Tesco’s Business Environment and Strategic Capability

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The past few decades have witnessed cut-throat competition among business entities in nearly all industries, trying to cut a niche for themselves and net some profits for their shareholders. Firms have conglomerated into distinctive industries for the purposes of marketing their products and services. Today, we have the travel industry, car industry, manufacturing industry, supermarket chains, and many more industries that compete for consumers in the marketplace. In this trade, some industries are more profitable than others owing to the dynamics of the competitive structure used by stakeholders. The supermarket chain industry is one such entity that has benefited immensely from utilizing the dynamics of competitive structure and various analytical models to gain a foothold in the increasingly competitive business market (Yu 2008). This paper aims at analyzing the business environment of Tesco supermarket in relation to various business analytical models used in the assessment of the nature of competition in the supermarket chain industry. The paper also aims at analyzing Tesco’s strategic capability.

Based in Britain and with subsidiaries in many other countries, TESCO is an international general merchandising and grocery retail chain (Tesco 2008). It is accredited for being the largest British supermarket retailer by both domestic market share and global sales, with profits rising to 2 billion sterling pounds by the close of the 2007 financial year. It has risen in rank and file to become the fourth-largest retailer in the world. Though it originally specialized in the eating business, Tesco has managed to use sharp business acumen to diversify into areas of consumer electronics, consumer health insurance, clothing, consumer financial services, renting and retailing music downloads, DVDs, CDs, and internet service, software, and consumer health insurance.

Tesco has utilized various business models to sustain itself in the market as one of the market leaders in the supermarket industry. From its humble organic growth of the 1950s, Tesco has mastered the game of acquisitions to own more than 800 supermarket stores to date (Tesco 2008). How Tesco’s management has been able to beat other leading supermarkets in their own game remains a matter of debate among industry analysts. Using various analytical models such as Porter’s Five Forces model and PESTLES, this part aims at analyzing Tesco’s key business structure, strategy, and operations that have enabled it to be one of the kingpins in the supermarket industry.

Porter’s Five forces Model

The Five Forces Model invented by Michael Porter remains one of the Competitive Position models that are greatly used by industry analysts to analyze and assess the competitive position and strength of a business organization or corporation. According to Porter, long-run industry profitability and attractiveness is determined by five forces namely: entry of new competitors, the threat of substitutes, the bargaining power of buyers, the bargaining power of suppliers, and the degree or intensity of the rivalry between competitors (Jackson 2007). Being in the competitive supermarket industry, Tesco has been influenced by all the five forces mentioned in Porter’s model.

The Five Forces Model can be used to analyze the business environment of Tesco’s supermarket chain. According to porter, the level of competition can be raised by new entrants to the industry thereby influencing its attractiveness (Jackson 2007). In the supermarket industry, new entrants largely depend on the barriers to entry to be able to effectively penetrate the market. Key entry barriers faced by any industry include economies of scale, investment or capital requirements, admission to industry distribution networks, customer switching costs, and the probability of retaliation from existing industry players. Through its sheer appetite to acquire other superstores, Tesco has particularly been effective in putting up considerable barriers to entry for other supermarkets aiming to enter the market. From the 1950’s up until the ’60s when the supermarket chain was shaping up, it was able to acquire 200 Harrow Supermarkets, 70 Williamson Stores, 97 Charles Phillips supermarkets, and 212 Irwins Supermarkets. Plainly put, the supermarket chain has effectively curtailed the threat of new entrants through acquisitions.

In the admission to industry distribution channels, Tesco has successfully reigned over the market for specific products especially in areas of consumer electronics and grocery, thereby shielding new supermarkets from accessing low-priced, consistent suppliers. It has a distinct advantage over new entrants when it comes to the economies of scale basically because it pays a lot less per item supplied than new entrants would pay through purchasing large consignments of goods at low prices (Mindtools 2008). Economies of scale demand new entrants to purchase small quantities of goods at a much higher cost. The supermarket chain has been in operation since 1929 and therefore enjoys a good capital or investment portfolio that new entrants would almost find challenging. All these have contributed to the competitive advantage of Tesco over other new entrants.

Porter argues that industry profitability and attractiveness are also influenced by the threat of substitutes. Substitute products have been known to influence the prices of various commodities depending on the costs of switching to the substitutes, the willingness of the buyers to buy the substitutes, and the relative performance and price of the substitutes (Jackson, 2007). The threat of substitutes has been credited with driving profits to zero in classical economics. In Tesco’s case, stiff competition from other supermarket chain stores with the capability of offering substitute goods like Sainsbury has driven their prices downwards thereby affecting profit margins. In fact, prices of various commodities have been revised downwards owing to the power bestowed on the buyers. It is common sense that buyers will exercise their authority and shop in other supermarkets if the price of groceries becomes unbearable in Tesco. It is also clear that the profit margins of the supermarket chain have been affected by the cheap prices of substitutes found in other supermarkets across the world. But Tesco has been able to maintain its dominance owing to its organizational nature.

The power of suppliers is an integral part of Porter’s Five Forces model. The profitability of an organization is overly influenced by the cost of products that are bought from suppliers in form of components or raw materials (Jackson 2007). Suppliers are engaged in the business of supplying products and materials to the industry. The industry is thought to be less effective in theory if the suppliers have high bargaining power over the business entity. Accordingly, suppliers’ bargaining power is high when: there are a few dominant suppliers and numerous buyers; there are highly valued and undifferentiated products on offer; when product manufacturers strive to set up their own retail distribution outlets; when buyers are not keen on integrating back into the supply chain; and when the business entity is not a vital customer group to the supplier chain (Mind tools 2008). In the supermarket industry, retailers are often demanded by suppliers of goods and commodities to pay a particular price for the goods offered. Supermarket retailers don’t get the goods if they don’t pay the price. But Tesco has had a distinct advantage as far as influencing suppliers owing to its huge portfolio. Due to its huge capital returns and wide network, the supermarket chain has ably managed to dictate the price it pays the suppliers thereby gaining a distinct competitive advantage over other supermarkets. Suppliers are often left with a much smaller market for their products if they do not reduce their prices to the satisfaction of Tesco.

In the center of all this, the profitability of the industry is determined by the intensity of the rivalry between various players. Rivalry depends on the structure of the competition and is less intense when there exists a clear market leader in the industry and more intense when there are many equally sized or small competitors (Jackson 2007). Tesco is a sure market leader in the supermarket industry and hence rivalry between it and other small establishments has been minimal. According to the model, the rivalry is also less pronounced when the buyers have higher switching costs or when the buyers are required to pay more for buying an alternative product. To this extent, the rivalry between Tesco and other supermarkets is minimal based on the fact that supermarket commodities are generally priced around the same price tag. The degree of rivalry is also informed by strategic objectives. In the 1980s and ’90s when Tesco was pursuing aggressive growth tactics, the rivalry between it and other supermarkets was at its fever pitch as witnessed in its hostile takeover bid of Hillard’s chain of supermarkets in 1987. Rivalry is also influenced by the degree of differentiation of the industry, with Porter arguing that less rivalry exists in industries where competitors can differentiate their products. In the supermarket industry, Tesco has not only differentiated the range of products on offer but has effectively differentiated its network into six formats namely Tesco Express, Extra, Metro, Superstores, Home plus, and One stop (Tesco 2008). This has given it a competitive advantage over the other supermarket chains.

PESTLE Analysis

The PESTLE tool can be used to evaluate the position and current status of an individual or organization in relation to their current roles and external environment to form the basis for strategic management and future planning (Allan 2007). It entails evaluating the political, Economic, Social, Technological, Legal, and Environmental influences on the industry. These external conditions are beyond the influence or control of the industry as they arise from the external macro-environment. However, external factors are crucially important for the survival of any business. In the political scenario, Tesco has been motivated by good British government policies and regulations, tax policies, and directives to be able to blossom from a single supermarket store into one of the largest supermarket chains worldwide. In the social arena, it has been positively driven by efficient consumer culture, increase in population, and general lifestyle changes to effectively establish a ready market for its products.

The appealing enterprise and business economic directives coming from the British government and other governments where Tesco has a stake coupled with good income generation targets has enabled the supermarket to be favored by external economic factors. In its home country of Britain, stringent fiscal policies effected by the government have been critical in curtailing high-interest rates and inflation while at the same time ensuring that distribution of disposable income among the citizens can efficiently maintain a working consumer culture (Mind tools 2008). External economic factors have also brought about rapid globalization which has been central to the growth of Tesco. What’s more, Tesco has invested heavily in technology to become the largest grocery home shopping service in the whole world. Due to huge investments in technology, the supermarket is able to provide a large variety of consumer goods, financial services, and telecommunications online. In 1996, Tesco was the first supermarket chain to offer a vigorous online home shopping facility that has enabled the chain stores to expand rapidly using minimum investments (Tesco 2008). In essence, it has been able to utilize relevant emerging technologies to reach end consumers of its products from the comfort of their homes. For the supermarket chain, online business transactions have enabled it to increase remote working while at the same time reducing costs of communication.

Environmental and legal factors have minimally affected the growth chances of the supermarket chain. In fact, EU legislation requiring nations from the European Union to do away with trade barriers has served to make the supermarket chain more effective in reaching out to its most loyal customers in countries affected by the legislation (Mind tools 2008).

Critical success factors

According to analysts, both analytical models are used by industry stakeholders to understand the dynamics of the business environment in which an entity is operating, thereby determining the success, opportunities, and threats of an enterprise. A businessman can minimize threats and take advantage of the opportunities that the above two analytical models present through merely understanding the environment in which the business operates (Anna 2003). In this perspective, Tesco has been effective in reigning over the market for specific products and services. Through acquisitions, Tesco has been successful in putting up a strong resistance to supermarkets aiming at entering the industry. Being a market leader in the supermarket industry, Tesco has also successfully fed off rivalry among key players in the industry. It has been successful in winning over the power of the buyers owing to its long history of operation, and at the same time winning over the power of suppliers owing to its favorable economies of scale and strong financial backing. These are strong success factors for Tesco

Summary of opportunities and threats

Due to its competitive advantage, Tesco’s future is bright. It has numerous opportunities for growth owing to the fact that it has been able to acquire more than 1800 supermarkets in acquisitions and takeover bids; it has an adequate investment or capital requirements; and is overly favored by the economies of scale. More opportunities are guaranteed by the stability of the government in Tesco’s parent country, freedom of press, proper tax policy and tariff controls, low-interest rates, low inflation, healthy consumer culture, positive lifestyles and attitudes, and job market freedom. It has also been impacted positively by emerging technological trends. However, it has weaknesses in form of the threat of substitutes brought in by competing supermarkets chains and rivalry.

Analysis of Tesco’s Strategic Capability

In the analysis of the two models, we have seen how Tesco has been influenced by the external environment to bring about opportunities and threats. But a critic would want to ask why Tesco is a superior performer to Asda and Sainsbury super stores yet the supermarkets compete for business in the same environment. To answer such a critic, the difference in performance is brought about by strategic capabilities discussed below.

Value chain and Network

Developed by Michael Porter, value chain describes all the categories of actions within and around a business entity which together produce a commodity or service for uptake by the end consumers (McKissick 2004). The value network is the set of inter-organizational relationships and networks that are essential in the creation of a commodity or service. Broadly put, a value network is a connected series of knowledge streams, resources, and organizations involved in the development and delivery of a value product to end customers. A single business entity does not undertake all the value activities that are involved in the production of a commodity from the design to the delivery of the commodity but rather position itself to take on a specialized role as part of a wider value network.

To this effect, Tesco utilizes both the value chain and the value network to come up with products for their consumers. In the value chain, Tesco has developed unique products such as consumer health insurance and consumer financial services. In value systems, Tesco has been overly concerned with inbound logistics involving all the activities it goes through in receiving the materials for the commodities, storage, and the distribution of the inputs to the services or commodities offered, including transportation of the materials, materials handling, and stock control. It also involves outbound logistics through the process of storing and distributing various commodities to consumers through its supply network (Strategy 2008). It also involves itself with marketing and sales, whereby the organization provides consumers with knowledge about its various products and services and where the consumers can get them. This is often done through the process of selling, sales administration, and advertising. Through using such systems, Tesco has effectively been able to position itself superbly in the supply chain to attain the maximum heights of value and customer satisfaction while effectively taking advantage of all the competencies of all business entities in the supply chain.

Competitive advantage: Threshold vs. Unique competencies

For a company to achieve a competitive advantage over its competitors, it must utilize its threshold capabilities and unique competencies. The capabilities needed for any organization to effectively compete and survive in a specific environment or market are the threshold capabilities. Though important, the threshold capabilities by themselves do not create a superior performance or competitive advantage like is the case with Tesco. The competitive advantage of Tesco is actually based on its ability to come up with products and services that other supermarket chains have found hard to imitate. This is the unique competency of Tesco. It has been credited with designing unique financial services and consumer healthcare insurance that is unique to itself thereby giving the supermarket a strong financial footing over its competitors. Therefore, unique competencies are basically the abilities and skills through which resources are positioned through an entity’s processes and activities so as to accomplish competitive advantage in ways that other business entities cannot easily obtain or imitate. From its online grocery stores and DVDs and CD rental to offering products in insurance, Tesco has effectively positioned itself to offer core or unique competencies that other supermarket stores such as Sainsbury find hard to copy or imitate. This has given the supermarket chain a distinct competitive advantage over other supermarkets (Strategy 2008).

Sustainable competitive advantage

In a layman’s language, sustainable competitive advantage enables industry players to survive cutthroat competition over longer periods of time. At Tesco, this prerogative has been credited with allowing the improvement and maintenance of the supermarket chain’s competitive position in the global market. Tesco’s sustainable competitive advantage can be attributed to its favorable economies of scale, increased diversification of products and services, as well as its long history. It started operations in 1929 and therefore enjoys superior resources as well as superior skills (Strategy 2008).

Strategic choice

Tesco has overly utilized the strategic choice approach to maintain its competitive advantage over its competitors. The approach utilizes four basic principles namely shaping, designing, comparing, and choosing. In the first principle, Tesco supermarkets have effectively been able to identify the problem areas in the supermarket industry. In designing, the supermarket chain has sat down to design what could be done to the problem areas and has henceforth compared various principles and ideas to choose the best methodologies to solve the problem areas (Chapman 2005). For example, Tesco made a strategic choice in coming up with online stores to sell its grocery and food when it was faced with a problem of shortage of consumers. Managers decided to use the internet and other emerging technologies to ensure that they remained ahead of the pack. The introduction of online grocery stores made the supermarket chain command a substantial proportion of consumers thereby helping it to regain its competitive environment. That is the power of strategic choice.

Strategic fit

Strategic fit or strategic realignment is basically the extent to which various activities of a sole business entity work in partnership to balance out and complement one another so as to contribute to the competitive advantage of the organization (McKissick 2004). Tesco supermarkets have been a master in strategic fit in that it has come up with diverse activities that work to complement one another thereby making the supermarket chain enjoy a distinct competitive advantage over its competitors. While average superstores deal with the sale of commodities, Tesco’s chain of supermarkets has increasingly diversified its activities to include offering services such as internet service, consumer financial services, and consumer health insurance. These services have complemented the traditional supermarket role of offering commodities for sale to consumers thereby increasing its competitive advantage. Its internet-based grocery stores were well received in the market thereby increasing its competitive advantage. Overall, Tesco has benefited a great deal due to the transfer of skills and knowledge, and also through the economies of scale as its various activities complement each other in the market. In the same vein, it has been negatively affected by strategic fit when it comes to acquiring other supermarket stores as some of the activities of the supermarket to be acquired conflict rather than complement Tesco known roles and activities (Anna 2003)

The Ansoff Growth Matrix

This is another analytical model that could be used effectively to analyze Tesco’s products and its market growth strategy. For organizations, any attempt to grow to depend on whether the business entity focuses on if it is trying to introduce new products to new markets or if it is selling existing products into existing markets (Wright 2006). The Ansoff Matrix utilizes market penetration, market development, product development, and diversification to evaluate an organization’s market development strategy. In market penetration, Tesco has been involved in selling existing commodities to existing markets. It has been able to increase its market share substantially through advertising its products, competitive pricing, and sales promotions. It has been engaged in efforts of restructuring mature markets through acquisitions and hostile take-over bids thereby effectively driving out its competitors. Through its introduction of loyalty schemes such as the Clubcard, Tesco has been able to increase the capacity of existing customers to buy its commodities and services thereby dominating the supermarket industry (Tesco 2008).

Tesco has also been able to utilize market development to sell its existing products and services into new markets through acquisitions of foreign supermarkets. It has effectively entered into new markets in countries such as China, Czech Republic, Japan, Hungary, France, and others. With its introduction of new products into new markets, Tesco has effectively entered into product development. It has also effectively utilized diversification strategies to market new products into new market environments such as its internet shopping service (Wright 2006).

Summary of strengths and weaknesses

Due to Tesco’s integration in value and network chain, it has effectively positioned itself in the supply chain to attain the maximum heights of value and customer satisfaction while effectively taking advantage of all the competencies of all business entities in the supply chain. Tesco’s unique competencies have given it a distinct strength in coming up with products and services that other supermarket chains have found hard to imitate such as the Clubcard and the internet service. Tesco has also gained from utilizing strategic choice to come up with online stores to sell its grocery and food when it was faced with a problem of shortage of consumers. It has effectively used strategic fit to come up with activities that complement each other thereby maintaining its competitive advantage.

Tesco chain of supermarkets have increasing diversified its activities to include offering services such as internet service, consumer financial services, and consumer health insurance. It has also found strength in restructuring mature markets through acquisitions and take over bids thereby effectively driving out its competitors. It has benefited from Ansof’s matrix through increasing the capacity of existing customers to buy its commodities and services thereby dominating the supermarket industry. Above all, Tesco has also been able to utilize market development to sell its existing products and services into new markets through acquisitions of foreign supermarkets.

The weaknesses of Tesco cut across the supermarket industry. First is the increased competition coming from other industry players, coupled with an ever soaring economic environment occasioned by global recession. This can aptly be explained using PESTLES analysis. Consumer power is decreasing owing to external factors. Tesco is also faced with the challenge of venturing into new markets especially in countries where it is rarely known. But overall, Tesco’s business environment and strategic capability is healthy when analyzed using the various analytical models described in this paper.

References

Allan, A.W 2007. PESTLE and SWOT Analysis.
Anna, B.C 2008. Business Definition for Strategic fit. BNET.
Jackson, F.W 2007. Porter’s Five Forces: A model for Industry Analysis. Web.
Mind tools 2008. PEST Analysis: Understanding “Big Picture” Forces of Change. Web.
McKissick, F.W 2004. Strategic capability: Ensuring the growth of your Business. Prentice Hall.
Strategy – Analysing Competitive Industry Structure2008. Tutor2U. Web.
Shaw, B.A 2003. Business environment: Strategic capability. Oxford University Press
Tesco 2008. Tesco: Our structure. Web.
Wright, D.E 2006. Ansoff’s Product/ Marketing Mix. London: Routledge
Yu, C.H 2008. Competitive Advantage. Web.

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