I INTRODUCTION

The largest industry in UK is the food and drink retail sector, providing

employment more than 3 million people particularly in production,

manufacturing and retailing. Around 9% of GDP was recorded in the year

2003 (Datamonitor, 2003).

The essay summarizes on Tesco external environment (PESTEL Analysis),

and internal environment (SWOT Analysis) and what all strategies will Tesco

need to adopt in future.

Tesco rank as one of the largest supermarkets in United Kingdom. Tesco

divides itself into four sub divisions of Tesco Extra, Tesco Superstore, Tesco

Metro and Tesco Express. It has 2,318 stores and has more than 326,000

employees. Tesco provides to its customers various food products and sells

clothes and other non-food lines and also many of its store has gas stations

which in due course is becoming of the largest UK independent petrol

retailers. It also has other services like Tesco Personal Finance.

[pic]

PESTEL ANALYSIS:

Below is the PESTEL analysis of Tesco that can help perform better.

Political

    • Since the tie up between China and WTO which led to the free flow of

foreign trade between western companies and removing all the barriers

(Straits Times 2010). By this accession Tesco made its way into China by

joint ventures and allowed to open shopping malls in China which includes

Anshan, Fushan and Qinhuangdao. Tesco growth is expected to rise by one

quarter of the company’s profit.

    • Due to increased globalization and free trading provided by various

governments of different countries has helped Tesco expanding globally.

Formation of EU in 2004 enabled Tesco to enter into EU markets.  

Economic

    • This is considered as one of the most important factor for Tesco because

it deals with the buying behaviour of customers. In 2008 UK was hit by

recession which led to the reduction in interest rates and there was rise in

unemployment during 2009 (Euromonitor, 2010). There is again a steady rise

in spending power of customers because they feel confident of their financial

situation. Customers will only spend on basic items rather than luxury items

where they would normally spend more money without recession (Keynote,

2010).

    • The main advantage of recession to the customers was that they started

to eat more at home and spend less outside and which provided opportunities

for supermarkets like Tesco’s to make profit (Guardian, 2010).   However, it

should also be noted that food is the last option that the customers will think

on cutting it out. After all there has been a rise in customers spending on food

(Euromonitor, 2010).

Social

    • According to Herald Scotland, 2010 analysis UK population has Baby

Boom Generation representing mainly retired people than children. For many

food retailers the ageing population is discouraging because they spend less

on food and moreover they shop less in supermarkets as compared to

younger generation. And moreover the internet literacy level is very low

among the ageing population therefore they find online shopping less

convenient.

    • These days consumers have become more health-conscious therefore

the demand in organic food is rising because Supermarket like Tesco are

concentrating more on organic products. Tesco was the first supermarket that

started payment by cheques and cash at the checkouts.

Technological

    • Technology is one the main variable that is directly associated with

operations, processes of grocery and food retailers and supply chain. There

has been a steady growth in supermarkets because of the use of Internet

through online grocery retailing. According to the Office for National Statistics,

2010 &0% of UK population uses internet.

    • With use of Information technology loyalty programs are being introduced

which help supermarkets in preventing customers to switching over

competitors.

    • One of the recent technology is the Mobile technology developed by

Cortexica vision Systems, which is being used by Tesco which enables

customers to buy selected range of wines from their mobile phones.

    • Online retail shopping is also gaining increasing due to broadband internet

in UK. It accounts for 15.5 million broadband users in UK 70% of the overall

market.

Environmental

    • Due to government laws of promoting reusable bags and reducing the use

of plastic bags has resulted in reducing the overall cost of Tesco thereby

maintaining good   Tesco’s corpoarte social responsibility image.The

customers using the reusable bags has increased from 71% to 74% (Office

for National Statistics, 2010).

    • Due to high awraness of being sustainable in the world by reducing

carbon footprint Tesco started adding C footprint data on its dairy products,

orange juice and potatoes. It is further aiming to expand by giving information

of carbon footprints on its bread and as well as on non-food items (Tesco,

2010).

    • Tesco also advices its customers on how to remain clean and green while

cooking food items thus enabling them to go eco-friendly (Yuthas, 2009 ).

    • Tesco started a Scheme called Tesco’s Green Clubcard points where it

rewards its customers who recycle and uses recycling products (Tesco,

2009& Datamonitor, 2010).

Legal

    • VAT has predicted to rise to 20% because the government has to finance

huge deficit budget which will affect the non-food sectors such as clothing of

Tesco (HM Treasury, 2010).

    • There has been an increase in the minimum wages to 15.5%. This

increase in the minimum wage affects the operating costs of various

supermarkets (National Minimum Wage, 2009).

An Analysis of Porter’s Five Forces.

For any company to be competitive it should analyze its structure of the

industry (Porter, 1985). Porter’s Five forces for Tesco are:

Threat of Substitute products and services

    • A low threat has been found in food items and medium to high threat for

non food items.

    • Small Convenience stores, off-license stores and organic shops pose a

threat to Tesco where they provide high quality products at low prices. Tesco

prevents its substitutes to enter the market by opening its Express stores in

towns and cities.

    • Non-food items like clothing have a high threat of substitute as consumers

are attracted towards discounted prices due to the economic recession.

However Tesco provides its customers with discounted prices.

Threat of entry of new competitors

    • For any new competitor to enter in food and grocery retail industry is very

low.

    •   For any new competitor to enter into market it should have huge capital

and should be able to establish its brand name. Many major Brands like

Tesco, Asda, Sainsbury’s and Morrison’s have   80% of the food retail market

in the UK. Hence, a new entrant should be able to produce products at low

prices and high quality in order to establish itself in the market.

    • The new supermarket has an entry barrier due to local government

authorization planning which consumes time and resources to establish.

Intensity of competitive rivalry

    • There has been seen a high level of competitive rivalry in the food and

grocery retail industry.

    • Asda, Sainsbury’s, Morrison’s are the direct competitors of Tesco. They

compete with each other in terms of price, products and promotions. Asda has

increased its market share from 16.6% to 16.8% in 2009-10 which is one of

the biggest competitors to Tesco.   Sainsbury’s has increased its market

share from 15.8% to 16.1%.   Morrison’s to 11.6% from 11.3% through out the

same period (Euromonitor, 2010). Due to the slow increase in market shares

from these various competitors has resulted an increased in market rivalry,

which can be considered as a threatening to Tesco market leadership

position.

    • Some supermarkets are at a very distance away in some rural areas so

some of the consumers prefer to go to the nearest retailers like Somerfield

and Co-op.

    • There are two companies like Aldi and Lidl which have gained a

tremendous market share especially during recession and during 2008 their

growth had recorded a sale of 25%.

Bargaining power of buyers

    • There has been a fairly high bargaining power exhibited by various

buyers.

    • Some products which are high in quality and standardization with a slight

differentiation in the product. With these slight differentiation in the products

buyers can get themselves easily switch from one brand to another brand.

    • There is always a tendency that most consumers tend to go for lower

prices offered by various companies. By using retail shopping online the

prices are compared easily and thus helping its customers in selecting its

products.

Bargaining power of suppliers

    • There has been a fairly low bargaining power from the supplier.

    • For a supplier it is very important how they are building contracts with

large supermarkets. Major leading supermarket retailers Asda, Tesco and

Sainsbury’s are strong and have better negotiations power and they can get a

better and negotiable price from the suppliers.

For the company to be leader in the food retail industry should only focus on

external environment but also its internal environment. Below is the SWOT of

Tesco i.e. strengths, weaknesses, opportunities and threats where Tesco

needs to improve on these analyses.

Strengths

    • According to Datamonitor (2010), Tesco is at the third position in the

world’s retail sector, which is operating with 4,331 stores in USA, Europe and

Asia. In UK it has 30.7% share in grocery retail market (Euromonitor, 2010).

    • Tesco has been reported a £54 billion company turnover in the year 2008

with 14.9%. It customizes its products and services according to the different

customer’s needs and wants (Fame,2010).

  [pic]

  Yearly Growth Performance of Tesco.

    • Tesco’s customized strategy helps them to stay focus on product

affordability to satisfy their customers needs yet providing them with better

quality products (Tesco ,2010).

    • Tesco’s uses customer retention strategy by providing them with loyalty

scheme known as ‘Tesco Clubcard.’ Tesco uses a powerful CRM systems like

Crucible and Zodiac where it uses its customer information by giving them

loyalty schemes which acts as a tool for various other promotional techniques

and direct marketing (Dunn Humby 2008).

Weaknesses

      Geographical diversification proves to be Tesco’s one of the weakness

due to its major operations taking place within the UK retail sector (75%

revenue in 2009) thus providing the firm with the market systematic risk.

      One of the other major weaknesses of Tesco’s was reported in 2009

where a number of products were recalled resulting in a high financial loss to

the company and affecting its brand image within the market (Mintel, 2010).

Opportunities

      There has been 620 Tesco stores in 2009 out of these 435 are located

internationally (Mintel, 2010) thus resulted in minimizing its geographical

diversification weakness.

      Tesco is attracting new customers due to its rapidly growing popularity

and which is estimated to be more than 10,000,00 customers in 2010

(Guardian, 2010).   An increase in the customers count is helping the firm to

reduce the overall cost of the product and increase the firm profit.

      According to the Daily Mail, 2010 Tesco is highly focusing on global

expansions plan by entering into the Indian market.   Tesco with Trent, retailer

of Tata group has signed a limited franchise agreement between them.   The

Tata group of industries represent one of the strongest chains in industrial

sectors of India

      Tesco has an opportunity to rise the revenue in the food retail sector from

£125 billion in 2009 to £145 billion in 2014 (Euromonitor, 2010).   The main

reason is that the recession will overcome and people will start buying more

things rather than just buying limited food products or non-food products.

Threats

      Due to the global financial crises, the economy of UK has contracted by

2.4% (2009) and will continue to do so by 4.2% (International Monetary Fund

(IMF) (Poulter, 2009).   Tesco has its main operations in the UK markets

which can have an impact on its financial situation.

      The recession in the past two years has resulted an increase in

unemployment rate and decline in income which is affecting the behaviour of

consumers in buying the various products particularly the non-food items.

      Tesco has a great amount of threat from its four strong competitors i.e.

Asda, Sainsbury’s, Morrisons and Waitrose. But Tesco is seen leading this

UK grocery market for the past 15 years. (Mintel, 2010).

[pic]

Tesco’s Schematic SWOT Analysis Diagram.

We will now consider Tesco Value chain Analysis and its Core Competence

where it is able to differentiate itself among the competitors.

Value Chain Analysis

According to Lynch (2003), value chain is defined as the links between key

value adding activities and their interface with the support activities. Value

chain has been implied as a strategic evaluation tool used for distinguishing

the strengths and weaknesses in value adding processes (Audrestsch, 1995).

The value chain of Tesco has been demonstrated in the following diagram:

[pic]

Value Chain of Tesco

Inbound Logistics:   The company achieves its low costs from its suppliers by

using its key bargaining powers like its leading position in the market and as

well as the economies of scope (Abeysinghe, 2010). To increase its efficiency

and effectiveness within the firm’s inbound logistics operations Tesco

constantly started upgrading its ordering system, in-store processes and

vendor lists.

Operations Management:   Tesco uses IT systems to keep the low cost

leadership strategy running due to which its gets recognized in supply chain

management. Tesco has invested £76 million in streamlining its operations by

using ERP which is the company’s digital third generation program hereby

providing various solutions within the firm. (Tesco, 2010).   The company has

accounted £550 million increased profit and further on, this system has helped

in minimising stock holdings within the company as well.

Outbound Logistics: To be effective and efficient in bound logistics Tesco

prevails to holds its position online as well as offline food retail sector. Tesco

throughout the years has been maintaining its various types of stores,

arrangements of store and store formats which helps in gaining maximum

customer exposure.   These formats are nothing but its sub divisions like

Tesco Express, Metro, Superstores, Extra and Homeplus.

Marketing and Sales:   Tesco provides its customers with loyalty programs by

giving them Tesco club card which helps in retaining its customers and also

prevents them to switch over to its competitors. Tesco also gives advice on

environmental issues by staying clean and green which includes ways of

reducing food waste and also carbon footprint while preparing meals and be

highly sustainable.

Services:   The Company uses its cost leadership strategy and differentiation

to increases it customer services. This is achieved with the development of

self-service kiosks, financial services, focused direct marketing and

promotions Keynote (2010). The figure gives the detailed analysis of the

Value that has been created by these four big supermarket chains.

[pic]

Core Competence:   The performance of the company superiority mainly

depends on how the company’s uses its resources in creating competence at

the level of organisational activities (Johnson and Scholes, 2003).  

Henceforth for any company to be competitive advantage for it should focus

on its core competencies. For any company to maintain its power and to

maintain its position it has to minimize its competition.   Henceforth Tesco

focuses its attention on its core competencies because its affect competitive

advantage.

The core competence helps in improving the performance of the company

and result in significant better performance than the competitors.   In order to

understand performance standards and what constitutes good or bad

performance it has been noted that benchmarking also plays an important role

in identifying these issues.   Tesco has core competences embedded deep in

its operational level of working. Prahalad and Hamel who developed a

framework in the 1990s suggested that for any company to achieve its long

term growth it should be able to expertise in the key distinctive and critical

areas of the company (Drejer, 2000; De Toni, and Tonchia, 2003).   With

regards to Tesco, the areas of expertise are lies in the central areas of the

organization where the value is added to its service and delivery like Tesco’s

retail service accounts rose by 36%.   Every week more than   50,000 new

service accounts are opened by the company.   They have also launched their

own financial services internationally in Hungary and Korea (Datamonitor

Report, 2003 and MarketWatch, 2004).

Tesco’s core competencies have remained constant for a very long time. The

company should have a changing core competence based on company’s

environment and should also be flexible with the time. Therefore Tesco needs

to adapt, change and implement its new core competencies very frequently

according to the scenario.   It has now introduced its Loyalty Clubcard by

implementing its retention strategy and also went into banking sector.

Core competences framework suggests three factors, which can help to

identify core competences:

Provide potential access to a wide variety of markets: which is creation of new

services and new products within the firm.   Tesco has established its strong

position in food retailing industry.   The core competence that helped Tesco

enters in both food and non-food products are its distinctive brands that

focused the market segment.   Tesco is now recognised as a company which

provides good customer services along with quality products.

Makes a significant contribution to the perceived customer benefits of the

outcome: to help deliver a fundamental customer benefit. Tesco Company

was first among the UK grocer to introduce the loyalty card for its customers

which has gained a high popularity among consumers.   It periodically emails

customers with regards to the products clearance or sales in the store.   Its

supply and delivery systems is also very efficient and keep customers

satisfied all the time.   Due to these core competences it has enabled itself to

stay at top position in the UK market.

Difficult for competitors to imitate: In todays world the competitions is growing

day by day and therefore the company to compete with its competitors needs

to adopt a unique core competency. Tesco has been leading the UK food

retailer since 2003 and because of these reasons its still holds a very strong

position in the UK market.   According to Market Watch, 2004 Tesco adopts a

different approach thus providing a good corporate reputation by creating new

premium quality products.

Tesco has used core competence very effectively and in a timely manner.  

However, 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.

Conclusion:

From the above essay it can be concluded that Tesco is able to strongly hold

its differentiation strategies and cost leadership because it aligns with current

retail segment and produces products according to the customers’ needs and

wants. Tesco constantly strives to reach its targets with the help of better

supply chain management and also the introduction of Information

Technology. The core competency of Tesco has also aligned with the current

business environment, which is one of the positive steps for the company.

REFERENCES:

Abeysinghe, T. (2010), ‘Roaring tigers, rising dragon’, Straits Times

(Singapore), February 2, 2010. Available at

http://www.fas.nus.edu.sg/ecs/scape/doc/ST-NUS-Econ-Series-02Feb10.pdf

Audretsch, D. B. (1995), Innovation and Industry Evolution, (Cambridge: MIT

Press)

BBC (2009), ‘Czech, Greek presidents support Turkey's EU bid’, BBC

Monitoring Europe, December 2, 2009.

Daily Mail (2010), “Tesco starts Pounds 1bn price war”, Daily Mail, Jan 18,

2010. p.7

Datamonitor (2010), ‘Company Profile – Tesco’, Datamonitor Europe, 2010,

Ref Code: 1674

DunnHumby (1996), “Databases in direct marketing”, IDM lecture presented

at Bristol Business School, Bristol, November 21, 1996.

Euromonitor (2010), ‘Industry Profile – Food retailing’, Euromonitor

International, 2010

Fame (2010), Annual Reports Analysis – Tesco plc, FAME International

Herald Scotland (2005), ‘Baby boom gone bust, Policies needed to tackle

worryingly low birthrate’, Herald Scotland, November 11, 2005. Available at

http://www.heraldscotland.com/sport/spl/aberdeen/baby-boom-gone-bust-

policies-needed-to-tackle-worryingly-low-birthrate-1.37681

HM Treasury, (2010), “Evidence on the UK Economic Cycle”, July 2010

HM Treasury, (2008), ‘Evidence on the economic cycle’, HM

Treasury,November,2008.Available

http://news.bbc.co.uk/1/shared/bsp/hi/pdfs/24_11_08_pbr_economiccycle.pdf

Keynote (2010), Keynote Report on Food Retail Industry, Keynote

International

King, I. (2009), ‘Tesco shows its claws’, Sun, Jan 18, 2009. p.42

Lynch, R. (2006), Corporate Strategy (4th ed.) (Harlow: Pearson Education

Limited)

Mintel (2009), Food Retail Industry – Including Online, Mintel Research

National Minimum Wage (2009), ‘Low Pay Commission Report 2009’,

National Minimum Wage. Available at

http://www.lowpay.gov.uk/lowpay/report/pdf/7997-BERR-Low%20Pay

%20Commission-WEB.pdf

Office for National Statistics (2009), ‘Internet Access Households and

Individuals’, Office for National Statistics, August 29, 2009. Available at

http://www.statistics.gov.uk/pdfdir/iahi0809.pdf

Porter, M. (1985), Competitive Advantage: Creating and Sustaining Superior

Performance, (Location: The Free Press).

Poulter, S. (2009), ‘Debt problems piling up for younger generation’, Daily

Mail, Nov 14, 2009

Shales, A. (2009), ‘An unpalatable attitude towards food’, Financial Times,

Oct 22, 2009. p.19.

Tesco (2009), ‘Corporate Responsibility Report’, Tesco. Available at

http://www.investis.com/plc/cr09/crr09.pdf

Tesco (2010), ‘Annual Report and Review 2010’, Tesco. Available at

http://ar2010.tescoplc.com/en/downloads.aspx

Tomlinson, H. & Evans, R. (2010), ‘Tesco stocks up on inside knowledge of

shoppers’ lives’, Guardian, September 20, 2010. Available at

http://www.guardian.co.uk/business/2005/sep/20/freedomofinformation.super

markets

Turban, E., Rainer, R.K. & Potter, R.E. (2001), Introduction to Information

Technology, (Chichester: Wiley)

Wood, D. (2009) ‘Are We Cooked Yet?’, Treasury & Risk Management, 15(6),

June 2009, p.1424

Yuthas, K. (2009), ‘Inputting the Environment: Reconsidering the

Environmental Information Matrix’, Journal of Information Systems, 19(2), Fall

2005, p105-109.