Understanding Strategic Management - Essay Example

Understanding Strategic Management Table of Contents Introduction 4 Brief Overview of Tesco Plc 5 Purpose of Tesco Plc 5 Environmental Scanning 6 External Analysis 6 PESTLE Analysis 6 Porter’s Five Forces Analysis 7 Internal Analysis 10 Value Chain Analysis 10 Resource based View 11 Strategy Formulation in Tesco 12 Market Options Matrix 12 SWOTS Analysis and TOWS Matrix 13 Strengths 13 Weaknesses 14 Opportunities 14 Threats 14 Proposal for Strategy 14 Conclusion 16 Reference 17 Introduction Understanding strategic management is the basis requirement for developing growth oriented strategy. Proper strategic analysis helps a company to achieve competitive advantage by identifying various internal and external factors that influence the growth of business. In this process, strategic management models and theories are very helpful for the entire business and industry. Effective decision making process must take into account the basic elements of strategic management. The decision making process can be divided into three basic stages i.e. analysis, formulation and implementation. Decision makers and managers must apply their strategic skills in the process of managing an organisation. Increasing competition and changing nature of demand are the two prime reasons behind the increasing demand of strategic management process in the contemporary world. This paper will attempt to assess a company by using strategic management tools and models. The models and tools will be used for two proposes i.e. for environmental scanning and for strategy formulation. Environmental scanning will include internal and external analysis. The next section will show the company’s strategic position in the market. Based on the analysis and findings, relevant strategies will be recommended. Tesco Plc has been selected for the purpose of strategic management analysis. Tesco is a UK based company and is operating in the global retail industry. However, in this paper, the primary focus will be on the UK retail industry. Brief Overview of Tesco Plc Tesco Plc is a UK based leading retailer. The company was founded by Jack Cohen in 1919. The company was first listed in London Stock Exchange in 1947 and it launched its corporate website (Tesco.com) in 2000 (Tesco Plc-a, 2010). The company offers a wide range of product and retailing service through its numerous superstores. Tesco offers homes products, fast moving consumer products, clothing, consumer durable, electronics etc (Tesco-a, 2010). The latest annual report of Tesco disclosed that it owns 4810 stores in the global market and nearly 472000 employees are working with Tesco (Tesco Plc-b, 2010). It experienced very fast growth and after its global expansion, the company became the third largest retailer in the world after Wal-Mart and Carrefour. The company has developed its reputed brand image in the market. Specially, in UK, the company has gained a large share of the market (Silverthorne, 2010). Purpose of Tesco Plc Tesco has developed an effective and efficient strategic management procedure in its organisation. The strategic framework of Tesco primarily focuses on corporate sustainability. Its core value strives to enhance the brand image in the market. Tesco’s core purpose is “to create value for customers to earn their lifetime loyalty” (Tesco Plc, 2010). The company has realized that importance of customers and employees for its growth and development. For offering value added services to its customers, Tesco aims to understand its customers in order to meet their needs. Additionally, it is also responsible for bringing about development in the community and society of customers. Tesco believes in team work and internal strength of the company. To increase the expertise, the company concentrates on knowledge sharing and experience. Tesco is able to understand its customers because it keeps itself updated about their taste and preferences. Environmental Scanning External Analysis PESTLE Analysis PESTLE analysis is useful in analysing the macro-environmental factor influencing the industry and company’s growth. PESTLE includes political, economic, social, technological, legal and environmental factors (Cheverton et al, 2005, p28). PESTLE analysis for Tesco is discussed below for the UK market. The global business of Tesco is mainly influenced by political factors. Tesco is the market leader in UK and its stable political condition is a major contributor in this respect. The company receives high political support by virtue of huge employment that it generates. The Economic condition of UK is quite stable and its citizens enjoy high income. The per capita GDP of UK is $34,200 and nearly 80.4% of total labour force is engaged in service industry (CIA, 2010). The purchasing power of UK people has increased significantly. These economic factors have facilitated the growth of Tesco. The demographic nature of UK people is favourable for Tesco’s growth. The UK people prefer to buy from one-stop shops as they find it more comfortable. UK is quite densely populated with 62,348,447 populations. 99% of total population is educated which affects their perceptions and buying behaviours (CIA, 2010). Legal factors like taxation, labour policies of UK are important for Tesco. The UK government controls the market to discard the monopoly condition. UK is technologically sound as the government has developed proper transportation system and invested in national research and development. Leading retailers including Tesco uses several technologies like Wireless devices; Radio Frequency Identification (RFID) etc are in trend. Civil legislation for environmental protection guides the UK companies to follow fair operational practices that have the least impact on society. However, Tesco is very concerned with environmental factors. For example, it has opened its first zero-carbon store in Ramsay, Cambridgeshire (Finch, 2010). Porter’s Five Forces Analysis Porter’s five forces help to determine the degree of competition prevailing in an industry. Competition affects profitability of an industry. According to Porter, there are five forces that affect an industry and these are bargaining power of buyers and suppliers, threat from substitute product and rivalry from existing competitors. The following model shows the model of five forces. Figure 1: Porter’s Five Forces (Source: Luecke, 2006, p.74) Considering the above factors, Porters five forces analysis is done for UK supermarket retail sector. In UK industry, a large number of small retailers are present except the big four i.e. Tesco, Asda, Safeway and Sainsbury. Consumer’s switching cost is very low and as there are a large number of retailers in UK. However, Tesco tries to control the consumer’s bargaining power by offering loyalty cards and discount. Bargaining power of supplier is high for the small retailers but giant retailers like Tesco have the power to influence supplier’s pricing strategy. The retailers have to maintain good relationship with the suppliers as they are important for supply chain maintenance. Threat from the substitute product in supermarket is negligible because the supermarkets have goods of several brands for the same product categories. The substitute for retailer services cannot be matched. However, e-marketing, catalogue-marketing and home delivery services also pose as a threat for the supermarket. For example, Argos offers home delivery survives and catalogue marketing and is highly popular in the UK market (Argos, 2010). Existing rivalry in the UK retail market is the most important factor that has intensified the degree of competition. The following table shows the market share of leading supermarket retailers of UK. Figure 2: Market Share of UK retailers (Source: Giha and Renwick, n.d.) The above table indicates that due to increasing competition, the market share of Tesco decreased by 3% in 2007. Other medium size retailers like Morrisons and Somerfield are trying to expand their market by making investment in market. Internal Analysis Value Chain Analysis Value chain analysis of a company clarifies the value creation process. It describes the various activities of a company. Value chain includes the primary and other supporting activities of a company. The retailers do not manufacture product and hence, the value chain of retailer differs. The primary operational task for a retailer is to manage its supply chain, logistics, inventory and other departments like finance, HR etc are supporting activities. The following figure shows value chain for retailing business. Figure 3: Retail Value Chain (Source: Pradhan, 2006, p126) As per the above figure, the suppliers are the first and the most important factors for maintaining a proper value chain. Tesco has also developed a long-standing relationship with its valuable suppliers. It also helps the farmers to improve their productivity. For example, it supports cultivation organisations like British Farm Assurance (Instituto De Empresa, n.d.). Primarily, the aim to develop customer driven supply chain process is to improve customer value. To improve supporting activities like infrastructure, technology, Tesco has invested a large amount of capital. The company particularly focuses on workforce management for improving its value chain. Tesco is committed to improve its value chain and it has efficiently managed its supply chain activities. Resource based View Resource based view (RBV) analysis considers the internal resources of a company. A company equipped with high quality resources enhances of the company. The resources of a company include tangible and intangible assets. According to Begemann, “RBV is a theoretical framework which proclaims that distinct resource combination of organisation sources of competitive advantages” (Begemann, 2008, p.6). Gaining competitive advantage and core competencies is crucial for developing effective and efficient strategic model. Tesco has established many superstores with high infrastructure. In UK, Tesco has a strong hold. It has opened nearly 2482 stores and the company is serving its customers with the help of 287669 skilled employees. During 2009, Tesco has earned £38558 million revenue from the UK market (Tesco Plc-b, 2010). Its reputed image in UK and the global market is the most important synergy for the company. Tesco’s management style is open to innovation for accommodating the expectation of customers. Tesco offers healthy and high quality products to its customers, which has been made possible by partnering with valuable suppliers. Tesco stores nearly 7000 local products in its supermarket (Tesco-b, 2010). Strategy Formulation in Tesco Market Options Matrix Market options matrix is a model that helps to identify various strategic option based on product categories and market exposure. This model is also known as Ansoff Matrix. The following figure shows the model for market option matrix. Figure 4: Market Options Matrix (Source Johannesson, n.d., p.8) The above figure of market matrix model identifies and compares the market for an existing product. Tesco offers wide range of product of different brands. However, the core product of Tesco is its retailing servicers and therefore, the company must focus on its service activities and pricing strategy. However, as per the market option matrix, Tesco can influence the market by offering products which are in demand. Technological innovation in retailing market of UK is in vogue. For example, the use of IT services and RFID in supply chain management and in services offerings is in trend. Therefore, the company keeps trying to improve the market by offering the best service in the market. In order to enter the market, the company focuses on high quality services as well as low cost providers. SWOTS Analysis and TOWS Matrix TOWS matrix is an effective model for developing a strategy by taking into consideration the internal strength, weaknesses and external opportunities and threat. The following model of TOWS matrix shows the strategy formulation process based on the SWOT analysis. Figure 5: TOWS Matrix (Source: Proctor, 2000, p.137) To formulate the strategy as per the above model, SWOT analysis of Tesco Plc is very necessary. Strengths, weaknesses, opportunities and treats of Tesco Plc are discussed below. Strengths Higher growth rate of Tesco is a result of its increasing market share. Tesco has entered the financial services sector by expanding the volume of its business. Nearly 13% of UK’s retail market share is captured by Tesco. Its high brand image is the major strength for the company (Datamonitor, 2004). Weaknesses Tesco relies excessively on the UK market. In 2003, nearly 73.8% of total revenue came from the UK market. However increasing dependency is its weakness. The liquidity position of Tesco is quite weak as company keeps acquiring new stores (Datamonitor, 2004). Opportunities The company has entered banking & insurance sectors and also in non-food retailing like cosmetics, health and beauty clothing etc. The markets for these products have higher growth in future. Threats The company is facing intense competition in UK market from giant retailers like Asda, Safeway, Sainsbury, Morrision etc. The market share of Morrision and Sainsbury is increasing. Internationally, the company is facing competition from Wal-Mart and Carrefour. Proposal for Strategy The above discussions and analysis have revealed important findings that are very helpful for formulating strategies. External analysis indicates key factors that affect the company and the internal analysis depicts the core competencies of Tesco. In order to formulate a strategy for Tesco, Porter’s generic strategy model is very useful. The following model shows the generic strategy frameworks. Figure 6: Generic Strategy (Source: Stonehouse, 2009, p.175) As per the TWOS matrix and generic strategy, Tesco must try to achieve the cost leadership strategy with better and innovative service. It will help Tesco to compete with its key competitors on a global basis. For example, Wal-Mart has gained popularity due to its ‘Every Day Low Price Strategy’. Some of the proposals for achieving low cost leadership are given below. Slow down the expansion plan and concentrate on existing stores. Acquire low cost suppliers by partnering with them and by providing them extra benefits. Concentrate on the existing international stores. Bring constant innovation in service quality. Must provide training to employees for offering better service quality. Must implement RFID technology in all the stores for reducing inventory and logistic cost. Develop effective pricing strategy and offer high discount for bulk shopping. Bring improvements in e-shopping for reducing cost of stores and services. Conclusion The paper has dealt with the strategic management of Tesco by using various strategic models and tools. These tools and models have been used to analyse the external and internal conditions of Tesco. PESTLE and Porter’s five forces analysis have indicated major external factors that have affected Tesco and the retailing industry of UK. The Value Chain and RBV analysis have portrayed the internal core competencies of the company. For strategic analysis, the market option matrix and TOWS matrix have been used. After analysing the company’s situation, it has been recommended for Tesco to follow cost leadership strategy along with better services. Reference Argos. 2010. Home Delivery. [Online]. Available at: http://www.argos.co.uk/static/StaticDisplay/includeName/OrderingForHomeDelivery.htm. [Accessed on December 08, 2010]. Begemann, F. 2008. Co-Branding as a Brand Strategy – An Analysis from the Resource-based View. GRIN Verlag. 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