Strategic Management System of Tesco - Essay Example

Introduction: Tesco, the market leader in the UK grocery and supermarket business sectors emerged as a world retailer on the international stage in the early part of this decade. The company is admired throughout the world for its skills in market responsiveness, customer service, cost management and supply chain excellence. 1.1. Value chain: The following schematic diagram depicts the series of interrelated generic activities / processes common to all businesses through which businesses deliver value and derive sustainable competitive advantage. The schematic was originally suggested by Michael Porter (1980) in his "Competitive Strategy". Figure 1: Value chain depicted by Michael Porter Inbound logistics include the receiving, warehousing, and inventory control of input materials. Superior supply chain management has always been Tesco's core strength. Stockholding and distribution costs were minimized by constantly replenishing stocks. The new Tesco stores were built so as to facilitate reconfiguration (for e.g. walls in the warehousing area could dismantled to make for additional selling space) and minimum warehousing space. Operations are the value-creating activities that transform the inputs into the final product. Outbound logistics are the activities required to get the finished product to the customer, including warehousing, order fulfilments, etc. Marketing & Sales are those activities associated with getting buyers to purchase the product, including channel selection, advertising, pricing, etc. Service activities are those that maintain and enhance the product's value including customer support, repair services, etc. The elements of the value chain described here have been dealt with in the earlier discussion. 1.2. Antecedents: The first three letters 'Tes' that form the name Tesco come from the founder Jack Cohen's first tea supplier, T. E. Stockwell and the 'co' from his surname - supply chain management has always been prominent in the company's scheme of things. Tesco has lived up to its founder Jack Cohen's slogan: "pile it high; sell it cheap " till 1977. From then on the company shifted its market position and set about attracting a more affluent customer base. According to Smith et al. (2004), there have been four phases in the reconfiguration of Tesco's distribution and operational strategies. They were; direct delivery of the supplier to the retail store; centralised distribution system for ambient goods to be supplied to regional centres, which began in the 1970s but continued to evolve over the years; a composite distribution system developed in 1989 and vertical collaboration in the supply chain to achieve better operational efficiencies. The 'reconfiguration of distribution and operational strategies' helped the company to achieve sustainable competitive advantage. The company's fortunes changed dramatically during the 1992-2002 decade. The top six retailers in the UK up to 2002 were Tesco, Sainsbury's, Gateway (now Somerfield), Argyll (now Safeway), Asda (acquired by Wal-Mart) and Kwik Save. Tesco was far ahead of its competitors in 2002 with sales worth ' 15.6 billion - her nearest rival Sainsbury's had sales of ' 6.4 billion. In 2002 W. M. Morrison arrived as a new entrant to the top six claiming a place above Safeway with sales of ' 3 billion in that year and in the process dislodging Kwik Save. 1.3. Strategic challenges: The strategic issues that the food retailing industry faced in the last decade of the twentieth century were challenging. As all of them offered - more or less - the same goods it was difficult to create a sustainable competitive advantage over an extended period. The differentiator was to be service and to beat competition businesses had to constantly evolve a process of innovation in their service offering. One of the consequences of this evolving process of innovation was to diversify product offerings that made food retailers move into non-food businesses like clothing, electrical goods, petrol, financial products and insurance apart from developing their own-label brands. Companies expended a lot of time and energy in developing customer loyalty programmes (by introducing such inducements as loyalty cards). The other major development was the advent of the internet as a powerful marketing channel. When domestic businesses reached a maturation stage most companies had to look to overseas expansion as a means of growth. In the year 2002, Tesco already had a major international presence operating 1,023 stores in 10 countries (of which 750 were in the UK), employed 260,000 people and had access to a population of 280 million people. Tesco's turnover increased by 38% from 1999 to 2002 and net profit by 37%. The company's stock price more than doubled from ' 0.89 in April 1996 to ' 2.06 in October 2002. 1.4. Distinctive competence: Companies undertake the following activities to develop distinctive competences: identifying a company's strengths and weaknesses; determining the strategic importance of these strengths and weaknesses; analysing the market needs and identifying comparative advantages that distinguish a company from its competitors. Terry Leahy - a marketing man - the CEO since 1997, drove a number of "critical marketing programmes" to develop distinctive competences for Tesco. They include the introduction of 'value lines' that matched or undercut discounters on commodity items, while maintaining margins on most of the range; the establishment of smaller inner-city Tesco Metro stores, to supplement out-of-town superstores; the launch of the Clubcard loyalty programme, which doubled the company's sales growth; mounting an effective challenge to high street chains like W.H. Smith in the sale of newspapers, magazines and books. Technological innovations at the point of sale like customer operated scanning were introduced. Customer care was given prime importance: for e.g. 4500 new jobs were created in 1996 to assist customers to pack bags, unload trolleys, fetch forgotten items and replace damaged goods. Stores in key locations were made 'all night open' 1.5. Threshold competence: In an individual threshold competences refer to generic or open-ended capacities like generic knowledge, motive, trait, self-image, social role, or skill which is essential to performing a job, but is not causally related to superior job performance, like being able to drive a car or win the respect of colleagues/customers. When applied to business organisations, threshold competences - especially in the American context - are used a yardstick for measuring best performers. The following table shows that Tesco was ahead of the field with operating margin as the economic indicator: 1.6. Resource imitability: There are four levels of resource imitability as applicable to business organisations. They are: Easy to imitate e.g. commodities and cash. Can be imitated - but may not be e.g. capacity pre-emption and economies of scale. Difficult to imitate e.g. Brand loyalty, favourable cost position, employee satisfaction and reputation for fairness. Cannot be imitated e.g. Patents, unique location and unique assets like mineral rights. While Tesco definitely does not fall into the fourth category, some features of its business fit into each of the other three categories. As we have seen the products Tesco sells are generally commodities and can be imitated by others. As the company is far ahead of others in its economic indicators like revenues and profitability it is not easy to pre-empt its capacity or replicate its economies of scale. But W.M. Morrison - although it has less than one fifth of Tesco's revenues - outperformed Tesco on all economic indicators, as can be seen from the table below: Morrison is a potential threat, especially if Tesco allows itself to be lulled into complacency by its current performance. Tesco has over the years built a sizeable brand loyalty; it has demonstrated its ability to compete on price and could ward of threats from aggressive competitors like Asda Wal-Mart. Leahy said that he has been interviewing focus groups of employees to find out what they value in the company. The answers that he got were teamwork praise and trust which have been adopted as core values by the company. This in turn would make the employees care for the customer. In order to re-energise the staff and to inculcate in them an attitude of respect and meaningful work the company invested in a series of training programmes at various levels of employees from 1996 to 1998. The training programmes dealt with fundamentals of management, and more importantly the ability to adapt to changes in the environment rather than resist changes out of fear of the unknown. Job security was an additional motivational factor and in cases where some positions were eliminated, people in such positions were offered alternative jobs in the company. 1.7. Dynamic capability: Dynamic capability refers to an organisation's ability to use its resources to competitive advantage - the dynamic aspect referring to the firm's ability to modify and revise competencies for an ever-changing market situation, capability referring to the organisation's internal and external skills, resources and functional competences to match the market situation. Tesco floundered for a while in the 1980s when it stuck to its of pile its high; sell it cheap philosophy. The upwardly mobile middle class demanded better quality and the ambience that goes with it and not cheap discounts. It was at this time the company demonstrated its willingness to learn and adopt to changing market dynamics. The company took what the analysts call the unusual step of conducting large-scale survey of its current and potential customers. The surveys revealed that the customers wanted lower prices, better service, more selection and more non-food products. Tesco then changed course by deciding to woo both the bargain hunters as well as the premium shoppers on the grounds that it was in the 'middle market', where the greatest mass customers were to be found. The company began constructing superstores, bigger than its traditional superstores, which helped it offer greater variety at lower prices. For the high-end shoppers the company offered organic food products and launched a wide range of own label-brands first under the Value brand and later under the Finest Gourmet label. Simultaneously the company addressed the issue of superior customer service. For example if customers find more than one person before them in the queue, a new counter was opened. If a customer seeks direction for locating an item a staff member would actually guide him/her to the shelf and not merely point it out. 2.1. Cultural web: The dynamics of the evolving socio-cultural milieu has profoundly impacted shopping and retailing the world over and Britain is no exception. A burgeoning upwardly mobile middle class, attitudes to work leisure, increased numbers of women in the workforce; the impact of information technology on work and work related issues and increased disposable incomes have been the key drivers of changes in shopping and retailing practices. Understanding the mind of the modern consumer poses a great challenge to marketers. For e.g. consumers do not mind paying more for branded products even when generic equivalents of the same products - presumably offering the same quality - are available. Smaller quantities of 'microwave-able' products are purchased at greater prices rather than larger quantities at lower prices of the earlier 'open and heat' equivalents in order to save time and perhaps lost culinary skills. People's expectations have broadened following greater exposure to a global culture, experiences and horizons because of increased holiday travel, television and the internet etc. Paradoxically, the very experiences narrowed their appetite for consumer goods transposing an American idiom on worldwide consumption. Pringles, Coke, Pepsi, Gap and Nike are all examples of the worldwide popularity of American brands. While such preferences are likely to impact individual's belief statements and shopping attitudes other socio economic causes like globalisation, environmental depredation too will have at least an indirect effect on mass retailing. For e.g. issues like the battle over genetically modified foods versus organic foods will continue to play out and be responsible for more corporate behaviour. The overall impact of such dissimilarities and paradoxes is to further fragment the market so that no single marketing strategy can effectively address all of them. One of the more important aspects of the changing socio-cultural dynamics and lifestyle aspirations is people's attitude towards work and leisure that is likely to have a fundamental impact on much of the shopping experience. The time and money interaction between the 'time rich money poor' and 'time poor money rich' individuals has been recognised - although it is not possible to quantify it - and is observed in town centres and other retail locations. It highlights a problematic aspect of shopping or to what extent is it shopping, just looking or buying' The other factors that radically alter shopping/retailing preferences and attitudes are mobility and the advent of the internet which elevated shopping experience to a new level. 2.2. Tesco's response to changing consumer attitudes: Leahy explains listening to the customers as the key to Tesco's success and its ability to outperform competitors. Tesco introduced such innovative ideas in stores as 'virtual assistants' that help customers scan barcodes to check information regarding ingredients without the need for human assistants. Leahy was prepared to court the wrath of the authorities in pleasing his customers. For example in July 2000 he reintroduced pounds and ounces to product packaging (in addition to metric weights as required by European law) as there was evidence that the customers preferred the old measures. Marketing Director Tim Mason commented: "We are not anti-European, but we are pro-shopper" (Piercy 706) In response to socio-cultural changes in shaping consumer preferences and attitudes, Tesco too has been modifying its business patterns. For e.g. the company has been extending its non-food product sales. Leahy planned to double the proportion of non-food sales from its 3% level in 2000. During the Christmas season 2000 alone the company sold 14000 DVD players and 8000 wide screen televisions. Demand foe electrical goods and mobile phones drove the company's impressive sales growth. During 2001 the company's financial services range of products like credit cards, automobile insurance performed well. The company was already selling scooters the Far East built 'Tescooters', signalling its proposed entry into the automobile selling sector. The company was experimenting with its foray into the leisure and travel sector. The impact of these aggressive moves reflected in the company's financial performance: in April 2001, Tesco announced that it had breached the ' 1 billion ($ 1.4 billion) mark in annual profits. The only other British retailer to achieve this was Marks & Spencer but that was briefly between 1997 and 1998. During year when other retailers' sales were relatively static, Tesco's earnings rose by 11%. Leahy set a goal to have more physical selling outside Britain in 2003. In line with this goal, already 37% of the company's physical floor space was located overseas and in 2001 its non-UK sales were ' 3 billion ($ 4.4 billion). Expansion plans for the company's entry into Eastern Europe (e.g. Hungary) and Asia (e.g. South Korea, Taiwan, and Thailand) were underway. Tesco's e-business launched in 1996 not only survived the busted dot-com era but bucked the trend by being one of the few successful e-businesses. In early 2001 the company's internet sales were ' 250 million making Tesco Direct (the company's e-business division) larger than Amazon.co.uk with predictions of ' 300 million for the subsequent year. A cornerstone of the "Tesco way" was the "steering wheel" which laid out the objectives by which managers were evaluated. The wheel was rates the employee's performance measured against pre-determined objectives each quarter. The ratings are colour-coded for e.g. green indicated good progress, yellow caution and red a definite problem. 3.1. Porter's generic model: The success of an organisation measured on financial indices depends on two parameters: profitability as the prime attraction of an industry and the position of an organisation within the industry. According to this theory, even an organisation with below-average profitability may offer superior financial returns if it is optimally positioned within the industry. This it does by leveraging its strengths, which according to Michael Porter fall into categories: cost leadership and differentiation. By varying the focus on the strengths three different generic models may be derived. They are called generic because they or not organisational or industry specific. Figure 4 depicts the theory diagrammatically: Figure 4: Porter's generic strategies. 3.2. Cost Leadership Strategy: This strategy calls for the ability to produce goods of a given quality within the industry at low cost. The firm then sells the goods at average price to make more profit than its competitors or at below average prices to gain market share. If there were to be a price were the company can still maintain its profitability whereas its rivals suffer losses. Even if there is no price war, as the industry matures and prices drop, companies, which can produce cheap, will stay profitable for longer periods of time. The cost leadership strategy is generally aimed to target a broad market. Companies that can develop unique processes to cut down production costs, have the ability to source cheap raw materials or vertically integrate with their suppliers or to eliminate some costs altogether can aim for cost leadership. Such companies have the following internal strengths: Access to capital to invest significantly in production capacities, which will act as an entry barrier to others. High level of expertise and the ability to design efficient manufacturing processes. Highly efficient distribution channels. We have discussed the limitations of this strategy under resource imitatbility (Section 1.6). Improvements in technology facilitating low cost production may nullify competitive advantage. 3.3. Differentiation Strategy: On the other hand if a company can develop a product or service that offers unique attributes valued by customers and perceived by customers to be better than or different from the products of the competition. The additional perceived value allows the company to charge a premium for the product or service, the additional price setting off the extra costs incurred in adding unique value to the product or service. Companies that seek to use the differentiation strategy have the following inherent strengths: Access to high technology and research Highly skilled and creative product development team. A strong sales team capable of communicating the product's uniqueness to the customer. An organisational reputation for quality and innovation. As we have seen in section 1.6. resource imitability, the differentiation strategy can be seldom applied to the food retailing industry even under its present expanded scope to cover variety of products and services. 3.4. Focus Strategy: The focus strategy aims at a narrow segment within which the company attempts for either a cost leadership or a production differentiation. The company using this strategy often enjoys a high degree of customer loyalty, which discourages rivals from competing directly in the segment. Although this strategy affords the company the ability to merchandise a broad range of products and to pass on higher production costs to the customers, the system generates lower volumes. However the risk with this strategy is that it can be easily imitated and a broad-market cost leader may beat the company at its own game. Also other focus strategists may offer better service in the segment and this usurp market share. 3.5 Combination of generic strategies as an alternative model: It is not always possible to combine the advantages of all the strategies by combining them. Even if a company has the ability to combine for e.g. high quality (differentiation) with cost leadership it may not be able to sustain this over the long term or even if it does it may project a confused image to the consuming public. Consequently the company will not be able to derive any competitive advantage will be "stuck in the middle" as described by Porter. Porter therefore argues that if companies seek to adopt multiple strategies they should do so by creating separate business units. Some authorities offer a caveat even to the single strategy approach saying that the consuming public is not homogeneous in its preferences and customers seek multi-dimensional satisfactions such as combinations of quality, style, convenience, price etc. There have been instances when high quality suppliers following a single point strategy when a rival entered the market with lower quality product that addressed the overall customer needs. 3.6 Five forces model: Porter mentions five forces that come into play within the industry against which it is necessary to defend the thee strategies viz. cost leadership, uniqueness and focus. They are: entry barriers, buyer power, supplier power, threat of substitutes and rivalry. All these forces are applicable to British supermarket environment 3.7 Tesco strategy: We have in earlier sections covered some of the strategies adopted by Tesco, but in this section we will be revisiting them with view to interpret them from the point of view of generic strategies and combination of generic strategies. Cost leadership: Tesco lived up to its founder's edict of 'pile it high; sell it cheap' but by late 1980s the "appeared to have lost its way" (Sadler 236). It was not able to offer the quality of goods upscale 'more affluent, upwardly mobile' middle class was demanding nor the deep discounts that the price conscious customers demanded. Sainsbury's and Waitrose were the preferred food shops for the upper echelons (classified AB social groups) while the lower strata (the CD groups) shopped at Asda and Kwik Save. It was then that the company did the wise thing by polling customer tastes in a large-scale marketing survey of its current and potential customers. The answers were revealing: the customers of course wanted lower prices but better service, more selection and more non-food products. The company then decided that it should satisfy both the bargain hunters and the premium shoppers by tapping the middle market. This led it into investing in the construction of super stores bigger than any existing supermarkets that could offer a large variety of goods and at low prices. To satisfy the high-end shoppers it offered organic foods and premium own-label brands like 'Value brand' and the 'Finest Gourmet brand'. Differentiation: Segmentation of customers offered a solution to the cost leadership conundrum. Now the company addressed itself to the strategy of differentiation. Competitors may imitate offering premium service in the long term but once a company builds a 'brand equity' and earn the loyalty of customers, any imitation will only flatter the original and further strengthen it. Therefore the company decided to improve customer service in various ways. Self service stores follow the 'customer as labour' strategy to economise on labour costs but Tesco decided that employing store assistants may be a small price to pay for the large goal of customer loyalty. A customer care programme recruiting 4500 new store assistants was launched. The assistants in blue waistcoats would pack bags, unload trolleys, fetch forgotten items and replace damaged goods. If a customer seeks guidance to pick up an item, instead of merely pointing out the direction, the assistant would lead him/her to the stall. If there is more than one customer before one in a queue, a new counter would be opened so as to reduce the check out time. The company has also invested in technology upgradation by introducing 'virtual assistants' that would help customers read barcodes. Leahy called the series of measures 'listening to our customers'. 3.8 Comparison with Raynair - Cost leadership: The 'no-frills' airline Ryanair, like Tesco resorted to 'mid-course correction' by adopting the 'cost leadership' strategy. The airline was originally a full service operator competing with Aer Lingus by offering low fares. The company lost ' 18 million in four years. Michael O'Leary its latest CEO (the company went through five CEOs in the aforesaid four years) adopted the 'no-frills' strategy of the Southwest Airlines in the US and turned the company around by 2000. In that year the company made of profit of ' 70 million and with a market value of ' 3.2 billion is the fourth largest 'no-frills' airline in Europe. Differentiation: Ryanair was also able to build a substantial brand value that is difficult to copy - although its prices may be. The airline is renowned for its constant 80% load factors and is patronised not just by cost conscious leisure travellers but also by business people. The company skilfully avoided competing with other airlines by avoiding expensive and congested national airports, by developing underdeveloped routes and attracting not only rail and road travellers but also those that would simply stay at home. 4.0 E-commerce: The objective for launching Tesco Direct the e-commerce arm of Tesco was 'narrow customer focus'. It was obvious from the beginning the e-commerce arm would not be able to match the brick and mortar business operations of a food retailer. Many 'dot.coms' started in the first flush of e-commerce enthusiasm of the 1990s folded up before the decade was out. But e-commerce was definitely suitable for a different kind of commerce. It not only offers the customer the choice of infinite variety that no physical distribution system can offer but does so cost effectively, the option of real-time transactions and speedier deliveries. The physical distribution network may match the 'speedier delivery' part of the Internet transactions but the time required for the first (ordering / order processing) part of the transaction is reduced to practically zero or 'real time' in Internet parlance. There was some skepticism when Tesco launched its e-business in view of the doom that met many American e-grocers in the 1990s. However the '95 billion British grocery market was tempting. Further it was estimated that eventually 30% of all grocery buying would be online. Therefore Tesco made a cautious low-tech entry after five years of preparation and piloting. Tesco.com is the world's largest e-grocery stores and at the end of 2000 was handling 60,000 orders a week, had 750,000 registered customers and a sales target of '200 million. The company planned to spend '400 million on promotion to reach '500 million in profits by 2005. The service delivers in addition to food items, electrical goods, baby clothes, videos and home furnishings. The model has integrated the online and offline business. Besides the online sales is part of branch sales and "feed into the store replenishment systems without breaching the integrity of the tight supply chain." The software for the online store is programmed to retrieve previous purchases, offer personalized service and reminders and believe it or not warn about allergies (based on previously fed information) and food choices. The most interesting thing about the online store was customers did not see the online and offline stores as mutually exclusive. Tesco was teaming with ITV Digital to provide grocery shopping through digital television. "The next battle is expected to revolve around improving the 'last mile' of delivery to the consumer - secure boxes outside the home or in the garage, collection from local garages or the Post office, to avoid the customer having to be home for the delivery." (Piercy 2002 199-200) Bibliographic References: Bell, David E. (2003). Tesco Plc. Harvard Business School. 9-503-036. Rev. March 6, 2003. Competitive Analysis - The UK Retail Sector (n.d.) Institute for Retail Studies - Competitive Analysis of the Retail Sector in the UK Piercy, Nigel F. (2002). Case 6 Trolleywars - The Next Generation. Market-Led Strategic Change. Oxford, UK. Butterworth Heinmann. (pp. 704-709) Sadler, Philip. (2003). Cases Tesco: Continuity in Strategic Management - From Discount Store to UK Market Leader to Global Business. Strategic Management. (2nd Edition). MBA Masterclass. London. Kogan Page. (pp. 231-242) Smith, David & Sparks, Leigh. (2004) Logistics in Tesco past, present and future. In Fernie, John. (Ed) Logistics and Retail Management: Insights into Current Practice and Trends from Leading Experts. London. GBR: Kogan Page, Limited, 2004. (pp. 101-118). http://site.ebrary.com/lib/britishcouncilonline/Doc'id=10074933&ppg=121 Instructions: The main article to be used for this work is the article on Tesco Plc by David E. Bell - Harvard Business School (9-503-036, Rev. March 6, 2003). The main question and requirement is attached. Harvard Referencing Instructions files attached: 1. Strategic Management.doc There are four compulsory questions. Instructions and information: 1. Answers are expected to show originality of thought and evidence of independent analysis and creativity. 2. Candidate will be expected to interpret data on organisations and critically evaluate the strategic management of these organisations recognising that there is often incomplete information and ambiguity. 3. Answers should be 4000 words excluding appendices. QUESTION You are advised to conduct a strategic analysis of Tesco as a preparation for answering the following questions You can cross-reference points made in one question to another Question 1 (25 marks) Draw a value chain for Tesco's activities in the UK. What activities do Tesco have to perform well in order to remain competitive in their market place' Discuss the following concepts in the context of the case: Distinctive competence/core competence Threshold competence Resource imitability Dynamic capability Question 2 (25 marks) Use the cultural web concept to map Tesco's organisational culture in 2003. Pick key features of the web that your analysis suggests have helped Tesco to achieve their success. How has the web changed during Terry Leahy's tenure as chief executive' Have these changes contributed to Tesco's success, how, why' Question 3 (40 marks) (a) In the context of the UK supermarket environment, critically evaluate Porter's model of generic strategy and one other model that discusses market strategy. Is it possible to categorise Tesco's market positioning as following a specific generic strategy, why, why not' (b) Does your analysis suggest any similarities/differences between the market strategies of Ryanair and those of Tesco in the context of the models discussed in part (a) Question 4 (10 marks) Were Tesco wise to enter internet retailing, why, why not' Read More