Strategic Management of TESCO supermarket: PESTEL analysis,

Porter's 5 Forces analysis, Critical success factors, SWOT

Analysis, VALUE CHAIN analysis, TESCO'S strategic options,

Core Competences & Cultural Web.

I INTRODUCTION

The food and drink retail sector represents the largest industry in

the UK, providing employment for over three million people in

primary production, manufacturing and retailing. In 2003 retail

accounted for 9% of gross domestic product (Datamonitor, 2003).

In recent years UK supermarkets have come under increased

scrutiny over their treatment of suppliers, particularly of own-label

products, yet the development of strategic supply networks has

been an integral part of most supermarket strategies for the past

decade.

The report below provides an insight into the supermarket

company, Tesco, with emphasis on its external environment

analysis and company's analysis of resources, competence and

culture. Two future strategic options are suggested in regards to

the resources based strategies.

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 Tesco is one of the largest food retailers in the world, operating

around 2,318 stores and employing over 326,000 people. It

provides online services through its subsidiary, Tesco.com. The

UK is the company's largest market, where it operates under four

banners of Extra, Superstore, Metro and Express. The company

sells almost 40,000 food products, including clothing and other

non-food lines. The company's own-label products (50 percent of

sales) are at three levels, value, normal and finest. As well as

convenience produce, many stores have gas stations, becoming

one of Britain's largest independent petrol retailers. Other retailing

services offered include Tesco Personal Finance.

2.0 INDUSTRY ANALYSIS: PESTEL FRAMEWORK

2.1 Political Factors

Operating in a globalized environment with stores around the

globe (Tesco now operates in six countries in Europe in addition to

the UK; the Republic of Ireland, Hungary, Czech Republic,

Slovakia, Turkey and Poland. It also operates in Asia: in South

Korea, Thailand, Malaysia, Japan and Taiwan), Tesco's

performance is highly influenced by the political and legislative

conditions of these countries, including the European Union (EU).

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 For employment legislations, the government encourages

retailers to provide a mix of job opportunities from flexible, lower-

paid and locally-based jobs to highly-skilled, higher-paid and

centrally-located jobs (Balchin, 1994). Also to meet the demand

from population categories such as students, working parents and

senior citizens. Tesco understands that retailing has a great

impact on jobs and people factors (new store developments are

often seen as destroying other jobs in the retail sector as

traditional stores go out of business or are forced to cut costs to

compete), being an inherently local and labour-intensive sector.

Tesco employs large numbers of; student, disabled and elderly

workers, often paying them lower rates. In an industry with a

typically high staff turnover, these workers offer a higher level of

loyalty and therefore represent desirable employees.

2.2 Economical Factors

Economic factors are of concern to Tesco, because they are likely

to influence demand, costs, prices and profits. One of the most

influential factors on the economy is high unemployment levels,

which decreases the effective demand for many goods, adversely

affecting the demand required to produce such goods.

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 These economic factors are largely outside the control of the

company, but their effects on performance and the marketing mix

can be profound. Although international business is still growing

(Appendix A), and is expected to contribute greater amounts to

Tesco's profits over the next few years, the company is still highly

dependent on the UK market. Hence, Tesco would be badly

affected by any slowdown in the UK food market and are exposed

to market concentration risks.

2.3 Social/Cultural Factors

Current trends indicate that British customers have moved

towards 'one-stop' and 'bulk' shopping, which is due to a variety of

social changes. Tesco have, therefore, increased the amount of

non-food items available for sale.

Demographic changes such as the aging population, an increase

in female workers and a decline in home meal preparation mean

that UK retailers are also focusing on added-value products and

services. In addition, the focus is now towards; the own-label

share of the business mix, the supply chain and other operational

improvements, which can drive costs out of the business. National

retailers are increasingly reticent to take on new suppliers (Clarke,

Bennison and Guy,1994; Datamonitor Report, 2003).

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 The type of goods and services demanded by consumers is a

function of their social conditioning and their consequent attitudes

and beliefs. Consumers are becoming more and more aware of

health issues, and their attitudes towards food are constantly

changing. One example of Tesco adapting its product mix is to

accommodate an increased demand for organic products. The

company was also the first to allow customers to pay in cheques

and cash at the checkout.

2.4 Technological Factors

Technology is a major macro-environmental variable which has

influenced the development of many of the Tesco products. The

new technologies benefit both customers and the company:

customer satisfaction rises because goods are readily available,

services can become more personalised and shopping more

convenient.The launch of the Efficient Consumer Response (ECR)

initiative provided the shift that is now apparent in the management

of food supply chains (Datamonitor Report, 2003). Tesco stores

utilise the following technologies:

• Wireless devices

• Intelligent scale

• Electronic shelf labelling

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 • Self check-out machine

• Radio Frequency Identification (RFID).

The adoption of Electronic Point of Sale (EPoS), Electronic Funds

Transfer Systems (EFTPoS) and electronic scanners have greatly

improved the efficiency of distribution and stocking activities, with

needs being communicated almost in real time to the supplier

(Finch, 2004).

2.5 Environmental Factors

In 2003, there has been increased pressure on many companies

and managers to acknowledge their responsibility to society, and

act in a way which benefits society overall (Lindgreen and Hingley,

2003). The major societal issue threatening food retailers has

been environmental issues, a key area for companies to act in a

socially responsible way. Hence, by recognizing this trend within

the broad ethical stance, Tesco's corporate social responsibility is

concerned with the ways in which an organization exceeds the

minimum obligations to stakeholders specified through regulation

and corporate governance. (Johnson and Scholes, 2003)

Graiser and Scott (2004) state that in 2003 the government has

intended to launch a new strategy for sustainable consumption and

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production to cut waste, reduce consumption of resources and

minimise environmental damage. The latest legislation created a

new tax on advertising highly processed and fatty foods. The so-

called 'fat tax' directly affected the Tesco product ranges that have

subsequently been adapted, affecting relationships with both

suppliers and customers

2.6 Legislative Factors

Various government legislations and policies have a direct impact

on the performance of Tesco. For instance, the Food Retailing

Commission (FRC) suggested an enforceable Code of Practice

should be set up banning many of the current practices, such as

demanding payments from suppliers and changing agreed prices

retrospectively or without notice (Mintel Report, 2004). The

presence of powerful competitors with established brands creates

a threat of intense price wars and strong requirements for product

differentiation. The government's policies for monopoly controls

and reduction of buyers' power can limit entry to this sector with

such controls as license requirements and limits on access to raw

materials (Mintel Report, 2004; Myers, 2004). In order to

implement politically correct pricing policies, Tesco offers

consumers a price reduction on fuel purchases based on the

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amount spent on groceries at its stores. While prices are lowered

on promoted goods, prices elsewhere in the store are raised to

compensate.

3.0 INDUSTRY ANALYSIS: PORTER'S FIVE FORCES

3.1 Threat of New Entrants

The UK grocery market is primary dominated by few competitors,

including four major brands of Tesco, Asda, Sainsbury's and

Safeway that possess a market share of 70% and small chains of

Somerfield, Waitrose and Budgens with a further 10%. Over the

last 30 years, according to Ritz (2005), the grocery market has

been transformed into the supermarket-dominated business.

Majority of large chains have built their power due to operating

efficiency, one-stop shopping and major marketing-mix

expenditure. This powerful force had a great impact on the small

traditional shops, such as butchers, bakers and etc. Hence,

nowadays it possesses a strong barrier for new companies who

desire to enter the grocery market. For instance, it becomes rather

difficult for new entrants to raise sufficient capital because of large

fixed costs and highly developed supply chains. This is also

evident in huge investments done by large chains, such as Tesco,

in advanced technology for checkouts and stock control systems

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that impact new entrants and the existing ones. Other barriers

include economies of scale and differentiation (in the

provision of products or services with a higher perceived

value than the competition) achieved by Tesco and Asda seen

in their aggressive operational tactics in product

development, promotional activity and better distribution.

3.2 Bargaining Power of Suppliers

This force represents the power of suppliers that can be

influenced by major grocery chains and that fear of losing their

business to the large supermarkets. Therefore, this consolidates

further leading positions of stores like Tesco and Asda in

negotiating better promotional prices from suppliers that small

individual chains are unable to match Ritz (2005). In return, UK

based suppliers are also threatened by the growing ability of large

retailers to source their products from abroad at cheaper deals.

The relationship with sellers can have similar effects in

constraining the strategic freedom of the company and in

influencing its margins. The forces of competitive rivalry have

reduced the profit margins for supermarket chains and suppliers.

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3.3 Bargaining Power of Customers

Porter theorized that the more products that become standardized

or undifferentiated, the lower the switching cost, and hence, more

power is yielded to buyers Porter M. (1980). Tesco's famous

loyalty card - Clubcard remains the most successful customer

retention strategy that significantly increases the profitability of

Tesco's business. In meeting customer needs, customizing

service, ensure low prices, better choices, constant flow of in-store

promotions enables brands like Tesco to control and retain their

customer base. In recent years a crucial change in food retailing

has occurred due to a large demand of consumers doing the

majority of their shopping in supermarkets that shows a greater

need for supermarkets to sell non-food items. It has also provided

supermarkets with a new strategic expansion into new markets of

banking, pharmacies, etc. Consumers also have become more

aware of the issues surrounding fairer trade and the influence of

western consumers on the expectations and aspirations of Third

World producers. Ecologically benign and ethically sound

production of consumer produce such as tea, coffee and cocoa is

viable, and such products are now widely available at the majority

of large chains.

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3.4 Threat of Substitutes

General substitution is able to reduce demand for a particular

product, as there is a threat of consumers switching to the

alternatives Porter M. (1980). In the grocery industry this can be

seen in the form of product-for-product or the substitute of need

and is further weakened by new trends, such as the way small

chains of convenience stores are emerging in the industry. In this

case Tesco, Asda and Sainsbury's are trying to acquire existing

small-scale operations and opening Metro and Express stores in

local towns and city centres Ritz (2005).

3.5 Bargaining Power of Competitors

The grocery environment has seen a very significant growth in the

size and market dominance of the larger players, with greater store

size, increased retailer concentration, and the utilization of a range

of formats, which are now prominent characteristics of the sector.

As it was mentioned above, the purchasing power of the food-

retailing industry is concentrated in the hands of a relatively small

number of retail buyers. Operating in a mature, flat market where

growth is difficult (a driver of the diversification into non-food

areas), and consumers are increasingly demanding and

sophisticated, large chains as Tesco are accruing large amounts of

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consumer information that can be used to communicate with the

consumer Ritz (2005). This highly competitive market has fostered

an accelerated level of development, resulting in a situation in

which UK grocery retailers have had to be innovative to maintain

and build market share. Such innovation can be seen in the

development of a range of trading formats, in response to changes

in consumer behaviour. The dominant market leaders have

responded by refocusing on price and value, whilst reinforcing the

added value elements of their service.

4.0 CRITICAL SUCCESS FACTORS

After a close evaluation of the external analysis of the grocery

industry and SWOT analysis presented in Appendix B, it is crucial

to consider internal operational effectiveness of Tesco in the form

of identifying critical success factors of the company within the

food retailing sector.

4.1 Branding and Reputation

There are companies that have always understood that they were

selling brands before the product. Tesco is a brand and also

serves as the core strategic advantage. The company was

spreading like wildfire transforming the generic into the brand-

specific, largely through carefully branded packaging and the

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promotion of an “every penny counts” environment. The company

has a strong brand image, and is associated with good quality,

trustworthy goods that represent excellent value.

The product and service development processes of the company

have been substantially re-engineered, to facilitate better

management of product lifecycles and more efficient delivery of

wide ranges of products to customers. Product activity has

focused on enhancing core ranges and introducing quality

products. Tesco's innovative ways of improving the customer

shopping experience, as well as its efforts to branch out into

finance and insurance have also capitalized on strong brand

reputation.

The company is also very successful in terms of customer loyalty

due to its loyalty cards system and its general approach to

customizing services to the needs of every customer. This is truly

evident in terms of tremendous growth of on-line sales where the

company has a strong platform to further develop this revenue

stream. After considering the fact the nowadays majority of people

have less time for shopping, Tesco employed this on-line systems

and now became the biggest online supermarket.

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4.2 IT Integration

Today companies act in an increasingly dynamic and complex

environment, giving more difficulties making forecasts and

adapting themselves to the continuous changes. In order to be

able to compete in this kind of world, it is necessary to innovate at

an extraordinary speed, continuously improving the products,

services and processes. For Tesco operations have become

necessities rather than luxuries. Systems that control stock, keep

all the stock and deliveries records and analyse business

transactions are the lifelines of the company. It can also be said

that IT has risen beyond its traditional support role and taken up a

central role in business strategy formulation.

Extranet system employed by the company, enables Tesco to use

the Internet to create proprietary and customised information flows

between the company and its business partners. The system

connects business partners online behind virtual firewalls, bringing

more flexibility, scalability, extensibility and integration across the

distribution channels. Extranet also helps to extend the key

information on business partners throughout the supply chain and

facilitate collaborative relationships with partners. Market

exchanges hold the promise of extending Tesco's reach, delivering

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buyers to their virtual doorstep from around the world. Other

examples of the most efficient technological advances that support

daily business operations of Tesco are wireless devices, intelligent

scale, electronic shelf labelling, self check-out machine and radio

frequency identification (RFID) systems. This technology is an

effort to maintain Tesco's ability to handle an increase in

product/service volume while controlling costs; it also enables to

be innovative and market oriented.

4.3 Supplier Management

Tesco, like many other grocery chains companies, sources its

goods from overseas manufacturers who are more competitive on

price and volumes. For many years Tesco has been supporting

British jobs and expertise by encouraging large branded suppliers

to develop exclusive production facilities. But in recent years the

company has realised the need to look abroad for products no

longer available in UK, bud tried to do it through long-established

UK partners. The foods continued to be heavily UK-based due to

the very successful range of prepared foods.

As a major retailer selling diverse product range, they work with

many different suppliers around the world, with employees from

many different cultures and ethnic groups. Therefore, it is the

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company policy and company's main approach to have unique

relationships with suppliers. Applying advanced technology in its

communications and cooperation with the suppliers, the company

aims to control the work of its suppliers and heavily relies on their

efficiency. The direct suppliers use a number of sub-contracted

suppliers, selected to be best in class in their country. Tesco has

established close relationships with the contractors believing that

regular and long term orders promote the investment necessary to

improve conditions in the supply chain.

Being an international company, Tesco develops various supplier

management programmes to survey key suppliers and franchisee

satisfaction. The company also takes part in the Ethnical Trading

Initiative.

The table presented below gives a strategic comparative analysis,

comparing Tesco's successful factors discussed above with the

same factors of the main competitors' in the UK grocery industry.

The scores have been give with the scale from 0 to 5

CSF Sainsbury's Asda Safeway

Branding 5 3.5 3

IT Integration 4 3 3

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 Supplier 5 3 4
Management

Total 14 10.5 11

The results highlight that the main threat is potentially coming

from Sainsbury's that possesses a strong brand name and is

carefully selects and controls its suppliers.

5.0 ANALYSIS OF RESOURCES, COMPETENCE AND

CULTURE

5.1 SWOT Analysis

Tesco is the top grocer and leading retailer in its home market of

the UK. Pitched at the broad middle mass-market, it has

maintained its position through a clear focus, well targeted product

offer and excellent record both in product and format innovation.

Tesco also leads the world in online grocery retailing. In the UK

the company concentrates on running grocery superstores, c-

stores and an online service. Elsewhere the focus is usually on

hypermarkets. In 2003, the group's trading record around Europe

and UK has been outstanding.

The full SWOT analysis of Tesco is presented in Appendix B,

summarizing the key issues from the business environment and

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the strategic capability, including resources and competence, of

the company that are most likely to impact on strategy

development

5.2 Core Competence

Superior performance, according to Johnson and Scholes (2003),

has to be determined by the way in which company's resources

are deployed to create competence in the organisational activities.

Core competencies are activities or processes that critically

underpin the company's competitive advantage. The primary

target for the company is to recognize that competition between

businesses is as much a race for competence as it is for market

position and market power. Therefore, the goal for Tesco

management is to focus the attention on competencies that really

affect competitive advantage.

The competence leads to levels of performance from an activity or

process that is significantly better than competitors.

Benchmarking may help in understanding performance standards

and what constitutes good or bad performance. However, it will be

crucial for Tesco to look at the generic level. Core competences

may be embedded deep in Tesco at an operational level in the

work routines. The framework developed by Prahalad and Hamel

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in the 1990s suggests that over time companies may develop key

areas of expertise which are distinctive to that company and

critical to the company's long term growth (Drejer, 2000; De

Toni, and Tonchia, 2003). In the case of Tesco the areas of

expertise are most likely to develop in the critical, central

areas of the organisation where the most value is added to its

service and its delivery. For example, trust in the Tesco brand

lies at the heart of these services and in 2003 the number of retail

service accounts rose by 36%. Some 50,000 new service

accounts per week are being opened and Tesco sees these areas

as long term businesses with the potential to build real scale.

Financial services have also been launched internationally in for

example Hungary and Korea (Datamonitor Report, 2003;

MarketWatch, 2004).

Through a long period of operations, core competencies of Tesco

have to be rather fixed. Prahald's and Hamel's approach states

that core competencies should change in response to changes in

the company's environment and be flexible and evolve over time.

Therefore, Tesco needs to adapt to new rapidly changing

circumstances and opportunities, so its core competencies will

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have to adapt and change. The example of this was when the

company has launched its loyalty card and went into banking.

Core competences framework suggests three factors, which can

help to identify core competences:

Provide potential access to a wide variety of markets :

enables the creation of new products and services. Fro instance,

Tesco has established a strong leadership in food retailing industry.

The core competence that enabled Tesco to enter retailing of food

and non-food products was a clear distinctive brand proposition

that had a focus on a properly define market segment. Tesco is

recognized as the company, providing the most customized and

efficient service, based on a good customer relationship

management.

Makes a significant contribution to the perceived customer

benefits of the outcome: delivers a fundamental customer

benefit. In order to identify core competences in a particular

market, the question of - why is the customer willing to pay more or

less for one product or service than another- needs to be

addressed. For example, Tesco have been very successful in

capturing the leadership of the retailing market. This shows that

Tesco designs and implements effective supply systems and

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deliver an efficient "customer interface". Tesco was the first UK

grocer to launch a loyalty card and has been the most effective.

Palmer (2004) claims that until recently, it was the only grocer to

use the information to mail customers every month.

Difficult for competitors to imitate highlights the need for a core

competence to be competitively unique. This indicated the

importance of product differentiation. For example, for many years

up to 2003 (In 2003 Tesco has been recognised a leading UK food

retailer) Tesco had a very strong position within the retailing

industry. It had a different approach to the service concept,

providing good corporate reputation and introducing new premium

quality products (MarketWatch, 2004).

Applying this framework to Tesco shows that the company in order

to be successful has to base its business strategy on these

capabilities. Capabilities result from Tesco's ability to combine and

exploit these resources in uniquely different ways. In the external

environment, the intensity of competition is not completely under

the retailer's control, however, to compete effectively Tesco have to

identify its core competences and use them for company's

advantage.

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5.3 Cultural Web

Cultural web theory application (The cultural web theory is also an

effective analysis for management in order to represent the

underlying assumptions linked to political, symbolic and structural

aspect of the company) is a useful tool in considering the cultural

context for Tesco's business. Culture generally tends to consist of

layers of values, beliefs and taken for-granted actions and ways of

doing business within and outside the company. Therefore, the

concept of cultural web is the representation of these actions taken

for granted for understanding how they connect and influence the

strategy (Veliyath and Fitzgerald, 2000; Johnson and Scholes,

2003). It is also useful to understand and characterise both the

company's culture and the subcultures in adaptation of future

strategies.

Culture can be analysed through the observations of how the

company behaves, including routines, rituals, stories, structures

and systems. This presents the “clues” about the taken-for-

granted assumptions. Tesco has a very friendly and supporting

approach in the routine ways that staff at Tesco behave towards

each other, and towards those outside the company that can make

up the ways people do things. The control systems and

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measurements are constantly under the management review to

monitor the efficiency of the staff and managers' decisions. The

rituals of the company's life are the special events, corporate

gatherings, which Tesco emphasises what is particularly important

and reinforce the way things are done. On-going meetings and

communication at every level of the company's hierarchy represent

a strong internal environment.

6.0 TESCO'S STRATEGIC OPTIONS: GENERIC STRATEGIES

Generic Strategies are characterised by an individual retailer's

response to the industry structure. For a giant retailer, such as

Tesco, to obtain a sustainable competitive advantage they should

follow either one of three generic strategies, developed by Porter.

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 The first strategy of cost leadership is one in which Tesco can

strive to have the lowest costs in the industry and offer its products

and services to a broad market at the lowest prices. This strategy

will be based on the Tesco's ability to control their operating costs

so well that they are able to price their products competitively and

be able to generate high profit margins, thus having a significant

competitive advantage. If Tesco uses another strategy of

differentiation, than it has to try to offer services and products

with unique features that customers value. Tesco will be able to

create brand loyalty for their offerings, and thus, price inelasticity

on the part of buyers. Breadth of product offerings, technology,

special features, or customer service are popular approaches to

differentiation.

The last strategy of focus can be either a cost leadership or

differentiation strategy aimed toward a narrow, focused market. In

pursuing a cost leadership strategy Tesco focuses on the creation

of internal efficiencies that will help them withstand external

pressures. Therefore, it appears reasonable to think that Tesco

will have frequent interactions with the governmental/regulatory

and supplier sectors of the environment. In accordance to this

framework, while both overall cost leadership and differentiation

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strategies are aimed at the broad market, Tesco may also choose

to confine their product to specific market areas or may choose to

offer a smaller line of products to the broad market, thus pursuing

a strategy of focus or niche (Porter, 1980). In other words, Tesco

pursues a strategy of cost leadership or differentiation either in a

specific market or with specific products.

The danger some organisation face is that they try to do all three

and become what is known as stuck in the middle. In case of

Tesco it is not appropriate, as they do have a clear business

strategy with a clearly defined market segment.

7.0 MARKET OBJECTIVES AND STRATEGIES

IMPLEMENTATION

Strategy frameworks and structuring tools are key to assessing

the business situation. Risk and value trade-offs are made explicit,

leading to concrete proposals to add value and reduce risk.

Explicit plans for action, including effective planning need to be

developed by Tesco as the strategic alternative.

From the generic strategies discussed above, Tesco is likely to

employ two strategic options that are also likely to be primary

market objectives of focus on market development though

partnerships and diversification through new product development.

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Market Development Strategy: Joint Developments and Strategic

Alliances

By entering new markets like China and Japan it can serve as a

key growth driver of the company's revenues and expansion

strategy. Tesco's interests in Japan are likely to continue growing

in due course, as Asian markets are showing an increase in

consumer spending and increased trend towards retailing. These

new markets are also demographically high opportunity markets.

In the case of Tesco, one of the suggested strategic options is in

international alliances with the local retailers in Asian markets. It

will be considered as a method of development and may be

formed to exploit current resources and competence. By entering

into joint ventures or partnerships, in order to gain a larger

economy of scale and larger market presence, Tesco will draw on

the extensive local knowledge and operating expertise of the

partner whilst adding its own supply chain, product development

and stores operations skills to deliver a better shopping experience

to customers. However, given the huge scale, potential and

complexities of these markets, Tesco may feel that being the first

mover is not necessarily an advantage. The success of the

partnership will be related to three main success criteria:

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sustainability, acceptability and feasibility. Sustainability will be

concerned with whether a strategy addresses the circumstances in

which the company is operating. It is about the rationale of this

expansion-market development strategy. The acceptability relates

to the expected return from the strategy, the level of risk and the

likely reaction of stakeholders. Feasibility will be regarded to

whether Tesco has the resources and competence to deliver the

strategy.

Product Development: Diversification

Johnson and Scholes (2003) believe that changes in the business

environment may create demand for new products and services at

the expense of established provision. Ansoff's matrix also

suggests that if new products are developed for existing markets,

then a product development strategy has to be considered by the

management level of a company. In expanding and diversifying

Tesco's product mix, it is also crucial to implement internal

development when new products are developed. The nature and

the extent of diversification should also be considered in relation to

the rationale of the corporate strategy and the diversity of the

portfolio. By following the changing needs of the customers Tesco

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can introduce new product lines. This may require more attention

to R&D, leading to additional spending.

The retailing industry is experiencing overcapacity and innovative

services and products being the major competitive advantage.

Therefore, innovation has to be a major driver for Tesco's product

development. For example, Tesco can develop a portfolio of

different store formats in the UK, each designed to provide a

different shopping experience. While the majority of Eastern

European and Far Eastern outlets are hypermarkets, Tesco can

also develop different store types in these markets as well. This

value added by the uniqueness will eventually lead Tesco to

command a premium price. The management of technological

innovation is increasingly involved in strategic decision-making.

Tesco have to exploit their internal strengths and minimise their

internal weaknesses in order to achieve sustained competitive

advantage (Although a competitive advantage is the goal

innovators want to achieve, the ability to create platform(s)

depends on how they could manage the innovation. Nevertheless,

it does not mean that the innovator has to possess all requisite

capabilities, the important thing is the ability to organise and use

the capabilities of others in order to create a business platform).

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8.0 CONCLUSION

The success of the Tesco shows how far the branding and

effective service delivery can come in moving beyond splashing

one's logo on a billboard. It had fostered powerful identities by

making their retiling concept into a virus and spending it out into

the culture via a variety of channels: cultural sponsorship, political

controversy, consumer experience and brand extensions.

In a rapidly changing business environment with a high

competitors' pressure Tesco have to adopt new expansion

strategies or diversified the existing in order to sustain its leading

market position in an already established retailing market. The

company must constantly adapt to the fast changing

circumstances. Strategy formulation should therefore be regarded

as a process of continuous learning, which includes learning about

the goals, the effect of possible actions towards these goals and

how to implement and execute these actions. The quality of a

formulated strategy and the speed of its implementation will

therefore directly depend on the quality of Tesco's cognitive and

behavioural learning processes.

In large organizations as Tesco strategy should be analysed and

implemented at various levels within the hierarchy. These different

29
levels of strategy should be related and mutually supporting.

Tesco's strategy at a corporate level defines the businesses in

which Tesco will compete, in a way that focuses resources to

convert distinctive competence into competitive advantage.

APPENDIX B

SWOT ANALYSIS: TESCO

Source: Mintel Report, Datamonitor Reports, Tesco Case

Studies

Strengths

Increasing market share: Tesco holds a 13% share of the UK

retail market. Its multi-format capability means that it will continue

30
to grow share in food, while increasing space contribution from

hypermarkets will allow it to drive a higher share in non-food.

Tesco's general growth and ROI show no sign of abating: In

the UK, Tesco's late 2002 investment into West-midlands based

convenience store group T&S was billed as the most aggressive

move into the neighborhood market by a big-name retailer so far.

The deal has turned Tesco into the country's second biggest

convenience store chain after the Co-operative Group, and the

company also plans to open up 59 new stores in the UK this year.

Tesco has grown its non-food division to the extent that its

revenues now total 23% of total group earnings. Tesco's

international business segment is growing steadily, and is

predicted to contribute nearly a quarter of group profits over the

next five years. If geographical spread continues to grow, this will

ensure Tesco's continued regional strength.

Insurance: In fiscal 2003 Tesco Personal Finance reached the

milestone of one million motor insurance policies, making it the

fastest growing motor insurance provider ever. The

group's instant travel insurance allows Clubcard holders to buy

their holiday insurance conveniently at the checkout. Pet

insurance now has over 330,000 cats and dogs covered, while the

31
life insurance policy followed on from the success of last year,

when it was voted The Most Competitive Life Insurance Provider in

the MoneyFacts Awards 2003.

Tesco online: Tesco.com is the world's biggest online

supermarket and this year the group had sales of over £577

million, an increase of 29% on last year. Tesco online now

operates in over 270 stores around the country, covering 96% of

the UK. With over a million households nationwide having used

the company's online services, the company has a strong platform

to further develop this revenue stream.

Brand value: Profits for Tesco's operations in Europe, Asia and

Ireland increased by 78% during the last fiscal year. The company

has a strong brand image, and is associated with good quality,

trustworthy goods that represent excellent value. Tesco's

innovative ways of improving the customer shopping experience,

32
as well as its efforts to branch out into finance and insurance have

also capitalized on this.

UK market leadership reinforced: Since acquiring number one

ranking in 1996, Tesco has developed a successful multiformat

strategy that has accelerated its advantage. Its UK sales are now

71% larger than Sainsbury's. Also the Competition Commission's

report makes it very difficult for a competitor to challenge its scale

and has effectively scuppered Wal-Mart's chances of stealing UK

leadership. Therefore, Tesco is in an enormously strong position

in its domestic market.

Weaknesses

Reliance upon the UK market: Although international business is

still growing, and is expected to contribute greater amounts to

Tesco's profits over the next few years, the company is still highly

dependent on the UK market (73.8% of 2003 revenues). While

this isn't a major weakness in the short term, any changes in the

UK supermarket industry over the next year for example, like the

Morrison's group successfully purchasing the Safeway chain could

alter the balance of UK supermarket power, and affect share.

Debt reduction: Tesco is not expected to reduce its debt until at

least 2006. Tesco has a large capital expenditure program mainly

33
due to its huge investment in space for new stores.

Since its expansion is so aggressive, Tesco has little free cash for

any other operations.

Signs point to serial acquisitions: With an enterprise value of

£23 billion, Tesco clearly has enormous firepower. Also, its

product range is vast and almost any acquisition can be justified,

particularly in the UK. While 'fill the gap' strategy would be useful

to the company, as has been the case with the UK convenience

market, there is the danger of Tesco becoming a serial acquirer, as

this tends to reduce earnings visibility and quality.

Opportunities

Non-food retail: The growth in Tesco's hypermarket format in the

UK means that there are expectations of seeing its 13% share of

retail sales climb sharply over the next few years. It can use its

footfall and low cost structure together with improved

merchandising skills to add another leg to growth. Equally, its

growth overseas will further increase earnings and scale, taking

Tesco onto the virtuous circle of growth. It is estimated that

Tesco's non-food sales will double over the next four years.

34
Worldwide it has sales of £7 billion in non-food, some 23% of the

total. Its aim to be 'as strong in non-food as we are in food', no

longer sounds like the consultancy-speak that it once did, and they

are getting there using the basic tenets of value, choice and

convenience that have been so successful in food. Around half of

new space opened in the UK last year was for non-food and the

result has been to increase its market share from 5% to 6% and its

overall share of UK retail sales has increased by 100 basis points

to 12.8%.

The company's telecoms venture is the latest stage in its strategy

to develop popular retail services. It has repeated its approach in

banking, by capitalizing on its brand.

Health and beauty: Tesco's UK health and beauty ranges

continue to grow, and it is currently the fastest growing skincare

retailer in the market. The company has a volume market-leading

position in both toiletries and healthcare and is number one retailer

in the baby goods markets. Across all health and beauty ranges

Tesco continues to invest in price to deliver the value customers

have come to expect and this year invested £27 million on health

and beauty pricing alone. The company now has 19 stores with

opticians and nearly 200 stores with pharmacies.

35
 Further international growth: Tesco now operates in six

countries in Europe in addition to the UK; the Republic of Ireland,

Hungary, Czech Republic, Slovakia, Turkey and Poland. It also

operates in Asia: in South Korea, Thailand, Malaysia, Japan and

Taiwan. Seven years ago, its International sales were £770

million. Now, they are nearly 10 times larger, at almost

£7 billion, with profits of £306 million. In the current year, Tesco

will add 2.5 million square feet to sales area and could well enter

another major market. Growing internationally has forced Tesco to

become serious about hypermarkets and this has had seriously

positive implications for growth in the UK. Tesco has formed a

strategic relationship with US supermarket, Safeway Inc, to take

the tesco.com home shopping model to the US. Telecoms are the

latest stage in its strategy to develop popular retail services. It has

repeated its approach in banking, by capitalizing on its brand. In

2004 the company plans to enter the Chinese market, as China is

one of the largest economies in the world with tremendous

forecast growth and will present many opportunities for Tesco.

Threats

UK structural change could spark a price war: The price

followers in the UK market are about to become aggressive

36
investors in price, Safeway because of new ownership and

Sainsbury because of new management. Morrison is reducing

Safeway's prices by up to 6% and Sainsbury is bound to see lower

prices as one of the basic changes necessary to drive its recovery.

With both Asda and Tesco committed to price leadership, this could

result in a step down in industry profitability.

Overseas returns could fall: The buy case for Tesco is

predicated around investment overseas driving higher group

returns as each country moves past critical mass. This might not

happen, either because of economic conditions, competitor action,

or failure in Tesco's business model. It also could come as a

consequence of an aggressive move into a larger market, such as

China or Japan.

Wal-Mart/Asda challenge: Since the US shopping giant Wal-mart

purchased Asda, Tesco's rank as the top UK supermarket has

been threatened. Asda can now compete extremely well on price

and range of goods. For the moment, Asda is the third largest

supermarket in the UK, just behind Sainsbury's and then Tesco.

However, Asda closed the gap on Sainsbury's in 2003, leaving the

company to directly challenge Tesco's dominance.

37
Tesco is well aware of this, and has so far been quick to keep up

with price cuts or special offers at Asda. Wal-mart may also decide

to wield its buying power more heavily in the UK, and this could

spell the end of Tesco's brand dominance in the future.

International expansion: International growth is expensive.

Entering new markets with a new brand requires heavy investment

and marketing, as well as land prices (which are currently low) and

extra distribution and operation expense. Tesco's debt may

increase before it begins to decline.

Korea is contributing a good proportion of Tesco's international

profit growth. If profits continue to grow in this way, Korea will

probably represent one-third of Tesco's international profits in

2003. Korean consumer spending is currently quite low, and

coupled with the country's current unrest, and Tesco's large

investment, this represents a high risk area for Tesco to bank on.

APPENDIX C

VALUE CHAIN

38
Primary Activities

(Currently, Adds value (+), losses value (-), Potential to add

value (P+))

Inbound logistics

Inbound logistics are placed at the first stage of the value chain as

they possess the earliest opportunity to create value. Therefore,

the elements of this stage are considered to be upstream activities.

The logistical tasks, in this case, include the receipt of goods from

suppliers, storage of goods, handling & transportation of goods

internally and placing the products on the shelves. Tesco tries to

maintain the level of consumer choice in store (+), whilst improving

the efficiency of its distribution system (+). In applying a quality

control procedure concerning damaged goods and products, it

provides an excellent opportunity to reduce costs unfairly incurred

by the company, therefore preventing these costs being passed on

to the consumer (P+).

Operations

The production element of Tesco' activities are service orientated.

Hence, operations could be the second upstream opportunities

that enable services and products to be provided, tasks such as

opening every day in accordance with trading hours, maintaining

39
the shelves, and the stock (+). In order to obtain future

competitive advantage Tesco has to consider expanding further in

terms of operating hours in those places, where it does not occur

or opening new Metro and Express stores (P+). However, this

might be restricted by law or planning councils, which is essentially

takes away competitive advantage (-).

Outbound logistics

The third stage of the value chain is the outbound logistics that is

concerned with delivering the product to the customer. Tesco

currently adds value in its home delivery service (+). However,

other tangibles that have to be improved are those of parking

facilities, trolley collectors, till staff and systems to gain competitive

advantage, if executed more efficiently than competitors, they will

add value by saving the customer time (+), whilst increasing the

turnaround (+). Adding value could be achieved through the

implementation of a trolley deposit system, keeping them tidy and

enabling customers to get to and from the premises quicker, as

well as making these facilities readily available and quicker to

obtain (P+).

Marketing and sales

Marketing and sales are placed under downstream elements of

40
the value chain. Clubcard gives further discounts and loyalty for

the customers (+). However, Tesco may also decide to attract

more customers by advertising via radio, local newspaper and

national TV eg the “lower prices” advertising campaign or more

discounts offers (+). With a more customer sophistication and

their awareness of ethical business practices, it may give the

company some constraints in terms of selling environmentally

friendly products (-). In return, Tesco can take it as an advantage

and provide customers with more of the recycling points and

include information in their advertisements, adding value for

customers who will believe that by choosing to shop at Tesco,

people are helping the environment (P+).

Support Activities

Company Infrastructure

Planning and control functions are the ones that account to

provide the continued focus on the costs and cash control of the

company's operations (+). And departments such as profit

protection whose main jobs are to reduce shrink. The company

has now increased its staff count who are involved in upgrading its

anti-fraud software (infrastructure/technology, interdependence),

and installing new security systems which aim to reduce internal

41
theft, an expense the customer will now not have to cover in the

price of their purchases (+).

Human resource management

HRM is regarded as up and downstream activity, covering

everything from recruitment to management development. The

company aims to increase the number of training schemes and

further develop its recruitment programmes so to pass on to the

customer the benefits of a well recruited, well trained staff, not the

costs (+). Tesco continues to invest in customer service (+), where

training is also linked directly to pay, so the staff are motivated to

learn, and are encouraged to improve their approach to customers

and service provision quality. (P+).

Technology development

It is a downstream activity and is the ability to provide new

innovative product ranges/ solutions that anticipate customer

needs. It also remains a key competitive advantage, adding value,

as Tesco's brand name gives the product vitality (+). However,

installation and capital investment is a long term process and

needs total commitment of the staff. But who will be responsible

for the service provision and the floor personnel? (-).

42
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