Corporate Strategic Review on TESCO
Task A. Rethinking UK Tesco’s Adherence to Local Agricultural Supply Strategy
Tesco’s apparent nationalistic approach in acquiring agricultural products in their supermarket chains, have been violating the competitive advantage tenet as it continues to buy the expensive British agricultural products, instead of getting supplies from other countries who can provide a quality yet cheaper products.
Tesco is British agriculture’s biggest customer – selling more British food than any other retailer. All Tesco fresh, UHT and organic milk comes from British Farms and 100% of our fresh shell eggs, including organic eggs, are British. After tax Tesco reveals they only make 3p for every £1 of product that they sell. Profits are driven by volume rather than margin. Moreover, on most fresh meat and dairy lines Tesco asserts that they barely cover the costs and often they buy British produce even when prices are lower abroad. In addition, they buy from suppliers, not direct from farmers, so they pay the market price –they don’t set the farm gate prices.
Thus, Tesco have been containing costs that would have been significantly reduced if they do not strictly implement this policy. In fact, the Tesco management has already asserted that they buy nearly all fresh meat from the UK, importing only when British meat is unavailable or quality dictates. In this regard, they discloses that they ensure the standards of food safety; quality and welfare are the same regardless of where the food is produced. When Tesco assures that the quality will not be significantly changed and the question of quality is settled, why resort to the higher-priced goods when cheaper products are available?
Using Porter’s Generic Strategies, this approach of Tesco shall be evaluated and assessed. It will also be subjected to the five industry forces such as: Entry Barrier, Buyer Power, Supplier Power, Threats of Substitute and Rivalry. Tesco can be categorized in Porter’s Generic Strategies as belonging to the Broad Industry- as it targets an economy of scale whose product line is extensive. Moreover, the standard banner of Tesco had been on its affordability thus, placing it on the Low-cost strategy. There are five advantages of this approach as outlined by Porter: In the entry level, Cost Leaders has the ability to cut price in retaliation and deters potential entrants. Second, they have the ability to offer lower price to buyers. Moreover, they are better insulated from powerful suppliers. Fourth, they can use low price to defend against substitutes. And lastly, they can are better able to compete on price.
Porter’s Generic Strategies
Target Scope
Advantage
Low Cost
Product Uniqueness
Broad
(Industry Wide)
Cost Leadership
Strategy
Differentiation
Strategy
Narrow
(Market Segment)
Focus
Strategy
(low cost)
Focus
Strategy
(differentiation
However, Tesco despite being the dominant chain store in UK have yet to contain market competition as other companies such as J Sainsbury continues to share a large chunk of consumers that Tesco also targets. In fact the statistics below proves that J Sainsbury have kept up with the competition by substantially sustaining the gap between the market leader. Moreover, other companies has also a significant market share such as the ASDA Group, Safeway and Somerfield. All of whom had been strategically positioning themselves in the market to get a bigger share of the market.
Rank 2000
Company & Operations
Sectors
Sales 99/00
Sales 98/99
Sales 97/98
1
Tesco Plc
Grocers
16,958,000
15,835,000
14,971,000
2
J Sainsbury Plc
Grocers; DIY; mixed goods
13,570,000
13,184,500
12,682,000
Thus, while Tesco dominates the market, it does not have the capacity to control the marketplace because of the close competition that the other companies offer. Moreover, the ability to cut back prices to deter competition may only be possible if the rival companies are small. In terms of size, the other companies are actually on a head to head contest with the other corporations.
Competitive advantage would thus be fought in the ability of the companies to provide high-quality products on cheaper prices without compromising profitability. Thus, importing agricultural products on countries that can provide it at a much cheaper price would provide the optimum advantage for Tesco in terms of lowering the cost in the supply chain.
Feasibility, Acceptability and Suitability Analysis
Tesco works on such a wide range of customers thus supermarkets respond to customers’ demands through low prices are essential for families on a budget. Low prices are also good for the economy – supermarkets have played an essential role in contributing to low inflation. The feasibility and acceptability of providing such substitutes would be the core dilemma of importing agricultural products aside from the employment issues that it may trigger. However since all imports of agricultural and food items are subject to the sanitary and phytosanitary regulations of the EU as well as certification requirements specified by the UK veterinary and plant health authorities, there can be no question on the quality of the imported products.
Using the Ansoff Matrix (see Appendix 1), we can state that the selling of imported agricultural products in the UK market has already its own market share- there is an existing market. The problem lies in increasing this market. Packaging the imported agricultural products to suit the needs of the UK market by selling the expected quality at an affordable price can do this. In this stage, the firm seeks to achieve growth with existing products in their current market segments, aiming to increase its market share. Penetrating this market this market and expanding it to include the loyal followers of the Tesco groceries would greatly boost the company and the customers of the imported products.
The Implementation Process would entail a great cost for Tesco but only in the short run. Moreover, the cost can be covered by the reduction in prices that they can get from the imported materials. For more convenience, the processing would also take place in the country where the product had been imported. This would then result to the cost reduction that can propel the marketing campaign on the benefits and the affordability of the imported products. The marketing campaign will be a continuous process.
Implementation Diagram
Task B. TESCO’s Approach to Strategic Management
Strategic Management plays the most critical role in TESCO’s dominance of the UK’s retailing. In 2002 sales in the core UK market have grown by 7.9% and underlying operating profit by 6.9% reinforcing their position as the number one food retailer in the UK (see Appendix 2). In fact the growth seems to be soaring by the new developments such as the opening of 62 new stores in 2002 adding a further 1.4 million sq ft, acquiring 1,202 T&S Stores, a leading convenience retailer, giving TESCO an additional 1.8 million sq ft. This brings the total number of stores in the UK to 1,982.
This overarching progress though was not attained over time but is a product of a thorough and a premeditated examination of market trends and strategies that sought to revolutionalize the retailing industry in the UK. Thus, this allowed TESCO to rise in the retailing industry and is now generally regarded as the primary model of strategic planning in retail management.
Strategic Management Style
At Tesco Michael Porter led the team for Project Future – now recognized as one of Terry Leahy’s major contributions to their continuing dominance of the Grocery sector. In the words of Phil Clarke project Future brought about the “most dramatic change in working practices and the way in which stores are led in Tesco’s history”. The realised benefits of some £40 million of savings and revenue growth were considered almost as important as the change in culture. The project scope covered redesign of in-store processes, new approaches to store management and the introduction of a Balanced Scorecard (known as the Steering Wheel) tailored to each store.
Mission &
Objectives
Environmental
Scanning
Strategy
Formulation
Strategy
Implementation
Evaluation
& Control
Strategic Management Style in the Long-term
Tesco’s strategic management style is simple: use Porter’s Generic Strategy as a guide. Product differentiation and affordability has indeed brought retailing for Tesco on new heights. By developing this kind of strategy coupled with customer convenience, the company was able to produce economies of scale: the entire consumer populace is their target market.
At Tesco, the mission and objective is clear- attain market dominance by cultivating the customer loyalty to the company. Thus, aside from the strategies mentioned earlier, they have also launched environmental preservation projects that answer the growing concern for the environment. Tesco has a comprehensive recycling programme for customers and its own operations. There are recycling banks at over 500 of our larger stores, and Christmas card and carrier bag recycling facilities too.
The step change programme has delivered £230m of new efficiency savings this year and over £600m in the past three years. This year saw great progress with Primary Distribution, allowing Tesco to take control of product from the factory gates to distribution centres, improving efficiency and delivering cost benefits that reinvest in customer initiatives. All products have now been transferred to Continuous Replenishment system. This has delivered substantial benefits to the business and reduced the time it takes for a product to get from supplier to shelf.
Customer convenience has also been one of the keys of Tesco’s strategic management plan. Moreover, they have developed several market designs to keep their customers satisfied. For instance, they created different types of stores that seek to cater to the different needs of the UK market. They have four different store formats in the UK: Extra, Superstore, Metro and Express. Further, they Tesco does not rest on just building these types of store but also strives to maintain and expand it. In 2002, Tesco have invested over £150m into the Refresh programme to help serve customers better and improve availability, operations and store environment. A quarter of Superstores have received the customer-focused improvements in key areas including car parking, trolleys, signage, counters and availability. Express offers customers the chance to stock up on shopping at their convenience at a diverse range of locations, from inner city stores such as Maida Vale, London, to villages like Yateley in Hampshire. Although on a smaller scale than larger supermarkets, it will provide a broad but carefully selected range of essential everyday products. In the stores that convert to Express, customers will benefit from lower prices, improved service, better fresh food ranges and store environment, as well as better availability, quality and choice. This will also allow Tesco to accelerate their growth in the £20bn convenience market while continuing to run the remainder as One·Stop Shops.
However, the profitability and growth always goes with the development of the human resource personnel. The human capital after all, continues to be the single most important capital in businesses. Thus, recognizing that they are an essential element to the success and future of providing quality differentiated services at an affordable prices, Tesco had also a set of principles that promotes the growth and convenience of its employees. The Tesco Values are a set of principles that describe two work ethics such as: ‘Treat people how we like to be treated’ and ‘No-one tries harder for customers’. Also, employee benefits such as childcare voucher scheme and Shares in Success, where staff with more than a year’s service will be eligible for free shares has been devised.
Scenario Planning and Emergent Strategy
Market analysts have regarded the key to Tesco’s successful UK strategy is their delivery of first-class value, choice and convenience throughout their customer offer. In this regard they have created schemes to gain and create value for customers to earn lifetime loyalty. Projects under the banner ‘Every Little Helps’ were devised for this purpose. This means keeping the aisles clear, ensuring that customer can buy what they want, that prices at Tesco are low, that smaller queues at the checkout are planned and that every customer is offered help.
Moreover, innovations have also been made in response to customers’ needs. For instance, they have introduced over 5,000 new food lines in 2002, have led the way in bringing in screw-cap wines, Grab and Go counters have been introduced into over 500 stores, offering customers a huge choice of cheese and hot chicken without having to queue, making it simpler and cheaper to operate.
These innovations and situational insights by Tesco no matter how small have significantly affected the strategies mentioned. Moreover, the move to develop the online market retailing has also been at works at Tesco. It has yet to be developed at its fullest but the prospects according to market analysts shows that the expansion using E-commerce is excellent.
Tesco’s strategic management is relatively stable because of the changes that had been instituted at every step of the process. This is also the primary reason why Tesco continues to be the exemplary model that retailing business resembles in terms of strategy. Tesco however can make several improvements: at the level of strategy formulation and strategy implementation, they can assess their effectivity by evaluating not only the customers but more importantly, the rank and file employees. These personnel often interacts with the customer themselves thus, the areas of improvement in terms of product innovation, prices and consumer policies can better be improved. Further, in the cost reduction schemes- another factor where Tesco had developed its strength, they can look into the potential of utilizing raw materials and foreign workers in order to reduce cost without sacrificing the quality of their products. The dominance of Tesco in UK retailing proves nothing to be desired. However, the advent of E-commerce may just be the main competition that it will encounter if their E-marketing strategy will not be expanded. Thus, retailing is no longer contained in the portals of stores but rather on the homes of the consumers.
Appendix 1
Ansoff Matrix
Existing Products
New Products
Existing
Markets
Market Penetration
Product Development
New
Markets
Market Development
Diversification
Appendix 2
Retail Sales (£,000)
Rank 2000
Company & Operations
Sectors
Sales 99/00
Sales 98/99
Sales 97/98
1
Tesco Plc
Grocers
16,958,000
15,835,000
14,971,000
2
J Sainsbury Plc
Grocers; DIY; mixed goods
13,570,000
13,184,500
12,682,000
3
ASDA Group Plc
Grocers
9,204,000
8,198,300
7,619,200
4
Safeway Plc
Grocers
7,659,200
7,510,700
6,978,700
5
Marks & Spencer Plc
Mixed goods
6,482,700
6,601,100
6,695,800
6
Kingfisher Plc
Mixed goods; DIY; electricals; drug stores; music goods
6,098,644
5,412,728
5,046,812
7
Somerfield Plc
Grocers
5,465,700
5,897,900
3,483,600
8
Boots Company Plc
Chemist, opticians
4,668,000
4,474,700
4,465,300
9
GUS (UK Retail)
Mixed goods
3,810,100
3,675,600
3,597,500
10
Dixons Group Plc
Electricals
3,377,000
2,945,400
2,838,200
11
John Lewis Partnership Plc
Grocers; department stores
3,374,400
3,168,000
3,117,400
12
Wm Morrison Supermarkets Plc
Grocers
2,970,100
2,533,781
2,296,996
Credit:ivythesis.typepad.com
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