TESCO

Strategic Management of TESCO supermarket: PESTLE analysis, Porter's 5 Forces analysis,

Critical success factors, SWOT Analysis, VALUE CHAIN analysis, TESCO'S strategic options, Core
Competences & Cultural Web.
I

INTRODUCTION

The food and drink retail sector represents the largest industry in the UK, providing employment for over three million
people in primary production, manufacturing and retailing. In 2003 retail accounted for 9% of gross domestic product
(Datamonitor, 2003). In recent years UK supermarkets have come under increased scrutiny over their treatment of
suppliers, particularly of own-label products, yet the development of strategic supply networks has been an integral
part of most supermarket strategies for the past decade.
The report below provides an insight into the supermarket company, Tesco, with emphasis on its external
environment analysis and company's analysis of resources, competence and culture. Two future strategic options are
suggested in regards to the resources based strategies.
Tesco is one of the largest food retailers in the world, operating around 2,318 stores and employing over 326,000
people. It provides online services through its subsidiary, Tesco.com. The UK is the company's largest market, where
it operates under four banners of Extra, Superstore, Metro and Express. The company sells almost 40,000 food
products, including clothing and other non-food lines. The company's own-label products (50 percent of sales) are at
three levels, value, normal and finest. As well as convenience produce, many stores have gas stations, becoming one
of Britain's largest independent petrol retailers. Other retailing services offered include Tesco Personal Finance.

2.0
2.1

INDUSTRY

ANALYSIS:

PESTEL

Political

FRAMEWORK
Factors

Operating in a globalized environment with stores around the globe (Tesco now operates in six countries in Europe in
addition to the UK; the Republic of Ireland, Hungary, Czech Republic, Slovakia, Turkey and Poland. It also operates
in Asia: in South Korea, Thailand, Malaysia, Japan and Taiwan), Tesco's performance is highly influenced by the
political and legislative conditions of these countries, including the European Union (EU).
For employment legislations, the government encourages retailers to provide a mix of job opportunities from flexible,
lower-paid and locally-based jobs to highly-skilled, higher-paid and centrally-located jobs (Balchin, 1994). Also to
meet the demand from population categories such as students, working parents and senior citizens. Tesco
understands that retailing has a great impact on jobs and people factors (new store developments are often seen as
destroying other jobs in the retail sector as traditional stores go out of business or are forced to cut costs to compete),

being an inherently local and labour-intensive sector. Tesco employs large numbers of; student, disabled and elderly
workers, often paying them lower rates. In an industry with a typically high staff turnover, these workers offer a higher
level of loyalty and therefore represent desirable employees.

2.2

Economical

Factors

Economic factors are of concern to Tesco, because they are likely to influence demand, costs, prices and profits. One
of the most influential factors on the economy is high unemployment levels, which decreases the effective demand for
many goods, adversely affecting the demand required to produce such goods.
These economic factors are largely outside the control of the company, but their effects on performance and the
marketing mix can be profound. Although international business is still growing (Appendix A), and is expected to
contribute greater amounts to Tesco's profits over the next few years, the company is still highly dependent on the UK
market. Hence, Tesco would be badly affected by any slowdown in the UK food market and are exposed to market
concentration risks.

2.3

Social/Cultural

Factors

Current trends indicate that British customers have moved towards one-stop' and bulk' shopping, which is due to a
variety of social changes. Tesco have, therefore, increased the amount of non-food items available for sale.
Demographic changes such as the aging population, an increase in female workers and a decline in home meal
preparation mean that UK retailers are also focusing on added-value products and services. In addition, the focus is
now towards; the own-label share of the business mix, the supply chain and other operational improvements, which
can drive costs out of the business. National retailers are increasingly reticent to take on new suppliers (Clarke,
Bennison and Guy,1994; Datamonitor Report, 2003).
The type of goods and services demanded by consumers is a function of their social conditioning and their
consequent attitudes and beliefs. Consumers are becoming more and more aware of health issues, and their
attitudes towards food are constantly changing. One example of Tesco adapting its product mix is to accommodate
an increased demand for organic products. The company was also the first to allow customers to pay in cheques and
cash at the checkout.

2.4

Technological

Factors

Technology is a major macro-environmental variable which has influenced the development of many of the Tesco
products. The new technologies benefit both customers and the company: customer satisfaction rises because goods
are readily available, services can become more personalised and shopping more convenient.The launch of the

Efficient Consumer Response (ECR) initiative provided the shift that is now apparent in the management of food
supply chains (Datamonitor Report, 2003). Tesco stores utilise the following technologies:

Wireless devices

Intelligent scale

Electronic shelf labelling

Self check-out machine

Radio Frequency Identification (RFID).

The adoption of Electronic Point of Sale (EPoS), Electronic Funds Transfer Systems (EFTPoS) and electronic
scanners have greatly improved the efficiency of distribution and stocking activities, with needs being communicated
almost in real time to the supplier (Finch, 2004).

2.5

Environmental

Factors

In 2003, there has been increased pressure on many companies and managers to acknowledge their responsibility to
society, and act in a way which benefits society overall (Lindgreen and Hingley, 2003). The major societal issue
threatening food retailers has been environmental issues, a key area for companies to act in a socially responsible
way. Hence, by recognizing this trend within the broad ethical stance, Tesco's corporate social responsibility is
concerned with the ways in which an organization exceeds the minimum obligations to stakeholders specified through
regulation and corporate governance. (Johnson and Scholes, 2003)
Graiser and Scott (2004) state that in 2003 the government has intended to launch a new strategy for sustainable
consumption and production to cut waste, reduce consumption of resources and minimise environmental damage.
The latest legislation created a new tax on advertising highly processed and fatty foods. The so-called fat tax' directly
affected the Tesco product ranges that have subsequently been adapted, affecting relationships with both suppliers
and customers

2.6

Legislative

Factors

Various government legislations and policies have a direct impact on the performance of Tesco. For instance, the
Food Retailing Commission (FRC) suggested an enforceable Code of Practice should be set up banning many of the
current practices, such as demanding payments from suppliers and changing agreed prices retrospectively or without
notice (Mintel Report, 2004). The presence of powerful competitors with established brands creates a threat of
intense price wars and strong requirements for product differentiation. The government's policies for monopoly
controls and reduction of buyers' power can limit entry to this sector with such controls as license requirements and
limits on access to raw materials (Mintel Report, 2004; Myers, 2004). In order to implement politically correct pricing

policies, Tesco offers consumers a price reduction on fuel purchases based on the amount spent on groceries at its
stores. While prices are lowered on promoted goods, prices elsewhere in the store are raised to compensate.

3.0
3.1

INDUSTRY

ANALYSIS:

Threat

PORTER'S
of

FIVE
New

FORCES
Entrants

The UK grocery market is primary dominated by few competitors, including four major brands of Tesco, Asda,
Sainsbury's and Safeway that possess a market share of 70% and small chains of Somerfield, Waitrose and Budgens
with a further 10%. Over the last 30 years, according to Ritz (2005), the grocery market has been transformed into
the supermarket-dominated business. Majority of large chains have built their power due to operating efficiency, onestop shopping and major marketing-mix expenditure. This powerful force had a great impact on the small traditional
shops, such as butchers, bakers and etc. Hence, nowadays it possesses a strong barrier for new companies who
desire to enter the grocery market. For instance, it becomes rather difficult for new entrants to raise sufficient capital
because of large fixed costs and highly developed supply chains. This is also evident in huge investments done by
large chains, such as Tesco, in advanced technology for checkouts and stock control systems that impact new
entrants and the existing ones. Other barriers include economies of scale and differentiation (in the provision of
products or services with a higher perceived value than the competition) achieved by Tesco and Asda seen in their
aggressive operational tactics in product development, promotional activity and better distribution.

3.2

Bargaining

Power

of

Suppliers

This force represents the power of suppliers that can be influenced by major grocery chains and that fear of losing
their business to the large supermarkets. Therefore, this consolidates further leading positions of stores like Tesco
and Asda in negotiating better promotional prices from suppliers that small individual chains are unable to match Ritz
(2005). In return, UK based suppliers are also threatened by the growing ability of large retailers to source their
products from abroad at cheaper deals. The relationship with sellers can have similar effects in constraining the
strategic freedom of the company and in influencing its margins. The forces of competitive rivalry have reduced the
profit margins for supermarket chains and suppliers.

3.3

Bargaining

Power

of

Customers

Porter theorized that the more products that become standardized or undifferentiated, the lower the switching cost,
and hence, more power is yielded to buyers Porter M. (1980). Tesco's famous loyalty card - Clubcard remains the
most successful customer retention strategy that significantly increases the profitability of Tesco's business. In
meeting customer needs, customizing service, ensure low prices, better choices, constant flow of in-store promotions
enables brands like Tesco to control and retain their customer base. In recent years a crucial change in food retailing
has occurred due to a large demand of consumers doing the majority of their shopping in supermarkets that shows a
greater need for supermarkets to sell non-food items. It has also provided supermarkets with a new strategic

expansion into new markets of banking, pharmacies, etc. Consumers also have become more aware of the issues
surrounding fairer trade and the influence of western consumers on the expectations and aspirations of Third World
producers. Ecologically benign and ethically sound production of consumer produce such as tea, coffee and cocoa is
viable, and such products are now widely available at the majority of large chains.

3.4

Threat

of

Substitutes

General substitution is able to reduce demand for a particular product, as there is a threat of consumers switching to
the alternatives Porter M. (1980). In the grocery industry this can be seen in the form of product-for-product or the
substitute of need and is further weakened by new trends, such as the way small chains of convenience stores are
emerging in the industry. In this case Tesco, Asda and Sainsbury's are trying to acquire existing small-scale
operations and opening Metro and Express stores in local towns and city centres Ritz (2005).

3.5

Bargaining

Power

of

Competitors

The grocery environment has seen a very significant growth in the size and market dominance of the larger players,
with greater store size, increased retailer concentration, and the utilisation of a range of formats, which are now
prominent characteristics of the sector. As it was mentioned above, the purchasing power of the food-retailing
industry is concentrated in the hands of a relatively small number of retail buyers. Operating in a mature, flat market
where growth is difficult (a driver of the diversification into non-food areas), and consumers are increasingly
demanding and sophisticated, large chains as Tesco are accruing large amounts of consumer information that can be
used to communicate with the consumer Ritz (2005). This highly competitive market has fostered an accelerated
level of development, resulting in a situation in which UK grocery retailers have had to be innovative to maintain and
build market share. Such innovation can be seen in the development of a range of trading formats, in response to
changes in consumer behaviour. The dominant market leaders have responded by refocusing on price and value,
whilst reinforcing the added value elements of their service.

4.0

CRITICAL

SUCCESS

FACTORS

After a close evaluation of the external analysis of the grocery industry and SWOT analysis presented in Appendix B,
it is crucial to consider internal operational effectiveness of Tesco in the form of identifying critical success factors of
the company within the food retailing sector.

4.1

Branding

and

Reputation

There are companies that have always understood that they were selling brands before the product. Tesco is a brand
and also serves as the core strategic advantage. The company was spreading like wildfire transforming the generic
into the brand-specific, largely through carefully branded packaging and the promotion of an every penny counts

environment. The company has a strong brand image, and is associated with good quality, trustworthy goods that
represent excellent value.
The product and service development processes of the company have been substantially re-engineered, to facilitate
better management of product lifecycles and more efficient delivery of wide ranges of products to customers. Product
activity has focused on enhancing core ranges and introducing quality products. Tesco's innovative ways of improving
the customer shopping experience, as well as its efforts to branch out into finance and insurance have also
capitalized on strong brand reputation.
The company is also very successful in terms of customer loyalty due to its loyalty cards system and its general
approach to customizing services to the needs of every customer. This is truly evident in terms of tremendous growth
of on-line sales where the company has a strong platform to further develop this revenue stream. After considering
the fact the nowadays majority of people have less time for shopping, Tesco employed this on-line systems and now
became the biggest online supermarket.

4.2

IT

Integration

Today companies act in an increasingly dynamic and complex environment, giving more difficulties making forecasts
and adapting themselves to the continuous changes. In order to be able to compete in this kind of world, it is
necessary to innovate at an extraordinary speed, continuously improving the products, services and processes. For
Tesco operations have become necessities rather than luxuries. Systems that control stock, keep all the stock and
deliveries records and analyse business transactions are the lifelines of the company. It can also be said that IT has
risen beyond its traditional support role and taken up a central role in business strategy formulation.
Extranet system employed by the company, enables Tesco to use the Internet to create proprietary and customised
information flows between the company and its business partners. The system connects business partners online
behind virtual firewalls, bringing more flexibility, scalability, extensibility and integration across the distribution
channels. Extranet also helps to extend the key information on business partners throughout the supply chain and
facilitate collaborative relationships with partners. Market exchanges hold the promise of extending Tesco's reach,
delivering buyers to their virtual doorstep from around the world. Other examples of the most efficient technological
advances that support daily business operations of Tesco are wireless devices, intelligent scale, electronic shelf
labelling, self check-out machine and radio frequency identification (RFID) systems. This technology is an effort to
maintain Tesco's ability to handle an increase in product/service volume while controlling costs; it also enables to be
innovative and market oriented.

4.3

Supplier

Management

Tesco, like many other grocery chains companies, sources its goods from overseas manufacturers who are more

competitive on price and volumes. For many years Tesco has been supporting British jobs and expertise by
encouraging large branded suppliers to develop exclusive production facilities. But in recent years the company has
realised the need to look abroad for products no longer available in UK, bud tried to do it through long-established UK
partners. The foods continued to be heavily UK-based due to the very successful range of prepared foods.
As a major retailer selling diverse product range, they work with many different suppliers around the world, with
employees from many different cultures and ethnic groups. Therefore, it is the company policy and company's main
approach to have unique relationships with suppliers. Applying advanced technology in its communications and
cooperation with the suppliers, the company aims to control the work of its suppliers and heavily relies on their
efficiency. The direct suppliers use a number of sub-contracted suppliers, selected to be best in class in their country.
Tesco has established close relationships with the contractors believing that regular and long term orders promote the
investment necessary to improve conditions in the supply chain.
Being an international company, Tesco develops various supplier management programmes to survey key suppliers
and franchisee satisfaction. The company also takes part in the Ethnical Trading Initiative.
The table presented below gives a strategic comparative analysis, comparing Tesco's successful factors discussed
above with the same factors of the main competitors' in the UK grocery industry. The scores have been give with the
scale from 0 to 5
CSF

Sainsbury's

Asda

Safeway

Branding

3.5

IT Integration

Supplier Management

14

10.5

11

Total

The results highlight that the main threat is potentially coming from Sainsbury's that possesses a strong brand name
and is carefully selects and controls its suppliers.

5.0
5.1

ANALYSIS

OF

RESOURCES,
SWOT

COMPETENCE

AND

CULTURE
Analysis

Tesco is the top grocer and leading retailer in its home market of the UK. Pitched at the broad middle mass-market, it
has maintained its position through a clear focus, well targeted product offer and excellent record both in product and
format innovation. Tesco also leads the world in online grocery retailing. In the UK the company concentrates on
running grocery superstores, c-stores and an online service. Elsewhere the focus is usually on hypermarkets. In
2003, the group's trading record around Europe and UK has been outstanding.
The full SWOT analysis of Tesco is presented in Appendix B, summarizing the key issues from the business
environment and the strategic capability, including resources and competence, of the company that are most likely to
impact on strategy development

5.2

Core

Competence

Superior performance, according to Johnson and Scholes (2003), has to be determined by the way in which
company's resources are deployed to create competence in the organisational activities. Core competencies are
activities or processes that critically underpin the company's competitive advantage. The primary target for the
company is to recognize that competition between businesses is as much a race for competence as it is for market
position and market power. Therefore, the goal for Tesco management is to focus the attention on competencies that
really affect competitive advantage.
The competence leads to levels of performance from an activity or process that is significantly better than
competitors. Benchmarking may help in understanding performance standards and what constitutes good or bad
performance. However, it will be crucial for Tesco to look at the generic level. Core competences may be embedded
deep in Tesco at an operational level in the work routines. The framework developed by Prahalad and Hamel in the
1990s suggests that over time companies may develop key areas of expertise which are distinctive to that company
and critical to the company's long term growth (Drejer, 2000; De Toni, and Tonchia, 2003). In the case of Tesco the
areas of expertise are most likely to develop in the critical, central areas of the organisation where the most value is
added to its service and its delivery. For example, trust in the Tesco brand lies at the heart of these services and in
2003 the number of retail service accounts rose by 36%. Some 50,000 new service accounts per week are being
opened and Tesco sees these areas as long term businesses with the potential to build real scale. Financial services
have also been launched internationally in for example Hungary and Korea (Datamonitor Report, 2003; MarketWatch,
2004).
Through a long period of operations, core competencies of Tesco have to be rather fixed. Prahald's and Hamel's
approach states that core competencies should change in response to changes in the company's environment and
be flexible and evolve over time. Therefore, Tesco needs to adapt to new rapidly changing circumstances and

opportunities, so its core competencies will have to adapt and change. The example of this was when the company
has launched its loyalty card and went into banking.
Core competences framework suggests three factors, which can help to identify core competences:
Provide potential access to a wide variety of markets: enables the creation of new products and services. Fro
instance, Tesco has established a strong leadership in food retailing industry. The core competence that enabled
Tesco to enter retailing of food and non-food products was a clear distinctive brand proposition that had a focus on a
properly define market segment. Tesco is recognized as the company, providing the most customized and efficient
service, based on a good customer relationship management.
Makes a significant contribution to the perceived customer benefits of the outcome: delivers a fundamental
customer benefit. In order to identify core competences in a particular market, the question of - why is the customer
willing to pay more or less for one product or service than another- needs to be addressed. For example, Tesco have
been very successful in capturing the leadership of the retailing market. This shows that Tesco designs and
implements effective supply systems and deliver an efficient "customer interface". Tesco was the first UK grocer to
launch a loyalty card and has been the most effective. Palmer (2004) claims that until recently, it was the only grocer
to use the information to mail customers every month.
Difficult for competitors to imitate highlights the need for a core competence to be competitively unique. This
indicated the importance of product differentiation. For example, for many years up to 2003 (In 2003 Tesco has been
recognised a leading UK food retailer) Tesco had a very strong position within the retailing industry. It had a different
approach to the service concept, providing good corporate reputation and introducing new premium quality products
(MarketWatch, 2004).
Applying this framework to Tesco shows that the company in order to be successful has to base its business strategy
on these capabilities. Capabilities result from Tesco's ability to combine and exploit these resources in uniquely
different ways. In the external environment, the intensity of competition is not completely under the retailer's control,
however, to compete effectively Tesco have to identify its core competences and use them for company's advantage.

5.3

Cultural

Web

Cultural web theory application (The cultural web theory is also an effective analysis for management in order to
represent the underlying assumptions linked to political, symbolic and structural aspect of the company) is a useful
tool in considering the cultural context for Tesco's business. Culture generally tends to consist of layers of values,
beliefs and taken for-granted actions and ways of doing business within and outside the company. Therefore, the
concept of cultural web is the representation of these actions taken for granted for understanding how they connect

and influence the strategy (Veliyath and Fitzgerald, 2000; Johnson and Scholes, 2003). It is also useful to understand
and characterise both the company's culture and the subcultures in adaptation of future strategies.
Culture can be analysed through the observations of how the company behaves, including routines, rituals, stories,
structures and systems. This presents the clues about the taken-for-granted assumptions. Tesco has a very friendly
and supporting approach in the routine ways that staff at Tesco behave towards each other, and towards those
outside the company that can make up the ways people do things. The control systems and measurements are
constantly under the management review to monitor the efficiency of the staff and managers' decisions. The rituals of
the company's life are the special events, corporate gatherings, which Tesco emphasises what is particularly
important and reinforce the way things are done. On-going meetings and communication at every level of the
company's hierarchy represent a strong internal environment.

6.0

TESCO'S

STRATEGIC

OPTIONS:

GENERIC

STRATEGIES

Generic Strategies are characterised by an individual retailer's response to the industry structure. For a giant retailer,
such as Tesco, to obtain a sustainable competitive advantage they should follow either one of three generic
strategies, developed by Porter.
The first strategy of cost leadership is one in which Tesco can strive to have the lowest costs in the industry and offer
its products and services to a broad market at the lowest prices. This strategy will be based on the Tesco's ability to
control their operating costs so well that they are able to price their products competitively and be able to generate
high profit margins, thus having a significant competitive advantage. If Tesco uses another strategy of differentiation,
than it has to try to offer services and products with unique features that customers value. Tesco will be able to create
brand loyalty for their offerings, and thus, price inelasticity on the part of buyers. Breadth of product offerings,
technology, special features, or customer service are popular approaches to differentiation.
The last strategy of focus can be either a cost leadership or differentiation strategy aimed toward a narrow, focused
market. In pursuing a cost leadership strategy Tesco focuses on the creation of internal efficiencies that will help them
withstand external pressures. Therefore, it appears reasonable to think that Tesco will have frequent interactions with
the governmental/regulatory and supplier sectors of the environment. In accordance to this framework, while both
overall cost leadership and differentiation strategies are aimed at the broad market, Tesco may also choose to
confine their product to specific market areas or may choose to offer a smaller line of products to the broad market,
thus pursuing a strategy of focus or niche (Porter, 1980). In other words, Tesco pursues a strategy of cost leadership
or differentiation either in a specific market or with specific products.

The danger some organisation face is that they try to do all three and become what is known as stuck in the middle.
In case of Tesco it is not appropriate, as they do have a clear business strategy with a clearly defined market
segment.

7.0

MARKET

OBJECTIVES

AND

STRATEGIES

IMPLEMENTATION

Strategy frameworks and structuring tools are key to assessing the business situation. Risk and value trade-offs are
made explicit, leading to concrete proposals to add value and reduce risk. Explicit plans for action, including effective
planning need to be developed by Tesco as the strategic alternative.
From the generic strategies discussed above, Tesco is likely to employ two strategic options that are also likely to be
primary market objectives of focus on market development though partnerships and diversification through new
product development.

Market

Development

Strategy:

Joint

Developments

and

Strategic

Alliances

By entering new markets like China and Japan it can serve as a key growth driver of the company's revenues and
expansion strategy. Tesco's interests in Japan are likely to continue growing in due course, as Asian markets are
showing an increase in consumer spending and increased trend towards retailing. These new markets are also
demographically high opportunity markets.
In the case of Tesco, one of the suggested strategic options is in international alliances with the local retailers in Asian
markets. It will be considered as a method of development and may be formed to exploit current resources and
competence. By entering into joint ventures or partnerships, in order to gain a larger economy of scale and larger
market presence, Tesco will draw on the extensive local knowledge and operating expertise of the partner whilst
adding its own supply chain, product development and stores operations skills to deliver a better shopping experience
to customers. However, given the huge scale, potential and complexities of these markets, Tesco may feel that being
the first mover is not necessarily an advantage. The success of the partnership will be related to three main success
criteria: sustainability, acceptability and feasibility. Sustainability will be concerned with whether a strategy addresses
the circumstances in which the company is operating. It is about the rationale of this expansion-market development
strategy. The acceptability relates to the expected return from the strategy, the level of risk and the likely reaction of
stakeholders. Feasibility will be regarded to whether Tesco has the resources and competence to deliver the strategy.

Product

Development:

Diversification

Johnson and Scholes (2003) believe that changes in the business environment may create demand for new products
and services at the expense of established provision. Ansoff's matrix also suggests that if new products are
developed for existing markets, then a product development strategy has to be considered by the management level
of a company. In expanding and diversifying Tesco's product mix, it is also crucial to implement internal development

when new products are developed. The nature and the extent of diversification should also be considered in relation
to the rationale of the corporate strategy and the diversity of the portfolio. By following the changing needs of the
customers Tesco can introduce new product lines. This may require more attention to R&D, leading to additional
spending.
The retailing industry is experiencing overcapacity and innovative services and products being the major competitive
advantage. Therefore, innovation has to be a major driver for Tesco's product development. For example, Tesco can
develop a portfolio of different store formats in the UK, each designed to provide a different shopping experience.
While the majority of Eastern European and Far Eastern outlets are hypermarkets, Tesco can also develop different
store types in these markets as well. This value added by the uniqueness will eventually lead Tesco to command a
premium price. The management of technological innovation is increasingly involved in strategic decision-making.
Tesco have to exploit their internal strengths and minimise their internal weaknesses in order to achieve sustained
competitive advantage (Although a competitive advantage is the goal innovators want to achieve, the ability to create
platform(s) depends on how they could manage the innovation. Nevertheless, it does not mean that the innovator has
to possess all requisite capabilities, the important thing is the ability to organise and use the capabilities of others in
order to create a business platform).

8.0

CONCLUSION

The success of the Tesco shows how far the branding and effective service delivery can come in moving beyond
splashing one's logo on a billboard. It had fostered powerful identities by making their retiling concept into a virus and
spending it out into the culture via a variety of channels: cultural sponsorship, political controversy, consumer
experience and brand extensions.
In a rapidly changing business environment with a high competitors' pressure Tesco have to adopt new expansion
strategies or diversified the existing in order to sustain its leading market position in an already established retailing
market. The company must constantly adapt to the fast changing circumstances. Strategy formulation should
therefore be regarded as a process of continuous learning, which includes learning about the goals, the effect of
possible actions towards these goals and how to implement and execute these actions. The quality of a formulated
strategy and the speed of its implementation will therefore directly depend on the quality of Tesco's cognitive and
behavioural learning processes.
In large organizations as Tesco strategy should be analysed and implemented at various levels within the hierarchy.
These different levels of strategy should be related and mutually supporting. Tesco's strategy at a corporate level
defines the businesses in which Tesco will compete, in a way that focuses resources to convert distinctive
competence into competitive advantage.

APPENDIX B
SWOT

ANALYSIS:

TESCO

Source: Mintel Report, Datamonitor Reports, Tesco Case Studies

Strengths
Increasing market share: Tesco holds a 13% share of the UK retail market. Its multi-format capability means that it
will continue to grow share in food, while increasing space contribution from hypermarkets will allow it to drive a
higher share in non-food.
Tesco's general growth and ROI show no sign of abating: In the UK, Tesco's late 2002 investment into Westmidlands based convenience store group T&S was billed as the most aggressive move into the neighborhood market
by a big-name retailer so far. The deal has turned Tesco into the country's second biggest convenience store chain
after the Co-operative Group, and the company also plans to open up 59 new stores in the UK this year. Tesco has
grown its non-food division to the extent that its revenues now total 23% of total group earnings. Tesco's international
business segment is growing steadily, and is predicted to contribute nearly a quarter of group profits over the next five
years. If geographical spread continues to grow, this will ensure Tesco's continued regional strength.
Insurance: In fiscal 2003 Tesco Personal Finance reached the milestone of one million motor insurance policies,
making

it

the

fastest

growing

motor

insurance

provider

ever.

The

group's instant travel insurance allows Clubcard holders to buy their holiday insurance conveniently at the checkout.
Pet insurance now has over 330,000 cats and dogs covered, while the life insurance policy followed on from the

success of last year, when it was voted The Most Competitive Life Insurance Provider in the MoneyFacts Awards
2003.
Tesco online: Tesco.com is the world's biggest online supermarket and this year the group had sales of over 577
million, an increase of 29% on last year. Tesco online now operates in over 270 stores around the country, covering
96% of the UK. With over a million households nationwide having used the company's online services, the company
has a strong platform to further develop this revenue stream.
Brand value: Profits for Tesco's operations in Europe, Asia and Ireland increased by 78% during the last fiscal year.
The company has a strong brand image, and is associated with good quality, trustworthy goods that represent
excellent value. Tesco's innovative ways of improving the customer shopping experience, as well as its efforts to
branch out into finance and insurance have also capitalized on this.
UK market leadership reinforced: Since acquiring number one ranking in 1996, Tesco has developed a successful
multiformat strategy that has accelerated its advantage. Its UK sales are now 71% larger than Sainsbury's. Also the
Competition Commission's report makes it very difficult for a competitor to challenge its scale and has effectively
scuppered Wal-Mart's chances of stealing UK leadership. Therefore, Tesco is in an enormously strong position in its
domestic market.

Weaknesses
Reliance upon the UK market: Although international business is still growing, and is expected to contribute greater
amounts to Tesco's profits over the next few years, the company is still highly dependent on the UK market (73.8% of
2003 revenues). While this isn't a major weakness in the short term, any changes in the UK supermarket industry
over the next year for example, like the Morrison's group successfully purchasing the Safeway chain could alter the
balance of UK supermarket power, and affect share.
Debt reduction: Tesco is not expected to reduce its debt until at least 2006. Tesco has a large capital expenditure
program

mainly

due

to

its

huge

investment

in

space

for

new

stores.

Since its expansion is so aggressive, Tesco has little free cash for any other operations.
Signs point to serial acquisitions: With an enterprise value of 23 billion, Tesco clearly has enormous firepower.
Also, its product range is vast and almost any acquisition can be justified, particularly in the UK. While 'fill the gap'
strategy would be useful to the company, as has been the case with the UK convenience market, there is the danger
of Tesco becoming a serial acquirer, as this tends to reduce earnings visibility and quality.

Opportunities
Non-food retail: The growth in Tesco's hypermarket format in the UK means that there are expectations of seeing its

13% share of retail sales climb sharply over the next few years. It can use its footfall and low cost structure together
with improved merchandising skills to add another leg to growth. Equally, its growth overseas will further increase
earnings and scale, taking Tesco onto the virtuous circle of growth. It is estimated that Tesco's non-food sales will
double over the next four years.
Worldwide it has sales of 7 billion in non-food, some 23% of the total. Its aim to be 'as strong in non-food as we are
in food', no longer sounds like the consultancy-speak that it once did, and they are getting there using the basic
tenets of value, choice and convenience that have been so successful in food. Around half of new space opened in
the UK last year was for non-food and the result has been to increase its market share from 5% to 6% and its overall
share of UK retail sales has increased by 100 basis points to 12.8%.
The company's telecoms venture is the latest stage in its strategy to develop popular retail services. It has repeated
its approach in banking, by capitalizing on its brand.
Health and beauty: Tesco's UK health and beauty ranges continue to grow, and it is currently the fastest growing
skincare retailer in the market. The company has a volume market-leading position in both toiletries and healthcare
and is number one retailer in the baby goods markets. Across all health and beauty ranges Tesco continues to invest
in price to deliver the value customers have come to expect and this year invested 27 million on health and beauty
pricing alone. The company now has 19 stores with opticians and nearly 200 stores with pharmacies.
Further international growth: Tesco now operates in six countries in Europe in addition to the UK; the Republic of
Ireland, Hungary, Czech Republic, Slovakia, Turkey and Poland. It also operates in Asia: in South Korea, Thailand,
Malaysia, Japan and Taiwan. Seven years ago, its International sales were 770 million. Now, they are nearly 10
times larger, at almost
7 billion, with profits of 306 million. In the current year, Tesco will add 2.5 million square feet to sales area and
could well enter another major market. Growing internationally has forced Tesco to become serious about
hypermarkets and this has had seriously positive implications for growth in the UK. Tesco has formed a strategic
relationship with US supermarket, Safeway Inc, to take the tesco.com home shopping model to the US. Telecoms are
the latest stage in its strategy to develop popular retail services. It has repeated its approach in banking, by
capitalizing on its brand. In 2004 the company plans to enter the Chinese market, as China is one of the largest
economies in the world with tremendous forecast growth and will present many opportunities for Tesco.
Threats
UK structural change could spark a price war: The price followers in the UK market are about to become
aggressive investors in price, Safeway because of new ownership and Sainsbury because of new management.

Morrison is reducing Safeway's prices by up to 6% and Sainsbury is bound to see lower prices as one of the basic
changes necessary to drive its recovery. With both Asda and Tesco committed to price leadership, this could result in
a step down in industry profitability.
Overseas returns could fall: The buy case for Tesco is predicated around investment overseas driving higher group
returns as each country moves past critical mass. This might not happen, either because of economic conditions,
competitor action, or failure in Tesco's business model. It also could come as a consequence of an aggressive move
into a larger market, such as China or Japan.
Wal-Mart/Asda challenge: Since the US shopping giant Wal-mart purchased Asda, Tesco's rank as the top UK
supermarket has been threatened. Asda can now compete extremely well on price and range of goods. For the
moment, Asda is the third largest supermarket in the UK, just behind Sainsbury's and then Tesco. However, Asda
closed the gap on Sainsbury's in 2003, leaving the company to directly challenge Tesco's dominance.
Tesco is well aware of this, and has so far been quick to keep up with price cuts or special offers at Asda. Wal-mart
may also decide to wield its buying power more heavily in the UK, and this could spell the end of Tesco's brand
dominance in the future.
International expansion: International growth is expensive. Entering new markets with a new brand requires heavy
investment and marketing, as well as land prices (which are currently low) and extra distribution and operation
expense. Tesco's debt may increase before it begins to decline.
Korea is contributing a good proportion of Tesco's international profit growth. If profits continue to grow in this way,
Korea will probably represent one-third of Tesco's international profits in 2003. Korean consumer spending is
currently quite low, and coupled with the country's current unrest, and Tesco's large investment, this represents a high
risk area for Tesco to bank on.

APPENDIX C
VALUE CHAIN
Primary

Activities

(Currently, Adds value (+), losses value (-), Potential to add value (P+))

Inbound

logistics

Inbound logistics are placed at the first stage of the value chain as they possess the earliest opportunity to create
value. Therefore, the elements of this stage are considered to be upstream activities. The logistical tasks, in this
case, include the receipt of goods from suppliers, storage of goods, handling & transportation of goods internally and

placing the products on the shelves. Tesco tries to maintain the level of consumer choice in store (+), whilst improving
the efficiency of its distribution system (+). In applying a quality control procedure concerning damaged goods and
products, it provides an excellent opportunity to reduce costs unfairly incurred by the company, therefore preventing
these costs being passed on to the consumer (P+).

Operations
The production element of Tesco activities are service orientated. Hence, operations could be the second upstream
opportunities that enable services and products to be provided, tasks such as opening every day in accordance with
trading hours, maintaining the shelves, and the stock (+). In order to obtain future competitive advantage Tesco has
to consider expanding further in terms of operating hours in those places, where it does not occur or opening new
Metro and Express stores (P+). However, this might be restricted by law or planning councils, which is essentially
takes away competitive advantage (-).

Outbound

logistics

The third stage of the value chain is the outbound logistics that is concerned with delivering the product to the
customer. Tesco currently adds value in its home delivery service (+). However, other tangibles that have to be
improved are those of parking facilities, trolley collectors, till staff and systems to gain competitive advantage, if
executed more efficiently than competitors, they will add value by saving the customer time (+), whilst increasing the
turnaround (+). Adding value could be achieved through the implementation of a trolley deposit system, keeping them
tidy and enabling customers to get to and from the premises quicker, as well as making these facilities readily
available and quicker to obtain (P+).

Marketing

and

sales

Marketing and sales are placed under downstream elements of the value chain. Clubcard gives further discounts and
loyalty for the customers (+). However, Tesco may also decide to attract more customers by advertising via radio,
local newspaper and national T.V. e.g. the lower prices advertising campaign or more discounts offers (+). With a
more customer sophistication and their awareness of ethical business practices, it may give the company some
constraints in terms of selling environmentally friendly products (-). In return, Tesco can take it as an advantage and
provide customers with more of the recycling points and include information in their advertisements, adding value for
customers who will believe that by choosing to shop at Tesco, people are helping the environment (P+).

Support Activities
Company

Infrastructure

Planning and control functions are the ones that account to provide the continued focus on the costs and cash control
of the companys operations (+). And departments such as profit protection whose main jobs are to reduce shrink.

The company has now increased its staff count who are involved in upgrading its anti-fraud software
(infrastructure/technology, interdependence), and installing new security systems which aim to reduce internal theft,
an expense the customer will now not have to cover in the price of their purchases (+).

Human

resource

management

HRM is regarded as up and downstream activity, covering everything from recruitment to management development.
The company aims to increase the number of training schemes and further develop its recruitment programmes so to
pass on to the customer the benefits of a well recruited, well trained staff, not the costs (+). Tesco continues to invest
in customer service (+), where training is also linked directly to pay, so the staff are motivated to learn, and are
encouraged to improve their approach to customers and service provision quality. (P+).

Technology

development

It is a downstream activity and is the ability to provide new innovative product ranges/ solutions that anticipate
customer needs. It also remains a key competitive advantage, adding value, as Tescos brand name gives the
product vitality (+). However, installation and capital investment is a long term process and needs total commitment of
the staff. But who will be responsible for the service provision and the floor personnel? (-).