Strategic Management and History of Tesco - Assignment Example

? Organizations need strategies not only to out-smart competitors but even to maneuver through threatening environments (Mintzberg, 1985). Strategy helps focus effort and coordination of activity. A strategy defines the organization. Tesco, the giant retailer, has faced certain turbulent times as it diversified both geographically and in its product offerings. History of Tesco Tesco opened its first superstore in 1968 although the brand first appeared in 1924 (Docstoc, 2010). Their initial business level strategy was to focus on market and product development: They could focus on these two core issues as retail sector being in its nascent stage, they could increase their market share at low cost without increasing competitive rivalry. Tesco initially had a localized approach as they could perceive benefits in expanding in and around London. However, their policy since the beginning had been “Pile it high and sell it cheap” (ICMR, 2005) which adversely impacted their brand image. When Britain imposed the Retail Price Maintenance Act which prevented the retailers from selling goods below a minimum price, Tesco introduced trading stamps which were given to the customers which could be traded for cash or gifts. This was abolished in 1964 and then Tesco could offer competitive prices. Cost-leadership strategy In the early 1990s, the market condition being bad, Tesco faced difficulties such as low population growth, low food price inflation, matured and saturated supermarket sector in the UK, and strong competition from retailers such as Sainsbury, ASDA, and Safeway (Coriolis, 2004). The company’s profit margins were under pressure and it remained in 2nd position with Sainsbury leading in market share (ICMR, 2005). In saturated markets competitive rivalry increases and the profits diminish as the costs are high. This was when the British economy was hit by recession and Tesco was in trouble although competitors such as Sainsbury and Marks & Spencer’s announced record earnings. This was the period when Tesco changed its strategy and focused on increasing its market share by selling goods at prices much lower than its competitors. Their strategy was to grow bigger by increasing sales volume through lower prices: Source: Coriolis (2004). Tesco went in for a major image overhaul and closed down many of its stores and replaced many with bright and attractive stores (ICMR, 2005). They were focusing on the cost-leadership strategy. In fact, Tesco was the first to introduce the cut-price strategy which led to price war (Yoruk & Radosevic, 2000). According to Porter (1996) strategy rests on unique activities and to be sustainable the strategic position requires trade-off. They did acquire cost-leadership and became the leading retailer in the UK but cost-leadership comes with disadvantages (Porter, 1979). Very low cost can take loyal customers away and lead to a decrease in revenue which is exactly what Tesco suffered with. They also earned a bad reputation in the process, which is when they decided to diversify. Strategy can be formulated at three different levels – corporate level, business unit level and the department level (Strategy Web, n.d.). The CEO at Tesco formulated the strategy at all three levels. His service philosophy was “Every little helps” and “We listen carefully to our customers” (ICMR, 2005). He defined the management practices and how to achieve the corporate goals and missions. The business unit level strategy deals with positioning the firm against competitors. The CEO focused on cost-leadership to gain competitive advantage but such advantage is not sustainable. The functional or department level strategy deals with different functions within the organization and towards this, the Steering Wheel strategy were formulated. Formal planning, according to Mintzberg (1994) is dependent on the preservation and rearrangement of the established categories – the existing levels of strategy (corporate, business unit level and the functional level), and the established types of products. Tesco stuck to its strategy of low cost and high volumes since the beginning in different forms. This was not real strategic change, which according to Mintzberg requires inventing new categories and not rearranging the old and established ones. Strategic planning is the creative act of synthesizing experience into a novel strategy. When Terry Leahy took over as the CEO of Tesco in 1997, he aimed to make Tesco a ‘value retailer’. He named the strategy he wanted to adopt as The Tesco Way which comprised of the company's core purpose, values, principles, goals and the Balanced Scorecard. This strategy was named the Steering Wheel, meant to steer the business and people: Source: Coriolis (2004). Related and unrelated diversification The company then extended the core and adopted four-pronged strategy – they stuck to their core UK business, and retailing business but also diversified into non-food business and international expansion. Tesco thus pursued the related and unrelated diversification strategy equally. According to Whittington, firms enter into unrelated diversification to protect the firm against the risks of environmental shocks, especially technological change (Kay, 2002). Tesco adopted this differentiation and repositioning strategy to promote themselves against a wider range of product categories at competitive prices (Laforet, 2007). They diversified through acquisition and expansion into new markets and new products and services. Their international expansion was mainly through acquisitions but acquisition stifles innovation. When the food retail market matured and the price war had begun, Tesco went in for both product and market diversification. Tesco’s strategy is based on certain elements – flexibility as it each market is unique, local approach, focus on few countries, have multiple formats as no single format can cover the entire market. In addition they believe in developing skills capabilities in people, processes and systems. Through brands they build lasting relationship with customers. After specializing in food, Tesco diversified in discount clothing, financial services, music downloads, internet services, consumer health insurance and dental plans and software. It also entered the housing market and thus had both related and unrelated diversification. Thus by building real scale in new areas, they have been able to lead over rival supermarkets both in market share and market capitalization (Financial Times, 2007). International expansion The company initially concentrated on the core growth of the company but they also grew through acquisitions. UK was their core market but Leahy’s strategy was to focus on international expansion, foray into non-food sector, and retailing services. By mid 1990s Tesco started expanding and their typical strategy was to enter a new country through acquisitions. By this time, there was saturation in the UK retail market and the biggest retailers started looking towards other countries. Initially Tesco did not meet with success in its international ventures. Reflection and analysis of the past international retail experience is essential for new market entry and development (Palmer, 2005). When Tesco did not meet with success in its ventures in Ireland and France, it changed its strategy and focused on the emerging markets in Central Europe. It used the acquisition strategy as the mode of entry in to nations such as Poland and Hungary, Czech Republic and Slovakia. When it entered through acquisition it had the existing market share and did not have to create a new customer base. It also kept the initial costs under control. Because they demonstrated a high degree of flexibility in international expansion, they could attain competitive advantage because of their size, location and the wide range of goods on offer (Yoruk & Radosevic, 2000). They used their failures in certain markets as learning processes. For instance, in France, even though Tesco was not successful, they learned about trading in different markets and benchmarking different competitors. They however, wanted to adhere to the original Tesco formula with regional touches to appeal to local communities. The Tesco formula could not work in France because of the protectionist policies of the French government. It then decided to make some changes due to cultural differences when expanding overseas. It has then entered Japan and Turkey through acquisition and Chine through joint venture. It did not get the first mover advantages in China as Carrefour and Wal-mart had been dominating the market when Tesco entered. It entered through joint venture with a local operator which owns the Hymall Hypermarket chains. International branding works well with Chinese consumers. This is the reason that Tesco focused on offering products that Chinese people would buy as they would consider Tesco as another western chain. The success in China lies in quickly entering the second and third-tier cities (BBC News, 2007). In the US it used its core competency and focused on opening hard-discount stores; it shaped its strategy after taking into account the competitive forces in the US. The competitive forces need not be manifested in competitors; it could also be rooted in the underlying economics of the nations (Porter, 1979). However, it continued to maintain its relations with the existing suppliers and vendors even for the US supplies. It took with it the group of British companies with whom Tesco worked in the UK. It maintained its fresh poultry and meat suppliers by the company that supplies at its UK stores. It gets its own label sugar snap peas, washed salad, fresh fruit and fresh juices from a US subsidiary in the UK for the US market (Freshplaza, 2007). However, this strategy of sourcing its supplies for the US market from the UK is a radical shift in strategy. They have always wanted to build local relationship and have a local approach. Tesco even controlled the distribution system in the US. Another difference in strategy from the rivals in the US is that Tesco is maintaining single delivery while others have separate deliveries from its suppliers. However, in 2008 Tesco experienced that some of its regular shoppers were cutting back on expensive goods. It also saw the customers trading down the value food ranges. People, of late, look for value. This has also affected the housing market as food and petrol prices have gone up. Despite the downturn, Tesco claims to have maintained 3.5% growth in the core UK market (Kollewe, 2008). During this period the consumers have become cautious and the non-food growth was affected, which makes up between one-fourth and one-fifth of Tesco sales. In international business Tesco enjoyed growth helped by the strong Euro. How it did start losing its share in the UK grocery market while Aldi and Lidl started gaining market share. This led to a drop in the shares of Tesco. Amidst recession the strategy should change to adapt to the situation. Planning and adapting are two different issues. While planning decomposes the organization into component parts, adapting deals in ideas and perspectives (Ghoshal & Mintzberg, 1994). The strategy making process in the latter is more emergent than deliberate. What is required is for the top management to energize and drive entrepreneurial behavior at all levels in the organization. The top management has to be involved in management development programs and involvement in the strategic decision in acquisitions and resource allocation priorities. Thus the strategy that Tesco should adopt for its US market under turbulent times would be suggested based on its strategy evaluation using different strategic models. Any firm devising the international marketing strategy would have to take into account the external environment and consider the threats and opportunities. The strategy has also to consider the organizational capabilities. Thus external and internal analysis of the current strategies and objectives would help find the right strategic direction. Strategic model – Ansoff’s Matrix Market penetration Tesco initially followed this strategy as this is the last risky because it is based on the organizational resources and capabilities. It has a wide range of products and over time, diverted from its core product – grocery. It started selling more non-food items and hence it was the worst hit as items like furniture and housing are non-priority items on the consumer expenditure list. Non-food items suffered more than the food items and this is where the discounters could gain an edge over Tesco (BBC News, 2008). New market development Tesco went in for massive market development both nationally and overseas using the existing competencies. They developed new target segments in new geographical markets. Diversification Diversification was both related and unrelated as it extended its core competencies. They focused on both product and market diversification. They formed opportunistic alliances with organizations such as Exxon Mobil to sell petrol through their stores. New product development During turbulent times adaptation becomes essential. Since Tesco has always kept customers’ interest at the core of its philosophy, they must have a customer-focused strategy and cut down its product range to suit market demands. It should now restrict non-food expensive items like furniture and focus on food items including grocery. Strategic forces – globalization George Yip’s international drivers The four factors that drive internationalization under this theory include the market factors, the cost factors, the competitive forces and the government factors. Market drivers While the customer needs are not global, Tesco does have a presence in lead countries. They are also trying to use the same supply and distribution channels in the US as they have in the UK but this may not be feasible in the long-run. A local approach becomes essential in the retail sector. Cost drivers Tesco has a steep experience curve and favorable logistics which would enable them to achieve economies of scale. Moreover, technology changes are rapid and customers are technology-conscious. Tesco hence needs to make changes to their offers and services to suit customer demands. They have ventured into the developing economies because of cheap labor which helps achieve economies of scale. Government Drivers Most emerging economies have reduced the trade barriers and the protectionist attitude (Manning & Baines, 2004). Thus capital also can flow freely to developing economy which is conducive to the growth of the retail sector. Competitive forces Competitive rivalry in the industry is intense. Consumers are spoilt for choice and hence retailers have to maintain some differentiation strategy to sustain competition. Suppliers too have bargaining power although Tesco being a bulk buyer can maintain exclusivity. Tesco was thus driven to global markets because of government factors, competitive forces in addition to the cost drivers. Porter’s Diamond Model: To understand the dynamic forces in the retail sector in the US, Porter’s Diamond Model is very effective. Demand conditions Lifestyle changes have enabled the consumers to become more demanding. Purchasing power globally has been on the rise. In the US, a study by the Institute of Grocery Distribution (IGD) finds that there is a growing trend in premium grocery demand and hence the convenience stores should focus on this segment (Awbi, 2006). A Japanese retailer Famima is aiming to find its niche with affluent consumers. Factor conditions The natural resources and the climate are not very critical in the food retail sector. However, the location and the demographics are important. As of now Tesco has been focusing on smaller formats in southern California and Las Vegas region. Related and supporting industries As retailers have expanded overseas, the suppliers too have become internationally competitive. The retailers need to have more control over suppliers and their behaviors and protect against quasi rent-seeking activities. The retailers should have control over the supplies, the delivery schedules and over quality. They must have open communication with suppliers and access to management information (Manning & Baines, 2004). Since competition in US was intense, Tesco did not rely on the US suppliers and preferred to take its regular and trusted suppliers from the UK. Firm strategy, structure and rivalry Retailers have to follow a different strategy based on the demographics, location and consumer demands. The firm structure too depends on the local conditions and Tesco has a different format for the US. They now plan to open 4,000 sq. ft convenience stores in the crowded urban sprawl around Los Angeles, which will be a much smaller version of its outlets (Birchall, 2011). It has its own 88-acrs distribution centre in the US but because of the recession the capacity is underutilized, leading to a trading loss. Because of intense rivalry consolidation has been taking place in the sector. In addition, these retailers have a global supply base which further exerts pressure on the domestic producers. While coordinated global supply chains are in place, Tesco sticks to its own trusted suppliers. The rivals in the US have emulated its small store strategy with focus on prepared meals for the ‘time starved’ US con summers. Because of the lifestyle changes and the existence of a premium segment, Tesco can consider opening special stores aimed at this new segment. Porter’s Five Forces: Threat of new entrants Forces of globalization have meant the US tradition retailers face more competition from foreign retailers such as Tesco. However, competition from the local retailers being intense European retailers such as Sainsbury’s, Marks & Spencer, and Carrefour has been unsuccessful in their efforts to compete in the U.S. market with European store formats (Martinez & Kaufman, 2008). Thus, the threat from new entrants is low. Bargaining power of suppliers The bargaining power of suppliers is low in the US as they fight for shelf space. Despite this, Tesco has taken its suppliers and vendors from the UK, thereby implementing backward integration in its supply chain. The focus is no more on price but on value addition. Bargaining power of consumers Bargaining power of consumers is high in the US as there are too many large retailers. Tesco hence offers an extended selection of prepared meals and entrees for time-pressed consumers. They focus on health concerns with labels like “no transfats,” “no artificial colors,” and “no preservatives" to match the consumer demands for healthy food choices (Martinez & Kaufman, 2008). In line with the local approach, the smaller stores meet the local consumer needs and to reduce time spent for shopping grocery items. In the US Tesco does not compete in the premium sector and focuses on smaller formats for local consumers. Competitive rivalry Tesco plans to speed up its store openings in the US which shows the intense competition that prevails in the industry (Martinez & Kaufman, 2008). Local competition is very intense which is evident from the fact that Tesco has to unveil stores under the shroud of secrecy and shipping goods from the US east coast. Threat of substitutes Threat of substitutes remains high because buyers would be willing to switch retailers. This is the reason that traditional food retailers in the US are expanding with differentiation strategies. They are also trying to emulate Wal-mart’s logistics system and engaging in cost-cutting strategies (Martinez & Kaufman, 2008). There has been a shift in the US food and grocery retaili8ng and the trend is now towards discounters such as Wal-mart and Target (Awbi, 2006). In the US Tesco operates amidst intense competition, with the consumers’ bargaining power being high. They hence need a strategy of differentiation which to some extent they are able to maintain because of the supplies being sourced from the UK. McKinsey’s 7s To determine the organizational capability, internal analysis can be conducted through the McKinsey 7s framework. The 7 interdependent factors comprise of hard and soft elements. Hard elements Strategy Tesco’s growth strategy has always been customer-focused. They wanted to give the best to the consumers. However, they also used the differentiation strategy and after the initial market penetration, they adopted the cost differentiation strategy. This helped them to deal with competitive pressures. Tesco strategy had always been to grow either through acquisitions or joint ventures in international expansion but for the US it chose organic growth. Marks & Spencer’s and Sainsbury had failed in the US market when they entered through acquisitions. After extensive market study of consumer needs (their basic philosophy being meeting customer demands), they entered under the Fresh& Easy brand. Structure Each subsidiary business at Tesco has a designated CEO who is responsible for governance and compliance. The risks and responsibilities have been assigned to each level of management. The Board oversees the monitoring system and has specific responsibilities for itself as well as for the different committees under the Board (Tesco Plc, 2010). The structure of the Board ensures that no single or group dominates the decision-making process. Systems Tesco has very strong monitoring and control systems in place. They acknowledge that risks are inherent in any business and hence they have learned to manage rather than eliminate the risk of failure (Tesco Plc, 2010). They track their trading on a daily and weekly basis while the financial performance is reviewed weekly and monthly. Steering Wheels are operated at each business unit and the results are reviewed on a quarterly basis. Soft elements Shared values The core purpose of Tesco is to create value for customers to earn their lifetime loyalty. They ensure that their people, the employees understand the core values of the organization. They work as a team and, trust and respect each other. Style They do not have a dictatorial style of management and they believe that the greatest leaders are their customers. Moreover, the CEO acknowledges that it is not possible to micro-manage 350,000 employees globally. They develop leaders at every unit and they follow a participative style of management. Staff They have recruited local staff in the US. The organizational culture is people-centered. They have an anti-union stance in the US because they felt that the local unions in the US were trying to damage their business from day one (Foley, 2010). This has been a subject of criticism by a Human Rights organization in the US. Skills Tesco has products and services from grocery to banking and the skills gap in the financial sector threatens growth in the financial services sector (BBC News, 2011). Conclusion Tesco can no longer work on its philosophy of “Pile it high and sell it cheap” as the consumers are consciously spending on both food and non-food items. Tesco has been able to achieve success in the US where other retailers from Europe failed. However, it operates under intense competition. Tesco has the necessary resources, competencies and capabilities which would enable it to have competitive advantage (Hales & Barker, 2003). Its core competency lies in its sourcing from the UK which also gives it a product differentiation – pre-packed and shelf-ready food. Having their own suppliers also gives them the bargaining power and allows them to settle prices at their own business terms instead of relying on local suppliers. Since the organization is financially strong and has a capable Board of directors, it should move to other underserved locations within the US instead of focusing in Los Angeles and California region. The number of retail stores in the US as excessive even before the current recession. As consumer credit tightened consumer spending became frugal and conscious, focusing on the necessities Farfan, 2011). A sizeable number of stores closed down in 2010 and the prediction for store openings in 2011 suggests that retail expansion will resume. Green products and green facilities, are publicized by retailers because this is what the consumers demand. The younger generation prefers internet retailing and hence to be successful retailers have to offer this service along with the brick and mortar stores in the US. Moreover, they have only been focusing on smaller formats with cost-controlled items. Since market for premium sector does exist, they could start with a few stores with a focus on the premium segment. When the brand name is well known trust can be expected from loyal customers (Laforet, 2007). The loyal customers are more willing to try new products if it comes through a trusted brand. Tesco has learned from its failures and now is cautious in its approach. However, adaptation is essential according to the local needs. According to Ghoshal and Mintzberg (1994) a firm is considered diversified when it moved beyond different products to different businesses. These businesses do not have divisional autonomy but are overseen by a central management. The central management at Tesco has to allow for autonomous venturing and performance planning but keep the central control with it at the top. This is known as the spinning top strategy and central control is absolutely essential for conglomerates (firms that go in for unrelated diversification). There should be constant renewal of vigorous energy from the central leadership at Tesco. Diversified organizations such as Tesco need elaborate systems of formal planning and informal adapting. They need to particularly focus on resources planning (shifting of resources from low potential to high potential businesses) and logistics planning (scheduling procedures and processes of material flow). These require competency leveraging and team working, which is one of the capabilities at Tesco. 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