Analysis Of Tescos Corporate Strategy

In this report I have discussed Tesco’s corporate strategy. The first section provides background into the company and shows that it currently dominates the UK grocery market.

The next section explains the importance of a corporate strategy for long term success in any market place. Tesco’s is operating a two tier strategy; the first includes expansion into non food products within the UK market and creating strategic alliance with RBS for example, to create Tesco Personal Finance. The next one includes aggressive expansion into overseas grocery markets. The main aim of this report will be to study the corporate strategy regarding expansion into Middle East & India.

This is followed by a review of Tesco’s expansion plans explaining why it is necessary for Tesco’s to expand into overseas markets. Some of the points discussed are that Tesco’s UK market share in the grocery has reached a saturation point and it faces price wars from budget supermarkets such as Lidl which puts a downward pressure on profit margins. Also, Tesco earns three quarters of its revenue from UK sales and in a competitive environment it and needs to expand into India and the Middle East to increase revenue sources.

The next section provides analysis on Tesco’s corporate strategy.

The first part of the analysis is based on Porter’s Generic Strategy that provide options available to Tesco to sustain a competitive advantage. Cost Leadership strategy is suitable for operations in India as low prices will attract volume sales. However a combination of differentiation and niche strategy is necessary to remain profitable in UAE market due to its smaller population but higher GDP per capita. Porter’s five forces model is used to assess the competition in the target market with use of generic strategy’s attributes to defend against these competitive forces.

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SWOT analysis is carried out to analyze Tesco’s present corporate strategy showing the external factors that influence the business. Strengths include Tesco’s high growth in UK and overseas and its commercial standing and known brand. It has access to cheap lending and Economies of scale. Its biggest strength is its consumer oriented approach which caters to needs and demands for local consumers.

Weaknesses include potential to enter into price wars with has a detrimental affect on profit margins. Also while it may offer multiple non food product lines it may not be able to compete with specialist retailers. Finally regulatory barriers in India that restrict foreign ownership of retail stores could slow down expansion into the region.

The report concludes by evaluating the present corporate strategy for Tesco’s expansion into overseas grocery markets. The expansion is important to sustain a competitive edge. Tesco needs to ensure that in order for successful expansion it needs to remain flexible and consumer oriented and avoid mistakes made by Walmart in Germany and Brazil and Carrefour in Eastern Europe.

Introduction & Background

Tesco was founded in 1919 by Jack Cohen in East London, It is now a UK-based international grocery and general merchandising retail chain. It is the largest British retailer by both global sales and domestic market share, with profits exceeding £3 billion. It is currently the second largest retailer in the world based on profit. Originally specialising in food and drink, it has diversified into areas such as clothing, consumer electronics, financial services, telecoms, and home and health products. (http://www.tescoplc.com/plc/about_us/tesco_story/)

The aim of this report is to analyse Tesco’s present corporate strategy with emphasis on what it could do to improve its business. I will provide evidence and reasons on why the company’s present strategy has potentially high profitability and the aspects that need to be altered.

Even though Tesco’s primary business of selling groceries is not unique but it is the business model that differentiates it from the rest and maintains its global market share. It has generated high profits through aggressive overseas expansion into US, Eastern Europe and South East Asia. It has maintained a strong customer focused business model, with extensive use of its club card loyalty scheme and utilizing top of the range information systems to maintain a very efficient supply chain. (P. McGoldrick, 2002)

Tesco’s Corporate Strategy

Strategic management is a set of managerial decisions and actions that determine the long term performance of a corporation. Many companies can manage short term bursts with high performance but only a few can sustain it over a long period of time.Of the original Forbes 100 companies listed in 1917, only 13 are still in business. (E.D. Beinhocker, 2006)

In the last decade, Tesco brought about a lot of strategic changes and has grown to become UK’s number one retailer. It is also considered to be one of Europe’s fastest growing financial company and probably the most successful internet supermarket in the world. (A. Seth & G. Randall ,1999)

Tesco’s is operating a two tier expansion strategy.

The first part is expansion into non food sector within its home market in the UK. This includes offering home and health, pharmacy, telecommunications and financial services products. It has continued to maintain its market share in its grocery sales via aggressive pricing and targeted marketing while expanding into more risky and high profit areas with good success. Tesco setup a strategic alliance with Royal Bank of Scotland whereby it offers most of RBS banking services in its stores around the UK. It has taken advantage of its widespread network of stores. In 2008 Tesco Personal Finance had posted £71m half year profits with 5.6m customer accounts. It is aiming to increase that profit including from other services including telecommunications to £1bn. (J. Bamford and D. Ernst, 2002)

http://news.bbc.co.uk/1/hi/business/6257331.stm

(The Economist, Supermarket Finance: A Mortgage from Tesco? 2nd Oct 2008)

The second part of Tesco’s strategy is to expand its grocery business into Continental Europe, India, South East Asia and the Middle East

Review of Tesco’s Expansion Plans

Tesco has had great success in the UK market where it has gained over 30% of the grocery market share. There are too many hurdles such as restrictions from competition commission and local groups that will not allow Tesco to open many stores in new locations along with planning restriction in the UK. It has however continued to profit from its share in financial services and telecommunications sector. It also gained the first mover advantage when it launched tesco.com.

From the figure above, we can deduce that majority of Tesco’s sales are from its UK operations (100-23.4 = 76.6%). This makes it more important to continue aggressive international expansion as it provides more opportunities for revenue growth.

The UK grocery market share has reached a saturation point. With low cost brands such as Lidl and aggressive price war with ASDA in the UK, the profit margin for grocery products have fallen.

The strategy is to diversity grocery sales into other countries and make use of the fast growing economy of India and cash heavy consumer of United Arab Emirates. In today’s competitive environment Tesco cannot rely on three quarters of its revenues from one country. Of the world’s top 250 retailers, 104 have no international operations at all, according to Deloitte, a consultancy firm. Tesco could be the first one to enter the market in UAE and India to obtain the first mover advantage. (The Economist, Global Retailing:Trouble At Till, 2nd Nov 2006)

In this report I will concentrate on Tesco’s strategy for overseas expansion in the grocery market as I believe it carries more opportunities and has higher growth potential. The primary objective of this report is on Tesco’s expansion plan in the India & the Middle East.

Analysis of Tesco’s Corporate Strategy

The reason to carry out external analysis is to identify potential opportunities and threats facing Tesco. External analysis provides information that strategic managers use in planning, decision making and strategy formulation. It helps reduce environmental uncertainty

(B.K. Boyd & J. Fulk, 1996)

Michael Porter has made major contribution to corporate strategy and I will use some models to judge potential of success for Tesco’s existing corporate strategy.

Porters Generic Strategies

They outline the three main strategic options available to Tesco to achieve a sustainable competitive advantage. They are cost leadership, differentiation and focus/niche strategy.

http://tatler.typepad.com/images/strategy.jpg

Cost Leadership: The company producing products at the lowest cost can obtain competitive advantage. This strategy is suited to Tesco’s business operations in India as currently their involvement is restricted to wholesale sector. Foreign firms in India are unable to have 100% ownership at retail statge. Technopak, a Delhi-based retail consultancy, expects Indian retail sales to rise to nearly $430 billion by 2010. Modern retailers’ share will rise from just 3% now to 16-18%, it says. A low cost/low price business model will yield the highest returns and sales volumes due to size of India’s population. (The Economist, Retailing: Setting up shop in India, 2nd Nov 2006)

Differentiation: It involves selling products that have unique attributes preferred by customers and as a result they are willing to pay a higher price. Although Tesco’s business of selling grocery products is not unique, Its business model differentiates it from rivals. Especially its club card loyalty program that allows Tesco to react to changes in consumer preferences faster and gain advantage by being the first one to address any new demand for products.

Niche: Its usually suited to smaller corporations, they can enter particular segment of the market and offer specialist products.

Michael Porter argued that in order to be successful in the long run, a firm must choose one of the strategies or they will not benefit. However, contemporary research has shown evidence of firms practicing such a “hybrid strategy”. Hambrick (1983 cited by Kim et al. 2004, p.25) identified successful organisations that adopt a mixture of low cost and differentiation strategy. A combination of differentiation and niche strategy would be most effective in the UAE market. First of all due to small population of 6m, Cost leadership model would not work as there is little potential for higher sales volumes. UAE is still a developing market and there are not many supermarkets chains with large market share. Also Tesco could offer unique products, such as its healthy living range and finest brand range that would appeal to the expatriate’s community which makes up 80% of UAE’s population. GDP per capita of UAE is over $54,614 and high disposable income due to absence of income tax, this makes it an ideal market for niche, high end products that carry high profit margin.

M. Porter, Competitive Strategy: Techniques for Analysing Industries and Competitors

http://tatler.typepad.com/images/strategy.jpg

(The Economist, Retailing: Setting up shop in India, 2nd Nov 2006)

Porter’s 5 Forces

Porter explains that there are five forces inherent in markets that determine the level of competition and profitability for Tesco in UAE and India.

The first force is the threat posed by new entrants, Tesco’s rivals, Wal-Mart and Carrefour are also expanding into overseas markets and this could lead to aggressive pricing to retain market share which may have a detrimental effect on profit margins. Currently Tesco has sufficient purchasing power to experience economies of scale which acts as a barrier to entry for other businesses. Also, it is planning a partnership with Bharti Enterprises in India where by Tesco will control wholesale market and distribution network responsible for supplying products to 5000 stores.

(The Economist, Retailing: Setting Up Shop In India, 2nd Nov 2006)

The second force is threat of substitutes, Grocery products have highly elastic demand and customers have alternatives if price is set too high. For example, in UAE retail sector, Tesco could establish itself as a premium grocery retailer. Once way to reduce the threat of substitutes is to diversify the business and expand into non food sectors. It could form strategic alliance with local firms to offer services, similar to its partnership with RBS in the UK.

The third force is the threats from the bargaining power of buyers, this is strong for all retailers in the grocery market. It could gain significant market share if it offers products to cater for western expatriates as currently there is limited availability of English grocery items. Also, it could reduce threat of substitutes by extending its loyalty program to the UAE. Such as club card scheme, Healthy living club and Tesco Vine club etc. With prices for eating out rising fast, it could offer healthy and finest range ready meals to increase its customer base.

Finally the threats from the suppliers bargaining power, it’s fairly low for Tesco as it’s usually a major customer for most suppliers and has the power to control its supplier pricing to an extent. Also in terms of rivalry, there is several small supermarkets within the UAE but none of the big ones such as Carrefour and Wal-Mart have yet entered the market.

The five forces analysis gives an improved understanding of the degree of competition faced by Tesco. The analysis shows that the grocery industry can be highly competitive, with buyers possessing powerful influence over the large number of substitute brands available to them. From the previous section we can see that generic strategies each have attributes that help to defend against competitive forces.

SWOT Analysis

SWOT analysis has proven to be the most enduring analytical technique used in strategic management. In a 2007 McKinsey & Co global survey of 2700 executives, 82% stated that the most relevant activity for strategy formulation were evaluating the strengths and weaknesses of the organisations and identifying top environmental trends affecting business performance over 3-5 years.

(J. Choi, D. Lovallo & A. Tarasova, McKinsey Quarterly Online, July 2007)

Strengths

Tesco has published sales gain of 13% for UK markets which is higher than rivals in the UK and 26% revenue growth in international markets.

Tesco has a strong brand and excellent commercial standing. It won the retailer of the year 2008 award at World Retail Awards.

On basis of its size and credit worthiness, Tesco can experience economies of scale and obtain funding for expansion into India/UAE even during credit crisis.

Tesco’s approach is very flexible, they don’t always push the Tesco brand name unless it has an advantage when entering a market, for example in Turkey Tesco maintained the name Kipa as local customers were familiar with it.

http://www.worldretailcongress.com/page.cfm/action=Archive/ArchiveID=7/EntryID=1

http://news.bbc.co.uk/1/hi/business/4781458.stm

(The Economist, Global Retailing: Trouble At Till, 2nd Nov 2006)

http://www.worldretailcongress.com/page.cfm/action=Archive/ArchiveID=7/EntryID=1

Weaknesses

There are regulatory barriers in obtaining retail trade licences in India. At present a foreign company can only operate as a distributor/wholesaler. However it is still a good opportunity to enter the market as a wholesaler and establish a distribution network.

If it enters into a price war with local retailers, the margins will suffer and since UAE population is only 6million, the low margin high volume strategy will not be effective.

Tesco is a public company and if it spends too much of its capital on overseas expansion the UK market may suffer in the short term and shareholder may oppose some expansion decisions.

Tesco may offer multiple product lines in the same store, but since there are specialist stores for electrical products for example; Tesco may struggle in non food sector.

(The Economist, Retailing: Setting up shop in India, 2nd Nov 2006)

Opportunities

UAE allow foreign investment and ownership which combined with ease of funding provide low barriers to market entry.

Tesco has created a very efficient home delivery network in the UK, It could utilise its expertise to create the very first home delivery service for grocery products in the UAE.

With wide access to the internet among UAE residents, Tesco could enter the online market for food and non food product.

Economic growth in India has maintained at 6-8% per annum

Despite the credit crunch UAE has experienced a growth rate of 23%in 2008 with double digit growth in grocery sales.

The GDP per capita of a UAE is $54,607 making it an ideal location to offer high margin top end products such as the Tesco’s finest range.

Tesco could follow its business model in the UK to setup strategic alliance with local firms to diversify its products and services on offer.

http://uaeinteract.com/docs/UAE_GDP_soars_23_to_Dh934_billion_in_2008_/36962.htm

http://www.imf.org/external/pubs/ft/weo/2009/02/weodata/index.aspx

http://www.arabianbusiness.com/574404-uae-grocery-sales-growth-slumps-in-2009

Threats

Rising prices of raw materials and food products may lower profit margins.

People tend to vary of new brands. This problem can be overcome since Tesco has a strong internationally recognised brand. In addition Tesco tends to enter the market via partnerships or familiar brand name to avoid alienating the local consumer.

Local communities in some parts oppose Tesco and other major retailers from setting up stores as they believe it will destroy their community and small businesses.

Lower available income will impact and strategic focus may need to change to lower priced basic products with less focus on higher priced brands suggesting a switch in price architecture.

Retailers who set out on foreign adventures need to remember three basic rules. First, don’t forget the local touch. Wal-Mart got off to a bad start in Germany by appointing a country manager who did not speak German. In Brazil it failed to notice that people like to shop en famille: the aisles of its shops were too narrow to accommodate the standard family party. Successful foreign adventurers adjust their formats to local needs. B&Q, a British do-it-yourself retailer, discovered that Chinese people look down their noses at doing things themselves. It became a buy-it-yourself, and get somebody else to do it for you, retailer.

Second, make sure your timing is right. In 1995 Yaohan, an aggressive Japanese retailer, opened one of the world’s biggest department stores in Shanghai. It planned to build 1,000 Chinese shops. But a decade ago Chinese people were too poor to support its vision and in 1997 Yaohan filed for bankruptcy. Third, be selective about what you try. Tesco, which has been pretty successful in foreign markets, is shortly going into America-but with convenience stores only, because it reckons the supermarket business is too crowded.

(The Economist, Global Retailing: Trouble At Till, 2nd Nov 2006)

Conclusion

In this era of globalisation an organisation can no longer trade in its locality and sustain a competitive advantage. Tesco needs to continue its expansion overseas as UK market has reached saturation point in the grocery sector. It needs at least half of its revenues from overseas operations to reduce its over reliance on UK sales. The Porters generic strategy and SWOT analysis shows some promising opportunities in India and UAE which could turn into profitable operations. Some of the potential threats can easily be overcome.

The key to success for Tesco in its expansion strategy is flexibility and timing. India has recently allowed some Foreign Direct Investment even though its restricted to ownership of wholesale sector, its a good opportunity as retail sales in India are forecasted to be $430bn by 2010. Unlike Wal-Mart which failed to enter the market in Germany and Brazil due to lack of knowledge of local trends and consumer preferences. Tesco has been successful in entering several overseas markets. This is due to their consumer oriented approach and their study of local demand prior to setting up.

Before expanding into the US, researchers, including a small cohort of Tesco’s top executives, spent two weeks living with 60 American families and studied their grocery purchasing habits.

Strategic management is an ongoing process, the key for managers is to remain flexible, open and alert to changing circumstances. Strategies don’t always succeed, results may fall short due to internal short coming or predictions about external opportunities and threats were inaccurate. Whatever the reason we change the strategy as needed to take advantage of new information.