The business and financial performance of Tesco

Introduction

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 Literature Review gives a broad idea of the groups’ business, their strategy, the application of GST framework in Tesco, the employment policies, the Balanced Scorecard approach adopted by Tesco, 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.

Aim

To study and analyse the financial performance and corporate strategy of TESCO

Objectives

The main objectives of this research project are to analyse the business and financial performance of TESCO and evaluate the following issues:

• The competitive environment in which the company operates
• The company’s financial performance using ratio analysis
• The corporate strategy of the company
• Recommendations for future directions for the next two years

CHAPTER 2

Literature Review

Introduction

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. 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 a priority. The strategy to diverse is the basis for the growth recently. They have expanded in China by opening of three Tesco Life space shopping malls in China. They focus on customer with loyalty programs called Club card. In 2010, the Clubcard was launched in Poland, Slovakia and Thailand. Tesco has opened first zero carbon store at Ramsey in Cambridgeshire in 2010. Tesco believes that proper training for staff, growth and innovation with suppliers, good returns to shareholders and expansion of financial services, non-food and telecom, new markets in Central Europe, Asia and US are their growth strategies (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.

Strategies during Recession

Tesco has been able to sustain during the 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 organisation as a whole we must know the parts an relationship between them (Singh, 2009). In an organisation, the system components are people and the departments. Systems components are 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 lies in the other components of the system. The components of a system are mutually interdependent. An organisation system is also interdependent. There is no component within the organisation that can actively exist without depending on other parts. Another characteristic of the system is that they have high permeable boundaries allowing the flow of information in and out (Miller K., 2009).

Systems behaviour is always related to the concept of complexity. The more complex the system, more intricate is the behaviour. The characteristics of simple and complex systems are as described below.

• Simple systems are characterized
• A small number of elements
• A few interactions between the elements
• Attributes of the elements are predetermined
• Interaction between elements are highly organized
• Well-defined laws govern behavior
• The system does not evolve over time
• The system does not pursue their own goals
• The system is unaffected by behavioral influences
• Characteristics of large systems are
• The system is largely close to the environment
• The complex system characteristics
• Large number of elements
• Many interactions between elements
• Attributes are not predetermined
• Interaction between elements is loosely organized
• Probabilistic in behavior
• System evolves over time
• Subsystems are purposeful and generate their own goals
• System is subject to behavioral influences
• System is largely open to environment

A complex system behaves in an unexpected manner and the relations between cause and effect are difficult to understand. A system is generally less sensitive to external structural influences than internal. The general unifying force keeps a systematic hierarchy together according to evolutionary direction (Skyttner, 2005). The introduction of a unique input can at some critical time may permit a semi-organized system to grow.

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, Payroll and Accounts payable, employee record keeping information. The Management Information Systems relate to sales Management, sales region analysis, Inventory control, Annual budgeting, Profitability control, Relocation cost analysis, Contract cost analysis, etc. The Executive Information Systems include Sales trend forecasting, Operating plan, Profit planning and personnel planning.

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 have reduced the risks. The Board discusses the strategy issues at 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. The Group ensures that the strategy is communicated well to the parties who are supposed to deliver it. A Steering Wheel based on balanced score card approach is set in all countries and business units to help deliver the business strategy.

Financial Strategy and Group treasury Risk- The financial risks of the group relates to the availability of funds to meet business needs, default by counter parties in case of financial transactions, fluctuations in foreign exchange rates and interest.

Financial Services Risk -There are clear policies and operating parameters and the activities are clearly reviewed and audited. There is financial services risk associated with Tesco bank. There is a risk that the company may not perform according to the strategy, as it is susceptible to economic downturn affecting consumer spending.

Operational threats and performance risk in business -The strategy of continuous acquisition and development of sites also carries a risk. All business units have stretching targets based on the Steering Wheel, and the performance is monitored and reported regularly.

Competition and Consolidation – The failure to compete with competitors in areas of price, products, range, quality and service has an adverse effect on the company’s business. The Group provides a broad appeal on price, range and store format in a competitive way. The performance is tracked against a range of measures that customers feedback and the customer’s perceptions and about the competitors.

People capabilities – They review the people policies and provide training and development and incentives to the people. People matters group, staff surveys, regular performance reviews, the involvement of trade unions for clear process understanding and response to employees.

Reputational risk – 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.

Environmental risk – The main environmental risk is climate change for which they have laid out environmental policies and strategies are laid out and reviewed on a regular basis.

Product safety – Tesco has detailed policies and procedures for ensuring product integrity and there are strict product safety reports and management processes.

Health and safety risks – The group has implemented stringent safety measures in their stores, distribution centres and offices, which are monitored regularly.

Ethical risks in the supply chain – Tesco insists on strict labour standards and have set up the Ethical Training Initiative. They expect their suppliers to follow ETI base code and guarantee the workers the rights set out within it.

CHAPTER – 3

Financial Analysis

CHAPTER 5

Discussion

Studies show that TESCO has a well-established strategy for growth, strengthening the core business and venturing into new markets. Their business has adopted to the local market with the help of local management teams finding ways to lower the costs. (Tesco plc 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 the 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).

CHAPTER – 6

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.

CHAPTER – 7

Recommendations

The Case study assignment has viewed and analysed 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 organisation’s overall success
• Asian markets can be seen as a long-term opportunity.
• 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
• Competitiveness and Momentum should be the key drivers for growth
• Though the company has put some efforts, it should focus more on community activities and the environment.
• Executives should be encouraged to execute entrepreneurialism
• The group should be able to quickly respond to the changing customer needs and cope with the changing economic environment.