the recession. Even though with the all these economical indicators suddenly changing to negative as far as business environment is concerned it can be seen that Tesco's business has not been affected very badly. The reasons is that its core business of food retailing is mainly untouched by the recession

The level of business investment and extant of regulation as far as Tesco is concerned has not been positive in the last 10 years. The anti competition commission had conducted an investigation in to the monopolistic practices of Tesco and their supplier management programmes. These along with much council refusals to give permissions due to flouting of building plans had been a major negative factor for Tesco. But it is to be noted that many of these individually concerned Tesco and not as a general economic condition.

Conclusion

Tesco has become a phenomenon in the retail market. It has nearly a third of UK's market with profit greater than £2bn a year. Tesco has achieved through the strategy of diversification, customer orientation and employee benefits. The core of Tesco strategy was its innovative use of technology, for example, it first built the self-service until and cameras. Tesco follows a strategy of customer orientation, to change as the consumer preferences change. Their new businesses are based on scale and profitability. The current global situation is a matter of concern, while the group is trying to adapt to the changing environment well.

The economic recession has not affected Tesco much due to their nature of business and the company is investing in new areas of business. Some of these new investments are reflected in their return on investments and liquidity ratios of Tesco's in the last five years. The general economic trends and their movements have not affected Tesco in a negative way during the last ten years.

Recommendations

The Case study assignment has viewed and analyzed Tesco and its business from a strategic perspective and has put forward the following recommendations.

The Group should continue to focus on the Balanced Scorecard Approach for the organization's overall success

Asian markets has to be seen as a long-term opportunity especially the south East Asian countries such as Korea, Thailand and china.

Employees should be encouraged to be involved in the financial performance of the company as in a profit-sharing basis

The company should aim at innovation and expansion in retailing services, and also in to new business areas of personal finance and retail clothing markets.

Though the company has put some efforts, it should focus more on community activities and environment.

References

Skyttner, L., (2001), General systems theory, ideas and applications, World scientific press.

2008 Tesco Report Complete. (2008). Retrieved from www.tesco.com

A Business for a New Decade. (n.d.). Retrieved from http://ar2010.tescoplc.com/a-business-for-a-new-decade/for-a-new-decade.aspx

Chairman's Statement. (2010). Retrieved from Tesco.

Key Performance Indicators. (2010). Retrieved from Tesco Company website.

Miller, k. (2009). Organisational Communication - Approaches and Processes. Wdaworth Cengage Learning.

Miller, K. (2009). Organisational Communication -Approaches and Processes. Wadsworth Cengage Learning.

Singh, D. H. (2009). Organisational Behavior. V.K.India Enterprises.

Skyttner, L. (2005). General Systems Theory: Problems, Perspective, Pracitce. World Scientific Publishing.

Tescoplc Annual Report and Financial Statements 2010. (n.d.). Retrieved from www.tesco.com.

Tesco's Steering Wheel Strategy. (2010). Retrieved from http://www.icmrindia.org/casestudies/catalogue/Business%20Strategy/Tesco's%20Strategy.htm

Thompson, J. L. (1993). Strategic management: awareness and change . Chapman & HAll.

Writing Services

Essay Writing
Service

Find out how the very best essay writing service can help you accomplish more and achieve higher marks today.

Assignment Writing Service

From complicated assignments to tricky tasks, our experts can tackle virtually any question thrown at them.

Dissertation Writing Service

A dissertation (also known as a thesis or research project) is probably the most important piece of work for any student! From full dissertations to individual chapters, we’re on hand to support you.

Coursework Writing Service

Our expert qualified writers can help you get your coursework right first time, every time.

Dissertation Proposal Service

The first step to completing a dissertation is to create a proposal that talks about what you wish to do. Our experts can design suitable methodologies - perfect to help you get started with a dissertation.

Report Writing
Service

Reports for any audience. Perfectly structured, professionally written, and tailored to suit your exact requirements.

Essay Skeleton Answer Service

If you’re just looking for some help to get started on an essay, our outline service provides you with a perfect essay plan.

Marking & Proofreading Service

Not sure if your work is hitting the mark? Struggling to get feedback from your lecturer? Our premium marking service was created just for you - get the feedback you deserve now.

Exam Revision
Service

Exams can be one of the most stressful experiences you’ll ever have! Revision is key, and we’re here to help. With custom created revision notes and exam answers, you’ll never feel underprepared again.