Internal and External Analysis of Tesco Plc - Case Study Example

28 March 2007 Internal and External Analysis of Tesco Plc Microenvironment Core Competencies When John Cohen founded Tesco, he envisioned a retail outlet which will become a leader in the industry because of its low cost strategy. Thus, the retail giant based its operation on a "Pile it high, sell it cheap" approach (Tesco Plc 2006). Founded in this philosophy, the retailer has grown to be a global brand which still sticks to this strategy. In the core of the company's operation is its quest of providing customers with products at the least possible price. This has become the core competency of the business organization. However, as opposed to other retailers in the global market, Tesco couples its cost competency with excellent customer service. Recognizing that customer loyalty is not only cultivated through competitive pricing, Tesco also invests in training its employees and making them part of its success through the extension of high quality service together with their cheap products (Tesco-Counting on Customer Satisfaction n.d.). Value Chain and Value Web Looking at the value chain of Tesco, it can be seen that it is relatively more efficient in carrying out its outbound logistics, distribution, and customer service. Its efficiency in outbound logistics is justified by its mere scope and size. Tesco, as one of the world's largest retailer, is a very important customer to its supplier (Tesco Plc 2007). Thus, the company posses a high bargaining leverage, enabling it to get discounts which are not otherwise available to its smaller competitors. The company also enjoys economies of scale in distribution, advertising, administrative processes, and production. This enables Tesco to significantly reduce cost and generate high margins. As opposed to other players in the industry, Tesco's own brand is a source of large margins in its total revenue (Tesco Plc 2007). With this, it can be seen that the competitive advantage of Tesco is generated through its cost efficiency. The company uses its size and economies of scale throughout its value chain in order to significantly drive down its cost, allowing it to charge lower, if not the lowest price in the market (Tesco Plc 2007). However, the fact that the company does not just offer products at less than industry average prices but couples it with excellent service implies that it also takes effort in differentiating itself from its competitors. For Tesco, it is not just about the product but the shopping experience is also a key in cultivating customer patronage and loyalty. Through the value web analysis, it can be seen that the relationship of Tesco with its supplier and its customers are very much significant in the creation of a competitive advantage. Through the company's strategic alliance with its supplier, Tesco is able to bring down prices. On the other hand, the company's launching of the Loyalty Card allows it to know more about its customers for more specific target marketing. It becomes apparent that all these strategies are very much supportive of a cost advantage. Strategic advantage entails less procurement costs while target marketing becomes a key in cutting advertising costs (Tesco Plc 2007). 2. Macroenvironment PEST Analysis Political. In the political aspect, there has been a wide and rapid integration of economies into a global village through the creation of regional blocs and free trade zones like NAFTA and European Union. This change, which is largely brought about by the various policies put in place by the government authority facilitates the faster and easier influx of goods and services through the elimination of trade barriers and inflow of foreign direct investments through the increased capital mobility (Globalization: Threat or Opportunity 2007). Economic. The world has witnessed the rapid rise of traditionally developing economies like China, India, and Brazil. China, in particular has grown fastest among the different world economies in the last decade. This economic development becomes remarkable as it is even faster than what was experienced by Japan (Pingyao 2003). Economic development in various nations has positive implications. This signals the increase in disposable income and thus, higher purchasing power to be spent on consumer and durable goods. Social. One of the most important social trends is the wide acceptance and popularity of the internet as evidenced by the rise in the number of internet users and higher internet literacy on a global basis. Together with this development is the growing confidence and preference of customers to buy products online. The internet is now considered by the customers as a place to purchase various goods, exchange product reviews from other buyers, and a place to meet new friends (Internet World Statistics 2007). Another social issue affecting companies is the growing preference for business organizations who contribute to sustainable development. This pressures companies to embark on corporate social responsibility programs. Customers do not only focus on product or service quality but on the way the company conducts its operation and how it contributes in preserving and enhancing the community where it does business. Technological. Perhaps, the technology which brought the largest impact and had become the key driver in the global business arena is the internet technology. It is expected that this technology will further shape the way companies do business by integrating the sub-units of a business organization, connecting buyers with seller, and connecting sellers with their suppliers. Technological advancement has also made it possible to surf the internet at fast speeds through the use of third generation mobile phones. This will make internet more accessible to each customer thereby bringing them closer to online business organizations (Kotler and Armstrong 2001). 3. SWOT Analysis Strengths Size and Scope. Tesco capitalizes on its mere and size and scope. As the largest retailer in the UK, the company benefits from economies of scale in terms of administrative and advertising expenses. The large operation of the business organization allows it to distribute costs among its business units thereby allowing it to become more cost efficient. The company's large scope enables it to gain high brand equity and higher recall from customers. Excellent Customer Service. Tesco recognizes the fact that its tangible products have an intangible component. Thus, the company ensures that aside from offering best value products, it also offers excellent customer service. Loyalty Cards. Tesco is distinguished in the retailing industry because of the tools that it employ in order to improve its delivery of customer service as well as how it maximizes its potential. Its Loyalty Card is subscribed by more than 10 million customers which allows the retailer to identify customer profile, sales, and establish more targeted marketing. Weaknesses Reputation. As the largest player in UK, Tesco has an extremely high bargaining power with its suppliers allowing it to discriminate on which it will source its merchandise. Various groups have been advocating the right of the small farmers and suppliers who cannot price as competitively as the large suppliers of Tesco. With the widespread use of Loyalty cards, Tesco's customers are also wary of the privacy of their personal information. Opportunities Geographical Expansion. The increasing globalization and the economic development of various countries like China, India, and Brazil posts large opportunities for Tesco to focus on these regions. The company can capitalize on its size in order to build presence abroad in order to take advantage of the expected rise in disposable income and purchasing power. Capture Mobile Users. With the easy internet access in mobile phones, Tesco can also hope to take advantage of this sector by creating features in its website which will allow customers to be better viewed by mobile users. Threats Intense Rivalry. Tesco faces more intense competition from its rivals both in the United Kingdom and other countries. As J. Sainsbury and Asda aggressively depend and battle for market share, Tesco is pressured to find ways to compete more efficiently. Foreign Currency Fluctuation. As Tesco is an international player, it is exposed to the risk of incurring losses through foreign exchange fluctuations. References De Wit, B. and Meyer, R. 2004, Strategy: Process, Content and Context, 3rd edition, Thomson, chapter, 5. Globalization: Threat or Opportunity 2007, Retrieved 28 March 2007, from http://www.imf.org/external/np/exr/ib/2000/041200.htm Kotler, P & Armstrong, G 2001, Principles of Marketing, Prentice Hall International, Inc., New Jersey Pingyao, L. 2003, China's Economic Growth: New Trends and Implications, Retrieved 28 March 2007, from http://www.iwep.org.cn/pdf/2003/wec_2003_1-2_laipingyao.pdf Tesco-Counting on Customer Satisfaction n.d., Retrieved 28 March 2007, from http://www.conchango.com/Web/Shared/Documents/Tesco%20Food%20Counters.pdf Tesco Plc 2007, Retrieved 28 March 2007, from http://en.wikipedia.org/wiki/Tesco Tesco PLC Website 2007, Retrieved 28 March 2007, from http://www.tesco.com Thompson, A. Jr. & Strickland, A.J. 2002, Strategic Management. 3rd ed. New York Mc Graw-Hill. Read More