Strategic Planning Assignment - Tesco

STRATEGIC PLANNING COURSEWORK: LONGITUDINAL STRATEGIC DEVELOPMEN STUDY OF TESCO

OLUKAYODE OMOSEBI MBA 8A A4032655

LONGITUDINAL STRATEGIC DEVELOPMENT STUDY OF TESCO Contents Introduction ..................................................................................................................................... 3 Past Strategies Deployed................................................................................................................. 3 Diversification............................................................................................................................. 3 Acquisition .................................................................................................................................. 4 Extension of Service ................................................................................................................... 4 Strategic Alliances ...................................................................................................................... 4 Creation of Sub-brands ............................................................................................................... 5 In-Store Brands ........................................................................................................................... 5 International Expansion .............................................................................................................. 6 Current Strategic Situation .............................................................................................................. 6 SWOT Analysis .......................................................................................................................... 7 PESTEL Framework Analysis .................................................................................................... 9 Political Factors ......................................................................................................................... 9 Economic Factors. ...................................................................................................................... 9 Strategic Direction for Future ....................................................................................................... 11 Expansion into Growing Economies ........................................................................................ 11 International Strategic Alliances ............................................................................................... 11 Diversification........................................................................................................................... 12 Strengthening Competitive Positioning In Food Retail ............................................................ 12 Conclusion .................................................................................................................................... 14 References ..................................................................................................................................... 16

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LONGITUDINAL STRATEGIC DEVELOPMENT STUDY OF TESCO

I N T ROD U CTIO N Tesco is a United Kingdom based multinational grocery retailer. Tesco is the third largest retailer on the global level after Wal-Mart and Carrefour. The expanse of the business is in fourteen countries in three continents. The company was started in the year 1919 and has grown tremendously in less than a hundred years to reach the level of third largest retail chain in the world. The Tesco brand name was formed in the year 1924. Tesco sells roughly 40,000 food products in its superstores. The major product portfolio consists of clothing and food products. Tesco has also strengthened its own brands over the years and they account for almost half of the company’s sales. The paper assesses the strategic development of Tesco since its formation. Significant attention is paid on the strategic development of the company during the previous twenty five years. The paper carries out an analysis of the past strategies of the organization along with current strategic situation. Two tools of strategic management are utilized to appraise current strategic situation of Tesco. The first one is SWO T analysis and the second one is Porter’s Five Forces Model. The last part of the paper talks about the future strategic direction for Tesco based on the analysis of current strategic situation.

P A S T S TR A TE G IE S D E PLO YE D The section discusses the strategies adopted by Tesco in its recent path. Some of these strategies have proved to be highly successful and many of them are continued even to this day. Several strategic initiatives have been adopted by Tesco over the course of its history. The organization has started operations as a supplier of food and drinks, and continued its growth to become the third largest retailer in the world. Diversification – The first strategic move of the organization was to diversity its business into fast moving sectors. These sectors included clothing, consumer electronics and automobiles. The next round of diversification strategy changed the outlook of the organization to service sectors. Tesco initiated offering DVD rental services, healthcare services, financial services and even music downloads (Corporate Watch, 2004). The fundamental strategy of Tesco has remained to OLUKAYODE OMOSEBI A4032655

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LONGITUDINAL STRATEGIC DEVELOPMENT STUDY OF TESCO be the most cost effective supplier of goods and services. The organization is driven by the motto to be the lowest-priced supplier, irrespective of the industry is has operated it. Acquisition – Tesco followed its acquisition strategy for a relatively small period of time. The organization acquired a chain of forty supermarkets during late eighties. The retail chain used to operate with the name Hillards (Miller, Agnes and McBrewster, 2010). The second acquisition of Tesco came in the year 1994, when a retail chain of 57 stores William Low was acquired by Tesco, which lead the organization to expand its operations in Scotland. In recent years, Inverness was acquired by Tesco and was branded as Tesco town (Tesco PLC, 2011). Tesco’s entry in Ireland was executed through purchase of the retail arm of Associated British Foods which contained a very huge proportion of Ireland consumer market. Extension of Service – Tesco has the distinction of being the only retail chain which was successful in establishing the concept of online purchasing. The retailing experience of Tesco was put online in the year 2006, and quickly gained popularity in the target market. The reason for success of the initiative was appropriate branding of online shopping experience as a subbrand of Tesco (Tesco Plc, 2011). Grocery sales are obtainable within delivery range of chosen Tesco store. The differentiating factor is that goods are hand-picked within each store, in comparison to the warehouse model followed by other retail outlets. Online retailing initiative was supported by branded Club card and loyalty cards of the company. Also, in US market Tesco was able to obtain a 35% stake in Grocery Works (Corporate Watch, 2004). Strategic Alliances – In the year 1997, Tesco formed a strategic alliance with ExxonMobil to venture into petrol filling stations. The venture turned out to be quite successful with Tesco operating the attached stores under the Express format. The number of filling stations formed under the partnership of the two organizations grew to two hundred. Corporate Social Responsibility – Tesco aligned itself with social causes with the objective to create favourable brand equity in consumer markets. Tesco initiated a ‘computers for school’ scheme which offered computers in exchange for schools and hospitals receiving vouchers from shoppers at Tesco. Further, Tesco sponsors a football competition to facilitate young talent in UK. This competition is labelled as the Tesco Cup (Corporate Watch, 2004). The football competition has gained widespread popularity among youth throughout UK. Tesco also labels its brands pertaining to personal care and household products are ‘cruelty free’. This depicts the OLUKAYODE OMOSEBI A4032655

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LONGITUDINAL STRATEGIC DEVELOPMENT STUDY OF TESCO organization is concerned about wellbeing of animals and none of its products are tested on animals. In recent years, Tesco made a public announcement that it is part of the initiative to reduce carbon footprint among consumer products. Creation of Sub-brands – This is a highly successful strategy which adopted by Tesco to increase its penetration in consumer markets. None of the other global retailers have been able to emulate the idea of sub-brands as successfully as Tesco. Tesco divided into retail stores into six formats, which are clearly differentiated from each other through layout, size of the store and the range of the products offered to the consumers (Finch, 2010). Tesco Extra stores are large, mostly out-of-town hypermarkets which offer almost all product ranges. Their general layout is in the format of two floors. Ground floor is reserved for food offerings, while first floor offers clothing, consumer electronics and entertainment products. Tesco superstores represent large supermarkets which are mostly focused on groceries. Tesco Metro stores are medium-sized and located in inner cities (Tesco Plc, 2011). Tesco Express stores emulate the concept of neighbourhood convenience shops model. Busy city centrals are the preferred locations for these stores. One Stop is the smallest format of the store with slightly higher prices than other formats of retails by Tesco (Tesco PLC, 2011). In-Store Brands – Tesco stands out among contemporary retailers due to its highly successful implementation of the in-store brand concept. Tesco not only sells its Tesco brand name, but it has been successful in creating brands of its product categories. For instance, Technika is a brand name coined to sell consumer electronic products. Technika products can only be found within Tesco owned stores. Products sold under the brand name include TVs, MP3 players, computers and laptops, DVD players (Miller, Agnes and McBrewster, 2010). Phone Shops is the brand of communication service offering which can only be found within Tesco outlets. Offerings of the brand include mobile phone, landline phone and broadband internet services. Interestingly, Tesco has not invested in creation of its own telecommunication infrastructure to offer these services. Rather it resells these services from existing telecommunication companies and leverages its Tesco brand name to create an additional source of cash flow (Miller, Agnes and McBrewster, 2010). The brand Tesco Mobile was launched in partnership with telecom company O2.

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LONGITUDINAL STRATEGIC DEVELOPMENT STUDY OF TESCO International Expansion – The strategy of international expansion was the key driver of growth for Tesco. Tesco didn’t enter foreign markets with its standard Tesco’s product offering, rather the organization responded to the unique needs of the particular country. The key to success of Tesco was the fact it was sensitive to local expectations in other countries. Another important decision of Tesco was to enter into joint ventures with local partners to gain a favourable position in the market. For instance, when Tesco entered China it acquired a fifty percent stake in the local retail chain Hymall (Neil, 1997). The objective was only to gain a foothold in Chinese market. Two years later Tesco expanded its market share to ninety percent. Similarly, Tesco chose to enter Czech Republic by purchasing operations of a US retailer Kmart's. Persistence was also a key characteristic of Tesco in international expansion. When Tesco entered Ireland for the first time, it didn’t gain much success. However, Tesco persisted in acquiring Ireland market and ventured a second time (Vignali, 2001). Today, Tesco is a leader in the grocery market of Ireland, with a market share of more than twenty five percent. South Korean operations of Tesco were launched in partnership with Samsung. Turkey’s entry was characterized by Tesco’s own investment in infrastructure development and entire ownership stake with Tesco itself. The strategic history of Tesco has one prominent aspect. Each of the strategic moves of Tesco was in accordance with the mission and core values of the organization. The mission statement and values of Tesco reads, “Our core purpose is to create value for customers to earn their lifetime loyalty. Our success depends on people, "The people who shop with us and the people who work with us." If our customers like what we offer, they are more likely to come back and shop with us again. If the Tesco team find what we do rewarding, they are more likely to go that extra mile to help our customers” (Tesco Plc, 2011). We have seen that each one of Tesco’s initiative was driven by the focus to increase utility for the customers of the company. The organization has taken every initiative to improve shopping experience of the customers.

C U R RE NT S TR A TE GI C S ITU A TIO N Current strategic situation evaluates competitive positioning of Tesco. Two models of strategic management are utilized in this analysis along with special attention attached to macro OLUKAYODE OMOSEBI A4032655

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LONGITUDINAL STRATEGIC DEVELOPMENT STUDY OF TESCO environment. Salient feature of the analysis is interaction of the unique strengths and weaknesses of the organization with changes in external environment. Two analytical models are utilized in this section. First is SWOT analysis and second one is PESTEL framework. SWOT Analysis Strengths –

the key strength of Tesco is the huge market share commanded by the organization in

its various territories. For instance, Current market share Tesco for United Kingdom stands at thirteen percent of the overall retail market. The multi-format strategy followed by Tesco can created leadership of the brand in food category. The continued growth of Tesco’s has given it huge financial strength which can be utilized for any initiative deemed fit by the organization. Insurance business provides a steady stream of cash inflow to the business. Tesco’s online success in retailing has created another channel for brand supremacy of Tesco (Vignali, 2001). Loyal customer base and brand value of Tesco’s name ensures that the clients are loyal to the brand. Tesco.com is the largest online supermarket round the globe and revenues from this channel are growing steadily for the organization. The brand image of the Tesco stands for excellent quality and inspires trust of customers (Clive, Hunt and Philips, 2003). Products from Tesco represent excellent customer value due to emphasis of the company on low prices. Tesco’s innovative ways of enhancing the shopping experience of the customers has created a loyal following of the store among the target market. Unlike other retailers, Tesco has a highly successful strategy of having different versions of its retail outlets. The risk for Tesco of losing market share is low because its retail strategy is multiformat. Even if fall in demand for a particular format of its store occurs, it will compensated by the business from other formats of retail chains. The large size of procurements allows Tesco to get highly favourable terms and competitive prices (Powell, 1991). The organization can directly source from factories in lowest cost regions of the world like Shenzhen and Kenya. Management of Tesco is considerably experienced, which has given the organization a competitive edge over other retailers in UK market. Efficient distribution system of Tesco which has been perfected over years of operation is a unique strength of the retail chain. Logistical operations of Tesco are superior to those of other retailers in UK market. Weaknesses

– the dependence of Tesco on UK market as the major source of revenue is a

weakness. Almost three quarters of the revenue of Tesco is associated with UK market. This OLUKAYODE OMOSEBI A4032655

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LONGITUDINAL STRATEGIC DEVELOPMENT STUDY OF TESCO implies that the dependence on one geographical territory as the major source of revenue makes the company vulnerable to a recession or a natural calamity in UK market. Operations of Tesco are highly leveraged (Clive, Hunt and Philips, 2003). The debt structure of Tesco is long-term, which implies that for the next few years the debt as a percentage of total equity will remain significantly high for Tesco. Highly leveraged businesses are inherently more at risk of facing insolvency or bankruptcy. Further, a large proportion of Tesco’s revenues are given away in the form of debt servicing charges. Within UK market, considerable proportion of Tesco’s business is gained through acquisition rather than expansion through setting up their own stores. A large number of acquisitions weaken the culture of the organization because it is carrying legacy of several unsuccessful organizations’ cultures within (Clive, Hunt and Philips, 2003). This is yet another weakness of Tesco. Majority of these acquisitions were financed through debt rather than retained profits of the organization. Increase in geographical spread has made it difficult to find a unified strategic direction for the firm. The focus of the organization, in recent years, has spread too thin which presence of any strong strategy in a single market. Opportunities –

major opportunity for Tesco is to create leadership in non-food retail segment. The

hypermarket format of Tesco means in the company has a strong likelihood of increasing its sales and market share in non-food retail segments. The key to taking advantage of this opportunity is to improve its merchandising skills. In non-food retail segments, it is all about discovering lowest cost suppliers of products and putting in place a run-time inventory mechanism. The global trend is towards growth in non-food retail as compared to food retail. Pharmacy retail is yet another segment of retail which is forecasted to exhibit extraordinary growth in coming years. Pharmaceutical retail is, therefore, another key opportunity for Tesco. Emerging economies with growing middle-income groups represent another major opportunity for Tesco. For instance, Asian economies like India and Indonesia are a lucrative opportunity for retail business due to comparatively lower competition and new-found purchasing power among masses. The use of Club card database by the company to get to know demographics of its regions more closely and to develop customized strategy for each one of its market, is the key opportunity for Tesco. Rather than using a uniform strategy for its entire business, Tesco can create a separate strategy for each one of its regions to gain sustainable competitive advantage. OLUKAYODE OMOSEBI A4032655

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LONGITUDINAL STRATEGIC DEVELOPMENT STUDY OF TESCO Threats

– growing competition in UK retail market and a likely price war is a major threat for

Tesco. Safeway and Sainsbury are two retailers in UK market which have become highly aggressive in recent years and they are fuelled by the passion of new management and ownership. Morrison is another retailer which is utilizing lower prices as the strategy for gaining market share. The growing opposition to the idea of strong supermarkets is another threat for Tesco. PESTEL Framework Analysis PESTEL framework analysis is a tool of strategic management which is used for environmental scanning. The framework is used in the process of strategic analysis to get an overview of different macro-environmental factors which the organization has to take into consideration for choosing a strategic direction. The strategy for future is designed in accordance with the current standing of the organization. It is a highly useful tool for determining areas of growth and decline within the environment in which the business operates. Political Factors

– operations of Tesco are greatly impacted by legislations and regulations in the

regions under European Union. Governments in European Union encourage retailers to create job opportunities because retailing is the business sector which contains job opportunities for a highly diverse group – for instance, retail business employ people from young students to senior citizens. Tesco get favourable concessions from its operations in European countries by providing employment to disabled, elderly and working parents. Political factors are, therefore, quite favourable for Tesco (Tesco Plc, 2011). Economic Factors

– economic conditions of markets in which Tesco operates are not particularly

positive. UK and European markets of Tesco are under significant economic distress with widespread reforms is likely to create major redistribution in income and consumers will be cautious about spending money (Tesco Plc, 2011). The demand for electronics and consumer durables is not anticipated to grow significantly in the next decade for European markets. On the other hand, Malaysia, Japan and China are the markets with significant potential for growth and increase in purchasing power. Social and Cultural Factors

– the social and cultural factors are favourable for Tesco. Consumers

purchasing habits are shifting towards ‘one-stop’ and ‘bulk’ purchases of products. For hypermarkets discount stores, like Tesco, this is a positive trend. The second trend is purchase OLUKAYODE OMOSEBI A4032655

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LONGITUDINAL STRATEGIC DEVELOPMENT STUDY OF TESCO preference towards ‘store brands’ and organic food products. Tesco excels in both of the aforementioned area. Technological Factors

– technology is a highly important component in the context of Tesco, since

technology plays are decisive role in creation of several of innovative product and service offerings of Tesco (Clive, Hunt and Philips, 2003). Technological development benefits both customers and Tesco. Technology in retail sector is improving at a steady pace, which is a favourable aspect for Tesco. For instance, the launch of the Efficient Consumer Response (ECR) system will improve the fit of Tesco’s offering with the demand of customers. The retail chain will be able to respond much more quickly to changes in consumer demand. Environmental Factors

– there is an increased pressure on multinational organization to recognize

their conscientiousness towards society, and to invest towards social causes. Tesco already possesses reputation as a philanthropic organization aligned with several causes of social good (Finch, 2010). For this reason, this factor of external environment is also favourable for Tesco. Tesco product ranges have also been adapted with healthier technologies and this is affecting relationships with customers in a positive manner. Legal Factors

– legal and legislative factors have a direct impact on the performance of Tesco.

Some of the recent legal changes include banning of competitive pricing by retailer to drive out new competition from market. Awareness about monopoly control is gaining strength in several organizations round the globe (Finch, 2010). Tesco has not been involved with monopolistic practices in any of the markets in which it operates. For this reason, this factor of macroenvironment does not have any negative outcome for Tesco. The above mentioned analyses are highly useful in mapping the strategic positioning of Tesco in relation to its environment. It shows that Tesco operates in a fairly strong industry with a favourable competitive positioning in relation to its competitors. Certain weaknesses of the organization are also identified. The analysis is not going to be used to determine appropriate strategic direction for Tesco.

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LONGITUDINAL STRATEGIC DEVELOPMENT STUDY OF TESCO

S TR A TE GIC D I RE CT ION FOR F UT UR E Future strategic direction for Tesco is based on the above mentioned analyses. And explore a limited range of distinctively different choices for the organization. There are several strategic choices available for Tesco, which not non-exclusive, meaning that two or more of these alternatives can be adopted simultaneously. Expansion into Growing Economies The major strategic alternative for Tesco is to diversity market in which it operates. UK and USA markets are highly competitive and they are reaching the point of saturation. Opening up newer retail outlets within UK will merely be cannibalizing the current retail chains. Profits from existing operations should be utilized to invest in emerging economies in Asian region like India and Thailand. These are the two countries with a huge population base and a growing middle class with new-found purchasing power. Competition is also relatively weak in these parts of the world as compared to Europe, UK and US. Procurement and other competitive advantage of Tesco will be supported in these regions because of global nature of Tesco’s procurement. International Strategic Alliances A key strategic alternative for Tesco is international alliance of the retailer in Asian markets. Current strengths of Tesco can be leveraged to form partnership with local groups which posses’ knowledge about local variables. For instance, when entering into India, Tesco can carve a partnership with Reliance or Tata industries to form a win-win strategy. Tesco has proven expertise and trained staff for retail operations while local partner will supplement financial resources and knowledge of habits and customs.

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LONGITUDINAL STRATEGIC DEVELOPMENT STUDY OF TESCO Diversification Diversification strategy can be adopted by Tesco to enter into emerging products and services. Innovation is the need in contemporary retailing industry. Tesco should strengthen its positioning in non-food segment which is anticipated to exhibited greatest growth in coming years. By improving its merchandizing skills, Tesco can gain market share rapidly in non-food retail segment. Leadership can be gained in this region by finding the lowest cost suppliers and transporting the product in most efficient manner to its various warehouses and retail stores. Diversification in pharmaceutical retail is a high potential area due to global increase in demand for healthcare products and medicine. Strengthening Competitive Positioning In Food Retail There is an area of opportunity for Tesco within food retail segment to strengthen its competitive positioning in this segment. There is an emerging trend for consumers to prefer environmentally friendly and ethical food products. Consumers are willing to pay a small premium for such food products. By aligning itself with the movement for food sustainability, Tesco can gain consumers from other competitors in developed economies like UK.

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LONGITUDINAL STRATEGIC DEVELOPMENT STUDY OF TESCO

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LONGITUDINAL STRATEGIC DEVELOPMENT STUDY OF TESCO

C O NCL US IO N The paper has evaluated the strategic history of Tesco and current strategic positioning of the retail chain. It is found that the Tesco possess a consolidated position in its core markets as an established retailer. Some of the weaknesses of the business were also identified along with changes in external environment. Several alternative strategies are proposed for Tesco based on the findings of the analysis.

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LONGITUDINAL STRATEGIC DEVELOPMENT STUDY OF TESCO

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LONGITUDINAL STRATEGIC DEVELOPMENT STUDY OF TESCO

R E FE RE NCE S Clive, H., Hunt, T. and Philips, T. (2003) Scoring Points: How Tesco Continues to Win Customer Loyalty, London: Kogan Page Limited. Corporate

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PLC

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Tesco

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http://www.tescoplc.com/#footer_about-tesco_7 [20 Oct 2011]. Tesco Plc (2011) Tesco: Our History, [Online], Available: http://www.tescoplc.com/abouttesco/our-history/ [20 Oct 2011]. Vignali, C. (2001) 'Tesco's Adaptation to Irish Market', British Food Journal, vol. 103, no. 2, pp. 146-183.

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