Tesco grocery retailing, the UK-based supermarket is the company currently experiencing some difficulties: the business faces some difficult strategic choices. In order to provide the management with appropriate recommendations on how to resolve these difficulties, it is necessary to research the following areas: the macro environment of the company over the last 3-5 years; the micro environment, competitive position of the business, and its development over the last 3-5 years; the internal resources the company has and how well they fit the challenges of its environment; the degree of threat and/or opportunity posed by these environmental conditions; and the viability of the current strategy with possible alternatives for the Board to consider.
The decisions of the firm and the overall business environment are affected by various factors. These factors are the regulation by the government, economic situation, constant changes in technology as well as continuous changes in peoples’ tastes. In order to understand the above-mentioned factors, PESTLE analysis can help firms divide them into groups.
Regulation by the government means that in order to make sure that businesses are conducted fairly certain laws are adopted. The government of the UK does everything possible to promote fair competition and trading. For example, the Office of Fair Trade fined four largest UK retailers, Tesco among them, as they had colluded and applied anti-competitive practices regarding the milk price. The fine was more than £116 million for all involved parties (Supermarket sweep 2012). Such government laws forced Tesco to search for other ways of maximizing their profit as well as for the company’s strategy regarding discounts strategy and margins. If customers find out about the company’s involvement in these illegal practices, Tesco’s reputation will be damaged.
In order to get rid of the competition from other retailers, large supermarkets use a scheme with landholdings. A company, Tesco, for example, buys a lot of land around its stores. This way, it protects its business from competitors that will not be able to build their stores nearby and draw away Tesco’s customers. The land commission did not like this way of conducting business and announced the introduction of a special law that would not allow top supermarket companies accumulate lands for this purpose (Supermarket sweep 2012; Exchange Wire 2012). For Tesco, it means finding new methods that would prevent rivalling companies from building their supermarkets around Tesco’s stores. The rapid growth of the company is affected by all these laws that the UK government introduces with the noble goal of making all companies conduct their business fair and square (Supermarket sweep 2012).
The decline of the UK economy that is presently not in a good shape greatly impacts the disposable income of the country’s population. People prefer to save their money instead of spending it in stores and supermarkets. Tesco as well as other companies is affected by this fact. For example, heavy discounts that the company has introduced for the consumers to be able to buy goods cause company’s poor sales. Although such policy attracted new customers to the company, it has resulted in the company’s worst sales performance after the latest recession period (Supermarket sweep 2012). When the interest rates dropped from 5.75 percent as of November 2007 to mere 2.00 percent as of December 2008,because of the government that had also made a 2.5 percent reduction of VAT, it became apparent that these measures were aimed at encouraging people to spend their money more. It did not help Tesco increase sales, though (Supermarket sweep 2012; Exchange Wire 2012).
Tough times in the economy greatly influence people’s spending patterns. It is difficult to predict which social and cultural factors will impact the business environment. When the idea of healthy food was introduced and promoted, it would be in people’s interests to make their food purchases in supermarkets in order to cook their food at home. This food would be healthy, not to mention that it would cost less than the prepared one (Supermarket sweep 2012). This allowed Tesco to increase its performance and as a result the sales increased as well. An advertising campaign that cost the company £4 million in 2007 was launched by Tesco in order to show how cheap the company’s products were in comparison to the rivalling retailers (Morrison, ASDA, and others). The company’s reputation among people only increased due to this campaign (Supermarket sweep 2012; Exchange Wire 2012).
New technologies allow businesses to create new products and bring new business opportunities in general. This forces the industry to change its structure, to alter and adjust its productivity. Such a large company as Tesco should use new technologies to its advantage, thus creating new business opportunities and increasing its competitiveness. Tesco has managed to see what huge opportunities the use of Internet could bring to the company and did not waste a chance to take an advantage of it. The company started to sell their goods online. As of September 2007, 66.2 percent of online shoppers purchased grocery and other food in Tesco’s online stores. It shows how much the modern business environment of the company was changed by new technologies (Supermarket sweep 2012).
Various industries are the biggest consumers of natural resources. They consume a lot of energy for the production and transportation of their goods. That is why, the issue of saving energy and using renewable energy resources is so acute and pressing. Recycling is a good and important activity for such companies like Tesco. In 2007, the company and other players on the same retail market started to use this aspect for their benefit. They wanted the public to see them as environmentally conscious companies. That year, Tesco announced its plan to spend £500 million on green initiatives. The company’s online store also received an award for using environmentally friendly delivery vans (Supermarket sweep 2012; Exchange Wire 2012).
Micro Environment and Competitive Position
Internal factors that influence the competitive advantages of a company are called the microenvironment. In turn, it directly impacts the company’s organizational strategy. The modern business environment is very competitive. That is why, all companies aim at achieving three things. They want to survive, grow and, of course, have profit. Michael Porter created a Five Forces Model of Competition where the following factors are used to determine what influences competition in the industry and what its nature is. They are the following: “1) Competitive rivalry; 2) Power of suppliers; 3) Power of buyers; 4) Threats of substitutes; and 5) Threat of new entrants” (Porter’s five forces model 2008).
As for “Competitive rivalry”, Tesco does have its rivals in the industry of retail. These are such companies as ASDA, Sainsbury’s, Morrison, etc. The following issues as product, quality, price, and convenience of location are the driving force behind this competition.
Such a strong force as competition among rivalling companies leads to the zero profit for all involved parties. This competition has devastating effects on the companies’ profits. Tesco, for example, showed very poor sales results after it had implemented a discounter strategy for its customers (Barford 2012).
A company’s competitive advantage is such an advantage that a company gains over its rivalling companies. Hill and Jones give such a definition of the competitive advantage: “A firm has gained an above-average return as compared to its competitors in its industry” (Flint 2000). They also add: “… a sustained competitive advantage is simply a competitive advantage that has been maintained for a number of years” (Flint 2000).
Following the above-mentioned definition of the competitive advantage as the company’s highest position that has been occupied by it for several years, it is possible to say that Tesco is the leader of the UK retail market with such companies as Sainsbury, ASDA, and Morrison performing not so significantly as Tesco. A strategy of the core competence that meant competitive prices and the expansion of stores in various formats has brought Tesco its leading position on the market of the UK retail. Tesco has managed to expand its stores via purchasing private property in order to use them as stores later. An example of such a purchase is a 21 BP gas station that was purchased in 2005 and later converted into the Express convenience food store (Barford 2012; Supermarket sweep 2012).
As of 2006, Tesco’s share of the country’s grocery market constituted 26 percent and 51.1 percent of the country’s supermarkets belonged to Tesco. 66.2 percent of shoppers buying grocery and food online made their purchases in the Tesco’s online store. The company’s online sales grew by 33.4 % or in numerical form it was £10.9 billion. It was forecasted that the amount of £10.9 billion in 2006 would increase in five years to £26 billion (Barford 2012; Supermarket sweep 2012).
Geographically, the company is very large with having more than 3,400 stores and approximately 30 distributional centres. The public acknowledges the company as the most known and the largest retailer in the country. The company is not a pure food retailer; it also sells non-food consumer goods as well as services. For example, it has its insurance company – Tesco insurance, a mobile company – Tesco mobile, it sells cloth, broadband, and lots of other non-food consumer goods. Tesco achieves domination on the market by diversifying its business and providing people with virtually everything they need or might need (Barford 2012; Supermarket sweep 2012).
The company’s core business is grocery retail. Tesco, though, does not make it the only business of the company. Such non-food consumer products like insurance, mobile services, broadband services, clothes, etc. are brought to the market by Tesco before its competitors start selling similar products. The company’s resources as well as capabilities make it a serious rival for its competitors as it is quick to introduce innovations as well as efficient customer support of high quality. Tesco’s rivalling company “Argos” cannot boast of having the same competence in routine activities that Tesco is proud of.
The share of non-food consumer goods’ sales constituted 29 percent of the company’s total performance on the market in 2007. Tesco offers so many products, services, and goods that it would be safe to say that consumers can find anything they need and buy from Tesco stores and online stores, thus making the company the most preferred retailer among the others (Barford 2012; Supermarket sweep 2012).
Tesco’s pricing strategy and a huge number of offered products allowed the company the consistent increase of its market share. It creates its competitive advantage by utilizing its capabilities and resources that allow Tesco to lower the costs’ structure. This gives Tesco the power to be an aggressive competitor for Sainsbury’s, Morrison’s, and ASDA when it comes to price. Tesco contiguously grows and leaves its competitors in the industry far behind. The company’s presence on the market of South Korea is very strong even though the aggressive policy of Korean discounters forced one of Tesco’s competitors Wal-Mart to leave the South Korean market by selling all 16 stores that Wal-Mart had in the country (Barford 2012; Supermarket sweep 2012). Wal-Mart was simply unable to satisfy the taste and needs of the consumers in the country.
Internal Resources Evaluation
Firms that use the Porter’s model of competition should not forget about important factors that lead to the theory’s limited application in the modern market environment. Porter’s theory was introduced in the 18th century. As a result, it is based on the situation in the economy of that time. The markets of that time were relatively stable with competition being rather strong. The modern market structure cannot boast of having such features (Exchange Wire 2012).
The modern business model is different and it is not taken into account of the Porter’s model. Porter, as the author of these five forces of competition, acknowledged the part that innovations played in the process of revolutionary changes in the industry structures. Modern markets are known to be under the influence of innovations in technology and continuous and dynamic changes of the markets. Firms of the 18th century, for instance, did not have such a thing as a club card. Such cards are used in identifying the shopping behaviour of their owners. Companies knowing this behaviour as well as needs and wishes use the strategy of the club card to satisfy customers’ needs because they do not want to lose them (Exchange Wire 2012).
Porter’s model can be used with certain limitations because the modern structure of markets is different from the one that was used to create the model. It would not be very wise for companies to completely depend on this model when developing the strategies of their work.
This model is good for the analysis and identification of the opportunities that the companies’ rivals have. What this model omits is how changes can be implemented when companies want to reposition their competitive advantage. Also, the focus of this model is industries in general, it neglects individual companies. Each and every company’s aim is the maximization of its profit rate. Porter’s model simply does not view these companies, only industries in general (Exchange Wire 2012).
Threats and Opportunities
A threat of substitutes emerges when a person is not satisfied with the price or quality of the products of one company and can buy a substitute of this product from another company. The UK grocery market is known for a very competitive environment as it can offer a lot of substitute products. Such an extensive availability of substitute products may cause Tesco to lose a number of customers subsequently affecting the company’s market share. For example, 1000 customers might prefer ASDA to Tesco as the latter company’s products do not satisfy them (with their quality or price) (Exchange Wire 2012; Supermarket sweep 2012).
Currently the most serious and largest competitor of Tesco is ASDA. Tesco does have competitive advantage as it can purchase goods from suppliers paying less and small or new supermarkets cannot do that. This gives Tesco an opportunity not to lose its existing customers and remain the leader of the country’s grocery market.
Consumers of the company’s products are its customers. The competition among the producers of goods will remain, but their influence on the customers will weaken. In other words, the number of customers of a company determines its buyer’s power. Tesco’s customers and buyers are strong as they know that they can purchase the same goods from other companies, thus they demand better services and lower prices from Tesco (Exchange Wire 2012; Supermarket sweep 2012). As it has been previously mentioned, the buyer’s power manifested itself when Tesco offered a discounter for its customers aiming at retaining its customer base. The company’s sales performance (in the UK) suffered substantially.
The supplier’s power has its effect on the production of a company as well as influences the value that an industry creates. A strong supplier will be the one to determine the price for its supplies and not the company that buys supplies. Suppliers have the most power in some cases such as high switching costs, absence of substitutes for some product, and the company’s dependence of its suppliers. In the case of Tesco, it can be said that its suppliers are weaker and they have to maintain low costs for the production. This allows Tesco to maintain low prices for the products and keep its market share or increase it. For instance, some Tesco’s suppliers said that their retailer would not allow them to increase the price for their products (Exchange Wire 2012; Supermarket sweep 2012).
Potential competitors pose a threat to the companies with the established customer base when they want to make an entry to the market. They want to have their share of the market and their share of the profit. Theoretically, easy entrance to the market will lead to the increase of competition. Hindered entrance means that the established leaders of the market will prevent the newcomers from entering this or that market by placing barriers. Such barriers are advertising, increased entry cost for the newcomers, or even policies adopted on the government level (Exchange Wire 2012; Supermarket sweep 2012).
Tesco successfully competes with its rivals and competitors as it uses the competitive advantage in full, which allows the company to remain the leader on the UK retail market. If Tesco does not want to lose its leading position on the market or wants to increase its share, it should know what to be careful of. The company should be careful of its competitors and should pay attention to what they do (Exchange Wire 2012; Supermarket sweep 2012). Wal-Mart wants to throw Tesco from its top place on the market by overtaking it and gaining a bigger market share. ASDA is the biggest threat as its owner in the UK is Wal-Mart. Tesco must continuously improve its competitive advantage. It should have a competitive pricing strategy and expand its stores if it does not want to lose its leading positions.
Porter’s model of Five Forces of Competition is a powerful tool for the management used for analyzing the market. The stronger is the influence of these five forces on the competition, the greater it becomes. However, certain limitations do not allow the Porter’s framework to be the only determining force of the companies’ competition in the industry. Besides Porter’s model, there are forces influencing competition as well. Such force is the PESTEL analysis. In other words, these factors should be considered as well. Tesco must be aware of the latest changes in the government policies and technological innovations if it does not want to break any laws that govern business practices. Illegal practices can substantially hurt the company’s image in the eyes of the public and drive the company off its leading position among other retailers.