Environmental and Strategic Analysis of Tesco - Research Paper Example

? Retailing Management Introduction Tesco was founded in 1956. It is Britain’s market leader and largest retailer. The company has been able to achieve this status mainly through constant innovation and adopting competitive strategies. According to Michael Porter, designing competitive strategies takes the company closer to the environment that in turn helps in better organizational management. Through the years, Tesco has expanded its operations beyond the United Kingdom and has been successful internationally. It has approximately 2000 stores operating in 13 countries across Europe and Asia. The main focus areas for Tesco are its policies and processes, which are designed and implemented after a lot of thought and research. The company makes its international strategy effective by incorporating its UK strategy and fine tuning it to suit the cultural differences in order to meet the specific needs and preferences of customers in the different international markets it operates in. In order to achieve excellence in international operations, Tesco needs to maintain consistency in its quality and consumer experience by venturing into the business insights (Tesco, 2011). The main and critical component in the Tesco’s decision making process is its web-based business intelligence application product. This application is recognized for its speed, functionality and the flexibility necessary for the timely delivery of fashion products to the Tesco users worldwide. This is based on the technology developed by Tesco along with its Group retail MIS system. The Group retail MIS system helps the company in identifying the key areas of operations, finance, customers and people. This guides and facilitates the top management in measuring the store based performance of the company. Tesco’s strategic objectives thus have been focused upon the Group MIS which encourages and improvises on the local reporting and gives strategic insight into the functioning (Coriolis, 2004). Tesco: Environmental and Strategic analysis Understanding the environment and the influences which results from the changes provides different dimensions and challenges to strategic decision making but making sense of this diversity requires greater efforts and involves identifying the political, economic, social and technological influences which affect the organization. The PESTLE Analysis of Tesco involves the political environment which analyzes the local and national impact of the government. It also looks into the government laws and policies that have an impact on international business operations. The activity and momentum in the economy, such as fluctuations in the stock market and increase in the tax rates will have a significant impact on the company. Sociological factors include the changes in the culture and way of living of the people in general. It includes the changes in consumer behavior and their pattern of purchasing. For example, the new trend of e-commerce and online shopping brings in new technologies that the company will have to adapt. Environmental factors also play an important role as Tesco has to fulfill its corporate social responsibilities. It has to work on reducing the usage of fossil fuels in its transportation process (Case study, 2006). Possible environmental issues which Tesco will face in the near future are: Political - Ban of sale of alcohol to public above the age of 21 by the government. Economic - Implementation of tax on food by the government. Sociological- Tesco’s entry into US and Russia will help in expanding its operations and increasing its sales and profit levels. It helps in expanding the company’s horizon beyond the UK and overcome cultural barriers. Technological- A significant part of Tesco’s distribution costs consists of hydrogen powered lorries. Legal- The task of paying huge compensation claims has been disputed by Tesco. Environmental- The changes in the climatic conditions could have an impact on suppliers’ strategies and objectives. Porters Five forces Model affecting Tesco The key element in analyzing the environment is the ability to respond to the industry forces and their influences. It helps in getting an understanding of the main reasons why some companies are successful and have a competitive edge over others in the same industry. The five forces of Porters model is used to judge the competitive landscape. Industry competitors: Companies are keen to study and analyze the performance of competitors in the industry. In the face of intense competition, mechanisms are put in place to watch every move of the competitors. Tesco’s main competitors are Marks and Spencer’s Group, Royal Dutch/Shell group and the boots group plc. In the retail industry, there has been a significant increase in the size and capacity of the firms. As a result, Tesco faces intensive competition. Over the years, the increase in consumer demand has worked well for the retailing industry and made it stronger. The more diversified the functions of the competitors are in the industry in terms of personalities, corporate objectives, strategies, resources, the greater is the requirement for the management to adopt the strategic management concept in much detail with regards to Tesco’s strategic formulation. Potential Entrants: When a new firm enters the industry, its success depends on the manner in deals with various issues and its capability to cope with the existing players in the industry. These factors include economies of scale and scope, prior experience and expertise, ability to learn from past experiences, customer preferences and tastes, brand preferences and loyalty of the customers, capital needs, governmental regulations and policies, size of the firm, ability to synergize on their infrastructural and distribution needs etc. This means that new entrants will have to undergo a factor of risk. This could also be a barrier for entry for potential entrants. Buyers: Bargaining power of customers varies depending on the nature and size of the industry. In certain industries, there are small number of customers who make bulk purchases and have a dramatic impact on the sales and profit levels of companies. Whereas in the retail industry, there are large number of customers who make small purchases at regular intervals but not make huge purchases. As a result, bargaining power of consumers is on the weaker side. From the consumers’ perspective, when the number of sellers in the marketplace is more in number, there are more chances of consumers shifting from one supplier to another at no cost. Suppliers: Bargaining power of suppliers comes into play when there are limited number of producers with huge resources and output. This limited number of producers will fix the prices after taking into the costs incurred during the manufacturing process. Tesco: SWOT Analysis Conducting a SCAN involves conducting a Strategic Creative Analysis which deals with analyzing the strengths, weaknesses, opportunities and strengths known as the SWOT analysis (Case study, 2006). Threats to Tesco: The threats faced by Tesco include the volatility and fluctuations in the stock market. The tax trend may also create a sense of dissatisfaction in the organization. The biggest threat for Tesco has been the online or offline innovation carried out by the competitive supermarkets. These competitors take away the market share of Tesco and reduce its customer base. The decline and weakening of the economy also pose a threat to the company. Opportunities for Tesco: Tesco could gain some benefits by realigning its online resources and providing first hand information to the prospects. It could also explore the possibilities of collaborations, joint ventures and strategic alliances with other companies. Tesco can also venture into expanding its business in the UK and Russian markets. Tesco’s Main Weaknesses: During transportation, there is large-scale usage of fossil fuels. This increases the cost of operations. Fossil fuels are also extensively used in the supermarket heating systems. This is expensive and adds to Tesco’s cost of operations. The biggest threat comes from the internet company who invests in the different web technologies. Unlike Tesco, they do not have large amount of funds to invest in innovation. As a result, there are more chances of mediocrity and inefficiency. Tesco has a highly diversified product range offering a number of products varying in type, nature, price and brand. At times there is a tendency to compromise on quality and meet the required standards. This affects the brand image of Tesco and could result in losses. As a result, the media and advertising promotion may not yield the expected results. There is also lack of integration and consensus between online resources and offline resources. Tesco also invests heavily in new stores with huge infrastructural and capital expenditure outlays. This leads to blockage of finances and slower turnover of capital. Strengths of Tesco: Tesco has the benefit of enjoying its status as the biggest and largest retail brand. The company has the advantage of having a strong financial position. It has also built a loyal, diversified and trusted customer base over the years. Tesco’s stores focus on delivering value for money. It has also established a reputation for setting up excellent store locations with the best warehousing and inventory capabilities. Tesco also has a significant presence in the worldwide web. Web promotions offer club card schemes for retaining customers. The company has also ventured into foreign markets and successfully set up operations in countries worldwide. It has effectively adopted the economies of scale and set up varied store types (Ceres, 2010). Tesco strategic issues and challenges The food retailing industry is large and competitor intensive. A number of companies offer the same products and services at similar price points. There is not much product differentiation. As a result, companies find it difficult to specialize in a particular aspect and create a niche for themselves. Constant innovation and improvement is the key for long-term success. Companies need to focus on diversifying their product offerings, expanding their own product line, designing an online model for delivery of the products, and inventing loyalty cards and programs (Raab et al., 2008). Tesco was able to expand its operations internationally in an effective manner. It has also done well in non-food retailing. Tesco focuses on customer service and improving the service and quality standards constantly. The success of Tesco’s international strategy depends on the manner in which it implements its marketing techniques and adapts it to suit the local culture. Tesco has been making gradual moves towards its goal of being the global food retailer by exploring new markets outside the United Kingdom. Tesco has learnt from the failure of Marks & Spencer’s in the overseas market. It has focused its activities on customizing products and services to suit the local culture, tastes and preferences of the individual foreign markets (Case study, 2006). Identifying Strategic Opportunities Being successful globally requires tuning the operations and management functioning to suit the local requirements of the overseas markets. Tesco emphasizes on localizing and standardizing the management practices to achieve global economies of scale stressing upon good practices in customer services backed up by excellent training facilities for their staff. Tesco has made its presence felt in Japan. It has also built on its joint venture with Safeway to adopt the online web services in the US markets. A key aspect that presents both an opportunity and a challenge for Tesco is the ability to balance domestic and foreign markets simultaneously. It needs to understand the pulse of the domestic and overseas markets and design its strategies accordingly. With volatility in the global economy, there could be reverse globalization where companies focus only in their international operations and neglect their home market as in the case of Coca-Cola, Gillette and Marks & Spencer (Temporal, 2001). Tesco: Business Strategy ? Tesco takes on the US Wal-Mart: Tesco, the largest supermarket chain in the UK has made inroads into the retail market in the US. It aims to exceed the performance of US giant Wal-Mart. Tesco has based its strategy in the US around the concept of healthy food and less turnaround time through their Fresh & Easy Stores. The Fresh and Easy stores are open and functioning in Las Vegas, Los Angeles, San Diego and Phoenix. ?Tesco is adopting a Hard Discount Model which helps the company and the customers to manage their stored with the diversified product ranges which exists in tits portfolio (Case study, 2006). ? Tesco has realigned its IT processes and control mechanism. It is focusing on improving its IT governance, increase the alignment between IT and their businesses, reduction in the IT costs and increase on the IT savings. ? One of the key challenges faced by Tesco is sustaining market visibility, control and the information mechanism. It is planning to adopt the Business Engine Network (BEN) model. This model will be used to provide a web-based project management business platform to align IT with the business leaders to enhance the corporate strategy, financial governance and improving operational excellence. BEN facilitates the delivery of real time information to managers and the customers at the right time with the right product at the right place in a cost effective manner. Tesco has successfully adopted this business model to improve its reporting system. It has managed to align with the large retail companies by increasing the transparency between the international IT operations and the costs and operations involved in (ICMRI, 2005). Tesco: Strategic Implementations Tesco has implemented the “Steering Wheel” strategy that focuses on establishing the company as a value retailer. This strategy has helped to expand its operations and become the largest retail chain in UK. The concept is referred to as “The Tesco Way” that focuses on the company’s core values, functions, principals, goals and the balanced scorecard. The key result area known as the steering wheel highlights on the 4 major components which are operations, people, customers and finance (ICMRI, 2005). In the mid 1990s, Tesco had to face a lot of upheavals in its operations. Its revenue growth had slowed down resulting in lower profit margins. This affected its brand equity and image. The company was forced to shut down old stores and establish new and innovative store concepts. It was facing stiff competition from between the ASDA discount store and the giants like Marks & Spencer. The economic recession led to the introduction of new concepts, such as globalization, privatization and liberalization (ICMR, 2005). Tesco also had to deal with another drawback with regard to the Imperial Tobacco Company (ITC) that had included Tesco in its diversification strategy. On the other hand, Tesco shifted its efforts on downsizing its unprofitable stores and concentrating on the super stores. Tesco is well known as the customer relationship management (CRM) champion. The feedback received from customers are valued and stored in a database. This database is put to constructive use in improving quality of the products and the standards of customer service. Every three months the people of UK will receive a magazine where by they promote their products, special promotions and discounts available. This initiative is adopted by a majority of retailers today. However, the area in which Tesco was able to create a niche in its magazines was emphasizing on the best products, promotional coupons and the advertisements designed in the form of loyalty cards. From the customer perspective, it creates a sense of involvement and helps in generating interest, opinion and value in the minds of the consumers. The feedback and data obtained from the loyalty cards are used to design and implement customized marketing strategies to match customers’ requirements at minimum cost. Through this strategy, Tesco has been able to position itself as a company offering quality products at competitive rates and prices. The key to the success of this strategy was the emphasis on individual customer focus rather than group focus. Customers also benefitted from this strategy as they gained huge discounts. For the company, it helped in bringing in new customers and retaining existing customers (Raab et al., 2008). From the experience and knowledge gained over the years operating as a retail chain, Tesco has decided to focus on improving its four best practices. These four best practices are launching better and bigger stores more frequently; offering competitive prices which are low and at par with the industry; diversifying its product line by offering more number of products for the customers to choose from, and tapping into e-commerce by reaching customers through online shopping formats (ICMRI, 2005). Branding strategy One of the key elements in Tesco’s success story is its powerful CRM system. In its research, Tesco while looking at its customer base for a typical retail outlet found that that the top 100 customers were worth the same as the bottom 4,000. The company also found that the bottom 25% of customers represented only 2% of sales and the top 5% of customers accounted for 20% of sales. In the process of setting up a viable CRM strategy, Tesco realized that all customers are not equal. Tesco now measures valuable customers by the frequency of purchase and value of expenditure (Temporal, 2001). When Tesco says, "Every little helps", it really means it. The company’s CRM program is one of the best in the world. It is mutually beneficial to Tesco and its customers. Even though Tesco has been primarily a food retailer in the UK, it has been able to grow steadily. Despite operating in a mature market that has little growth, Tesco has been able to expand its operations successfully. This is proof of the strong customer base it has built over the years. In 1995, Tesco’s CRM program was established with the introduction of the Clubcard, which offered points on purchases and a small rebate to loyal shoppers. The company’s competitors did not take much notice of this initiative. Tesco was collecting important customer information with every swipe of the card through the card membership details and building a strong customer database. Through the Clubcard, Tesco was able to collect key customer information, such as what products they were and were not buying, where they were spending their time in the store, and where they were not, as measured by spending (Temporal, 2001). This critical information was put to good use by devising suitable customer retention strategies and programs. Customers received vouchers for items they liked to buy and offers to explore parts of the store that they had not yet seen. Different lifestyle magazines were created for different customers, and high-value customers got calls from the manager of the store, valet parking when they came to shop, and other special privileges. In 1996, Tesco offered a student card and another card for mothers, with separate offers suited to their specific needs. Through a partnership with Lunn Poly, the company offered a travel service giving discounts off high-street prices. Clubcard was combined with Visa through the Royal Bank of Scotland. Tesco also offered discounts on DIY goods through home improvement chain B&Q. In 1997, Tesco started to offer a full range of financial services and introduced the Tesco Direct service. The company focused on delivering extra value to customers, such as expectant mothers were given priority parking outside the store, changing facilities, and personal shopping assistants to help them. In 1998, Tesco also started to offer electricity and telecommunications products and services, following the deregulation of utilities in the UK. In the same year, the company also ventured into clothing through Next. Over the years, Tesco has identified 108 customer market segments. In 2000, Tesco entered into a joint undertaking with General Motors that allowed customers to buy cars from Tesco (Temporal, 2001). With the extensive use of Internet for shopping in recent times, Tesco has kept abreast of the trend and also sells online, delivering products to the customer's door, by refrigerated truck, if necessary. The company’s website, www.tesco.com, is customer friendly and easy to use. It offers the same look and feel that people experience in Tesco’s physical stores. Through the website, customers can purchase groceries, books, CDs, furniture, videos and also arrange for personal finance. Similar to the Clubcard, points get added for every purchase. As the number of purchases and points increase, relevant special offers and privileges are given (Chaffey, 2009). Tesco is well positioned to become a successful international brand. It has expanded its presence in Asia after acquiring the Lotus supermarket chain in Thailand, where customers can buy scooters (tescooters) and have them delivered to their homes. Tesco’s success is driven by its commitment to deliver value and delight its customers. This customer-centric approach has helped Tesco achieve consistent growth in sales, profits and market share. Tesco’s success story is a leading example of technology combined with a human touch can provide customers with a great experience. Customer relationship management strategy Since its inception in 1924, Tesco has been an innovator in the retail industry. In the 1930s, the company opened its first self-service grocery stores in the United States. In the 1960s, the company opened the first superstore in UK and introduced trading stamps. Trading stamps were given to customers upon purchase. These stamps could be redeemed for cash or gifts. Through trading stamps, Tesco could offer lower prices to its customers and avoid matching other retailers’ prices. Over the years, Tesco realized that the superstore concept was the key to long term success in the food retail business. As a result, the company has continued to build and establish new superstores. In 1985, Tesco opened its 100th superstore. The company executed a paradigm shift in its strategy by shifting basis from a price-oriented approach to a quality-oriented seller. In the 1980s, Tesco diversified its product range and customer basis; re-engineered the equipment and presentation at its stores, and enhanced its quality of service. A key component of this brand repositioning was the introduction of the Healthy Eating Initiative that provided nutritional information to customers on Tesco’s own brands. Tesco was one of the first retailers to offer this service. This strategic repositioning empowered Tesco to achieve success internationally (Chaffey, 2009). Tesco was successful in its CRM strategy as it focused on individuals. Companies can build and sustain a loyal customer base only when the customers are at the center of the CRM strategy. In CRM, there could at times be too much emphasis on the components, such as technology, customer profitability, loyalty programs and cards. The critical component is the customer. The customer-centric approach ensured that each individual customer is understood and valued. This helps in sustaining customer loyalty. In Tesco, the key differentiating factor in the CRM strategy is that more time and effort is spent on using CRM for strategic decision making. Tesco ensured that it gave equal importance to the communication (who-what-how-when) and the business decisions that are based on CRM. In designing and implementing its CRM strategy, Tesco has ensured that it is imbibed in the company’s culture. CRM is used to effectively address and solve real problem areas. It is actually put to use throughout the organization and does not exist just for data’s sake. The main strength of Tesco’s CRM is that it uses the information obtained to change that way the business thinks about and views its customers and business. E-business strategy Tesco has kept up with the times and offers online shopping experiences for customers through its website. Since 1994, the company has operated on the Internet in the UK. In 1996, it began offering a home shopping service. It also has Internet operations in the Republic of Ireland and South Korea. In 2001, Tesco set up GroceryWorks through a joint venture with Safeway in the United States, operating in the United States and Canada (Chaffey, 2009). Tesco.com has approximately 850,000 customers worldwide. More than 250,000 online orders are completed each week, with up to 5,000 orders placed per hour during peak business periods. The company’s website also serves as a general portal to view most of Tesco's products, including various non-food ranges (under the Extra banner), Tesco Personal Finance and the telecoms businesses, as well as extra services which it offers in partnership with specialist companies, such as flights and holidays, music downloads, gas, electricity and DVD rentals (Tesco, 2011). Tesco has successfully combined technology and customer focus to gain a detailed knowledge of its customer base and to segment customers according to purchases, location and life stage. It has been able to focus on the individual level and understand customers’ requirements in detail. The company focuses on delighting the customers by catering to their specific needs and preferences. Tesco has created a unique identity in the UK online supermarket shopping through its repeat order functions and lists of favorites and previous purchases. Tesco has been successful in its e-business strategy by combining its customer-centric approach with the best of modern technology to deliver a superior online shopping experience. Human resource strategy at Tesco Tesco employees form a significant part of its corporate establishment. The organization has a well defined hierarchical structure. The strategic model of the company is based on conventional human resource practices that have helped the company retain its market shares. However, in the past few years the management has implemented a variety of changes in its human resource strategies to ensure enhanced performance and productivity. Employees are the key asset to any organization and managers are well aware of the need for specialised and highly skilled personnel who can provide them with the competitive edge in business. The company has introduced an effective performance management system to build a positive work environment. The HRM practices within the organization include extensive training programs and workshops for the employees that emphasize communication skills, leadership qualities and proactive approach to work as necessary attributes to delivering efficient customer service (Times Now, 2011). Conclusion Over the years, Tesco has worked hard to deliver value to its customers and build its reputation in the domestic and international markets. The company has emerged as one of the leading players in the retailing industry worldwide. Tesco has also been successful in diversifying its line of operations by venturing into consumer electronics and durables, consumer financial services, internet services, clothes etc (Frat Files, 2008). Tesco’s promotional strategies have played an important role in contributing to the long term profitability and success of the company. This includes its in-store advertising and marketing their products and services to the supermarkets. It has also done well in evolving and adapting to the online shopping experience. Existing customers were targeted through emails and direct mail to inform them the availability and the schemes provided by Tesco. Tesco has formulated a new consumer innovation strategy which combines different practices and helps in the process of overall company enhancement. This has given the company a competitive edge over its rivals in the retail industry. References Case study. (2006). Innovation in the service sector: Tesco case study. Retrieved on Apr 30, 2011 from http://www.foundation.org.uk/events/pdf/20060425_heal.pdf Ceres. (2010). Tesco Plc. Retrieved on Apr 30, 2011 from http://www.ceres.org/Document.Doc?id=388 Chaffey, D. (2009). Tesco.com case study. Retrieved on Apr 30, 2011 from http://www.davechaffey.com/E-commerce-Internet-marketing-case-studies/Tesco.com-case-study Coriolis, D. (2004). Tesco – a case study in excellence. Coriolis report. ICMRI. (2005). Tesco’s steering wheel strategy. Retrieved on Apr 30, 2011 from http://www.icmrindia.org/casestudies/catalogue/Business%20Strategy/BSTR187.htm Raab, G., Ajami, R.A., Gargeya, V.B., & Goddard, G.J. (2008). Customer relationship management: a global perspective. Gower Applied Business Research. Temporal, Dr. P. (2001). Hi-tech hi-touch branding. John Wiley & Sons. Tesco. (2011). Tesco Plc – our strategy. Retrieved on Apr 30, 2011 from http://www.tescoplc.com/plc/about_us/strategy/ Times Now. (2011). How training and development supports business growth. Retrieved on Apr 30, 2011 from http://www.thetimes100.co.uk/case-study--how-training-and-development-supports-business-growth--132-359-1.php Read More