Managing Business Environment: the case of Tesco
Operating in a global market requires the formulation and implementation of effective strategies to establish and sustain competitive advantage. The retail grocery industry particularly in the UK was challenge by various changes for the past decades that affect every organizational operation and other relevant aspects. It is believed that “noticeable issues concerning the development of new forms of competition (discount firms), the increased use of information technology in the management and logistics of groceries, and the diversification of the operating activities of various firms (high proportion of non-food sales)” (Athanassopoulos 2003, 932-33) prompted strategic shift towards alterations of the traditional business strategies employed by the leaders of this industry segment.
Meanwhile, Tesco is among the leading international retailers with a total of more than 3,000 outlets and approximately 600 planned store openings in more than 10 countries (Kumar 2005). Its remarkable expansion since its establishment in mid 1920s from a diversity of formats, markets, and sectors resulted to its satisfactory industry position. Tesco is committed to its long term strategy for growth as based on its four key parts: Core UK, International, Non-food, and Retailing services and these key parts are considered as their criteria for competitiveness. According to Tesco’s corporate website (www.tesco.com 2008), their employees accounted to over 450,000 in all its stores around the world. They aim for a consistent delivery of “a strong customer offer on every visit and every transaction by focusing on the Group’s core purpose: to create value for customers to earn their lifetime loyalty”. Furthermore, “this core purpose is delivered through the Tesco values: no-one tries harder for customers and treat people how we like to be treated”. The top competitors of Tesco are ASDA Group Limited, J Sainsbury plc, Wm Morrison Supermarkets PLC, and other retail grocery outlets that operate in areas where Tesco also operate.
Current Strategic Position
According to its website, Tesco maintains business relationships with approximately 2,000 own-brand primary suppliers from less than a hundred countries. The current success of Tesco could be supportive of the claim that its logistics management strategy works to its competitive advantage. Specifically, facts from their corporate website identify a complex range of relationships starting “from individual farmers and growers through to processors, manufacturers, and distributors”. Partnership is essential particularly to the key players of the supply chain process. Tesco abides to the UK Government’s statutory Supplier Code of Practice, holds strict implementation on ethical trading and commercial policies, and conducts ethical trading training to all commercial staff involved with the buying for the UK.
Meanwhile, logistics plays major strategic roles in organizational operations as well as the environment of the business. Over a number of years, it has been a fundamental component in coming up with a competitive business strategy resulting to a similarly competitive profit edge (Whittington 2001; Heskett 1977). According to Vernon (2002), logistics is a major management task involving the most effective management of the flow of goods and services from origin to the point of delivery particularly to the purchasing outlets and the consumers. Specifically, it consist of a systematic process from inventory holding to product distribution including the aspects of the financial and human resource, which are considered as among the building block of a successfully functioning business (Vernon 2002). Earlier researches found out that increased attention on logistics and its management can contribute to the improvement of an organization’s competitive position particularly among those that operate globally (e.g. Andraski and Novack 1996; Morash et al. 1996; Fawcett and Gloss 1993) like Tesco having stores in other European and Asian countries. In relation to competitive advantage, logistics provide competence in the excellent delivery of products and services through speed, reliability, responsiveness, and low cost distribution (Morash et al. 1996). While organizations exhaust research and development (R&D) efforts in attempting to look over strategic issues such as a close scrutiny and tightening of operational concerns particularly logistics (Vernon 2002), the integration into its operations or even into overall corporate strategy offers considerable impact on customer value as compare to any other process related to operations (Andraski and Novack 1996). Williams and colleagues (1997) identify the benefits of integrating logistics into overall corporate strategy. According to them, the usual costs of operations are reduced, opportunity for new markets is present, customer service is enhanced, and competitive advantage is eventually established and sustained if logistics works in harmony with the overall business strategy.
Furthermore, the fundamental role of logistics in both organizational strategy and organizational environment (Kohn and McGinnis 1997) supports the marketing and customer service relationship strategies implemented by managers (Sautter et al. 1999). It must be understood that logistics is a supportive and complementary element to the marketing function of any organization (Sauter et al. 1999; Lambert and Stock 1993; Rinehart et al. 1989). For example, some businesses like Wal-Mart, another retail grocery business and Levi Strauss, a clothing business pay special amount of attention on their distinctive logistics capabilities with the purpose of maintaining their marketing and customer service aspects as a part of their competitive advantage (Lynch et al. 2000). In terms of marketing particularly on electronic retailing or e-tailing that is also being used by Tesco, the effective in application of logistics is considered as a competitive weapon to survive the unstable environment of online marketing (Dvorak and Van Paasschen 1996). E-tailing or online grocery retailing still uses the standard functions of logistics with the addition of the convenience of the Internet in terms of automation of many – if not all – processes and operations and creates a wide-reaching, 24-hour/day presence at a very reasonably low cost (Guttman 2002; Castells 2001). Logistics in online grocery retailing is a tool for increased efficiency and convenience (Dennis et al. 2004). It augmented the growth of retailer power to control their supply chains (Boyer and Hult 2005). The physical involvement of retailers is reduced but the supply chain management become more effective with the use of modernized equipment for operations (supplier and retailer linked) (Dennis et al. 2004). In customer service, the Internet contains profound effect on strategic thinking because of its expected ability to transform organizational cost structures and modify communication patterns with customers (Boudreau and Watson 2006). In general, logistics plays a strategic role in many companies (Mentzer et al. 2001; Mentzer and Williams 2001). Marketing and logistics must work in tandem for the customer to be satisfied particularly in both physical service factors (logistics) and intangible service factors (marketing). On the case of Tesco, there is an opportunity to increase the numbers and similarly strengthen relationships with the existing base of suppliers. There is also a chance to look on the possibility of using cost leadership strategy in product and market development. Tesco needs to come up with sound decision making strategies when it comes to managing logistics.
SWOT Analysis
SWOT stands for Strengths, Weaknesses, Opportunities, and Threats and among the most popular in understanding the overall strategic position of the organization as well as its affecting environment. In common cases, SWOT is employed as source of important information considered in creating competitive marketing strategies. SWOT also points out internal and external issues in the organizational environment. In the supply chain process, SWOT analysis functions in identifying strengths and opportunities as well as weaknesses and threats that will lead to possible advantages in relation to producers and suppliers of products and services along with extending the supply chain. For example, Tesco is considered to have an outstanding strength in its internet-based marketing. The internet could also be used in extending the supply chain because it integrates various organizational functions such as sales, operations, and logistics (Boyer and Hult 2005) among others. While Tesco intends to open up several store outlets in other parts of the world, the internet as a logistics infrastructure will bring opportunities to increase productivity while saving operational costs. The internet can bring advantages if used in revising existing supply chain strategies. The weakness of the internet as logistics infrastructure is privacy and security issues in acquiring products and services or even in marketing them to the consumers. On the other hand, the threat of the internet as a logistics infrastructure is seen on the inability of Tesco to deal with the fast technological changes that will affect not only its operations but also the suppliers, producers, and customers. The SWOT Analysis is to be used by Tesco as an initial strategic approach in looking on the significant issues about the organization and its operations particularly on the internal and external environments. The information that will be collected in the analysis will serve as the basis in coming up with strategic decisions and other organizational actions predominantly on logistics.
PEST Analysis
The PEST Analysis is concerned with the environmental influences of the business specifically on Political, Economic, Social, and Technological aspects. On other instances, there are two added elements – Legal and Environmental, thus making it PESTEL. However, these two added elements are argued to be included in the others. This type of strategic approach is directed in understanding the risk of uncertainty and the future operations of the business. It also prompts the business on how to respond on certain environmental considerations. The application of PEST Analysis is seen on the context of strategic planning and decision making. Like SWOT Analysis, it provides important and variety of information that are deemed contributory or affecting the organizational operations and other functions. On the case of Tesco and its logistics management, PEST Analysis will provide the needed requirements of the organization in terms of the procurement and distribution of products and services from various producers and suppliers in both local and global perspectives. The anticipated expansion of Tesco to various locations worldwide necessitates the understanding of these environmental factors so as to minimize problems in the arrival and distribution of products and services.
In application to the logistics of Tesco, political factors are seen on its compliance with the existing government regulations and relevant legislations. Most Tesco store outlets within UK operate under specific national legislative and entrepreneurial provisions and same us true to other store outlets outside UK. The intended business expansion on other locations, however, is crucial provided that the senior management must be able to evaluate national environment particularly on the case of political systems, security, and stability (e.g. China). For example, Tesco cannot easily open up a store in countries that are prone with political risks resulting to economic problems and uncertainty. It is because the political environment of any business plays a significant function particularly in the process of production and generation of revenues. In logistics, Tesco needs to explore potential suppliers in a given country as well as the supply chain strategies that could be adopted from the UK branches.
Economic force is about the essential issues that affect the business in the process of revenue-making. Specifically, it reflects on the economic conditions of the immediate business environment are crucial to the financial performance of the organization. On the case of Tesco, economic trends influence its operations. The currency and inflation rates as well as consumer purchasing power are among the trends that the senior management must anticipate and appropriately provide remedies. This applies to Tesco’s current markets as well as the intended openings of store outlets in other parts of the world. In logistics, economic issues are seen on the case of operating costs based on production, procurement, distribution, and marketing of products and services.
Social considerations are related on the aspects that describe the society, people, culture, and circumstances surrounding the organization and might create significant impacts on its operations. For example, Tesco are able to easily relate on environments that are similar to the UK, wherein social conditions and people and their cultures do not differ considerably. It must be considered that some Western brands are prohibited on some regions (e.g. Japan). The social environment is where the business is bound for. Logistics management on Tesco’s case is based on the need of the existing market.
Technology for Tesco is an indispensable factor in its overall operations. The advancements in technology benefits Tesco especially because Tesco maintains a strong online customer base. Technological innovations create new market opportunities for Tesco to strengthen their current competitive advantage. Technology and innovations are synonymous. This is the reason why Tesco invests on technological infrastructures to stay innovative in all the ways they do business. In the logistics context, Tesco uses the internet in distributing products to the consumers. There are also online operations that deal with suppliers and producers. However, these are intrinsic to the organization’s own operational strategy.
All in all, PEST Analysis is same as SWOT Analysis. In terms of logistics, PEST Analysis provides a framework on the environmental forces that will affect the strategic planning and decision making processes. The sets of information that are collected in the analysis are used in combating uncertainty and other issues especially on foreign operational markets.
Porter’s 5 Forces
Porter’s Five Forces Model is composed of competitive forces namely: the threat of entry of new competitors (new entrants); the threat of substitutes; the bargaining power of buyers; the bargaining power of suppliers; and the degree of rivalry between existing competitors. This model is used in understanding the competitiveness of the business within its niche industry as compared to its competitors or even other industries. It is commonly acknowledge that the analysis using the 5 Forces model determine the competitive position or power in a certain situation. On the case of Tesco’s logistics, this model is deemed essential in dealing with the stiff competition in the retail industry not only in UK but the world. It also deals with the issues in supply chains particularly on the suppliers who are in-charged in production and increase of product/service line. Although there are around a hundred suppliers, Tesco must establish a high quality supply chain to prevent scarcity and problems in its production. There are many businesses that are similar to Tesco so most suppliers will not hesitate to withdraw their products or services. Tesco is expected to maintain alignment with its logistics capabilities and work more closely with vendors for the improvement of inventory flow. Tesco can find other suppliers that can provide its supply needs.
Value Chain Management Analysis
Understanding the linkages between activities can lead to more optimal make–or–buy decisions that can result in either a cost advantage or a differentiation advantage. The goal of these activities is to create value that exceeds the cost of providing the product or service, thus generating a profit (Del Vecchio 2000). In the case of Tesco, the entire operation of the business should be examined and evaluated in relation to the current trends in the UK as well as global retail grocery market. According to Gurdjian and group (2000), it is important to understand local market conditions especially consumer behavior, competitive environments, management styles, and legal regulations because there are different variations across Europe and also globally. Considering Tesco operates in other European countries and Asian regions, understanding contributing factors help in determining the service delivery processes that strengthen as well as weaken the entire business operations. This will result to managerial options to eliminate the liabilities that detract the business or the need to developed and intensify some aspects of the operations.
The Analysis points out on its primary activities particularly of inbound and outbound logistics. In inbound logistics including material handling, warehousing, and inventory control and outbound logistics including collecting, storing, and distributing products to customers, Tesco uses considerable amount of financial resources to the total cost to produce some goods and services. Achieving competitive advantage through logistics and its effective management creates value when integrated with cost leadership business level strategy rather than on the case of differentiation business level strategy (Lynch et al. 2000). To do this, Tesco must be able to come up with valuable ways to reduce costs particularly on primary activities like inbound and outbound logistics.
Superior effectiveness of the computer-controlled logistics schemes is seen in Tesco (Fernie and McKinnon 2003). In terms of its e-tailing as key marketing and sales activity, the process of placing grocery orders over the internet that utilise highly automated centralized warehouses and computerized logistics structures is more efficient as to compare with groceries in the supermarket. On this case, Tesco should be able to establish contact to prospective customer and achieve an exchange of merchandise for payments not always requiring a visit to a physical store (Dennis et al. 2004). Some retailers saved a significant amount of their resources in operations “by replacing electronic-data-interchange (EDI) tools with Internet-based ones that facilitate product comparisons, streamline logistics, and help business-to-business vendors” (Calkins et al. 2000, 140). Tesco’s challenge is to look over the existing strategies in e-tailing in accordance to the varying trends in online retailing, consumer buying behaviors, marketing communications, needs and demands, and so on. In connection, implementing marketing strategies requires the need for continuing optimization or the ability to assess a myriad of possibilities in order to find the best one or near best one (Hoctor and Thierauf 2003). Strategies must be evaluated and improved by integrating other elements of marketing and management. Tesco must reach out to a broader target market and must project an image relevant to every members of the society. Its corporate social responsibility must be defined.
Meanwhile, the service delivery is an interactive and dynamic process that from the consumer’s point of view is much more than a passive exchange of money for a particular service. Tesco needs to strengthen its relationship with suppliers and increase market share based on the characteristics of services (e.g., intangibility, heterogeneity, simultaneity, and perishability) (Thompson and Strickland 2003). This effort will result to parallel business interests that will contribute to the beneficial effects to Tesco and its management as well as the suppliers’ business objectives. Contract agreements and other business transactions should present advantages and benefits for both parties. Efficient delivery of products and services through premeditated and tactical supply chain management initiatives should be prioritized.
In support activities, Tesco’s procurement process in unquestionable regardless of the criticism pertaining to monopoly and labor issues. Tesco maintains outstanding relationship to around a hundred producers and suppliers. On the case of management, Tesco’s management is prompted to take means based on current market conditions implied in research and development (R&D). Goal-setting is sought because there is a need to identify the key stakeholders and their priorities, understand and incorporate their perspectives to the future plans of the business. The conflicting interests of various stakeholders are perceived to be barriers for effectiveness and among the most primary management issue. On this case, Tesco should be able to unite stakeholders’ and organization’s interests and wellbeing by having a strong will of central leadership and administration that is supplemental to the overall mechanisms in the workforce.
The management of human resources is controversial. There are criticisms that are directed on Tesco on how they treat their employees. On this case, Tesco should cultivate and promote development on the needs of the employees provided that they are among the most essential assets of the organization. Financial assistance on human resources particularly to knowledgeable and skilled individuals should be accorded in order to improve the overall business operation as well as the engineering, monitoring, and control aspects of the business. Today, the challenge for every company is to explore the options and take advantage of the opportunities while taking caution in managing the risks (Macmenamin 1999). Tesco, with the recommendation of shifting to cost leadership business level strategy, needs to keep its operational expenses within a specified budget allocation in order to devote the necessary financial resources to both exploration and marketing.
Lastly, Tesco must be able to recognize technological changes and infrastructure particularly on its e-tailing business. Aside from Tesco’s use of internet as major technological infrastructure, changes are to be anticipated or the management should be able to deal with the rapid changes in technologies. Tesco is required to improve technological infrastructures through innovations to increase efficiency as well as quality of the products and services. This includes investments on machineries and equipment that will necessitate the increased and efficient operation of the organization’s management system particularly in logistics and its management. Technology management that is rooted on the idea of effective application of technology to create maximum profitability and performance should be perfected. It is necessary for Tesco to extend its technology management not only on the aspect of technology but also on the role of human labor force and their intervention and most especially in logistics context. All in all, Tesco’s senior executives who think about how to establish and sustain competitive advantage using logistics strategy should consider how to tailor their own logistics. To do so, they will need a sound understanding of the fundamental principles of good logistics as well as exploring new logistics capabilities.
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