Essential Analysis Framework in the Macro-Environment Level - Tesco - Essay Example

Strategic Management Table of Contents Introduction 3 A. Discussion 3 a. Essential Analysis Framework in the Macro-Environment Level 3 b. Sources of Competition in an Industry  5 Conclusion 8 References 10 10 Introduction Strategic management refers to the coordination of processes and activities to help organizations in the alignment of resources with the visions, missions, and strategies of an organization. It acts as a basis of transforming the static plan and provides feedback related to strategic performance which assists the decision making process of an organization. Strategy refers to a plan of action which states how an organization will achieve its objectives and mission. The company selected for the purpose of analysis is Tesco. The management of these activities can be termed as strategic management. There are various strategic decisions which Tesco has to make relating to factors such as the direction of Tesco in the long run, the scope of its activities, stakeholders’ values and expectations, responding to the ever changing business environment, building on its capability as a business entity, and acquiring a higher market share relative to its competitors. These decisions tend to be complex as they have to be made in an uncertain situation. There are also various levels of strategy for Tesco such as business level strategy, operational strategy, and corporate level strategy. Business level strategy refers to the way a business organization conducts itself in a particular market to be successful. Operational level strategy is about various levels of Tesco and their contribution with regard to accomplishment of the strategy. Corporate level strategy deals with the overall scope and purpose of Tesco and how to add value to various business units. A. Discussion a. Essential Analysis Framework in the Macro-Environment Level The analysis of those factors that are not within the control of a company can be termed as an analysis of macro environmental factors. Macro environment analysis is often done by Tesco to develop a sound knowledge of the issues that are present in the current business scenario. PESTEL framework is considered to be an important tool to conduct macro environment analysis by the Tesco. There are several factors that are considered in PESTEL analysis such as political, social, economic, legal, environmental, and technological aspects of a business environment. The sole purpose of PESTEL analysis is to assist Tesco management in the creation of strategies that will leverage the external factors that are not within the control of the organization to its favour. Political factors of the PESTEL analysis deal with factors such as government stability, trade tariffs, policies of social welfare that are imposed upon companies, tax policies, international business regulation laws, etc. These are important factors for Tesco because difficult political situations in a country result in reduced profits for Tesco as well as an inflexible environment for conducting business (Hill and Jones, 2007, pp. 333-337). Economic factors of PESTEL analysis is also an important consideration because it deals with issues such as income of consumers, unemployment, inflation, and interest rates, etc. These factors affect Tesco in a huge manner because lower income of consumers and inflation lead to difficult situations for Tesco to conduct its business. Social factors of PESTEL analysis comprise wealth distribution, demographics, education of customers, and lifestyles. These factors have a huge bearing on the way Tesco interacts with its consumers. If the consumers are not that educated, Tesco has to create simple marketing campaigns that can be easily understood by a large section of the population. Changes in lifestyle of consumers also force Tesco to change the price and/or quality of products that are offered by them. Technological factors of PESTEL analysis deal with technological changes of the environment. These factors are concerned with new innovations, technological developments, and the spending on research and development activities by Tesco. If Tesco is unable to cope with the changing requirements or fails to keep pace with the technological developments, it can put Tesco behind with respect to its competitors. Changes in technology will also change the expectations of consumers with respect to products that are offered by Tesco. Under such circumstances, it is of utmost importance that Tesco keeps them updated with respect to changes in technology to compete in this ever changing business environment. Environmental factors of PESTEL analysis are also called as ‘green’ factors (Bowhill, 2008, p. 75). These factors are concerned with energy consumption, environmental protection laws, recycling, global warming, and disposal of waste materials. Environmental factors affect the external environment of the business. Tesco must keep a close eye to any changes in law in this regard that can affect their interaction with the environment. Modern organizations must also be mindful of the fact that consumers are becoming more aware of the impacts of business organizations on the environment. Legal factors of PESTEL analysis are concerned with competition laws, safety and health laws, licensing laws, and employment laws. The management of Tesco must demonstrate sound knowledge over these laws to avoid lawsuits. Any changes in this regard must be closely monitored by Tesco because it affects their ability to conduct business in an efficient manner. b. Sources of Competition in an Industry  The main purpose of strategy formulation is to cope with competition. There are numerous companies fighting among themselves to acquire greater market share. Competition in any industry stems from its underlying economics and the competitive forces that govern that particular industry. There are five basic forces that determine the state of competition in any industry. Michael E Porter has developed a model in this regard called the Porter’s Five Forces Model. It comprises five forces such as threat of new entrants, bargaining power of buyers, bargaining power of suppliers, the degree of competition among existing firms, and threat of substitute services or products (Henry, 2008, p. 335). Threat of new entry can be considered as the ability of Tesco to enter a particular industry. The power of existing companies in the industry is affected to a great extent by the ability of Tesco to enter a particular industry that is new to them. If it costs very little for Tesco in respect of time and money to enter a particular industry, then the companies in that industry have a threat with respect to new entry. Threat of new entry has several aspects such as special knowledge, cost and time of entry, advantages with respect to cost, economies of scale, barriers to entry, and technology protection. If Tesco can enter into a particular industry and compete effectively with the existing organizations, then that industry is considered to have few advantages with respect to economies of scale and protection of key technologies. Under such circumstances it becomes very easy for Tesco to enter a particular industry because of fewer barriers to entry. Bargaining power of buyers refer to the power of buyers in the industry. If the products that are offered by Tesco in the industry are undifferentiated and have fewer switching costs, buyer groups exert a lot of power. Moreover if the buyers in the industry are concentrated and their purchases form a significant part of the sales of suppliers, buyers tend to exert power by bargaining down prices and force organizations operating in the industry to raise their product quality. If the buyer group poses a threat with regard to backward integration, then it is also considered as an advantage that the buyer group possesses (Roy, 2011, p. 25). Bargaining power of buyers is determined by a number of factors such as number of consumers, sensitivity towards prices, order size, and the ability of substitution. Bargaining power of suppliers refer to the power of suppliers in driving up prices of raw materials that is required by organizations to manufacture products. If Tesco operating in a particular industry have fewer options with respect to suppliers and if they need more of suppliers’ help in their production process, the greater the power of suppliers. The control and strength of suppliers over the organizations operating in a particular industry largely determines their power with respect to such organizations (Porter, 2008, pp. 55-59). The power of suppliers is determined by a number of factors such as the number of suppliers operating in a particular industry, size of suppliers, their uniqueness with respect to service that they provide, the ability of Tesco to substitute a particular supplier, and the cost that is associated with the process of changing from one supplier to another. Threat of substitute services or products refers to the ability of consumers to substitute the offerings of a company with the offerings of another company (Ashford and Beamish, 2005, p. 241). If consumers enjoy a high degree of flexibility with respect to substitution of products and/or services within an industry, then Tesco operating in that industry face a potential threat in this regard. It limits Tesco’s ability to charge higher prices for its products and/or services. If there are products available in the industry with good price/performance tradeoffs, consumers will substitute the products of the Tesco with those products if there is any increase in prices of products of Tesco within that industry. For example, a company manufacturing electronic security systems may see its product being substituted with security guards. It can be also termed as the availability of any product which the consumer can buy instead of buying the industry’s product. The threat of substitute services and/or products in any industry affects Tesco as a whole and also influences their profit making capability. The availability of a close substitute affects the profitability of any industry because consumers have the alternative available to them to purchase the close substitute instead of purchasing the product of the industry. The availability of substitute products in an industry makes it more competitive and reduces the profit making potential of organizations operating in that industry. Similarly if there is a lack in the availability of substitute products in any industry, it will make that industry less competitive and consequently the profit making potential of Tesco operating in that industry will increase to a considerable extent. There are several factors that goes on to decide the threat of substitute services and/or products such as switching costs which refer to the cost of switching from one product to another. The price of the substitute product is also of immense importance which decides the degree of threat that it poses to the original product. The quality of the substitute product also plays an important role in determining the degree of threat that it poses to the original product. The degree of competition among existing firms refers to the capability of the existing organizations. It also refers to the number of firms that are competing against each other. If an industry comprises numerous competitors and they also offer equally good services and products, it leads to a situation where Tesco is unable to exert a high level of power with respect to its competitors. Under such circumstances, consumers will go to other organizations if they are unable to secure a deal of their satisfaction from Tesco. The degree of competition among existing firms is determined by a number of factors such as number of competing entities, differences in quality, switching costs, and the costs associated with leaving the market. Conclusion PESTEL analysis is considered to be an important framework by which organizations analyse the macro environmental factors. Macro environmental factors can be termed as those factors that are beyond the control of an organization. The objectives of PESTEL analysis is to identify the external economical, political, social, environmental, legal, and technological aspects of an environment that may have a bearing on the business of an organization. Management of Tesco uses the information so gathered through PESTEL analysis to measure the risks that Tesco faces with regard to those factors and also to make informed decisions in this regard. PESTEL analysis is considered to be one of the main strategic management tools that help the managers of Tesco to organize the ideas that are gathered during the scanning of the environment. Porter’s Five Forces Model is considered to be an important tool for the analysis of industry competitiveness. Managers of Tesco face the task of analyzing the competitive forces that are present in the environment of the industry. Such an act helps Tesco to identify the threats and opportunities that are present in the industry environment. In this way, Porter’s Five Forces Model helps Tesco to formulate effective strategies that can take advantage of opportunities that are present in the industry environment in a better way. References Ashford, R. and Beamish, K., 2005. Marketing Planning 06/09. London: Routledge. Bowhill, B., 2008. Business Planning and Control: Integrating Accounting, Strategy, and People. New Jersey: John Wiley & Sons. Henry, A., 2008. Understanding Strategic Management. New York: Oxford University Press. Hill, C. and Jones, G., 2007. Strategic Management: An Integrated Approach. Boston: Cengage Learning. Porter, M., 2008. Competitive Strategy: Techniques for Analyzing Industries and Competitors. New York: Simon and Schuster. Roy, D., 2011. Strategic Foresight and Porter’s Five Forces: Towards a Synthesis. Berlin: GRIN Verlag. Read More