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.

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).

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

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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.

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).

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

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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
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 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

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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 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 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.

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 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

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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 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.

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.

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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 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 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

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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

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 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

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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 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 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-

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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 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.

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 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

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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.

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 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.

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 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.

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: 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

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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 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).

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.

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 In large organizations as Tesco strategy should be analysed and
implemented at various levels within the hierarchy. These different 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 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.

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 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 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, 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.

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 Debt reduction: Tesco is not expected to reduce its debt until at least 2006.
Tesco has a large capital expenditure program mainly 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.

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.

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 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 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.

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.

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 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

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 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

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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 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 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

19
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? (-).

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