Strategic Analysis - Essay Example

Strategic Analysis of Tesco PLC Table of Contents Table of Contents 2 Executive Summary 3 Introduction 3 Introduction to Tesco PLC 4 Competitive Positioning 5 Tesco’s Generic Strategies 6 Porter’s Five Competitive Forces Analysis 7 Threat of Substitute Products and Services 7 Threat of New Entry 8 Competitive Rivalry amongst Organizations 8 Bargaining Power of Buyers 9 Bargaining Power of Suppliers 10 SWOT Analysis 11 Strengths 11 Weaknesses 11 Opportunities 12 Threats 13 Conclusion and Recommendations 13 List of References 14 Executive Summary The context of this report is set to understanding the strategic direction adopted by Tesco PLC in order to achieve competitive advantage over its competitors. Moreover, the report also covers the strategic aspects of competitive strategy adopted by Tesco PLC to reduce the adverse impact of globalized marketplace environment. Keeping this in view, the author of the report has used Porter’s competitive positioning models and theories have been used in order to formulate the findings in an appropriate manner. The use of models and theories will be helpful in understanding how Tesco PLC is successful in gaining competitive advantage over its leading competitors in the marketplace such as Asda and Sainsbury’s. In order to determine the intensity of competition in the retail industry, the author of the report will implement the five competitive force frameworks along with segmentation strategies Tesco PLC has adopted pertaining to its target market. By identifying these strategies, the author will formulate certain recommendations for the management of Tesco PLC in order to capitalize on the opportunities available in the marketplace. Introduction To achieve the objective of this report, the author of the report has used different theoretical models in order to understand the business level strategies of Tesco PLC. With the help of these strategic models and theories, the author will reflect the findings of the research activity by communicating the competitive positioning approach implemented by Tesco PLC in order to come over the intense competition provided by its rivals in the retail industry of UK. On the other hand, the findings of this research report would also communicate to the rivals of Tesco PLC, how they can gain competitive advantage by adopting counter business strategies. The strategy analysis and the resulting recommendations are formulated keeping in view the long-term objectives of Tesco PLC and its rivals. Moreover, the focus of the recommendations will be laid on the changing business dynamics due to highly globalized business environment keeping in view the set of resources and competencies of the retail sector in UK. In order to increase readers’ understandability of the concepts presented in this report, the author will divide the strategic analysis into three parts. These are as follows: 1. Corporate level strategic analysis 2. Business level Strategic analysis 3. Operational strategic analysis Introduction to Tesco PLC Jack Cohen founded Tesco in 1919 by establishing a market stall in East London. In this manner, it can be asserted that Tesco is engaged in retail business for nearly a century in UK. Since 1919, Tesco PLC has been serving its customers with weekly shopping items and providing them with quality products with the slogan “Every Little Helps". As the business established itself firmly across UK, the management decided to expand its customer base by entering into international markets. Over a period of last 10 years, Tesco has achieved sustainable growth in the international retail sector and has become the third largest retail organization. The business and corporate level strategies of Tesco PLC aim at strengthening the growth pattern in five parts, i.e. the core business of the organization in UK, the non-food business, international business, retail services and community services. At the moment, Tesco has a market share of around 11%, which is increasing rapidly over the course of last 3 years. Still, Tesco could have achieved more market share which has been deprived because UK and global economy is experiencing recessionary period which has an impact on purchasing power of the customers (Tesco PLC, 2014). It is anticipated that Tesco will achieve four times more growth in the UK’s food and grocery retail sector as compared to Carrefour by 2015. The major catalyst for growth will prove to be the expansion in major economies of the world like China, United States of America and India. In this manner, it can be suggested that Tesco will overcome Carrefour as the second largest food and grocery retail organization in the world and will have only WalMart to beat (Tesco PLC, 2014). In UK only, Tesco PLC’s workforce comprises of over 530,000 employees who are deployed in a vast network of 2,200 food and grocery retail stores. Tesco PLC operates its stores in four different formats. The express stores sell over 7000 different products, the metro stores located in towns and city centers, Tesco superstores selling nonfood items and stationary and Tesco extra stores selling a wide range of food and nonfood products. Then there is Tesco Personal Finance which offers over 25 different financial products to the customers and offer to save accounts and credit cards along with automotive and travel insurance services. In this manner, it can be asserted that Tesco’s philosophy to grow in the market is based on diversification and enhancing the scope of the business (Datamonitor , 2013; Tesco PLC, 2014). Competitive Positioning In this section of the report, the author will analyze the business of Tesco PLC in the context of the environment and other businesses in the industry. Competitive positioning will facilitate the readers to understand how Tesco PLC’s products and services are different from its competitors. For this purpose, strategic fit is utilized by businesses to align the organization and the prevailing industry environment and determining which areas will provide competitive advantage. For this purpose, Porter’s Generic Strategy Framework is used in this report (Euromonitor, 2013). Tesco’s Generic Strategies Tesco PLC’s generic strategies are based on achieving competitive advantage over its competitors with the help of product and service differentiation and achieving industry wide cost leadership. Keeping this in view, it has been found that Tesco PLC aims at increasing its sales by offering products and services at low cost as compared to the competitors. By doing so, Tesco PLC aims at achieving economies of scale and eliminates any unnecessary costs. As a result, the sales of its products and services increase which yields high profits for the organization due to the cost advantage achieved over the competitors. In order to increase its sales of products and services, Tesco PLC focuses on differentiating its offerings from that of the competitors. For this purpose, value chain is aligned with the objectives of the organization and special attention is paid towards differentiating the features of the products and services (Aaker & McLoughlin, 2010). Suppliers and distributors are provided with special incentives in order to provide quality raw material and improve distribution mechanism’s efficiency. To achieve differentiation, Tesco PLC comes up with products that are either not been offered by its competitors or offered in a differentiated manner (Henry, 2011; Marketline, 2014). The generic strategy of Tesco PLC allows it to compete in the industry on the basis of efficient pricing which results in the form of higher unit profits (Thomson & Creevy, 2013). A cost leadership strategy is beneficial for Tesco PLC as it allows the organization to achieve greater workforce efficiency, control on overhead costs, increase the efficiency of the management and decision makers, requires the use of technology to reduce costs, allows access to low cost quality supplies and reduce the amount of waste produced in the production procedures (Hensmans et al., 2013). The financial benefits of cost leadership that Tesco PLC enjoys are that the business has access to capital sources for the sake of expanding its business by investing in fixed assets, allows the acquisition of efficient production machineries and allows acquisition of expertise in manufacturing processes. On the other hand, cost leadership also allows Tesco PLC to acquire efficient distribution channels (Williamson et al., 2013). Keeping in view the generic strategies of Tesco PLC, its position in the industry can be determined with the help of Porter’s five competitive forces analysis. The next section will focus on analyzing the competitive forces that prove to be the determinants of Tesco PLC’s position in the retail and financial sector of the world. Porter’s Five Competitive Forces Analysis In order to determine the sources of competitive advantage for Tesco PLC, the analysis of the structure of the industry is carried out in this section. Threat of Substitute Products and Services Tesco PLC face low threat of substitute products and services for the food section of its business and medium to high level of threat for the nonfood products and services in UK and the global marketplace. The small food chains, off license and organizing food chains are considered as a threat to Tesco’s low price and high quality food products. Even if these businesses possess some threat to Tesco PLC’s business, it is waved off by the third largest food and nonfood retailer by operating its Express stores in towns and cities across UK. Tesco PLC offers nonfood items at discounted prices which reduce the threat of these products being substituted by other providers in tough economic times and recessionary periods (Thomson, 2013; Goodwin, 2013; Tesco PLC, 2010). Threat of New Entry Tesco PLC faces low threat of new entrants in the food and nonfood retail sector of the UK. The low level of threat of new entrants is mainly because of huge capital investments required to be a competitive and established brand in the food and nonfood retail sector. Almost 80% of the market share of food and nonfood retail sector in the UK is captured by prominent and century old organizations such as Tesco, Sainsbury’s and Asda. Therefore, it will be almost impossible for new entrants to outmatch these organizations either by delivering products and services at exceptionally low prices or high quality. In order to establish a new food and nonfood retail brand in UK, the new entrants will have to receive a number of authorizations from the local government. The time and resource constraint is another significant barrier to entry in the UK’s food and nonfood retail sector (Tesco PLC, 2012; Yahoo Finance, 2013; Euromonitor, 2013). Competitive Rivalry amongst Organizations Tesco PLC faces extremely high competitive rivalry in the food and nonfood retail sector of UK. The direct source of competition stems from Asda, Sainsbury’s, Morrisons and Waitrose. The competitive elements between Tesco PLC and the above mentioned competitors are price, products and marketing strategies. The key competitor of Tesco PLC is Asda which have a market share of around 17%. On the other hand, Sainsbury’s market share is around 16% and Morrison’s market share is around 12%. The intense market competition between these food and nonfood retail chains is mainly because of slow market growth due to slow economic growth. The small food and nonfood retail organizations in rural areas of UK possess a threat to Tesco PLC’s existence in these areas mainly because, the consumers in these areas trust more on local retail shops and owners rather than big food and nonfood international retail chains. In economically tough times, hard discounters such as Lidl and Aldi eat out Tesco PLC’s market share and slow down the growth of sales of Tesco PLC (Marketline, 2011; Dawson et al., 2013). Bargaining Power of Buyers The customers of food and nonfood retail sector in UK enjoy a relatively higher power to bargain. The switching cost of products that are differentiated and standardized is relatively low which possess a threat to the offerings of Tesco PLC. The presence of information pertaining to food and nonfood retail products over the internet possesses great threat to Tesco PLC’s business, as the information allows the customers to compare the prices. If the customers find Tesco PLC’s products’ prices on the higher side, they will ultimately switch to the other brand. Moreover, the presence of other food and nonfood retailers in the retail sector of UK also provides customers with choices to make purchases from (Euromonitor, 2013; Marketline, 2011). Bargaining Power of Suppliers The demand for food and nonfood retail products and services in UK is ever increasing which requires retail organizations to make bulk and continuous purchases from the suppliers. Keeping this in view, it can be asserted that suppliers enjoy relatively low bargaining power due to heavy dependence on the revenues generated from the business activities carried out with the retailers in UK. It is difficult for suppliers of food and nonfood retail sector in UK to achieve rapid growth in a highly mature business environment. For this purpose, the suppliers of food and nonfood retail sector in UK does not bargain on the prices or the quality required by their customers in order to maintain a high level of trust (Dawson et al., 2013; Marketline, 2014). The business and corporate level analysis of Tesco PLC are carried out in the previous sections which allow the author of the report formulates an SWOT analysis of Tesco PLC. The SWOT analysis will be beneficial to determine its internal and external strengths, weaknesses, opportunities available to the business and prevailing threats that might have an adverse effect on the organization’s business and corporate level activities. SWOT Analysis Strengths Tesco PLC is one of the oldest and third largest food and nonfood retail organization in the world. Tesco has a network of around 4500 retail stores primarily in Europe, USA and Asia with a market share of around 30% only in UK. Over a period of last five years, Tesco PLC has achieved great financial growth, which stimulates its strategic capabilities. It is anticipated that Tesco PLC’s turnover is around £60 billion, which is 35% higher as compared to 2008. Tesco PLC is considered as the customers’ store which is mainly because of its efficient business and corporate level strategy, i.e. to implement the product and service offering strategy according to the preferences of customers in the target market. Tesco PLC is also considered as customers’ brand because the products offered to the target market are of superior quality and the pricing strategy adopted for these products is based on the affordability of the target market. For this purpose, the organization possess a strong market research mechanism which helps its marketers to collect customer data and develop efficient policies and strategies with the help of customer relationship management mechanism (Tesco PLC, 2011; Marketline, 2011). Weaknesses Tesco PLC is still lagging in performance delivery as compared to its competitors in the food and nonfood retail sector of the world. This is mainly because of quality being compromised in few of the product lines, which force the organization to recall the products and incur significant financial losses. Moreover, product recall also damages the brand image and reliability of Tesco PLC in the marketplace. The major focus of resource allocation is on UK, i.e. around 75% resources of Tesco PLC are reserved to serve the customer base in UK only. Due to this, Tesco PLC experiences significant lack of geographical diversification because the company is highly exposed to the loss of majority of its resources subjected to risks in the UK market (Tesco PLC, 2014; Thomson, 2013). Opportunities Tesco PLC’s commercial network portfolio is increasing with the company opening up 620 stores only in 2009 out of which, 435 were opened in international markets. In this manner, the company will achieve geographic diversification which will not only allow it to reduce the adverse effects of market situation in UK, but also allow it to improve its economies of scale. The emergence of online business medium provides Tesco PLC with enormous opportunity to expand its customer base. It is anticipated that around 1 million new customers will be added to the customer base of Tesco PLC in the form of new prospects who will shop online from company’s portal. In this manner, Tesco PLC will be able to improve its economies of scale and expand the size of its profits. The expansion of company’s business into international lucrative markets such as India and China will improve the global market position of Tesco PLC. It was expected that the food retail segment of the world would experience a rise in its revenues, i.e. £ 145 billion in 2014 from £ 120 in 2008. This is mainly because food retail is going to experience a boost in its sales even if the recessionary period prolongs (Tesco PLC, 2012). Threats A number of well-established food and nonfood retail chains are working on the prospects of entering into the marketplace of UK. The threat of these new entrants will be additional to the already existing intense competitive landscape of food and nonfood retail sector of UK and might challenge Tesco PLC’s authority on the industry leadership. The global economic contraction has also caused significant damage to the economy of UK. Tesco PLC majorly focuses on UK’s market and if the recessionary period prolongs and causes contraction in consumers’ purchasing power, Tesco PLC will be exposed to a high degree of threat. The shrinking incomes and increasing unemployment all over the world have affected the discretionary purchasing power of the consumers and reflects upon the sales and revenues of Tesco PLC (Euromonitor, 2013; Datamonitor , 2013). Conclusion and Recommendations Keeping in view the findings of this research report, it is evident that Tesco PLC has utilized Porter’s generic strategic to neutralize the threats present in the external environment and capitalize on the strengths and opportunities to strengthen its business and corporate level performance. Tesco has gained competitive advantage over its competitors in UK and across the globe to become the third largest food and nonfood retail organization in this world. In order to further stimulate growth in the global marketplace and keep its customer-base satisfied with the offerings, Tesco is recommended to adopt following strategies in order to survive in the global marketplace: 1. Tesco should focus on expanding its business outside UK in markets like Brazil, South Africa, Indonesia, Australia and India. By doing this, Tesco will achieve greater advantage over its competitors who are focused on UK’s food and nonfood retail sector. This is because, Tesco will have the opportunity to cover losses incurred in the UK’s marketplace because of the economic downturn and recessionary period. 2. Tesco PLC is advised to stimulate the growth of its online business portal. This is mainly because consumers these days are reluctant towards shopping in malls and stores due to their professional and personal engagement. In this scenario, the presence of Tesco’s online store facilitates their shopping of food and nonfood retail items. Moreover, the dependence on online business model will allow Tesco to reduce its overhead costs and the cost of acquiring labor force. List of References Aaker, D.A. & McLoughlin, D., 2010. Strategic Market Management: Global Perspectives. NJ: John WIley and Sons. Datamonitor , 2013. Tesco PLC. Company Profile. London: Datamonitor International Datamonitor International. Dawson, J., Tregear, A. & Turner, J.J., 2013. Are Tesco customers exhibiting a more social type of loyalty towards Tesco and Tesco Clubcard? A critical analysis of the nature and type of Tesco customer loyalty to Tesco in Dundee. Ebscohost, (2013), p.Online. Euromonitor, 2013. Tesco PLC. Company Performance Report. London: Euromonitor International Euromonitor International. Goodwin, B., 2013. Tesco uses big data to cut cooling costs by up to €20m. [Online] Available at: [Accessed 2014]. Henry, A., 2011. Understanding Strategic Management. Oxford: Oxford University Press. Hensmans, M., Johnson, G. & Yip, G., 2013. Strategic Transformation: Changing While Winning. London: Palgrave Macmillan. Marketline, 2011. Tesco Case Study: How Tesco Became the UKs Largest Retailer. Case Study. London: Datamonitor Marketline. Marketline, 2014. Tesco PLC: COmpany Profile. Company Profile. London: Datamonitor Marketline. Tesco PLC, 2010. Annual Report 2010. Hertfordshire: Tesco PLC. Tesco PLC, 2011. Annual Report 2011. Financial Statements. 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