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The Business Strategy of Tesco

Organisations in the current global economic landscape face both internal and external challenges within the fast, changing business environment in which they operate, and the supermarket industry is no exception. The general consensus, infact, among academics in relation to this sector, points to what Sparks (2000) in Smith and Elliot (2012, p.678) summarises as “an intensely competitive environment, where there is constant pressure to maximize profitability and reduce costs.” Studies into supermarkets that have been conducted to assess the pressures of everyday management have also concluded that the industry is results driven, with little work life balance and a hugely straining environment where those in positions of responsibility are essentially asked to run their own business. (See Grugulis, Bozkurt and Clegg, 2010; Ogbonna and Wilkinson, 2003). Clearly an industry with high expectations, the important question to answer is what are the internal and external factors which drive the business environment to be shaped in this way. More importantly, we must consider how these factors will essentially influence the future business environment for a large supermarket chain and what they will need to do to be a success in the industry. This paper will therefore analyse the current business environment for Britain's largest supermarket chain, Tesco, essentially gaining an understanding of the factors affecting its everyday operations, decisions and ultimately successes or failures. Using the frameworks of SWOT and PEST analysis in order to assess the business environment, there will also be a suggestion as to how the future looks for the most successful retail chain in Britain.

Before going on to analyse Tesco, it is important to understand exactly what is meant by the term ‘business environment.' As a concept, the business environment is not easy to pin down or define, due to its ‘myriad' nature (Ward et al., 1995). Bourgoin and Pleskovic, (2006, p.197) provide a broad view calling it “the nexus of policies, institutions, physical infrastructure, human resources, and geographic features that influence the efficiency with which firms and industries operate.” In this respect, it seems as though the business environment is the way an organisation carries out all aspects of its functions. Various external and internal factors can affect this, and this is what shapes the business environment. Exactly what these factors are though, and how much they really affect the business environment for a particular business or industry is open to interpretation and a certain level of ambiguity is possible. With this thought in mind we can consider all sorts of internal and external factors that affect the operations and functions of Tesco and the environment in which it operates.

Given this assumption, it seems logical to combine the use of both PEST and SWOT analysis as a tool for gaining an insight into Britain's largest supermarket chain if only to point out the possibility for a wide variety of factors affecting its operations and decisions. While PEST (Political, economic, social and technological) aids in providing what Ward and Rivani (2005) call a ‘satellite view' of the external environment, an accurate SWOT (strengths, weaknesses, opportunities, threats) enables the opportunity to assess the company from an internal perspective as well as seeking to understand the external influences which can both threaten and improve the organisation's future prospects. It is important to understand, however, that although both PEST and SWOT analysis are effective, this does not necessarily mean that the outcome of either framework analysis interlinks or in fact that any aspect of them will definitely apply to Tesco. There could potentially be a number of political factors which shape the business environment of Tesco but at the same time, only a small number of social and technological factors. Equally, there could be a limited number of opportunities with a large amount of threats, or vice versa. Ultimately, the frameworks that are being used for analysis are static, but a business environment is ever changing. This is worth noting when analysis is considered for the business environment of Tesco.

As already discussed, the supermarket environment is a very volatile one. It is fast paced, cutthroat and results driven. Tesco lies at the heart of this industry and represents these traits. But more broadly, the organisation has really led the change in the supermarket industry over the last 30 years, a story which is described by Smith and Sparks (2009, p.143) as “one of the more remarkable stories in British retailing.” Its internal policies which have enabled its significant rise to the top appears to be an obvious indicator to where the companies major strengths lie. The Tesco Loyalty card and its e-commerce operations are generally considered to be world-leading (Humby et al, 2003 in Smith and Sparks, 2009) while it has an “unrivalled ability to manage vast reams of data and translate that knowledge into sales.” (Capell, K, 2008, p.1). The innovational qualities which have been at the heart of the company's success have therefore ensured that Tesco has not just shaped the way it operates in its business environment, it has in some respects, shaped the environment of the whole supermarket industry in the UK. It has become dominant in its home market and increasingly significant on the international stage (Burt and Sparks, 2003). With a number of hypermarkets, supermarkets and convenience stores, sprawled across a vast number of countries, Tesco's' sphere of influence is much more extensive than its UK competitors. Added to this international presence is the salient fact that “a number of U.S. retailers have tried to copy Tesco' strategy” (Capell, K, p.2) reflecting the incredible influence its practices have had, and with that, evidence of internal success that has shaped its business environment. The very fact that Tesco is the leading supermarket chain in the UK, with 12% of retail spending going through its tills (Retail week 2013) is in itself a huge advantage to operations. It means easier access to the most suitable employees, leverage with suppliers and a huge advertising reach to customers. Of course, this position of power in the market does not mean that the organisation is immune to a variety of potential threats, both in its internal operations and external influences.

Despite expansion into international markets, Tesco has not always proved a hit with customers outside of the UK. For example, the chain of convenience store ‘Fresh & Easy' throughout the United States struggled from its implementation in 2007. International expansion has become the detriment of UK stores too, whose profits have paid for it and as a result the quality of staff, service and range of products has begun to lag behind rivals Sainsbury's and Asda in home operations. There is always also the added possibility that success could lead to the Icarus effect (Miller, 1990). This is a situation in which an organisation becomes so successful in using particular processes and procedures, that it becomes a danger to its own future business, with trajectories of decline appearing in strategy, goals, culture and structure. In essence, this means that Tesco may have the problem of developing a sense of tunnel vision, in which it sees only particular aspects of operating in the business environment rather than ensuring it continues to innovate to react to external factors which will influence its future outcomes. Of course this all depends exactly on what the external factors are. Threats come in various shapes and sizes for Tesco. The scale and size of the supermarket industry is larger and more competitive than ever before, particularly with the expansion of Morrisons, branching out into more and more parts of the country, and the rise of Aldi since the start of the economic downturn. Economic problems throughout the UK have undoubtedly been a major threat to Tesco. Despite traditionally having the capacity and advantage of catering for the majority, the recession saw the likes of Netto and Aldi increase sales significantly through even lower product prices, while Tesco has at times struggled (Retail week, 2013). These new, expanding and ultimately cheap supermarkets give consumers on a low budget an alternative, making them look likely to become major players in the future. Meeting customer needs has become increasingly important, with the speed of everyday modern day life meaning that trends and behaviour change much faster than in previous years and the variety of choice is astounding. Grocery retailers now have to adapt by being more creative and efficient than ever before (Kumar 2008).

In consideration of Porter's five forces model, (Porter 1980) it is also worth considering how there is a threat to Tesco of new entrants into the supermarket industry. There are a number of reasons why this could occur. An organisation may be able to forge a stronger relationship with buyers or suppliers than that of Tesco, which would give them a significant advantage over its rivals, by limiting their access to distribution channels and reducing costs through economies of scale. However, this is more likely to occur from an already well established UK retailer within the supermarket industry, such as Sainsbury's or Asda's. The potential for new entrants, in fact, seems relatively unlikely, given the already well established number and variety of supermarket chains. A major rival of Tesco could also prove threatening through providing better services, including technological ones. Although Tesco was the first supermarket to offer online shopping to Britain, it is no longer the only one to do so. The digital economy we now live in ensures that the internet is being increasingly used for weekly shopping and it is an aspect of business which is likely only to increase rapidly over the next decade. Tesco must therefore not only ensure that its delivery is efficient and effective to households, but also that its website is appealing to the public and consumers are constantly kept abreast of the latest information on deals and product offers. More specifically, Tesco will need to adapt to the increased use of mobile phone and tablet devices and ensure their technology is up to speed and prepared for the high numbers of web traffic which could potentially make use of their website much slower. Customer experience online is becoming more and more crucial to an organisations success (Rose et al., 2011), and operating in an industry in which affects any member of the public, the best available technology could prove to be vital to the future success of Tesco.

Although a potential threat, Tesco should see this technological factor which affects their business environment as a fantastic opportunity. As the market leader within the UK supermarket industry it is best placed to make use of improvements in its online facilities with more access to the right talent. As the pioneers of online supermarket retailing, (Retail Week, 2013) they also have the foundations in place to continue innovation in this area of their business, as long as they are equally able to recognise the decrease in the use of hypermarkets and react accordingly. There is also a great opportunity for Tesco to develop their diversified services in banking due to the decline in trust of UK banks since the beginning of the economic downturn. Tesco have a real chance to show the consumer that they are an alternative lender and a company to trust in. Finally, Tesco have to recognise that its UK operations are beginning to become neglected, as is its image at home. It has set aside £1bn to improve existing stores, with plans in place to increase staffing levels and to create a better environment for customers to shop in (Retail week 2013). It has also made significant steps into ensuring its brand image is improved, by hiring the agency Wieden and Kennedy to take charge of its marketing practices.

There are ultimately a number of different factors, both external and internal, macro and micro, which affect the business environment of Tesco. Being the leading organisation within the supermarket industry, the company is in a good position to deal with the threats of competitors, which comes in various forms. The strength of Tesco's UK operations have at times appeared to become neglected and this provides its main rivals, Asda and Sainsbury's the opportunity to take advantage. Additionally, the weakened economic environment has allowed discounters such as Aldi and Netto to gain a firm foothold and therefore potentially take a share of Tesco's customer base. Despite new and existing competition, the reputation of Tesco and its success as Britain's largest supermarket chain means it essentially has its destiny in its own hands. It has significant resources to ensure it can enhance its in store facilities, services and quality of staff and currently has the strongest relationship with suppliers, giving it the best bargaining power and allowing economies of scale. Finally, its history of developing online retail means it has the best opportunity out of all the UK supermarket chains to ensure the best standards of technology, where the future arguably lies for the industry. The business environment of Tesco is therefore one which has a number of threats but which can be dealt with as long as the internal strengths which have made the organisation a success are continued to be realised to their full potential.

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