Value Chain Analysis Of Tesco Management Essay

In this assignment, I have doing research on Tesco, UK. Tesco is the leading retailer in UK. Other than UK, it is also manages over thousand of supermarkets and Hypermarkets in Ireland, Central Europe and Asia.

I start with Value chain analysis (internal analysis) of Tesco. This tool used to demonstrate the Inbound Logistics, Operation, Outbound Logistics, and Service. Then analyzed the PEST analysis which stands for Political, Economics, Social/Culture, and Technology Factors. It’s easily extended into a more detailed analysis by adding legal end environmental considerations.

On the other hand, I have critically evaluated 3 strategic options of Tesco. First strategy is Generic Strategy. That is the competitive strategy developed by Porter. One out of three generic strategies are Cost Leadership, Differentiation, and Focus. Second strategy options are the Market Development strategy Joint development, strategy alliances, and partnership. Last strategy are the Ansoff’s Matrix strategy Market Penetration, Market Development, Product development, and Diversification.

Finally choose Ansoff’s Matrix strategy as a best fitted theory of Tesco. This is because Ansoff’s matrix provides the basis for an organisation’s objective setting process and sets the foundation of directional policy for its future.

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Introduction of the company

Company background of Tesco,UK

Tesco is the leading retailer in UK. Its manages over a thousand supermarkets, hypermarkets and convenience stores in United Kingdom, Ireland, Central Europe and Asia. It’s operating around 2,318 stores and employing over 326,000 people. It provides online services through its subsidiary, Tesco.com. The UK is the company’s largest market, where it operates under four banners of Extra, Superstore, Metro and Express. The company sells almost 40,000 food products, including clothing and other non-food lines. The company’s own-label products are at three levels, value, normal and finest. As well as convenience produce, many stores have gas stations, becoming one of Britain’s largest independent petrol retailers. Other retailing services offered include Tesco Personal Finance.

History of Tesco

Tesco started life in 1919 when Jack Cohen started selling surplus groceries from a stall in the East End of London. Mr. Cohen made a profit of £1 from sales of £4 on his first day. The Tesco brand first appeared five years later in 1924 when he bought a shipment of tea from Mr. T. E Stock well. The initials and letters were combined to form Tes-co and in 1929 Mr. Cohen opened the flagship Tesco store in Burnt Oak, North London.

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The brand continued its rise in the 1930s when Mr. Cohen built a headquarters and warehouse in North London and in 1932 Tesco became a private limited company. In 1947 Tesco Stores (Holdings) Ltd floated on the stock exchange with a share price of 25p.

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Value chain Analysis of Tesco- internal analysis.

Value chain is defined as the links between key value adding activities and their interface with the support activities. Value chain has been implied as a strategic evaluation tool used for distinguishing the strengths and weaknesses in value adding processes. The value chain of Tesco has been demonstrated in the following diagram:-

Inbound Infrastructure

H.R Management

Margin

Supported

Activities

Technology Procurement

Procurement

Inbound Logistics 20%

Margin

20%

Services

5%

Outbound Logistics

15%

Operation

30%

Primary Activities

Fig 1: Value Addition in Value Chain of Tesco [Source : Value chain, Lynch (2003)]

Inbound Logistics

The overall cost leadership strategic management of Tesco is exhibited in its lean and agile inbound logistics function.  Drawing upon Abeysinghe, the company uses its leading market position and economies of scope as key bargaining powers to achieve low costs from its suppliers.  The analysts have also highlighted the constant upgrading of their ordering system, approved vendor lists, and in-store processes to induce effectiveness and efficiency into the company’s inbound logistics operations.

Operations Management

Tesco has been praised by a number of supply chain management critics for its effective use of IT systems that facilitate the company’s low cost

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leadership strategy.  According to Tesco, the company has invested over £76 million in streamlining its operations through their Tesco Digital program, which is a third generation ERP solution for the company.  The company has achieved £550 million in increased profitability during 2009 alone due to the introduction of this system.  This company wide ERP system has also facilitated the minimization of stock holdings within the company.

Outbound Logistics

Tesco holds leadership position in online and offline food retail segments, which is due to its efficient and effective outbound logistics.  Drawing upon Mintel , the company has developed a range of store formats and types, which are strategically placed to achieve maximum customer exposure.  These formats include Express, Metro, Superstores, Extra and Home plus which are segmented according to the target population.

Marketing and Sales

Loyalty programs like Tesco Club card are being introduced through information technology advances which dissuade the customers from switching over to their competitors.  Tesco has introduced its Greener Living Scheme to give consumers advice on environmental issues including how to reduce food waste and their carbon foot print when preparing meals.

Services

Tesco has been pursuing a dual strategy of cost leadership and differentiation, which has led to an increased importance placed on customer service.  Drawing upon Keynote, this dual strategy is exhibited through the development of self-service kiosks, financial services, focused direct marketing and promotions.

In order to put Tesco’s value chain analysis into perspective, it should be noted that despite cost leadership strategy the company has been able to create a high degree of value in comparison with its key competitors.

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PEST Analysis of Tesco- External analysis

Political Factors

Operating in a globalized environment with stores around the globe (Tesco now operates in six countries in Europe in addition to the UK; the Republic of Ireland, Hungary, Czech Republic, Slovakia, Turkey and Poland. It also operates in Asia: in South Korea, Thailand, Malaysia, Japan and Taiwan), Tesco’s performance is highly influenced by the political and legislative conditions of these countries, including the European Union.

For employment legislations, the government encourages retailers to provide a mix of job opportunities from flexible, lower-paid and locally-based jobs to highly- skilled, higher-paid and centrally-located jobs. Also to meet the demand from population categories such as students, working parents and senior citizens. Tesco understands that retailing has a great impact on jobs and people factors, being an inherently local and labour intensive sector. Tesco employs large numbers of student, disabled and elderly workers, often paying them lower rates. In an industry with a typically high staff turnover, these workers offer a higher level of loyalty and therefore represent desirable employees.

Economical Factors

Economic factors are of concern to Tesco, because they are likely to influence demand, costs, prices and profits. One of the most influential factors on the economy is high unemployment levels, which decreases the effective demand for many goods, adversely affecting the demand required to produce such goods.

These economic factors are largely outside the control of the company, but their effects on performance and the marketing mix can be profound. Although international business is still growing, and is expected to contribute greater amounts to Tesco’s profits over the next few years, the company is still highly dependent on the UK market. Hence, Tesco would be badly affected by any slowdown in the UK food market and are exposed to market concentration risks.

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Social/Cultural Factors

Current trends indicate that British customers have moved towards ‘one-stop’ and

‘bulk’ shopping, which is due to a variety of social changes. Therefore, Tesco increased the amount of non-food items available for sale.

Demographic changes such as the aging population, an increase in female workers and a decline in home meal preparation mean that UK retailers are also focusing on added-value products and services. In addition, the focus is now towards the own-label share of the business mix, the supply chain and other operational improvements, which can drive costs out of the business. National retailers are increasingly reticent to take on new suppliers.

The type of goods and services demanded by consumers is a function of their social conditioning and their consequent attitudes and beliefs. Consumers are becoming more and more aware of health issues, and their attitudes towards food are constantly changing. One example of Tesco adapting its product mix is to accommodate an increased demand for organic products. The company was also the first to allow customers to pay in cheques and cash at the checkout.

Technological Factors

Technology is a major macro-environmental variable which has influenced the

development of many of the Tesco products. The new technologies benefit both customers and the company:- customer satisfaction rises because goods are readily available, services can become more personalized and shopping more convenient. The launch of the Efficient Consumer Response initiative provided the shift that is now apparent in the management of food supply chains. Tesco stores utilize the following technologies:-

Wireless devices

Intelligent scale

Electronic shelf labeling

Self check-out machine

Radio Frequency Identification .

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The adoption of Electronic Point of Sale (EPoS), Electronic Funds Transfer Systems (EFTPoS) and electronic scanners have greatly improved the efficiency of distribution and stocking activities, with needs being communicated almost in real time to the supplier .

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Critically Evaluate 3 Strategic options of Tesco.

5.1 Critical Evaluation of Generic Strategy, Tesco.

Generic Strategies are characterized by an individual retailer’s response to the industry structure. For a giant retailer, such as Tesco, to obtain a sustainable competitive advantage they should follow either one of three generic strategies, developed by Porter.

Strategy of cost leadership

The first strategy of cost leadership is one in which Tesco can strive to have the lowest 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.

Strategy of Differentiation

If Tesco uses another strategy of differentiation, than it has to try to offer services and products with unique features that customer’s value. Tesco will be able to create brand loyalty for their offerings, and thus, price inelasticity on the part of buyers. Breadths of product offerings, technology, special features, or customer service are popular approaches to differentiation.

Strategy of Focus

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. Therefore, it appears reasonable to think that Tesco will have frequent interactions with the government and supplier sectors of the environment.

In accordance to this framework, while both overall cost leadership and differentiation strategies are aimed at the broad market. Tesco may also choose to confine their product to specific market areas or may choose to offer a smaller line of products to the broad market, thus pursuing a strategy of focus or niche.

The danger some organization face is that they try to do all three and become what is known as stuck in the middle. In case of Tesco it is not appropriate, as they do have a clear business strategy with a clearly defined market segment.

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5.2 Critical Evaluation of Market Development Strategy, Tesco.

Strategy frameworks and structuring tools are key to assessing the business situation. Risk and value trade-offs are made explicit, leading to concrete proposals to add value and reduce risk. Explicit plans for action, including effective planning need to be developed by Tesco as the strategic alternative. Tesco is likely to employ 2 strategic options that are also likely to be primary market objectives of focus on market development though partnerships and diversification through new product development.

Joint Developments & Strategic Alliances.

By entering new markets like China and Japan it can serve as a key growth driver of the company’s revenues and expansion strategy. Tesco’s interests in Japan are likely to continue growing in due course, as Asian markets are showing an increase in consumer spending and increased trend towards retailing. These new markets are also demographically high opportunity markets.

In the case of Tesco, one of the suggested strategic options is in international alliances with the local retailers in Asian markets. It will be considered as a method of development and may be formed to exploit current resources and competence.  By entering into joint ventures or partnerships, in order to gain a larger economy of scale and larger market presence, Tesco will draw on the extensive local knowledge and operating expertise of the partner whilst adding its own supply chain, product development and stores operations skills to deliver a better shopping experience to customers. However, given the huge scale, potential and complexities of these markets, Tesco may feel that being the first mover is not necessarily an advantage.

The success of the partnership will be related to three main success criteria:- sustainability, acceptability and feasibility. Sustainability will be concerned with whether a strategy addresses the circumstances in which the company is operating. It is about the rationale of this expansion-market development strategy. The acceptability relates to the expected return from the strategy, the level of risk and the likely reaction of stakeholders. Feasibility will be regarded to whether Tesco has the resources and competence to deliver the strategy.

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5.3 Critical Evaluation of Product Development/Ansoff’s Matrix, Tesco.

Market Penetration

Tesco perfected its long term growth strategy based on four key parts. The openings on other locations are supported by their purpose of growth in the core UK, expansion of international retail industry ,strong non-food and food services & outstanding customer services, Tesco uses competitive pricing strategies, advertising,

and the other sales promotions to sell existing products & services to existing markets.

Market Development

The intention of Tesco to expand beyond its current business environment is supported with coming up with new product dimension, distribution channels, & other strategies with exclusive purpose of attracting customers to build a new market. On the case of Tesco, UK, Producers are mainly UK citizens because they understand the needs of the UK market. This is 1 unique strategy that developed Tesco’s new market for their existing products & services.

Product Development

The risks of introducing new product or service in an existing market are countless. For Tesco, their growth strategy on the expansion of non-food is an example. Tesco introduces other services aside from food to their existing market. Like in market penetration, various strategies (example: pricing, advertising, and sales promotions) are significantly considered.

Diversification

Diversification is investing on new markets using new products/services. Tesco should understand the presence of risks on this process. The use of intensive Research & Development (R&D) efforts is necessary.

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Critically Evaluate the best fitted Ansoff’s Matrix Strategy of Tesco.

By the Analysis, I understand that Ansoff’s Matrix theory is the best fitted theory for Tesco. Ansoff’s matrix suggests that if new products are developed for existing markets, then a product development strategy has to be considered by the management level of a company. The nature and the extent of diversification should also be considered in relation to the rationale of the corporate strategy and the diversity of the portfolio. By following the changing needs of the customers Tesco can introduce new product lines. This may require more attention to Research and Development.

The retailing industry is experiencing over capacity and innovative services and products being the major competitive advantage. Therefore, innovation has to be a major driver for Tesco’s product development. For example, Tesco can develop a portfolio of different store formats in the UK, each designed to provide a different shopping experience. While the majority of Eastern European and Far Eastern outlets are hypermarkets, Tesco can also develop different store types in these markets as well. This value added by the uniqueness will eventually lead Tesco to command a premium price. For penetrating to an international market, Tesco has joined with other successful business. For example, Tesco in 1999 has joined to Samsung in South Korea, and it has 81% share of this venture.

The management of technological innovation is increasingly involved in strategic decision-making. Tesco have to exploit their internal strengths and minimise their internal weaknesses in order to achieve sustained competitive advantage. Although a competitive advantage is the goal innovators want to achieve, the ability to create platform depends on how they could manage the innovation. Nevertheless, it does not mean that the innovator has to possess all requisite capabilities; the important thing is the ability to organise and use the capabilities of others in order to create a business platform.

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Conclusion

As a conclusion, I have doing research on Tesco , UK. The success of the Tesco shows how far the branding and effective service delivery can come in moving beyond splashing one’s logo on a billboard. It had fostered powerful identities by making their retailing concept into a virus and spending it out into the culture via a variety of channels, such as cultural sponsorship, political controversy, consumer experience and brand extensions.

In a rapidly changing business environment with a high competitors’ pressure Tesco have to adopt new expansion strategies or diversified 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. Svtrategy formulation should therefore be regarded as a process of continuous learning, which includes learning about the goals, the effect of possible actions towards these goals and how to implement and execute these actions. The quality of a formulated strategy and the speed of its implementation will therefore directly depend on the quality of Tesco’s cognitive and behavioural learning processes.

Tesco is one of the most advanced companies in consumer understanding aided by IT, For example: – Dunhumby and Tesco Clubcard data. 

Consumer data has shaped product offerings, ranges, given Tesco a better understanding of consumer segments and shopping profiles, and helped marketing to build loyalty and develop promotion offerings that suit target groups.  This level has helped Tesco to remain leader within the UK market.

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