Analyzing Tesco’s Business Strategy And Challenges
Market share of Tesco In UK
Do research on Tesco’s and then write a report to Senior Management that addresses the following issues. (You should underpin your analysis with theoretical models that you have researched on the basis of business strategy)?
In the current contemporary business scenario, business strategy is one of the major decision making that helps the organization to compete in the current business scenario. Formation of business strategy needs planning , time and other resources in order to implement within the company (Analoui and Karami, 2009). Since the global retail chain companies are making frequent change in their strategies in order to gain the large market shares specifically Tesco. Business strategy is made as per the current structure and considering the future prospectus of the company. The study will focus on the business strategies of the Tesco and the problem faced by Tesco. Apart from that study will also help the give the recommendation for the existing business strategies issues faced by the Tesco (Dess and Lumpkin, 2009).
Tesco is one of the largest retail chains of UK. Company stands second in the world after Wal-Mart. Company was established in the year 1919 at hackney London, UK. The founder of the company is Mr. Jack Cohen. Tesco Plc is more than 500,000 employees and has business in 12 nations. The company is selling diversified products starting from the grocery , to electronic to clothing line to sports merchandise (Tesco.com, 2015). Company has been leading revenue earner in UK as per the Forbes magazine in 2014 with £71 billion. Recently company is also come into the business of the financial services and telecoms sectors along with internet services. Company is been listed in the LSTC and FTSE within 100 best company for investment. Although company is been revenue is higher but company is facing severe low on growth because of the changing market frequent trends (Tesco plc, 2015). Apart from that , with rise in the competitors company growth rate has been decreased which lead the company to slop its position in recent times.
|
Top five global retail companies |
Sales (Amount, 000) |
|
Wal-Mart |
$256.3 |
|
Carrefour |
$70.5 |
|
Ahold |
$56.1 |
|
Tesco |
$46.2 |
|
Kroger |
$44.2 |
Graph 1: Top five global retailers
(Source: Drummond et al. 2012, pp-125)
Although Tesco has high market share in UK but company faces strong challenges in order to sustain in current competitive scenario. Company is facing several issues in order to maintain its growth rate which is decreasing every year (Dobson, 2009). Some of the major issues faced by the Tesco in recent times are given below:
-Too much of diversifications of business
-Rising prices of raw materials that lead to increase the price of the existing products
-High investment in club card
– Poor financial decision making
-Ethical issues
Apart from the above, there have been other smaller issues that can cause bigger problem for the company in near future. Some of the smaller issues are increase in waste which is creating high carbon emission (Doyle and Stern, 2006). This leads the company to pay penalty as per environmental act 1997. Besides that, company is also facing tough to survive in the EU market because of market entry mode the company in green filed investment and most of these stores in EU are becoming sick units (Tesco.com, 2015).
|
Retail companies |
Market share 2014 % |
Market share 2013 % |
|
Tesco |
26.34% |
29% |
|
Asda |
18% |
17% |
|
Sainsbury |
17.31% |
16% |
|
Morrison’s |
12% |
11% |
|
M&S |
8.34% |
6% |
Business Strategy of Tesco
Graph 2: Tesco decreasing market share
(Source: Hollensen, 2014, pp-34)
Too much Diversification of the business: Diversifications of the business in the financial services and telecom sector is been one of the major poor business strategy in recent times. Company has invested more than £30 million in the financial services like insurance and banking system (Ander and Kapoor, 2010). as per the Dave lewis , Tesco CEO , investment in the financial services will be good in future but since the company has only been able to take 4.1% of the shares among the big insurance houses like Merril Lynch and Commonwealth insurance. Tesco deals in personal finance, retail banking, home loans, credit card and vehicles loan etc are some of the major activities of Tesco plc (Barney, 2009). Tesco bank is been wholly owned and control by the Tesco . Company is facing financial crunch that has been very part of the 2008 financial crisis. Extensive investment in the financial products like launching of the mutual funds and insurance has been one of the poor decision making of the Tesco (Tesco.com, 2015).
|
Year |
Tesco bank actual growth (£, million) |
Tesco bank Expected growth (£, million) |
|
2010 |
1.5 |
3.5 |
|
2011 |
2 |
2.2 |
|
2012 |
1.8 |
3 |
|
2013 |
1.3 |
1.6 |
|
2014 |
1.2 |
1.4 |
Graph 1: Tesco bank expected growth rate and actual Growth rate
(Source: Hollensen, 2014, pp-228)
From the above , graph , it has been found that , company expect growth and actual growth is very much difference because of company has not been able to compete in current banking sectors because of the these companies have diversified financial products whereas Tesco has lower products (Biggadike, 2010). Apart from that, company has not been able to keep the standard of their banking services as per the customer demand.
Apart from that, going global is another major issues which creating problem to sustain in the current business scenarios. Since the financial market and companies are offering various type of products but the Tesco is not able to cater with the new products like derivative , forex and Swaps etc has made the banking of Tesco poor in compare to the competitors (Bingham et al. 2011). Investment in banking sector was one of the right decisions made at the time when the sector is booming in 2000.
Another major diversification of the company that went one of the nightmare decisions for the company is investment made in Tesco Tech. The decision to investment in electronic business in order give the customer more diversified products made the company to lose its high profitability (Chesbrough, 2009). Company started off the electronic section selling of mobiles, tablets, televisions, iPod and music system etc which leads the company to increase its market shares with 23% but company severely fails to improve as because customers of UK are been very much particular about buying these products from the low cost and right quality which has been offered by the existing companies like KEF , ALBA , Pure and Pace are some of the major stores who has been in the apex position of selling of the electronic goods at lower price and with diversified products (Collis, 2010).
UK Supermarket Market Share
After then company also added to kitchen chimney, personal computer, laptop, hair dryer and geyser etc to add more to the variety and attract the customers. This decision has made the company to more poor situations as the customer be not looking for the variety rather looking for the discounts, competitive price and coupons on the business which lead to fail the business of the company. With rise in the inflation hit during 2008 subprime crisis has made it more badly for the company (Cool and Schendel, 2010) . Since then company has sold record low LCD and LED’s in 2013 in compare to the year 2011. Since, 2012, Tesco has introduce new strategy to sell its products is EMI system in selected products because of which company has able to creates high sales during march 2012 to December 2013 but the decision was not enough to carry forward the Tesco legacy as because the most of customer could pay their EMI which made the company to end up with used TV or geysers which again made the company to lose its growth streak (Tesco.com, 2015).
Too much diversification of the companies has made the companies to lose the high market shares which ultimately hit company profitability (Dentchev, 2009). Company investment in these two major businesses has made the company to lose their market shares. While making the feasibility study of the expansion plan or diversification plan has made the company loosen the grip of the market share. As company planning has been short sightedness which leads the company to loosen the grip of the market share (Eesley and Lenox, 2006). Apart from that, despite of being competitive advantages gained by the Tesco in terms of footfall in their stores, most of the niche retailers are being fighting back against the Tesco tech support electronic section.
Some of the major issues of the regarding the failure of the most of the business of Tesco are range of product and services offering are low and price ranges also been another major cause of the problems. Besides that, too much of diversification has made the company to made the poor decision making and poor planning to launch its products in without having long term planning leads the company loose their market shares (Goksoy and Ozsoy, 2010).
Moreover, company has expanded its both of diversification of the business at once which again has hit the company hard the company has to invest more than £20 million of investment in both of business. Although company has loosen the long-term sightedness but company new CEO Mr. Dave lewis , there has been several mistake was created in past that has made the company reduce its market shares and face loss of £2.8 billion but now is not the time of looking at the back rather looking to introduce some new techniques to getting rid of burden of sick units (Grant and Spender, 2009). Apart from that, to resolve the issues company will come up with new strategies like insurance on the electronic products will again boot up the company progress
Too much Diversification of the business
In banking system, company will start hedging business and broke the mould of old school of retail banking investment. Currency bank are not been limited deposit or return , it has become more wider in terms of functionality (Hall, 2011). There with advising the existing client to investment in shares, mutual funds or the in the forex as per the risk taking capacity will again make these business short run in their
As per the Dave Lewis, rising price of the raw materials has made the company has made the company increase in its price of the products . rising price of the products has made the company to shift their gear from Tesco to the Aldi and Lidl and German against who are selling the products at lower discount rates (Hall, 2011). Price war has been one of the major problems for the Tesco in recent times. As increase in the global retail business in UK has made the giant like Tesco work on their pricing strategy. Tesco is not able to gain the cost leadership because of the rise in the pricing competition among the retail competitors (Tesco.com, 2015).
Some of the products price of Tesco and its competitors in UK are given below:
|
Products |
Tesco £ |
Sainsbury £ |
Aldi £ |
|
Tomato soup (400gm) |
3 |
3 |
2.8 |
|
Organic products (400gm) (Own brand of baked beans) |
1 |
0.9 |
O.5 |
|
Cheese (150gm) |
3 |
2.5 |
1.75 |
|
LED TV (Sony 32 Inch) |
314 |
310 |
300 |
|
Aerated drinks (Coca cola 1 liter) |
1.49 |
1.44 |
1.20 (offer valid on purchase of two) |
From the above it has been found that, company is not been able to gain the large market shares in recent trends because of the rise in the price competition. Company is facing tough to compete with these new and small companies because their market growth is been increasing rapidly because these companies has been looking to achieve the cost leadership in the market.
Figure 2: Porters generic model on the Tesco price issues
(Source: Ho and Tang, 2009, pp-367)
Once Tesco was on the cost leadership with broad target but current company has been cost focus as to only cater the middle and high age income group by introducing the new international brand in the market (Dick and Basu, 2007). Whereas Companies like Aldi and Lidl are some of the major companies who are looking to achieve the cost leadership in order keep attracting the customer base.
Increase in price of the products to cater only fix level of income group has made the company to slow the growth of the company (Douglas and Craig, 2007). Company has introduced various other investments in introducing the club card for the discount on petrol over purchase of the 5 liter.
However, company ahs recently launched freaky Friday programme where the discount and products at your price strategies of the Tesco has been formulated to gain the confidence of the customers. Apart from that, company is also offering free home delivery in order to attract the customer towards the company. Most of it company has made several changes in its pricing strategy of grocery items to gain the cost leadership strategy (Eggert and Ulaga, 2006). Company founder Mr. Jack Cohen, itself looking to reduce the operation cost of raw materials by introducing new technologies to reduce the cost of raw materials.
Conclusion
From the above case scenario, it has been found that, in recent times Tesco growth has been severely declines because of several issues present in the company. Out of which two of the most important issues like Too much of diversification and pricing issues has reduce the company profitability in recent times. With diversification, company has invested more than £26 million in launching banking business with only limited services has turn into nightmare for the company. Since, the company is been going through very tough phase to sustain in the banking sector so company has introduced zero balanced accounts and credit card with limit of more than £5000. Although the decision was pretty good and company has able top gain the confidence of the existing customer but company fails to attract the potential customers because today banking services are not limited to the only cash withdrawal or cash deposit it has become more than it. Besides that, company entry in electronic section was also been one of the poor decision making. Quintessentially speaking, electronics is one of the booming sector but company has not made the long run plan or feasibility plan right that made the company to lose their customer base.
Apart from the above , the other major decision making by the company is poor pricing strategies in recent times. As the competition in the retail market has been grown , Tesco are suing cost focus to creates niche market which is very much short sightedness for the company. In near future , company will face strong competition among the Aldi and Lidl which will creates huge problem for the company in near future. In order to mitigate the both of the losses , Mr.Dave has come up with new set of ideas and solution like to introducing financial products and reducing the operation cost to reduce the price of the products.
Some of the major recommendation for the Tesco are given below :
With help of new financial products like mutual funds, Derivative instruments futures, forwards, options and Swaps along with that corporate bonds and treasury bonds will help the Tesco banking business to reach in the apex positions. With a variety of products like mutual fund will give the customers enough scope to save their taxes which will again bring the confidence of the customer base.
With new hedging products company will have enough scope to add the capital market instrument like wealth management and private equity which will lead the company to gain the large customer base. With the new set of products company may attract the existing and potential customer to keep up with Tesco financial solutions.
Apart from that, recently as per the BBC 1 news, Mr. Dave is looking to close its sick units which are very bold move by the company. With closing down sick units in the Ireland and Scotland will help the company to reduce the burden of looses. The loss make firm like Tesco Tech support must be come up with new ideas and new innovation areas to sell their products rather than only focusing on the giving offers.
More than 56 sick units in UK and Europe are being creating looses for the company. In order to close the sick units and save from long pain will help the company to reduce its unnecessary costing.
E-Logistics and E-procurement: With the help of new technology E-logistics helps the comp may to reduce the cost of the raw materials which will again help the company in the long run. Apart from that, E-procurement will give the company enough scope to reduce the cost of operation which will helpful in near future. Both of the technology will help the company to reduce its price of the products and maintains its position in UK market.
Promoting the local farm products: With the help of locally made fresh products will give th Tesco to cater the all income group and help to achieve the cost leadership strategies in the UK. Local farm products will give the company to create value piercing strategies which will boost the confidence of the customers which shift their gear from the small retail companies like Aldi and Lidl (Grant and Spender, 2009). Local farm products give the company to reduce the costing of its own set of brands in compare top other brand which will boost the sales of the company in near future.
By introducing the electronic products like mobile, washing, machine of kitchen chimney with free insurance facility will boost up the sale of the company. Insurance packages are one of the best techniques to attract the customer but the Tesco tech support products. Free insurance and after sales services will helps to boost the sales of the company in near future. After conducting survey by the London chamber of Commerce in 2013 , around 39.075 of the customers are very much buying the electronic products along with insurance (Hall, 2011). This gives the company to sell its products in large market base which gives the companies to outperform the electronic stores in UK like Argos and ALBA to run for their money with this business strategy.
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