Evaluation of the TESCO Strategy - Essay Example

?Evaluation of the TESCO Strategy Table of Contents Present Situation of TESCO 4 Analysis &Critical Evaluation of TESCO Strategic Positioning 5 Porter’s Five Forces Model 5 SWOT Analysis 7 Critical Analysis of TESCO determining Strategic Direction through Ansoff Matrix 8 Ansoff Matrix 8 BCG Matrix 9 Critical Evaluation of TESCO’s Strategy through Suitability, Acceptability, Feasibility and Sustainability Framework 11 Suitability 11 Feasibility 11 Acceptability 12 Sustainability 12 Conclusion & Recommendation 12 Reference List 14 Executive Summary Strategic analysis is essential for the formulation of goals and objectives of an organization. This requires analysis and scanning of the business environment in which the company operates and also requires the investigation of the competitor’s strategy. A strategic management analysis would be conducted for TESCO to understand the company’s present strategic position through Ansoff and BCG Matrix. The main objective of author of the study is not only to show the current strategic position of the company through strategic management analysis, but also would help in conducting environmental scanning, strategy formulation and implementation. This would help in understanding the changing market dynamics. The design of effective strategies for each line of business of the company would help in gaining competitive advantage over its competitors. The strategic evaluation of TESCO would also be done to help the managers assess the present organizational structure for error detection. Introduction: History TESCO is one of the leading supermarket retailer in United Kingdom (UK), and the fourth largest retailer in the world after Walmart, Carrefour and Home Depot. It is also one of the largest online grocery retailers in UK (Humby, Phillips and Hunt, 2008). Initially, Tesco specialized in food retailing but later it diversified into non food segments like clothing, electronic appliances, banking, insurance and telecommunications (TESCO Plc, 2013a). Present Situation of TESCO The company has a worldwide presence in China, India, Hungary, Slovakia, Czech Republic, Poland and many other countries. TESCO employs 300,000 people and operates 3,000 stores worldwide. TESCO employs 300,000 people and operates 3,000 stores worldwide. The company operates 200 stores in UK itself and offers a varied range of food items. It is the leading brand of food retailing in UK followed by Everyday Value. Tesco has always believed that the strategy of the company needs to be revised as per the changing taste and preference of consumers. Tesco believes in improving the customer service by responding to the customer needs and wants. The stores are usually renovated from time to time, in order to give customers a warmer and refreshing feel in the stores. TESCO products are usually low priced and of better quality (TESCO Plc, 2013b). The company believes in undertaking environmental and social responsibilities. It publishes its corporate social responsibility charter every year (Dinkhoff, 2009). Analysis &Critical Evaluation of TESCO Strategic Positioning It is necessary to undertake a strategic analysis at an industry level and also analyze various strategies for targeted segments. A useful and purposeful framework, which will help in identifying the resources and capabilities that are required to operate within a particular market (Aker and McLoughlin, 2010). This framework helps in formulation of strategies that help the company in gaining competitive advantage over its competitors. Porter’s Five Forces Model The five forces framework model developed by Michael Porter is instrumental in determining the competitive intensity and attractiveness of an industry by the interaction of five competitive forces. Threat of new entrants: The UK retail industry is suffering from economic slowdown which is indirectly affected by the low consumer spending and decrease in the demand of varied food and non food items. There has been limited entry of retail departmental stores in the UK retail industry during the tenure 2010 to 2013. There are various reasons due to the limited entry of retail stores in this industry like decrease in profitability, high start up cost for retail departmental stores and the market share being dominated by the leading UK supermarket industry. Bargaining power of buyers: The product offerings of most of the supermarket are quite similar. This has increased the chances of easy availability of the products for consumers at affordable prices. The buyers are quite high in this industry and also low in concentration and switching costs are also low. The bargaining power of buyers is high in this industry (Henry, 2008). Bargaining power of suppliers: The attraction to a particular industry from the supplier’s side in only because of its profitability and this is similar in the case of the UK supermarket industry. Due to immense competition in the UK supermarket industry the suppliers hold an important place due to their timely delivery and supply of goods and services. The UK suppliers have to invest heavily in the production and supply system for the timely delivery of the goods from the factory to the supermarkets. This is one of the reasons that suppliers demand high prices from the supermarket retailers. There is a high number of suppliers and concentration of buyers in this industry. The economic slowdown has led to a commercial tension between the suppliers and buyers due to increase in the prices which has eventually benefitted the suppliers. The bargaining power of suppliers is high in this industry. Threat of Substitutes: The leading UK supermarkets are already established and have immense popularity among the consumers. Although, the small retail outlets are also convenient for consumers but they do not have the potentiality of generating even 45 percent of the revenue earned by the supermarkets. The threat of substitutes is low in the UK supermarket industry (Henry, 2008). Intensity of Rivalry: There is high intensity of competition in the UK supermarket industry. The leading supermarkets of UK include TESCO, Sainsbury, Walmart, and Morrison. Altogether, the above mentioned leading supermarkets have a market share of 75 percent combined (Henry, 2008). SWOT Analysis It is the strategic management technique that helps in identifying the internal aspects of the organization. Strength: The British grocery retailer is one of the second largest shops in UK and worldwide in terms of profit and retail stores (English, 2009). Apart from the physical retail stores, the online stores of TESCO also generate huge amount of profit. The online stores offer convenience forms of shopping to customers in the forms of online delivery, online discount coupons and vouchers (Peston, 2006). Weakness: The major operations of the company are concentrated to the United Kingdom (UK) sector. The unsystematic geographic distribution is seen as one of the major weakness of TESCO as it is subjected to systematic risks of the entire UK market (Haerifar, 2011). Opportunity: the UK grocery market has been growing rapidly with an increase by 3.8 percent in the year 2011 and is forecasted to rise to a market valuation of ?196.2 billion in the next five years. The UK food market is expected to increase to ?145 billion by the end of the year 2014 (Euromonitor, 2013). Threats: The present economic slowdown has compelled the retailers to mark the food products at higher prices (Peston, 2012). This decision has not been welcomed by the consumers with open arms and most of the consumers have switched to the local format retail stores and also smaller hypermarkets. Thus, it is observed from Porter’s five forces and SWOT analysis that the present economic situation in UK is not that favourable for TESCO However, the future performance of the company may improve with the positive economic scenario in UK, the company needs to focus on its weakness to improve its sales considerably and also transform its weakness into strength. Improvement in operational excellence is required for successful geographical diversification of the company for further penetration. Critical Analysis of TESCO determining Strategic Direction through Ansoff Matrix Ansoff Matrix A strategic tool which helps in analyzing the growth opportunities of the company is known as Ansoff Matrix (McDonald and Meldrum, 2007).Through Ansoff matrix, the company can decide how and in which markets to compete and to compete in current or new markets through new or existing products (Lester, 2009). Existing (Products) New (Products) Existing (Markets) Market Development Presently, the company operates in more than 12 countries with a significant presence in the UK and European markets. The company offers products and services in food, clothing retail, electronics, beauty, wellness, and finance, petroleum and telecom products. Diversification The company has already gained goodwill through its financial service products. The company needs to divulge in insurance field by selling premium insurance services to the existing customers in the existing markets. (New Markets) Market Penetration Product Development The company is yet to penetrate further into the Asian markets by offering the customers the existing range of financial, beauty, wellness etc products. This strategy should be adopted by TESCO to increase its profitability and its customer base in the Asian markets. The company needs to develop its financial services further by offering investment banking and insurance products into the Asian markets. The strong brand name will help the company to yield profits from the emerging Asian markets. BCG Matrix This matrix is classified into four dimensions based on combination of market share and growth relative to the largest competitor. Stars TESCO superstores in the US and UK region generates majority of the brand but it also involves high amount of expenditure cost for its maintenance. Question Marks TESCO finance in the European region is one of the few services which have strong brand awareness among consumers, however, it has failed to generate high amount of profits unlike its subsidiaries. Cash Cows TESCO Hypermarket which is located in the outskirts and have high potentiality of yielding profits but presently generate fair amount of revenue. They also have high market share. Dogs TESCO has not been generating high amount of profits from Poland, Slovakian and Kipa region. This is because the customers have started shopping from the local format retail stores and chains. Through, Ansoff Matrix it is observed that the company has higher chances of increasing its customer and profit base through diversification. Diversification would enable the company to create a new range of financial products for its existing and new customer base. However, the company needs to formulate effective marketing plans for diversifying into the financial dimension. To offer customers high quality products, they would require effective strategic directions since it is quite separate from the core products that the company offers (Gargeya, 2012). Critical Evaluation of TESCO’s Strategy through Suitability, Acceptability, Feasibility and Sustainability Framework By analyzing various strategic alternatives and choices, the management team of TESCO should be able to utilize its team efficiently with an effective knowledge database to select the most suitable strategy. Suitability The strategic alternatives chosen should be analyzed whether they are appropriate and compatible with the company regulation and policies. One of the main motives of the company is to sell core financial and investment banking products (Learning Centre, 2010), but investment is this sector is costly hence TESCO should go for a joint venture with a reputed bank. Diversification would not only decrease its operating risk, but would also increase its profitability. The chosen strategy should capitalize on the company’s strength and core competencies (Gilles, 2000). Feasibility The company should have the required resources to implement its strategy (Gilles, 2000). The company can conduct a break even analysis to analyze its current resources. TESCO has sufficient human resources to utilize the financial resources and the tangible assets at the optimum level to achieve effectiveness of the company (Learning Centre, 2010). A successful joint venture will only take place if the profitable company is satisfied with the current position of Comet Group. TESCO needs to conduct the break even analysis to understand its present standing and analyze whether the strategy of undertaking a joint venture would be feasible or not. Acceptability Acceptability is concerned with the expectation of stakeholders, shareholders, and employees and any expected financial outcomes. The management team of TESCO should also have a discussion with its stakeholders and shareholders regarding the feasibility of the marketing strategy. If the stakeholders and shareholders are convinced that this strategy would enable lower risk and higher returns, the acceptability of the project is high (Gilles, 1996). The management of the company should abide by the laws of Trade Off theory, which suggests that the company should have a lower proportion of debt capital that would help the company in evading tax (Learning Centre, 2010). Sustainability TESCO contributes significantly to sustainable development by offering customers a highly innovative and user friendly products. The company recycles its product for the betterment of the entire society and community development. Conclusion & Recommendation Although, TESCO is one of the significant retail brands, it needs to diversify into several segments to yield profitability and to increase its customer base. The management needs to first evaluate its strategic position though SWOT, Porter Five Force model and several other marketing models and then select the best alterative solution, which will suit the company’s business environment and help it to yield profitability even in the present economic slowdown. The company can follow RATER and Blue Ocean strategy for further improvement in the existing marketing process. Reference List Aker, D.A. and McLoughlin, D., 2010. Strategic market management: Global perspectives. New Jersey: John Wiley & Sons. Dinkhoff, M., 2009. Business valuation of Tesco. Berlin: GRIN Verlag. English, S., 2009. Tesco defies recession with fastest sales growth in years. London Evening Standard, [online] 03 December. Available at: < http://www.independent.co.uk/news/business/analysis-and-features/recession-slows-the-tesco-juggernaut-1048858.html> [Accessed 17 September 2013]. Euromonitor, 2013. Tesco Plc in Retailing [pdf] Available at: http://www.euromonitor.com/tesco-plc-in-retailing/report > [Accessed 17 September 2013]. Gargeya, V.B., 2012. Customer relationship management: A global perspective. Farnham: Gower Publishing. Gilles, G.L., 2000. Global business strategy. London: Cengage Learning EMEA. Haerifar, P., 2011. Performance management in Tesco. Berlin: GRIN Verlag. Henry, A., 2008. Understanding strategic management. Oxford: Oxford University Press. Humby, C., Phillips, T. and Hunt, T., 2008. Scoring points: How Tesco continues to win customer loyalty. 2nd ed. London: Kogan Page. Learning Centre, 2010. Strategic Choice- Johnson and Scholes Suitability, Feasibility, and Acceptability Model [pdf] Available at: http://www2.accaglobal.com/pubs/hongkong/students/newsupdate/archive/2010/25/learning_strategic_choice.pdf > [Accessed 17 September 2013]. Peston, P., 2006. Operating Exposure Management: At Operational Level. [pdf] Available at: < http://nptel.iitm.ac.in/courses/110105031/pr_pdf/Module27.pdf > [Accessed 17 September 2013]. Peston, R., 2012. Is This the End of Tesco's UK Growth? BBC news, [online] 12 January. Available at: < http://www.bbc.co.uk/news/business-16527080> [Accessed 17 September 2013]. TESCO Plc, 2013a. Investors. [online] Available at: < http://www.tescoplc.com/index.asp?pageid=166> [Accessed 17 September 2013]. TESCO Plc, 2013b. About Us. [online] Available at: < http://www.tescoplc.com/index.asp?pageid=8&panel=1#panel1> [Accessed 17 September 2013]. Thompson, J., 2008. Recession slows the Tesco juggernaut. The Independent, [online] 03 December. Available at: < http://www.independent.co.uk/news/business/analysis-and-features/recession-slows-the-tesco-juggernaut-1048858.html> [Accessed 17 September 2013]. Read More