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Market Environment Analysis

Describe the scope of your report (Strategic Fit Analysis of Tesco UK). Give a very brief introduction to the company (outline of history, current market position and strategy) and to the supermarket industry in the UK. Outline the structure of the report.

Tesco PLC is Britain’s most renowned merchandise retailer and multinational grocery store.  The company’s headquarter located in Hertfordshire, United Kingdom. Jack Cohen founded Tesco in 1919 as a collection of a market stall. When Cohen brought a shipment of tea from T.E.Stockwell the initials of both the surnames combined lead to the name Tesco. Tesco had its first store opened in Burnt Oak, Barnet in 1929 (Anyesha, Hassan and Aboki, 2014). Though Tesco was a core grocery retailer, it was seen to diversify in areas like retailing of books, clothing, furniture, electronics, petrol, toys, software, telecoms, internet services and financial services. A company like Tesco is focused on business and so they get the privilege to enjoy success for a longer period of time. The corporate strategies are:

•    To deliver quality products to customers at a very competitive rate.

•    To focus on delivering world class customer service.

•    To provide the loyal customers with club cards.

•    To provide products of superior quality with innumerous choices.

•    To provide the customer with flexible store formats so that it enriches customers shopping experience.

The company for the first time in almost a decade has shown a shrink in its market share to a very low level. Bruno Monteyne, a senior analyst, said that Tesco has failed to compete with the changes in the UK environment. It lost its value credentials and has been charging about 6% more than Asda (Barnes, 2011).  The situation of Tesco would be worse than that faced by Carrefour during its worst phase.

The United Kingdom supermarkets occupied about 55% of the market share in 2008 according to research conducted by Nielsen. The supermarket chains mainly consist of 4 biggest retail outlets they are Tesco, Sainsbury, ASDA and Morrison’s. The total share of these retail outlets accounts for 67.9%. In this report, we analyze the strategic fit of the company Tesco UK.

To analyze the market environment scenario, we look into the three main factors of the company. The 1st thing that is looked upon is the microenvironment. It involves the company’s dealings internally and its performance in the industry. The 2nd is the macro environment which means is dealing outside the organization and finally comes the successful factors that are very essential as this keeps the company on operating with ease (Bilimoria and Coomber, 2009). For analyzing the macro environment, Pestle analysis is performed. The analysis is conducted by the following steps:

Pestle Analysis

• Political Analysis: The trade barrier was seen to remove when China was introduced to WTO. This encouraged western companies like Tesco to cover a large market area (1.3 Billion %). It is predicted that Tesco through international business would acquire one fourth of profit. With ten countries immersing in EU, Tesco expanded its retail chain in EU.

• Economic analysis: In the year 2008, the British economy was under recession. Despite the recession, the government’s initiative to reduce interest rate has caused unemployment to minimize during 2009 (Burch and Lawrence, 2007). This factor led to the increase in purchasing capacity of the consumers. However, the uncertainty remains, and consumers would not purchase ready meals or bonus products. The recession also had the positive aspect for Tesco to help increase its production due to increasing the expanses during these years.

• Social Analysis: The population explosion in the British society showed that the number of people under pension was more than the children. The aged population is more discouraging for the grocery retailers as they hardly step in the super market as the young generation is likely to do. The aged population is also not able to access the store’s online market forum due to low internet literacy. The consumers demands have also changed and they are becoming more health conscious. Tesco has adapted to this change the demand by providing natural products.

• Technological analysis: Technology as affected the system of operation, process, and deliveries of the retail groceries. The online retail operation of the company has shown a steady growth (Chaffey, 2006). Subscription through the Internet has shown an increased by 50 percentages. This has helped us to predict that about 70 percent of the Great Britain population has access to the internet. Loyalty program that are run through the information technology has helped to persuade the consumers not move to their competitors (Tesco leads the way in the loyalty program stakes, 2007). Retail distribution was also seen to flourish with the mobile technology. A wine appendices developed by Vision Cortexita has helped Tesco in 2009 to direct their clients to purchase wine using their mobile phones.

• Environment Analysis: From the national statistics data 2010, it was seen that consumers used the same bags repeatedly and tried to reduce the use of polythene bag they take from the shops, as a result, this has helped Tesco to earn corporate social responsibility and reduced cost of production.

Five Forces Model

• Legal Analysis: The lack in budgetary finances was seen to fill by the increase in VAT by 20 percent. The national minimum wage rate, 2009 has increased the minimum wage rate to 15.5 percent as the previous structure was very low. This, as a result, increased the working expenditure of Tesco.

Five forces model is used to analysis the micro environment of Tesco:

• Substitutes of Products and services threat:  Threat was considered low food and more for non- food items. Clothes faced the highest threat. The local markets are seen to offer products at a lower rate than that of the supermarkets like Tesco.               

• The threat from an entry of new rivals: Threat from competitors entering into the food retail market in UK was considered to be low. The food retail market is grasped by the leading giants like Tesco, Asda, Sainsbury and Morrison’s. If new firms enter the market, then they have to offer products at a lower price with superior quality. A significant amount of resources and planning is required to acquire the permission from the local authorities to build a new supermarket.

• Rival competition: Tesco faces an intensive competition from its rivals. Sainsbury’s market share increased from 15.8 percent to 16.1 percent during the year 2009. The other company’s like Asda and Morrison’s also showed an increased market share during this period.

• Bargaining power of buyers: The buyers have a considerable bargaining power. The products having small differentiation might allow consumers to switch to a different brand. With online retailing, the consumers were able to compare the product prices.

• Suppliers bargaining power: The power of the suppliers in the market is not very high. The suppliers fear to lose contact with the retailers, so they negotiate with the retailers at a very low price.

  Critical Success Factors:

Tesco was able to provide in the market, products at a more competitive price than its rivals. The critical successful factors that are enjoyed by the company are:

• Analysis of Competition: The Company has many retail stores that in turn can affect the food market as a whole. During the financial crisis, the company faced a shortage of customers because they moved on to cheaper products provide by the companies like Asda, Aldi, and Lidle supermarkets (Cho, 2010).  As Tesco is among the largest retailers of the United Kingdom it holds a profit of more than 2 billion pounds. Tesco was the fourth largest world retailer in the year 2008, according to the Reuters news, 2008. Local suppliers were also happy to work with the company as Tesco always cooperated with them. Tesco shared their industry experiences with the local clients (Thain and Bradley, 2012).

Critical Success Factors

• Sales strategy: The Company was able to market its product by the use of media. News and journals helped the company to advertise its new launches.

• Competitiveness: Customers are seen to provide feedbacks suggesting theta the experience they had while shopping at Tesco outlets was more pleasant than in other retail stores.  The prices that the companies offered were much lesser compared to other retail supermarkets.

A firm can achieve the strategic capabilities when the resources and the competences of the external environment are matched (Towill, 2005). Many management researchers felt that many strategies were to be developed according to the drivers of the macro environment. To analyze the resource and capabilities of the company Tesco, we need to identify its resources first (Clarke, 2002).  An organizations Resource may be classified as intangible or tangible.  Tangible assets are the physical and financial asset for the company, and it is also easily identified. Tangible resources for Tesco are 3700 stores, 60 billion pound turnover, 3 billion pounds operating income and about 440000 employees. These resources were not able to achieve a sustainable advantage for the company as per Hall. The more focus was on intangible resources. The resources that are intangible are not physically visible. These skills include technology, brand name, consumer information corporate culture and reputation. According to Grant (2005) these skills affected the competitive advantage of the firms because of their sustainability and uniqueness. The intangible resources that Tesco holds are retail industry knowledge, huge customer information, a renowned brand recognition, and reputation it holds in service and big brand innovations. Halls in 1992 has said that the most important intangible resources are the reputation of the company, the reputation of the product and the know-how of the employee (Smith, 2000). A firm should have unique and valuable resources to enjoy the privilege of competitiveness. The resources should be non-imitable, rare and non-sustainable (Dawson, Larke and Mukoyama, 2006). A firm can gain competitiveness when he adopts a strategy of value that is not taken up by its competitors or rivals.  The resources that accompany possesses plays an important role in the outcomes and strategies. The ways the resources are managed played a significant role. It is the organizational competencies that enable the company to combine effectively the resources. According to Porter, critical resources, core competence, and major success factors are very important for an organization to gain competitive advantage.

Conclusion

The key strategic capability of Tesco is its cost efficiency. Tesco enjoys economies of scale that help in marketing of the products. As the company has 31 percentages of the market share, so it has a strong influence on the cost. Due to the large volume of production the company enjoys a high bargaining power, spreads its specialization and overheads and divides it labor. The company Tesco gets advantage from its experience curve due to its large volumes of production than its competitors. Better equipment facility, specialization, standardization, and technology were driven learning are the benefits the company enjoys due to its experience in the industry for a longer period (Fernie, 2004). It was stated by Prahalad and Hamel the core competences does not make a proportionate contribution to final customer value or an efficient way in which the value is given to entering new markets. The challenges that are associated with core competences is to fit a strategy in between what is appraised by the customers and what are the good qualities of the company (UK supermarket chain trials biometrics, 2004).

• Activity system map of Tesco: It has been known to Tesco that it should know the capabilities that are precious for maintaining a relation with its customers. This will help them to gain a competitive advantage this is the reason why the core competence of the company is based on customer service, product value and product range as the Tesco’s service is mainly focused on the customer friendly environment and logistics. The relationship of Tesco with the suppliers has changed to integrated supply chain management from a deal based procurement. The retailers became stronger with the change in the balance of power (Fernie and Sparks, 2009). The suppliers were made to carry the stocks, and the TESCO’s EPOS system managed the production lines. There is a unique relation between the supplier and the company.

Training was provided to the employees of Tesco so that they behave properly in front of the customers and help them find the right product. This would help the company to achieve customer friendly environment. The checkout option is a plus point for the company that the other companies lack (Wilkinson, 2000). Due to the company’s Integrated Supply Chain, it has able to move their innovations to places of untapped or new segments in the market. Tesco also has some power over the new product development by the suppliers (Tesco adopts 100% degradable plastic bags, 2004). The wide supply market chain has enabled Tesco to become more flexible to the changes in the market. As discussed earlier, Tesco wants to get the advantage of the purchasing power of the buyer and learning experience to sell its large volume of merchandises (Humby, Hunt and Phillips, 2004). This as the result would help in reducing per unit cost and avoid damage in its unit margin due to reduced price.  Tesco is combining valued added product with the low prices. The company has able to manage its resource through the study of customer values and needs. The company has also maintained high volumes of sales and profit throughout.

• Strategy Clock: There are additive benefits for the company when it achieves differentiation and cost leadership simultaneously. It is said when the cost leadership and differentiation are achieved together combining of lower costs with the premium prices. So, Tesco earns more profit, and this will enable it to invest its resource to other strategic capabilities. On the dynamic capabilities frontier, Tesco has been able to employ two main tools. Firstly, it launched the Club cards in 1995 that functioned as pure marketing offer. This helped the company to gather data on the interests of the customers. Secondly, Knowledge integration was emphasized by the company (Kotler and Armstrong, 2012). An efficient integrated IT system and also an extranet system was launched by the company.

• Value Chain: To maintain the level of customer choices, Tesco has aimed to provide a wide range of products. The company wants to incorporate better quality control so that it can avoid damage of the products.

By strategic fit analysis we tend to understand the weaknesses, strengths, opportunities and threats company Tesco faces.

1.Increased market Share: As Tesco holds a considerable share in the retail market it will continue to grow its share in food as well as non food. There has been no sign of abating with the ROI and general growth of the company. The investment made by Tesco in the West midland was an aggressive decision which has made the company to move to become the second biggest store after the cooperative group. The revenues that are collected from the non food division were 23% of the total earnings (Moore and Robson, 2002).

2. Insurance: The insurance services provided by the company had a record of the highest number of motor vehicle services in the fiscal year 2003.  The club card holders they can get their travel insurance at the time of check out. The pet insurance covers almost the insurances of 3330 000 dogs and cats.

3. Tesco Online: Tesco has the biggest online store and the sale from it generally crosses 577 million pounds.

1.    Dependence on UK Market: Though the company has an international presence, Tesco still relies on the UK economy. This is not a weakness in the short run but it may create havoc in the long run. Morrison’s purchase of the Safeway chain has caused alteration in the UK supermarket and affected Tesco’s share (Neil Wrigley, 2014).

2.    Reduction in Debt: Tesco has made huge capital expenditure in building new stores. The debt of the company is not likely to reduce. There is also little cash left in the hands of the company for any other operations.

3.     Serial Acquisitions:  There is enormous firepower of the company as it is a 23 billion valued enterprise. Acquisition can be justified with its vast product range.  As Tesco happens to be a major acquirer of companies this would leads to lower earning visibility and quality.

1. Retail of Non food Items:  With the growth in the company’s hyper market format it is expected that there would be a growth in the retail sales in the years to come. Growth of the company can be increased by the combination of footfalls, low cost framework and merchandising skills (Over 1000 food products removed from UK supermarket shelves because of Sudan Red-1 scare, 2005).  Tesco can enjoy the virtuous circle of growth with increased earnings from the overseas. The sales from the non-food items are expected to double over the years. The company aims to be strong in the non food sector with a notable position in food. Last year around half of the new place was allotted for the non food items. This has resulted to increase its market share from 5% to 6%.

2. Beauty and Health: Tesco happens to be the fastest seller of skincare products in the market.  The range of beauty and health products is seen to grow continuously. The supplies of health care and toiletries in the market are in large volumes.

3.    Further international growth: Tesco operates in Asia, in six counties in Europe including UK. Around seven years back, the company’s international sales were 770 million pounds. The company now earns almost ten times of the previous amount. Tesco has been forced by the international growth to become more focused on hypermarkets as this had more positive implication of its growth in United Kingdom.

1.Price war due to change in UK’s structural Changes: The followers of price in the market of UK are likely to become aggressive investors due to change in ownership of Safeway and new management of Sainsbury. Safeway’s prices were reduced by the Morrison’s by 6%. Sainsbury also faced lower prices. There would be low profitability if there is continued leadership in prices by Tesco and Asda (Payne and Frow, 2013).

2. Fall in Overseas return: There might be some unfavorable conditions, failure of the business model build by Tesco and actions by its competitors that might result in the fall in the returns from abroad. The consequences also may be possible due to movement in the larger markets like Japan or China.

3. Challenges from Wal-Mart or Asda: The rank of Tesco has been threatened when Wal-Mart purchased Asda. Tesco is now facing challenges from the company Asda. With a fear in mind, Tesco is providing offers and price cuts to continue its competitiveness in the economy (Seth and Randall, 2001).

References:

Anyesha, A., Hassan, D. and Aboki, H. (2014). The Conquering Strategies of Oligopoly Firms. A review on entry Strategies of Tesco Company Plc in the UK and beyond. IOSR Journal of Business and Management, 16(8), pp.06-15.

Barnes, R. (2011). The great Tesco beauty gamble (the Tesco supermarket chainÂ’s marketing strategy for breaking into the UK beauty services market). Strategic Direction, 27(7).

Bilimoria, K. and Coomber, S. (2009). Against the grain. Chichester, U.K.: Capstone.

Burch, D. and Lawrence, G. (2007). Supermarkets and agri-food supply chains. Cheltenham, UK: Edward Elgar.

Chaffey, D. (2006). Internet marketing. Harlow, England: Prentice Hall/Financial Times.

Cho, Y. (2010). Retailer Brand Development and Handling Processes. University of Stirling.

Clarke, R. (2002). Buyer power and competition in European food retailing. Cheltenham: Edward Elgar Pub.

Dawson, J., Larke, R. and Mukoyama, M. (2006). Strategic issues in international retailing. New York: Routledge.

Fernie, J. (2004). Logistics & Retail Management. London: Kogan Page.

Fernie, J. and Sparks, L. (2009). Logistics & retail management. London: Kogan Page Ltd.

Humby, C., Hunt, T. and Phillips, T. (2004). Scoring points. Sterling, VA: Kogan Page.

Kotler, P. and Armstrong, G. (2012). Principles of marketing. Boston: Pearson Prentice Hall.

Moore, G. and Robson, A. (2002). The UK supermarket industry: an analysis of corporate social and financial performance. Business Ethics: A European Review, 11(1), pp.25-39.

Neil Wrigley, (2014). Store Choice, Store Location and Market Analysis (Routledge Revivals). Hoboken: Taylor and Francis.

Over 1000 food products removed from UK supermarket shelves because of Sudan Red-1 scare. (2005).Focus on Pigments, 2005(4), p.6.

Payne, A. and Frow, P. (2013). Strategic customer management. Cambridge, UK: Cambridge University Press.

Seth, A. and Randall, G. (2001). The grocers. London: Kogan Page.

Smith, H. (2000). Entry and Exit in Grocery Retailing. Oxford: Department of Economics, University of Oxford.

Tesco adopts 100% degradable plastic bags. (2004). Plastics, Additives and Compounding, 6(4), p.16.

Tesco leads the way in the loyalty program stakes. (2007). Strategic Direction, 23(2), pp.18-21.

Thain, G. and Bradley, J. (2012). Store wars. Chichester, West Sussex: John Wiley & Sons.

Towill, D. (2005). A Perspective on UK Supermarket Pressures on the Supply Chain. European Management Journal, 23(4), pp.426-438.

UK supermarket chain trials biometrics. (2004). Biometric Technology Today, 12(6), pp.1-12.

Wilkinson, M. (2000). The Tesco Roundabout. Books Ireland, (236), p.373.

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