Evaluation of Tesco - Case Study Example

Tesco Plc. Table of Contents Introduction 3 Pestle analysis of the industry 3 SWOT analysis of Tesco 5 Porter’s five forces analysis of Tesco 6 Future Analysis of Retail Industry 7 Conclusion 8 Reference 8 Introduction To attain sustainability is the foremost aspiration of every company or organisation. In order to survive in the competition and to sustain itself in the long run, companies formulate strategies in accordance with the shifting patterns of market forces. Strategy formulation is a lengthy process and needs constant monitoring so that it is in accordance with the prevailing market scenario. A successful marketing plan thus necessitates an impeccable scanning of the internal and the external factors of the company. This scanning process of a company’s existing environment is known as “Situation analysis” (Green and Jeff, p.51). Situation analysis takes into account five important areas of marketing that are necessary for decision making. These five areas are consumer, company, collaborators, competitors and climate. In this report, an overall situation analysis of Tesco will be executed with the help of SWOT, PESTLE and Porter’s five forces analysis. Tesco is a U.K. based public company primarily engaged in the retail merchandising. Tesco, the largest retailer (supermarket) in U.K has been operating since 1919 (Tesco Plc, 2010). Pestle analysis of the industry Pestle analysis involves the scanning of an industry’s broader environment. Pestle includes six factors; these are political, economic, socio-cultural, technological, legislation and ecological (Sinclair-Hunt and Partridge, p.77). Tesco is the retail industry operating in U.K. This particular industry is affected by these Pestle factors. The global credit crunch affected U.K. very badly and retail industry was one of the worst victims. The market however is slowly recovering and the government is paying special attention to this sector because of its ability to generate huge employment. As this industry is one of the fastest growing industries, the influence of the political factors has also been increasing. This industry is one of the major industries that add value to the economy. Economic factors like GDP, purchasing power parity etc have a huge influence on this type of industries. Per capita income of the nation is very important for this industry to operate, since retail consumers are its major revenue earners. The socio culture effect on this retail industry is also very important as their local stores function within the society. Factors like age, culture, education etc are instrumental in shaping the trends of retail industry. The use of latest technology is imperative in the development of the modern retail industry. Major retail players have developed their unique system to manage their business and to serve their customers. With the largest customer base, this industry also has the most number of consumer protection and safety laws made by the government authorities. All the retail companies have to abide by these rules and regulations. Ecological or environmental safety is one of the major concerns of this industry. In last few years, many retail companies have been trying to reduce their impact on environment. Wal-Mart and Tesco are the two leading global retailers who were pioneers in the use of eco-friendly products for their business. These companies have also developed recycling policies for reducing the effect of pollution on environment. SWOT analysis of Tesco SWOT analysis of company presents a detailed evaluation of its strengths, weaknesses, opportunities and threats. “Examining a company’s internal and external environment is essential in the process of strategic planning” (Böhm, p.2). Tesco is the leading retailer with operations based in various parts of the globe. It is currently operating in fourteen countries with 4,331 stores all over the world (Tesco Plc, p.4). It has successfully created its ‘brand value’ among the customers. In spite of the increasing competition, its market share is constantly growing. The retailer has diversified itself in the financial service sector that provides loans and insurance. It has the world’s biggest online retailing which has been instrumental in enhancing the growth of the company. According to the annual report 2009, Tesco Direct, its online non-food business has continued to grow rapidly, increasing its sales by more than 50% in the year (Tesco Plc, p.17). Currently it is the third largest retailer after Wal-Mart and Carrefour. Tesco presence is the most palpable in the U.K. market as most of its revenue is generated from it. This explains the reason for Tesco’s ill health during the period of global meltdown which badly affected the U.K. market. Its high debt led to the increase in leverage. It had to incur huge capital expenditure due to high investments in new stores. Tesco is mainly a food retailer and in recent years it has entered the non-food retailing but still tremendous potential exists in this section which is yet to be explored. Apart from these, it can focus on certain products segments like health care and beauty products as these sections too have the capacity to earn high profits. Furthermore, international expansion in South and East Asian countries like India, Japan, and China, will bring in good investment for the company. The price wars among the competitors are the source of the most potent threat for Tesco. Competition from the market leaders like Wal-Mart and Carrefour pose as the biggest challenge for Tesco. Porter’s five forces analysis of Tesco Porter’s five forces analysis is used to scan a company’s external environment. This framework helps organisations to ascertain the profit potential of the industry by analysing external forces of the industry (Henry, p,80). Competition is intense in the retail industry. In U.K. Tesco’s top rival include Asda Group, J-Sainsbury Plc., Safeway Inc etc and all of them are aggressive competitors engaged in price war with Tesco. The retail market is full of market leaders which restricts the potential entries in the market. However, the big players like U.S. based Wal-Mart has already entered the U.K. market. Market situations decide the potential entries and currently U.K. market is densely populated with big companies and profitability for new players may not be adequate. Buyers’ power is quite high as they have many retailers which increase their option. This however, is the most important factor that causes the price war. Like buyer’s power, the suppliers’ power is also strong as they have many retailers to supply, but the big players like Tesco can easily switch from one supplier to another as switching cost is low. Substitute products are available in plenty for Tesco’s competitors and there is no switching cost involved in it. To avoid competition it imperative for Tesco to maintain low prices so as to retain and attract customers. Future Analysis of Retail Industry The retail industry is one of the fastest growing industries. However it is also the industry that has the strongest competition. The big players like Wal-Mart and Tesco have expanded into various countries. This industry is often considered as immortal as retail is the only medium through which the customers are able to buy the manufactured products. Since the industry depends on the purchasing power of the customers, the macro-economic factors like inflation, interest rate, consumer debt and unemployment etc have a huge impact on the industry. In U.K., the retail expenditure is expected to rise around 16.3% over the next five years and the growth rate is also expected to rise in comparison to 2002-07 and value is likely to increase from £280.9bn to £326.6bn (Verdict, 2008). ‘Verdict’ has predicted that in the future years, online retailing will be very prominent. The growth of online shopping will be higher than store shopping. Over the next five year, the online shopping is expected to grow by 49.2% as compared to store shopping. “Most retailers will enhance or launch new sites this year” (Brandthing, n.d.). The use of technology for online shopping will create new opportunities. Even mobiles are being used to access the web for online shopping. The retailers thus will not have to incur cost for setting up new stores and their overall capital expenditure will decrease. This is good sign for Tesco as it already has the world’s largest online shopping. The consumers will also find it very feasible as they will not be required to visit stores to make purchases. Over the next five years, health and beauty care products is expected to be the most profitable section followed by food & grocery and clothing & footwear (Verdict, 2008). The attractive growth in this industry will attract many new domestic and foreign players. The market will become more populated causing an increase in the number of competitors. The drivers of the five forces will be stronger over the next five years. The impact of carbon taxes will lead to an increase in the prices of nearly all products. This might adversely affect the retailers of fuel and automobile but this will keep the pollution under control. Conclusion Situation analysis involves the overall analysis of an organisation resulting in the scanning of all the external and internal driving factors of its business environment. Tesco is the third largest retailer in the world and its situation analysis helps to frame a comprehensive idea about the company’s position and its operating industry i.e. retail industry. The environment of an industry decides its profitability. In spite of the presence of a large number of competitors, Tesco has been able to maintain a continual growth. The U.K. retail industry promises a bright future. The researchers predict a high growth in the next five years. However, the competition will also increase simultaneously. Tesco being an established brand can afford to be a bit more complacent but it needs to monitor its strategies regularly so that its sustainability is not compromised at the altar of competition. Reference Brandthing. No date. 2010 Retail Forecast Roundup. [Online]. Available at: http://www.brandthing.co.uk/news/wp-content/uploads/2010/01/2010-Retail-Forcast2.pdf. [Accessed on June 27. 2010]. Böhm, A. 2009. The SWOT Analysis. GRIN Verlag. Green, G. & Williams, J. 1996. Marketing: mastering your small business. Dearborn Trade Publishing. Henry, A. 2008. Understanding Strategic Management. Oxford University Press. Sinclair-Hunt, L. and Partridge, M. 2005. Strategic Management. Select Knowledge Limited. Tesco Plc, 2010. About Us. [Online]. Available at: http://www.tescoplc.com/plc/about_us/tesco_story/#. [Accessed on June 26. 2010]. Tesco Plc, 2009. Annual Report. [Online]. Available at: http://www.investis.com/tesco/pdf/repp2009.pdf. [Accessed on June 26. 2010]. Read More