With contemporary society of fluctuating customer preferences, dynamic market, shifting competition, reforming government, advanced technologies, change in economies, and transforming demography, it is not questionable why companies need to establish new policies, workforce environment, and particularly business strategies. However, it is questionable on how, where, and in what way they are able to improve their strategy paradoxes in order to create a unique selling point or competitive advantages to be outstanding in today and future national and international business markets. Thus for any firm, setting up new strategies is a must and given. That’s why companies need to persistently be aligned with their surrounding environments, either by responding to outside situations, or by proactively forming the commerce that they are operating. Hence, the right and outstanding strategies will be made for the right time and situations.
This essay will then discuss about strategies used by Tesco in participating more actively in the national and international market. However before going to Tesco’s strategies, let’s take a look at ‘what is strategy?’ and ‘strategy characteristics’.
What is strategy?
A strategy is the systematic plan of action and scopes of a business which is designed to achieve benefits for the business through its available configuration of resources within a competitive atmosphere, to meet the needs of consumers’ preferences and markets and as well as to satisfy shareholder expectations.
Strategy Characteristics
Strategy has three characteristics according to Wit, B, D & Meyer, R (2005) – process, content, and context. They are the most important distinction that can be recognised in daily-life strategic obstacle situation.
- Strategy Process: The process is to get involved with the strategy of who, how, and when – how should or is, strategy be created, analyzed, invented, formulated, applied, shifted, and managed; who get involved; and when do the essential actions take place?
- Strategy Content: The result of the above process is the strategy content. In terms of a query, the strategy content is related to the strategy of what – what should be or is the strategy for the corporation and its every single constituent unit?
- Strategy Context: The result of strategy content and strategy context is referred to strategy context. Talked in terms of a question, the context evolves with the strategy of where – where are the strategies process and content embedded in a firm?
II/. Tesco
Summary
Tesco is a public limited company and is the largest retailer in the U.K, while it is the third largest in the world. Tesco has roughly 4,000 stores in 14 countries. It was found by Jack Cohen in 1919. The company headquarter is in Delamere Road, Cheshunt, and Hertford shire, Britain. David Reid is Tesco chairman along with Sir Terry Leahy as a chief executive. The key goods of Tesco are customer products, Groceries, telecom, and financial services. The firm revenue is £56.910bn in 2010 and its operating profit is £3.457bn.
History: The Coming to Life of Britain’s Largest Supermarket
Tesco came to life in 1919 when Jack Cohen started selling surplus groceries from a stand and made his profit of £1 from sales of £4 on his first day. Five years later, 1924, Cohen established first brand of Tesco when he purchased a shipment of tea from a Mr T. E Stockwell and in 1929 Cohen opened Tesco store’s flagship. In 1930 a headquarter and warehouse were built as the brand went on its rise, and two years later Tesco turned into a private limited firm. Tesco’s stock exchange with a share price of 25p was floated in 1947.
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The expansion of Tesco became stronger as it bought 70 Williams stores in the 1950s along with 200 Harrow stores and in the 1960s, 97 Charles Philips stores and Victor Value chain were purchased by Tesco. The Guinness Book of Records recorded a Tesco store in Leicester as the biggest store in Europe in 1961. The next 13 years, the first petrol stations of Tesco were launched and became the biggest independent petrol retailer in the U.K. By 1979 the Tesco’s sales reached £1 billion and twice the amount to £2 billion in three years. A Tesco’s slogan was launched in 1992 as ‘every little helps’, and followed Tesco Clubcard in 1995, which provided a competitive edge to overcome the UK’s biggest food retailer, Sainsbury. And still in the 1990s, 24-hour service was introduced and long with the overseas expansion.
A Tesco website, www.tesco.com, was launched in 2000 while it expanded its products rang like clothes, electrical and personal finance goods. In the next 4years, Tesco stepped into broadband market. And two years later, the company announced to run its business in the U.S under the name of Fresh and Easy. Moreover, on 23 February, 2008 the sales rose to £51.8bn and pre-tax income increased to £2.8bn. In the same year, Tesco became the only supermarket that was every single postcode area in the U.K when it purchased rival Somerfield stores on remote islands in Scotland. In 2009, www.tesco.com/clothes was introduced and Clubcard was re-launched to double up customers vouchers. Finally in 2010, the firm ran the world’s first zero-carbon supermarket in Ramsey, Cambridgeshire, and also the first Lifespace mall in China.
Strategy
According to Data Monitor, food retailing analysts stated that: ‘The strategy of Sainsbury is far behind Tesco. Tesco has become a strong core and rapidly grew international stores in the U.K. Meanwhile, it developed good non-food sales, increased retailing services and took advantages of e-commerce effectively.’
The achievements of Tesco in the recent years have mainly come from the change to ‘higher margin’ non-food merchandise, expanding overseas branches, and forming a strong UK key business. Low prices, cultivating consumer loyalty, providing a wide range of distinct store concepts and improving retailing services, like insurance and banking, were the company’s main successes in competing with the rivals locally and internationally. Furthermore, the firm concentrates on non-food products, which has led to wondering whether it is fair to compare between other grocery shops and Tesco at all as it appears to have grown to be a consumer goods firm.
On 22 October, 2002 Tesco chairman David Reid made the declaration in a conference held at the annual institute of Grocery Distribution that: ‘You cannot save your way to prosperity. Growth is vital to shareholder, employees and suppliers.’ Growing investment is the heart of Tesco’s strategy. This asset does not simply come from investing back profit. In January 2004, Tesco’s new shares of 315m were placed to raise funds of £773m. By doing do, the company was able to pay off the debenture. At the same year on March the company declared to make a joint venture with Topland, a property group, to release the money of £650m from its UK property portfolio. However, Tesco’s credit was rated very low due to its borrowing money for expanding the company.
Core UK Business
From a Tesco’s preliminary statement of account in 2004, Tesco considers the below points:
For a further investment is to improve price position. The total of £140m in January 2006 is the most recent cost campaigns to improve the company position as Britain’s best value retailer. For instance, during a general price deflation in 2000, the deflation was between 2-3%, while Tesco was able to deflate the price nearly between 4-7%.
During 2003 and 2004, 21 extra stores were opened, of which 13 were the expansions and the rest were new which gives a total of 83.
Evidences show that customers love the Express stores, and the firm has increased share of convenience market to 5.9%.
Tesco Express stores are the key to further and continued success as executives look to employ the ‘street corner’ strategy by building more Express stores.
The sparkling growth of the business has stemmed from the expense of competitors, particularly Safeway and Sainsbury. Their battle is to detain customers. And the other UK retailers just have no ability to challenge on both store structures and price.
Suppliers, researchers, and farmers have mentioned a Tesco strategy that the company does not widely broadcast – exploiting the company’s monopoly (or to use a more precise terminology, oligopsony) position to decrease the price paid to suppliers. Thus, Tesco does not obtain profit from costumers, but also from suppliers.
The ‘Tesco’ Approach
This is the final plank in the firm’s strategy – ‘To create value for our customers, to earn their lifetime loyalty.’ The two values of the company are: ‘We treat people the way we like to be treated,’ and ‘No one tries harder than we do for customers.’ Nevertheless, these two values are selectively applied to shareholder and consumers rather than smaller rivals and farmers.
Major changes in lifestyle patterns are fundamental achievement of Tesco’s ongoing success. Tesco has taken advantage and responded to changes in lifestyle since the inception of the company over the 80 years. Those changes are: more women go into workplace, bigger disposable profit, the arrival of the weekly shop, fewer meal of family cook, and cheap food policy adopted after the Second World War by Britain.
Tesco’s Strategy vs Porter Diamond Model
Porter diamond model is an approach designed to get insightful of competitive position of a business in global markets.
a/. Demand Conditions
The demand factor with respect to production scale is one major issue in this theory. Generally, the productions scale relies on the needs and wants of consumers for the products or brands. In London, 70% of Tesco’s own brand is highly proffered and ordered by people due to the cheap price strategy of Tesco besides having finest quality in food items such as cake, bread and so on, and non-food products such as 14.95 euro of Tesco Ireland CD compared with over 20 euro of competitors’ HMV Ireland or Golden Discs selling the same goods.
b/. Related and Supporting Industries
The second competitive advantage of Tesco is that the firm has related industries that are competitive globally like Wal Mart, throughout advanced aspects like communication infrastructure, modern and skilled labour, and research facilities, and technological know-how.
c/. Factor Endowments
Tesco has fundamentally gained competitive edge through sophisticated labour and etc as mentioned in Related and Supporting Industries. Finance, insurance, digital services, entertainment services, broadband, phone, clothes, health and beauty, and media products are example of those competitive advantages. Moreover, a wide range of Tesco brand non-food products including Finest ranges and non-food Value are sold perfectly. Meanwhile the selling of these non-food goods is quite high in Ireland. CDs are the best instances which are the results of Tesco’s technological know-how, communication infrastructure, and research facilities.
d/. Firm Strategy, Structure, and Rivalry
Tesco has gained this fourth attribute to create unique selling point. Initially, Tesco’s superior technology of checkouts and stock control system has led the company to the success and expansion over the rivalries.
Strategy: The growth of the company over the last two decades has been related to the strategic and image transformation. Its prior achievement is because of an approach, ‘Pile it high, sell it cheap’ from Jack Cohen. The method was overtaken by the company during 1995. There are main reasons for the success like an ‘inclusive offer’ and customer focus. In addition the company has another four-pronged method: non-food business, international, core UK business, and retailing services.
Structure: The stores in the U.K have been separated into 6 formats based on their structure, which is differentiated by the stores’ size and range of goods sold.
Tesco Extra: is chain of mostly out-of-town hypermarkets.
Tesco Hypermarket: is a superstore with a combination of a department store and a supermarket, which gives a very big retail facility with a broad range of goods in one roof.
Tesco Metro: is a store that has size between Tesco Express and Tesco stores. The store generally is located on high streets of small town and city centre with typical size of 12,000 square feet.
Tesco Express: is a store that is neighbourhood convenience store. It has chiefly food with higher-margin goods owing to the lack of economic scale.
Tesco One Shop: is a Tesco only format in Britain which has no the name of Tesco in its name and consists of some of the smallest stores.
Tesco Homeplus: is a non-food store.
Rivalry: Tesco has Asda, Safeway, and Sainsbury as its domestic competitor. However, these rivals allow Tesco to be a better international challenger since the firm runs the business internationally.
Case Study: Tesco in Pakistan
Before entering its market in Pakistan, Tesco has used an environmental scanning technique to examine Pakistan information for strategic purposes. First of all, a Tesco study has shown that Pakistan has a high per-capita income which they are able to afford products from Tesco, and so it assists to rise in the employment rate. Meanwhile, the national GDP rate is 5.8%. Thus, people would prefer to purchase various products under one roof in affordable price when they get monthly salaries. Plus, Pakistan is an Islamic country which permits the retailer to sell excluding only alcoholic products that are banned legally. The country political environment is favourable since the rise of Tesco will help the government to raise tax revenue and the intervention of the government will assist the company to process effectively. For Pakistani culture, it offers Tesco a good demand condition as Pakistani people are influenced to get work done as soon as possible, so the Tesco takes the advantage to offer a wide range of products such as grocery, clothing and etc under one roof. The most benefit thing for Tesco is that there is only competitor in Pakistan, Metro which has small market share. Therefore, Tesco has an opportunity to obtain more shares because Tesco will aim all income levels of consumers. Finally, Tesco has chosen a strategy called Greenfield strategy (a strategy that is to enter new market without the help from local business) since the company doesn’t need help from local firms as it has only one competitor with small share in the hand. More importantly, the adoption of Greenfield is because the Tesco needs to begin from scratch in Pakistan. For marketing, Tesco would adapt pull strategy, a strategy that spends highly on advertising and customer promotion to build demand and loyalty of customers on a product. Lastly, Tesco chooses two type of financing: 70% from equity financing and 30% from debt financing.
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Tesco’s strategy vs Global Strategy
The growth and strength of Tesco do not depend only on real within the United Kingdom, but also internationally. When local opportunities have turned less, the company started its expansion over global like the other giant retailers. The rapid gains over Central Europe and Asia and a considerable market share have come from its effective strategy. The main solution to success of Tesco is to lie in its global strategy, in which the company mixes global management in many areas and domestic responsiveness.
Tesco’s tactic generally is to purchase an existing retail chain, or an important share of one, and transform it to subsidiary of Tesco. After that, the company can start the usual strategies by aggressively competing price, undercutting local businesses, selling petrol, creating Clubcard to build customer loyalty, opening 24 hours service and so forth. For its international stores, Tesco prefers large hypermarkets since it is easier to obtain planning permission for these stores in most countries than in the UK. These hypermarkets concentrate on non-food products.
According to David Hughes, professor of agribusiness and food marketing, claims that: ‘Retailers from rich countries look for five characteristics in countries – high population growth, big population, consumers levels of GDP edging per capita, high growth of income, and poor supermarket presence. With these five characteristics, giant retailers would step their businesses into those countries.’ That’s why Tesco focuses its expansion to Ex-Soviet nations and South East Asia rather than going to West Europe countires.
Case Study: Tesco in Thailand
In 1998 Tesco stepped into Thailand by purchasing a great amount of stoke in the Thai-owned Lotus chain of convenience locations. And Thailand was the first south-east Asian country that Tesco ran its business in a large scale, and 31% of Thai market had been captured by Tesco by the end of 2002. Moreover, Tesco Express stores are attached to Exxon Mobil petrol stations. During 2004, the retailer plans to capture the remaining stake in Tesco Lotus.
Tesco wanted to point out that it would be sourcing produce domestically, generally gaining the domestic economy, and providing local people jobs. The company also plans to help Thailand local suppliers to access local and global markets, and sell to multinational companies by offering them to develop and improve their service and quality standard.
As usual technique, Tesco is very proud of its price cutting technique in South East Asia. There is slogan from Tesco: ‘Like in the UK and Europe, we perform price campaigns to distribute to invincible value for our customers.’ This seems like declaring a war of opening hour and prices and the local retailers cannot possibly challenge with Tesco strategies. However, Tesco’s main competitors are not local retailers, but international retailers such as Carrefour and Wal-Mart, and domestic ones that suffer as a result of simply collateral damage.
III/. Recommendations
The strategies implemented by Tesco both local and international strategies work effectively in competing the local and global markets. For local business, Tesco seems to have a very higher strategy compared to Asda, Safeway, Sainsbury, and other biggest retailers in the UK. Its main four strategies are: non-food approach, retailing services, international strategy, and a strong UK core business. However, its international markets still seem to have troubles as a Tesco’s bitter experience in France (business collapse). Moreover, the company have too many corporate crime and global activities on the countries it is operating. For example, in Thailand, Tesco was taken to court as it exploited suppliers. It was found guilty on charging slotting fees to carry producers’ goods, charging suppliers fee of entry, advertising costs and goods show costs, and displaying own-brand items close to similar branded items. If we go to Ireland, we will see that Tesco has been fined by the country government over below cost price selling products which the company tried to undercut other traders. In addition, it has been fined for selling certain goods at a lower in the UK than in Ireland. Plus, Tesco workers’ in Ireland, in 2001, went on strike due to under payment. Tesco’s workers received $4.85 per hour, while the union stated 20p to 25p lower than salaries paid by Tesco rivals.
Hence, in order to compete with the world largest retailer, Wal-Mart, and to participate more actively in international markets, Tesco needs to improve the poor areas such as the dependence on the UK grocery market, high fossil fuel cost needed to use in transportation network and etc.
Suggestion: To improve those poor areas, Tesco should improve market development strategy and product development.
Strategic Alliances and Join Developments (Market Development Strategy): By expanding its international markets, Tesco should choose options of global alliances with local markets. This can be considered as a strategy of improvement and can be formed to take advantage current competence and resources. When forming partnerships or joint ventures, Tesco is able to gain and extend its local knowledge and operating expertise of the partner, meanwhile it can include its own supply chain, goods improvement and stores performing skills to distribute a better shopping experience to consumers. By doing so, it can obtain a bigger economic scale and bigger presence of market.
Diversification (Product Development): According to schools and Johnson (2003), business environmental changes may create demand for new products and services, while the matrix of Ansoff recommends that a product development strategy needs to be carefully thought by management of a firm, if they want to develop new products for the existing markets. Thus, Tesco’s expansion and diversification of products mix, the company has to implement internal improvement when new products are built. Moreover, Tesco needs to consider the relation between portfolio diversity and the rationale of the corporate strategy. Thus, Tesco is able to introduce new product lines followed by changes of needs and wants of customers. But this may need more concentration on R&D, guiding to additional expense.
Supermarket industry understands overcapacity and innovative goods and services that are being the main competitive edge. Thus, a Tesco’s key driver for product development is innovation. Tesco, for instance, has many formats of stores in the UK and each format is to provide different convenience to shoppers. Therefore, Tesco can create portfolio of different formats for international markets like Far Eastern and Eastern Europe whose stores are hypermarket. By doing so, Tesco can develop the uniqueness of value added which lead to command a premium price. Plus, Technological management of innovations is related to decision-making, so Tesco must exploit the internal powers and reduce internal weaknesses to accomplish sustained unique selling point.
IV/. Conclusion
Strategies implemented by Tesco are very successful in terms of both national and international strategies. With its effective business strategies such as the Tesco approach, ‘pile it high, sell it cheap’, global strategy and etc, they have turned Tesco into the biggest retailer in the UK by overtaking Asda, Sainsbury and other giant retailers, and also made Tesco to become the world’s third largest retailer after Wal-Mart and Carrefour.
For the local challenge, Tesco has competitive advantage over all retailers in the UK. Its four outstanding strategies are: non-food approach, retailing services, international strategy, and a strong UK core business. However, to challenge the world number one and number two retailers, Wal-Mart and Carrefour, and to attend more actively in international markets are troubles to challenge. Thus, Tesco needs to reform and improve its poor business strategies and areas. In order to improve those weaknesses, two solutions are suggested: Strategic Alliances and Join Developments (Market Development Strategy) and Diversification (Production Development).
Book References:
Mintzberg, H, Lampel, J, Quinn, J, B & Ghoshal, S (2003) The Strategy Process. 4th ed. New Jersey: Pearson Education, Inc.
Sadler, P (2003) Strategic Management. 2nd ed. Great Britain & The United States: Kogan Page Limited.
Wit, B, D & Meyer ,R (2005) Strategy Synthesis. 2nd ed. London: Thomson Learning.
Web References:
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