Case Study
A Strategic Analysis Report for Tesco Plc

Introduction

Company Background – Tesco

In the past decades, Tesco has been growing very fast, to become a well-know international retailing corporations, with its operations can be found in three regions, namely Europe, United States and Asia around the globe. According to the company’s annual report in 2010, the retail business of Tesco can be separated into two different segments – food and non-food. Apart from the retail business, Tesco is also having four other strategic business units, namely: Tesco Bank, online internet web portal called tesco.com, Tesco Telecoms and dunnhumby (Annual Report, 2010).

Structure of the Report

In this report, the several leadership and management issues facing Tesco in the near future will be discussed. To perform this, an external analysis on Tesco will firstly be performed. Under this section, PESTEL and Porter Five Forces Framework will be applied. After the external factors are analyzed, the report will continue to investigate the internal factors related to Tesco. For this, the SWOT analysis framework, McKinsey 7S Model, as well as a financial statement analysis for Tesco in the recent financial years will be performed. Later, results or issues discovered from these analyses will be summarized, and outlined. Specifically, the issues related to leadership and management for Tesco will be articulated. Then, several recommendations aim to addressing these leadership and management issues will be suggested.

External Analysis

External analysis is important for the analyst because such analysis will provide critical information on the macro-environment facing an organization. In fact, in the context of business management, an accurate understanding of the business environment is critical as the firm’s ultimate strategy, operations and any other activities will surely dependent on these findings. For this, two famous and widely used frameworks will be applied to analyze the macroenvironment facing Tesco, namely PESTLE and Porter Five Forces framework.

PESTLE Analysis

Under the PESTLE framework, there are 6 critical external forces to be investigated by a company. These forces include: political, economic, social-cultural, technological, environmental and legal forces. As Tesco is a multinational corporation, with operations around different regions around the world, the PESTLE analysis for Tesco will be performed from a global perspective. The PESTLE analysis of Tesco is presented as follow.

Political factors. Tesco has operation in three regions, namely Europe, Asia and North America. A review of the political risks that exists in these three regions indicates that the potential political risk facing Tesco is relatively low. Firstly, the political system in Europe and North America is relatively stable. While some countries in Asia do exhibit higher characteristics of political risks, these governments however are welcoming the investors and businesses from all around the world to do business in the respective country. Apparently, the governments are highly business friendly.

Economic factors. Up to date, the economic situations around the world remain volatile. Generally, the world is moving gradually towards recovery, but the economic system is susceptible to external shocks. In other words, the economy recovery process is fragile, and can suffer a double dip recession due to any unforeseen circumstances. In the west, there are issues of over-spending by governments. Particularly in Europe, there are serious sovereign debt issues to be handled. The unemployment rates in the Europe region remain sluggish. In fact, there are sayings that if the governments in various countries in the Europe region cut fiscal spending, the economy may suffer as demands due to government spending dry up and some government servants may lost their jobs (Schmidt-Hebbel, 2010). The situation looks more promising in Asia, but these countries have their issues to solve as well. For example, there are talks that assets bubbles are forming in many countries in the east of Asia. Inflation is pretty serious, and the rise of oil prices due to crises in Middle East had compounded the problems. The rise of food prices is argued may cause political instability among the poor people in these emerging countries. If the inflationary pressures are not curtailed, the economy of China and other countries may face a risk of hard landing in the future (Evans et. al., 2010).

Socio-cultural factors. As Tesco is an international retailer, socio-cultural factors from different countries are highly influential towards the success of international operations of Tesco. Generally speaking, people from different country have different cultures, from several Hofstede’s dimensions: high/ low power distance, individualism/ collectivism, masculinity/ femininity, and high/ low uncertainty avoidance. As the cultures differ from one country to another, it is important for Tesco to tailor the design of its products and services according to the local context (Brouthers et. al., 1998). Apart from that, societal factors also differ from one country to another. For example, there is a trend of population aging in countries from Western Europe and North America. Besides, consumers are getting more demanding (Siddiqui et. al., 2003). The good news however, is that the living standard of people has been improving, especially in those emerging countries, and they now have better purchasing power.

Environmental factors. Overall, global warming is a critical issue haunting people around the world. For this, people are getting more conscious on environmental issues. The public now demand corporations to exercise greater care to take care of the environment, and may even act against those socially irresponsible corporations. Governments are also getting stricter in implementing policies, rules and regulation for the corporations. There is also a trend of green movement by consumers, whereby people now tend to support those corporations that are more environmentally friendly.

Technological factors. The changes of technological forces are fast, and can lead to the success or failure of a retailer. In today world, the technological changes that will affect the future prospects of retailers include: the rise of e-commerce, the proliferation of internet services, the changing habits of people in buying things online, the rise of information system such as Customer Relationship Management, Enterprise Resources System, and the emergence of importance of internet marketing in the recent years. Due to the technological changes, the business landscape for the retailing industry is becoming more competitive, as successful retailers must be responsive and yet able to operate in a low cost manner, flexible and able to deliver mass customization products or services to the market.

Porter Five Forces

In order to understand the competitive forces shaping the retailing industry structure around the globe, Porter Five Forces framework will be used. Such a framework can complement well the analysis generated from the PESTLE framework, as it offer a different perspectives to look at the external factors that may affect the profitability and viability of a firm from the specific industry perspective.

Rivalry among existing competitors. In the international retailing industry, there are a few very powerful big players. Among these retailers include: Wal-Mart (from United States), Carrefour (from France), AEON (from Japan) and many other smaller size retailers. Overall, the competition is great among these retailers, as these retailers have been competing on both quality and lower price for the customers. In fact, in the different country, there are also local and yet powerful players competing for market shares with the multinational retailers. Overall, the entire industry structure is oligopoly in nature. The rivalry is intense as it can be observed that retailers are trying hard to lure customers with different techniques, and in many cases, had to continuously lower the pricing offered to customers to enhance customer loyalty.

Bargaining power of buyer. Overall, the bargaining power of buyer is great. This is because there is essentially no switching cost for buyers to buy from a single retailer or the other. Buyers are largely price-conscious. Besides, as the competition is great, many of the retailers have operations close to each other – significantly increasing the consumers’ choices. Due to the increasing popularity of internet, buyers can also easily compare prices offered by the different retailers. Such a scenario is clearly not benefiting the many retailers in the long run.

Bargaining power of suppliers. Fortunately, the retailers apparently had strong bargaining power, as the many manufacturers are struggling to sell their products through the retail outlets owned by large multinational corporations such as Tesco, Carrefour or Wal-Mart. In fact, the big retailers are able to collect fees from the manufacturers just to put their products on the shelves of the retail outlets.

Threats of substitute products. There is relatively few substitute products, as after all, the services provided by the retailers are to provide customers convenience in buying their daily necessities and other things. One possible challenge is the rise of online retailer services. However, such a trend is already captured by the many retailers, whereby it is easy to observe that the many retailers are setting up online store to reach the customers. Other potentially threatening substitute include the specialty online shops, the ability of customers to purchase directly from manufacturer online as well as the convenience shops located near to the residential areas.

Threats of new entrants. Due to the already intense retailing landscape, the threats of new entrants are moderate. This is because to set up such a wide network of retailing distribution channels can require a long time, and the system to manage the business required huge investment outlay. Not only is that, it is also not easy to build a strong and new brand name in the highly competitive and pricing sensitive industry. Rational businessmen will understand that it is not easy to compete with the existing powerful and deep-pocketed players. All these will deter potential competitors to ponder for some times before they are sure that they are willing to take such a huge risk to compete in the hypercompetitive industry.

Internal Analysis

In this section, the internal conditions of Tesco will be identified and analyzed. Internet analysis is critical as it is important to understand what the resources the firm possesses, the relative competencies of the firm, as well as the strengths and weaknesses of the firm. For this, SWOT analysis, the Seven S Model, as well as financial statement analysis of Tesco will be performed.

SWOT Analysis

In order to understand how the organization internet resources fit or can be utilized to take advantage on the external forces in the business environment, SWOT analysis can be performed. Under the SWOT framework, external forces can be separated into opportunities or threats; while internal forces can be divided into strengths and weaknesses. The following paragraphs will discussed all these four dimensions in details.

Strengths of the company. One of the strengths of Tesco is the large distribution network around the globe. This effectively enables the firm to achieve economies of scale in the retailing landscape (i.e., lowering the various costs and enable the firm to pursue a low cost leadership in many areas the firm is operating on). Besides, Tesco also enjoy a high level of customer satisfaction. The Tesco loyalty card enables Tesco to understand the customers better, and then tailor the marketing mixes of Tesco to serve the customers better, while at the similar time to enhance the customers’ loyalty (Humby et. al., 2004). Not only is that, the Tesco position in United Kingdom is dominating. That will serve as a strong base for Tesco to expand its operation to the international context. Apart from that, Tesco is also well known for able to produce happy, satisfied, committed, responsible and responsive workforce around the world. The satisfied employees in turns able to deliver better services to the customers, and indirectly produce satisfied customers. The brand name of Tesco is also well-know. This will enable the company to expand easily as customers tend to trust the reputable brand name in making purchasing decisions.

Weaknesses of the company. The key weakness of Tesco is that although Tesco is a huge multinational company, the size is still relatively small if compared to the big and powerful retailer such as Wal-Mart. This may cause Tesco to lose out in the race to become price leadership around the world. Secondly, as will be discussed in the next few sections, the use of debt of Tesco is increasing, where this will definitely increase the financial or liquidity risk of Tesco. Not only is that, the profit margin of Tesco is also decreasing in the recent years, indicating that the efficiencies of operations in the firm is decreasing, from the perspective of operating costs to revenue.

Opportunities in external environment. There are a lot of opportunities to be reaped by Tesco is the strategy is correct. As the economic power and growth has shifted to the East, especially to countries such as China and India in Asia, Tesco will be able to enjoy high growth rate from the subsidiaries in these countries. This is because the people is enjoying high standard of living, and have more purchasing power when the economy grow. Besides, there are also changes in the consumer purchasing behaviors, and apparently, Tesco has been taking initiatives to leverage on such a trend. The consumers are becoming more comfortable to purchase things online, and Tesco is providing such services to cater for such trends (Rogers et. al., 2005). Besides, the demographics in the western countries are changing as well, whereby the population is aging, and the retired group of people is demanding different products, services and lifestyles.

Threats in the external environment. The biggest threat in the environment is due to the still gloomy economic environment. As discussed in the PESTLE section before, the economy recovery process in the United States is fragile, and can suffer a double dip recession due to any unforeseen circumstances. The countries in Europe are threatened by high budget deficit as well as the issues related to sovereign debt. If the many countries implemented financial austerity at the similar time, there is a good chance that the region may suffer recession. From the industry context, as had been discussed under the Porter Five Forces Framework, the retailing industry around the world is competitive. That will be some real challenges to Tesco to overcoming these powerful competitors in the global arena.

McKinsey 7S Model

One of the widely used framework to consider the company as a whole is the Seven S model, in which an organization is being analyzed and described by several dimensions as follow: strategy, structure, system, style, staffs, skills, and super-ordinate goals. With better understanding on the organization from several perspectives, the organizational problems (if any) can be diagnosed. In this section, the Seven S Model will be applied to analyze Tesco.

Strategy. Overall, the long term strategy of Tesco is to broaden the scope of business to enable the corporation to achieve a sustainable growth rate, by cross selling various products or services to the existing customers, and also by expanding to other markets in the international context. In fact, according to Tesco Annual Report 2010, the strategy of Tesco as mentioned above has five elements, namely: to be a successful international retailers, to expand the core UK business, the achieve growth in both food and non-food segment, to develop retailing services, as well as to put the community at the center at whatever they do.

Structure. Organizational structure in Tesco can be considered a highly decentralized one. The parent company hold several subsidiaries, or more accurate to be described as the different strategic business units (operating in different business, such as Tesco Banking, Tesco Retiling, and Tesco.com). Besides, regional managers are given the responsibilities to manage the respective regions. Many of the local managers are empowered to do what is right, according to Tesco set guidelines and direction, as long as they see it fit to the local context (Ma et. al., 2010).

System. There are a lot of systems being implemented in Tesco. For the retailing system, there are a few IT/ IS infrastructure and system being used to manage the flow of information and customer data (Humby et. al., 2004). To manage the employee performance, Tesco has its differentiated human resources policies, practices and systems as well. Overall, there are many systems in place to facilitate the operations of Tesco.

Style. The organizational culture of Tesco is famously a customer centric culture (Rogers et. al., 2005). In Tesco, customer satisfaction is a very important aspect to be managed and handled by the managers as well as the workforce. In planning for business expansions, Tesco has been able to put customer at the center of their heart. In fact, a series of customer relationship management plans and strategies are carried out by Tesco to enhance customer loyalty in the firm. Tesco Loyalty Club Card is one of such initiatives. Another culture of Tesco is to put the employees at the center of the corporation (will be discussed more in the following paragraphs).

Staff. It is hard to argue that the main reason Tesco able to achieve high flying success in the competitive business environment is due to the success of people management in the corporation. This is agreed by researchers that the most prized assets of Tesco are its people (Strategic Direction, 2005). In Tesco, people is the integral part of the overall  business plan, as Tesco is practicing strategic human resources management to engage the workforce towards the successful implementation of Tesco strategies, missions and visions. In Tesco, the strategic human resources management started with the hiring of the very best talents available in the marketplace. The selection criteria are tough so that Tesco able to ensure the people being hired is suitable to the corporations (Palmer et. al., 2010). The Tesco will have a series of human resources development plan for the newly hired candidates. Some of them (hired abroad to be trained to takeover overseas managerial jobs) will be sent to UK to learn about the Tesco culture in greater details (Annual Report, 2010). Then the performance management system in Tesco is also fair and rewarding. Such system is said to enable the workforce to take full responsibilities on their career path and actions in workplace.

Skills. There are several skills possessed by Tesco. One of the critical skills/ core competencies is to expand profitably in the overseas market. Such a skill is not easy, given the fact that the biggest retailer such as Wal-Mart had fail several times in different countries, such as in Japan and Germany. Tesco success in the oversea market can be associated to its ability to manage its expansion cross culturally (Rogers et. al., 2005). It is able to adapt to the local context and build up brand loyalty in the oversea expansion projects. Secondly, Tesco is famous for the ability to ensure customer satisfaction as well. This can be seen by the fact that Tesco Loyalty Club Card members are increasing fast in the past few years (Annual Report, 2010).

Super-ordinate goals. Although the super-ordinate goals of Tesco are not explicitly mentioned in the corporate annual report, it can be seen that Tesco has been emphasizing that the firm is committed to deliver great values to the customers. Apparently, customer satisfaction is a key mission of Tesco, as many of the investment in Tesco is to enhance customer satisfaction and loyalty (Strategic Direction, 2005).

Financial Statement Analysis

In order to understand the financial picture or status of Tesco, the financial statement of the firm will be analyzed. In Table 1, the important financial information for Tesco is presented. The analysis of the 5-years financial statement will be presented thereafter.

 

Table 1: Financial Statement of Tesco Plc

 table-1

Source: Adapted from Tesco Annual Report 2010

 

Analysis of Tesco’s Profitability Ratios. Tesco is a highly profitable organization, judging from the outstanding achievement in ROE and ROCE. Often, a ROE figure exceeding 20% indicates that the firm possesses certain competitive advantages in the marketplace. This is true for Tesco, as it able to deliver great customer satisfaction at low costs. The profit margin for Tesco; however is low. This is mainly due to the highly competitive industry structure. This indicates that Tesco thrive on volume game.

Analysis of Tesco’s Operational Ratios. For Tesco, slower turnover rate is observed in the recent years. This can be probably caused by increasing competitions from other market players. Apart from that, the interest coverage ratio of Tesco had worsened. This is due to the usage of debt, causing a higher interest burden upon Tesco in the recent years.

Analysis of Tesco’s Capital Structure Ratios. It is obvious that the gearing ratio of Tesco has been increasing. This is due to the usage of more proportion of debt in the company capital structure. This can be a very risky move, as Tesco may easily become financially distressed in times of recessions.

Analysis of Tesco’s per Employee Ratios. It is found that the compensation per employees has been increasing in the recent years. However, one bad news is that employee turnover had increased. This is a bad news, as the higher turnover rate often indicate less satisfied employees in the company.

Conclusion: The Challenges Ahead

In short, it is found that the entire retailing industry landscape is highly competitive. This can be seen from the deteriorating financial in Tesco. Besides, in order to achieve growth, Tesco had also expanded to too many types of businesses. Although retailing is still the main business contributing significantly for Tesco revenue, Tesco has been expanding to other business such as financial services, online retailing, and etc. The more diversified business portfolio may dilute management attention on the core competencies of Tesco, and this can be a dangerous issue for Tesco. Besides, Tesco has been using a lot of debt in its capital structure lately. This means that Tesco can become financially distressed in hard times. Those areas that Tesco excel in the past are also showing negative signs. For example, employee turnover rate has been increasing gradually in the recent years. Giving all these challenges, Tesco is urgently required to adopt new culture or strategies to growth/ revitalize or reform the company. Besides, as Tesco has operation in the global context, it is important to for Tesco to not to lost attentions on these operations. Again, due to the already complex business portfolio of Tesco, it is even more impossible that the senior management of Tesco will be able to oversee so many issues in other regions around the globe. In the future, it is too important for Tesco to innovate, or to adopt new and stronger culture to ensure sustianble growth rate for the firm.

Recommendations

Judging from the highly complex environment, it is found that Tesco no longer can operate from a traditional mindset, by delivering incremental improvement to the marketplace. It is no longer relevant for Tesco to compete by offering slightly lower price to customers, slightly better rebates to consumers, or to differentiate slightly than the competitors. All these are no longer sustainable, as the small and the large competitors will fast to copy these strategies. Thus, it is important for Tesco to deliver new and innovative value offerings to the consumers. The existing core competencies of Tesco must also be strengthened, as if that is not done, Tesco may even lost the most basic requirement to compete in the every challenging marketplace. These improvements or changes are never something easy. In the following section, it is argued that such changes can be accomplished vie strong leadership as well as proper organizational change and development program in the organization.

Leadership

As Tesco had essentially become a diverse business, in a diverse geographical location, leadership has become more important. For this, it is critical for the management to manage the human resources in a more effective manner. The employees should be empowered, and be trained and developed, so that they can achieve important skills in managing the daily operations and strategic directions of Tesco. Decision making processed must be further decentralized. This is important as the organizations had become too huge to be managed. Rather, in such a complex organization, trusting, motivating, and empowering the workforce is more important. The workforce will be given the responsibilities to take responsive actions towards satisfying customers’ needs and demands. For this, it is important for senior management to focus on training local talents to deal with the local complexities in the global retailing arena. Instead of directing the managers from different countries to follow a set instruction by the headquarters, it is important to allow the local managers to take certain degree of risk to adjust accordingly to response to the local culture.

Cultural Web

To purely focus on developing customer centric culture in Tesco is no longer sufficient. To be able to compete effectively, it is important for Tesco to instill an innovative culture in the organization, by treating the workforce as knowledge workers. In order to instill such an innovative culture in Tesco, the Cultural Web framework is used. Suggestion on how the organization can develop an innovative culture in the firm is presented as follow.

Stories. In order to enhance the innovative culture in Tesco, it is critical for management to create or highlight several stories on how innovations had brought Tesco to greater success. For example, a particular innovation, suggested by an employee, that had bring forward great benefits to Tesco shall be communicated and shared among the diverse workforce. The workforce must be told how the person that can bring good and creative ideas, and how he is rewarded, and how the organization had benefited from such creative ideas. It is then important for the organization to encourage people to perform in the similar way as well. These stories can also be told to the new employees when they just join the organization.

Rituals and routines. Several routines should also be set. For example, Tesco employee must be taught to smile whenever facing with customers. The managers may be required to remind how important customer satisfaction as well as innovation is to Tesco success. The practices that can encourage Tesco to become an efficient (i.e., to achieve as lower costs as possible), customers centric (i.e., currently, the core competencies of Tesco), and innovative (i.e., a critical element to bring Tesco great success in the competitive industry) organization must be implemented in the firm.

Symbols. Symbols can also be used to further enhance innovative behaviors of people in Tesco. For example, certain symbols or perhaps diagrams or figures on how to think creatively and continuously improvement the workplace effectiveness can be put around the office.

Control systems. The control systems should be redesign. For example, as per the author understandings, no material indicates that Tesco is delegating much work to the employees, and to control the workforce from a set of values and corporate philosophy. All these are important. This is because as the organization get bigger, tight control is not longer relevant. Employees must be empowered to deal with daily complexities, applying their personal matured judgment, and being guided by only a set of Tesco values. For example, in order to ensure the culture of creativity, customer satisfaction and efficiencies are widely adopted and practiced, it is critical for Tesco to put these as the corporate values, and employees are to put these as the priorities when making decision in workplace.

Organizational structures. The organizational structures must be designed to become flatter. This is because hierarchical organization structure is no longer relevant in the dynamic market place. Today, businesses must become more responsive to market changes, consumers demands and preferences. Thus, a lot of decision making process must be decentralized. Organizations structures must be designed to support and facilitate the decision making process so that a truly responsive, dynamic and changeable organization can be formed.

Power structures. As argued above, it is important for Tesco to delegate the tasks to the employees, particularly to those local managers in other region. That is true as well to delegate the task to the managers from the respective strategic business units.

Strategic Human Resources Management

It is also highly critical for Tesco to continuous train the many level of management in the organization. Currently, it is acknowledged that Tesco is performing this well, and is treating this seriously. However, it is worth to reiterate that a continuously focus on enhancing the capabilities and competencies of the employees is really the route to success in the every challenging business environment in the future.

Final Conclusions

Overall, under the competitive business environment, it is managerial imperative for Tesco to change and to lead innovative and huge improvement process in the firm. A customer centric and a focus on efficiencies is no longer sufficient, as organization must become more innovative to change and adapt to new market requirements, as well as to move ahead of competition.

References & Bibliography

Annual Report. (2010). Tesco Plc.

Humby, C., Hunt, T., & Phillips, T. (2004). Scoring points: how Tesco is winning customer loyalty. Sterling, VA: Kogan Page.

Lowe, M., & Wrigley, N. (2009). Innovation in retail internationalisation: Tesco in the USA. The International Review of Retail, Distribution and Consumer Research, 19(4), 331.

Ma, Y., Ding, J., & Hong, W. (2010). Delivering Customer Value Based on Service Process: The Example of Tesco.com. International Business Research, 3(2), 131-135.

McTaggart, J. (2006). Industry awaits Tesco’s invasion. Progressive Grocer , 85 (4), 8-10.

Palmer, M. (2005). Retail multinational learning: a case study of Tesco. International Journal of Retail & Distribution Management, 33(1), 23-48.

Plimmer, G. (2010). Scoring points: How Tesco continues to win customer loyalty. Journal of Revenue and Pricing Management: Special Issue: AGIFORS 2009 Conference, 9(4), 377-378.

Ritson, M. (2008, October 29). Tesco takes fight to Aldi. Marketing, p. 20.

Rogers, H., Ghauri, P. N., & George, K. L. (2005). The Impact of Market Orientation on the Internationalization of Retailing Firms: Tesco in Eastern Europe. The International Review of Retail, Distribution and Consumer Research, 15(1), 53-74.

Schmidt-Hebbel, K. (2010). A gloomy outlook. Organisation for Economic Cooperation and Development. The OECD Observer, (270/271), 56-57.

Siddiqui, N., O’Malley, A., McColl, J. A., & Birtwistle, G. (2003). Retailer and consumer perceptions of online fashion retailers: Web site design issues. Journal of Fashion Marketing and Management, 7(4), 345-355.

Strategic Direction. (2005). The secrets of Tesco’s expansion success. Strategic Direction, 21 (11), 5-7.

Strategic Direction. (2008). Tesco’s American dream. Strategic Direction, 24 (2), 11-15.

Tesco leads the way in the loyalty program stakes: UK supermarket succeeds where so many others fall foul. (2007). Strategic Direction, 23(2), 18.

Tesco Plc. (2009). Annual Report 2009.

Tesco staff keep hands on the wheel: Objectives managed and steered to appraisal. (2009). Strategic Direction, 25(9), 5-8

 

(Visited 1,774 times, 1 visits today)

About the author

Related Post

Leave a comment

Your email address will not be published. Required fields are marked *