This paper discusses the strategies of a U.K.’s food retailer company (Tesco)—what strategy should be implemented, what strategies work, and what can be done to strengthen its industry. One strategy was chosen in the Porter’s Generic Strategies. A feasibility, acceptability and suitability analyses were also discussed. Lastly, Tesco’s current strategies were reviewed. TASK A:
With the core purpose of “creating value for customers to earn their lifetime loyalty”, Tesco has become the number one food retailer in the United Kingdom. In 2001, Tesco has occupied 15.6% of the UK food market and became the market leader by 6%. Serving a population of 60 million, Tesco has 729 stores in the U.K., and continues to strive to improve and expand its growing services to the people.
Tesco’s share of the UK market has increased steadily since the early 1990s as a result of the customer focused strategy. Aimed for long-term growth, the strategy focuses on four elements: Core U.K. business, Non-food business, Retailing services, and International market. To continue to grow market share is Tesco’s focus while ensuring to provide exceptional value and choice for their customers. Aside from selling customers food products, Tesco also aims to improve its market share by offering non-food products which include a wide variety of electrical equipment, home entertainment, clothing, furniture, cooking tools and home furnishings. The strategy for retailing services also changes to respond to the shopping demands of the customers by providing new products and services. As the world’s largest grocery e-tailer, the website Tesco.com and Tesco Personal Finance demonstrate their ability to extend the Tesco brand to the international market. Recently, Tesco announced to launch a fixed line phone service in 2003. Tesco has also successfully opened up new growth markets in Central Europe and Asia. The proportion of total Group space outside of the UK was 45% at the end of 2003/2003. Tesco now operates in Hungary, Poland, the Czech Republic, the Slovak Republic, Thailand, South Korea, Taiwan, Republic of Ireland, and Malaysia. To sustain and strengthen Tesco’s leading industry position, Tesco should always strive to meet the growing needs of the customers. At present, health issues around the world are increasing and have become more pressing, and Tesco should continue to join the government, hospitals and institutions in promoting awareness to the people. In 2001, the Alzheimer’s Society and Alzheimer Scotland were Tesco Charities of the year. Cystic Fibrosis was the Tesco Charity of the year for 2002. In addition, Tesco is the national sponsor for Race for Life, in aid of the Imperial Cancer Research Fund where over 250,000 women have participated in raising more than £15m. In 2003, Tesco can get actively involved by sponsoring symposiums, talks, and seminars on health issues, with more focus on prevention of illnesses and other conditions. At the same time, Tesco can introduce and promote the fresh and nutritious food they can offer to the customers, and highlight the importance of good health in mind and body. Vitamins, food supplements and other medicines can be introduced as an addition to Tesco’s food and non-food lines. This strategy can greatly help millions of people by promoting awareness, and make them feel that their well-being is important and considered at Tesco’s. This, in turn, will gain their trust and lifetime loyalty, the core purposes of Tesco, while providing the essentials for good health all in one place. To sell health essential products, Tesco can apply the Cost Leadership Strategy. This is one of Porter’s Generic Strategies which targets a broad market and aims to present customers with products at a low cost for a given level of quality. The industry sells its products such as medicines either at average industry prices to earn a profit higher than that of rivals, or below the average industry prices to gain market share. In the event of a price war, the firm can maintain some profitability while the competition suffers losses. Even without a price war, as the industry matures and prices decline, the firms that can produce more cheaply will remain profitable for a longer period of time. Some of the ways that firms acquire cost advantages are by improving process efficiencies, gaining unique access to a large source of lower cost materials, making optimal outsourcing and vertical integration decisions, or avoiding some costs altogether. If competing firms are unable to lower their costs by a similar amount, the firm may be able to sustain a competitive advantage based on cost leadership. Industries that succeed in cost leadership often have internal strengths such as access to the capital required to make a significant investment in production assets. This investment represents a barrier to entry that many firms may not overcome. Another strength is the skill in designing products for efficient manufacturing, for example, having a small component count to shorten the assembly process. The industry must also have a high level of expertise in manufacturing process engineering and efficient distribution channels to achieve success. Although the low-cost strategy can lead to an increase in market share, it also presents its own risks. For example, other firms may be able to lower their costs as well. As technology improves, the competition may be able to leapfrog the production capabilities, thus eliminating the competitive advantage. Additionally, several firms following a focus strategy and targeting various narrow markets may be able to achieve an even lower cost within their segments and as a group gain significant market share. The Cost Leadership Strategy is suitable for Tesco industries since Tesco is the current leading food retailer in U.K., and has expanded in more than ten countries in Europe and Asia. With 979 stores in U.K., the market share is now over 16.5%. Using this strategy will continue to increase its market share, and maintain its top position in the industry, which ideally fits Tesco’s goals and missions. The cost leadership strategy will give more focus on the tangible costs and benefits. This will also bring value to customers and establish a competitive price position against competitors. Because Tesco is so large and successful, it can afford to cut prices to a much larger degree than many of its competitors – for example when there is a general reduction in prices of 2-3%, Tesco prices can be reduced by 4%. Tesco profits have increased every year since 1987, announcing profits of 1.07 Billion pounds in April 2001. Its enormous share of the UK food market will no doubt continue to grow using this strategy. Moreover, the Cost Leadership strategy is feasible, which means that it can be implemented successfully using Tesco’s available resources. The funds required, its sources and timing, and the product sources are sufficient to apply the strategy successfully. This strategy will also meet the expectations of the stakeholders in the company through strategic implementation which includes resource management, organizational structure, and management of change. Using Ansoff’s Matrix to achieve growth, it can be seen that Tesco has implemented various strategies over the years. Tesco has used Market Penetration by marketing existing products to existing customers. It has increased its revenue by promoting Tesco’s products. Tesco now sells approximately 40,000 food products in a superstore, as well as clothing and other non-food lines. This shows that Tesco has successfully adapted the unrelated Diversification strategy to improve its market share, by adding CDs, videos, books, wine, games and others to their product line. This strategy has greatly increased the target customers, increasing Tesco’s market share and getting it to the top of the supermarket industries in the United Kingdom. Tesco has also adapted the Market Development and Product Development strategies by marketing their existing products in a new market. This was implemented by exporting products, and by marketing it in different regions in U.K. as well as in other countries. Products were developed in Tesco by replacing or updating models such as home equipment to give the customers what they want and what they need. Tesco also developed their own-brand products, available in three levels, Value, Normal and Finest which accounts for approximately 50% of sales. TASK B:
Tesco’s current approach to the process of strategic management is a long-term strategical plan, with focus on creating value to gain the lifetime loyalty of their customers. Tesco has four parts to its strategy: to maintain a strong core UK business, to be as strong in non-food as food, to grow internationally and to move into retailing services such as on-line shopping. This strategy is delivering the fastest organic growth of any major retailer in the world, with group sales of £22.8bn ( billion) and group profit before tax of £1.07bn (.5 billion). The company operates over 900 stores in the United Kingdom, Republic of Ireland, Hungary, Poland, Czech Republic, Slovakia, Thailand, South Korea and Taiwan. It has 240,000 staff worldwide and 25million sq. ft. of sales space, of which nearly 40% is outside of the UK.
To expand its success in its food retail operations, Tesco made multi-million pound investments in food store development in low-income areas. By linking with like-minded public and private sector organizations such as local community based organizations, colleges, and chambers of commerce, the company has opened locations in economically disadvantaged areas in the U.K.
Tesco’s strategy included an upfront investment in local workforce training with a special emphasis on the long-term unemployed. To work with local labor pools, Tesco invested in the development of literacy, as well as retail skills, and adapted the corporate recruitment process to enable trainees to the transition from welfare to work without losing benefits. Jobs were offered based on aptitude, not qualifications, and everyone interested in working was given the opportunity to learn the appropriate skills. The recruitment process guaranteed locally unemployed people a job before training commenced, subject to good attendance and attainment of skills. In addition to training, Tesco also addressed problems for job seekers such as transportation and childcare. With over 1,500 jobs created for area residents, Tesco has been successful in recruiting and retaining loyal staff for its stores.
On the other hand, two core values are emphasized in Tesco’s strategy which focus on providing the needs of the customers, and create Tesco teams to serve them. The first value is to gain the trust of customers. They make the customers believe that no one tries harder for customers than the Tesco team. They understand customers better than anyone, and they look after their people so they can look after their customers. They use their strengths to deliver the best values, and strive to be energetic, innovative and be first for their customers. The second value is to strengthen the Tesco team. To work towards success is to work as a team, trusting and respecting each other. They should always strive to do their best, while supporting and sharing knowledge with each member of the team. Most importantly, the Tesco strategy encourages the team to enjoy work, to celebrate success, and to learn from experience.
Tesco has over 195,000 people committed to serve customers and with these winning core values. This has enabled Tesco to become U.K.’s largest and best value supermarket, and to have the biggest on-line supermarket offer in the world. Tesco has been innovative in developing different store formats – Extra, Superstore, Metro and Express – to meet all the different customers’ needs. Tesco has started introducing our non-food offer into existing Superstores as well as into Extra stores. In 2002, 30 Express convenience stores were opened. Customer Champions was also launched to be the friendly face of Tesco in more than 300 stores. Now there are over 800 champions who welcome customers as they enter the store and deal with any customer queries or concerns, bringing the benefit of Tesco’s customer focus and value to many more communities. This was the basis of the winning formula that is still successful today. In recent times, Tesco has not dramatically changed its approach. Tesco continues to open new stores at a steady rate – the very large Tesco Extras (where they can get space and planning permission) down to the convenience end with Metros and Expresses. Tesco has remained price competitive. At a time when there is serious price competition between the major multiples, Tesco has stayed ahead of the game. Currently there is price deflation in groceries of around 2-3%, whereas Tesco’s deflation has been nearer 4% in recent periods, showing that they are now more price competitive than they were. Retailing services are a key part of the Tesco strategy for growth. They have developed the best on-line grocery home shopping system in the world which they know can be of use to other retailers. Tesco believes that on-line grocery is a service that meets the needs of busy consumers, and hopes to gain advantage since shopping through internet is getting more popular in many countries. Tesco.com is the largest and most successful Internet-based grocery home shopping service in the world. In the UK this service is profitable, has almost 1 million registered customers, 70,000 orders per week and annualized sales running at a rate of £300m (0m). Tesco.com now operates on three continents. Tesco.com internet home shopping model was launched in the USA, with Safeway Inc., combining Tesco’s expertise in store-based home shopping with Safeway Inc’s leading presence in the American market. Customers in Portland, Oregon, were first to try the new service, followed by San Francisco. Tesco.com is also growing rapidly in the Republic of Ireland, where the service covers 70% of the population. Customers can also shop online with Tesco in South Korea, where e-homeplus service from the Homeplus store in Ansan, near Seoul was launched. All these factors have helped Tesco to maintain momentum in its share growth, which continues to increase in the short term – achieving another all time high of 24.7% in the latest quarter and exceeding 25% for the first time ever in the four weeks to June. Tesco’s main source of growth has been the increase in its customer base with nearly 41% of all households in Britain visiting their stores at least once every four weeks (representing nearly nine and a half million households), compared to just under 40% a year ago. Furthermore, these customers are now visiting Tesco’s more often – an average of 3.9 visits every 4 weeks compared to 3.8. Even if prices are falling, consumers continue to bring the same volume of goods on each shopping trip from Tesco, and Tesco continues to gain its market share. Based on the principles of better, simpler and cheaper, Tesco’s operations were improved and efficiencies were increased. A combination of new systems and new processes were implemented which help in achieving savings of over £200m a year. Tesco uses the continuous replenishment system, the world’s first store-specific merchandising system used to tailor each store range to meet the precise needs of its customers. This is operating on nearly all food and drink lines, raising availability and simplifying operations. Tesco has also established a team to increase efficiency by better managing the movement of goods between suppliers and regional distribution centers, reducing costs, miles traveled empty and lead times. Two distribution centers in U.K. were also opened, providing an 18% increase in Tesco’s capacity, and strengthening the distribution network. In addition, change programs, based on the successful UK template, were established in Central Europe and Thailand which has made operations better for customers, simpler for staff and cheaper for the business. Tesco has also offered Tesco Personal Finance (TPF), now with over 2.5 million accounts, and share of profit rising from £3 million to £20 million. With 20% of sales now originating from the internet and 80% of business coming through the stores, Tesco’s products are available where and when the customers want them. Not only does Tesco offer food and non-food products, but Motor, Home, Travel, Pet, and Life Insurances are offered as well. Underpinning Tesco’s success is excellent management and an obsession with operational efficiency and productivity gains, which the company uses to keep prices low or to improve service rather than to increase its operating margins. Its well-implemented strategies and continuous flow of innovative and new ideas strengthen its industry, as it continuously caters to the needs of the people.
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