Unit 32 Business Strategy Assignment solution
Report on Business Strategy of Tesco
1. Part A.. 3
1.1 Task 1. 3
1.1.1 PESTLE Analysis. 3
1.1.2 SWOT Analysis. 5
1.2 Task 2. 6
1.2.1 VRIO Model 7
1.2.2 McKinsey 7S Model 8
2. Part B.. 9
2.1 Task 3. 9
2.1.1 Porter’s Five Forces Analysis. 9
2.2 Task 4. 11
2.2.1 Bowman’s Strategic Clock. 11
2.2.2 Porter’s Generic Strategies. 11
2.2.3 Strategic Management Plan. 12
Business organizations in order to be competitive in the market make use of strategic management which is a continuous process of creation, implementation, and evaluation of decisions that enable organizations to take strategic decisions. Strategic management acts as the foundation of the major goals and objectives which are formulated by the top management of the companies (Fleisher and Bensoussan 2015). It considers the available resources as well as the internal and external environments to develop policies and procedures to achieve strategic objectives.
The below discussion is presented in the form of a report in which a strategic management plan has been devised by considering the internal and external environmental and competitive analysis in the form of SWOT analysis, PESTLE analysis, McKinsey 7S model, VRIO framework. Porter’s five forces along with Bowman’s clock strategies. The entire discussion is focussed on the UK based multinational merchandise and grocery retailer, Tesco. It is headquartered in England and was founded by Jack Cohen. The product range of the Company includes supermarkets, convenience shops, hypermarket and superstore.
1. Part A
1.1 Mission, vision, objectives and core competencies of organization
Strategic directions and tactical actions undertaken by an organization are highly dependent on the environment in which it operates. Considering the environment in which business organisations operate, it is seen that there are two types of environment- micro and macro. Micro environment is the nearby environment in which a firm operates whereas, the macro environment is the general environment that can affect any firm and industry. With regards to the macro environment, PESTLE analysis is the most useful analysis that helps in studying factors like political, economic, social, technical, environmental, and social affecting the environment. Below is the PESTLE analysis of Tesco.
1.1.1 PESTLE Analysis
Political– One of the major political changes that have been initiated by the government of the UK is the new tax measure in the year 2011. The government increased the VAT rate to 20% with an intent to increase government revenue. However, this has resulted into lower customer spending thus affecting the profits (Feys and Probert 2015). The government has also proposed a fat tax which controls obesity and the problems associated with it. This has also adversely affected the sales of Tesco as a result of which the Company launched a brand new healthy food range.
Economic factors– With regards to economic condition, it is seen that the country was a victim of the financial crisis. Despite the financial crisis, the economy regained its economic growth rate and the GDP rose 2.7% higher. This growth in the economy is a positive sign for the Company as the growth in the supermarket industry.
Social factors– These are the factors which are related to the society. With regard to the macro-environment, it is seen that the aging population is increasing with an increase in the life expectancy of people. This has lead to the shift in the tastes of the aging population which are more prone to online shopping nowadays due to mobility issues. Tesco provides its products through an online platform (Newton 2014). Also, the elderly people having high income are more in favor of online shopping as compared to the middle class and poor. In spite of this favorable social factor, the Company has faced accusation of not providing quality products after the incidence of horsemeat scandal. This affected the perception of the customers.
Technological factors– Technology plays an important role in the success of an organisation. Technological advancements have sprung up in the business environment which provides opportunities to business organisations. Tesco has made use of mobile technology which has increased the distribution services of the Company which provided the customers an opportunity to select their preferred wine (Barney 2017). Apart from this, disruptive technology has entered the market which is an innovative technology. The growing popularity of this technology is an important consideration for Tesco as in changing times, customers would value disruptive technology.
Legal factors- The Company is adversely affected by the common agricultural policy of the UK in which direct subsidies are not revisited. Thus, significant fines can be imposed on the Company for forcing the agricultural suppliers to sell at lower prices.
Environmental factors- In a recent press release, it has been identified that the Arctic ice is melting which is causing a major problem in the environment. Tesco has realized this and thus, has initiated a new program that emphasizes the consumption of energy and utilization of greenhouse gas. By studying all the factors affecting macro environment, it is seen that the political factor of increasing the VAT rate has affected the Company which needs to be fixed in order to increase sales. Considering the social and economic factors, it is seen that these factors are favorable as the economy is reviving and the number of elderly people is increasing which in turn is likely to enhance company sales (Bryson 2018). Technological and environmental factors are the important considerations which the Company needs to consider as they affect the business to a large extent.
1.2 Factors that have been considering while formulating strategy
SWOT analysis is another tool majorly used in all organizations to study the internal environment in which organizations operate. Below is the SWOT analysis of Tesco.
Wide customer base- The Company serves a wide range of customers including equipment brokers, drilling contractors, homemakers as well as oil and gas companies. This is the major strength for the Company as it is not dependent on a single customer segment (Bull et al. 2016).
Licensing agreements- The Company holds various patents and licenses for developed technologies which is a major strength as the technology cannot be easily imitated. Also, a number of companies are attracted to work with projects because of a strong portfolio of patented technologies.
Wide product portfolio- Tesco specializes in a number of products and services thus, providing a wide customer segment.
Concentrated operations- The operations of the Company are concentrated as major revenues are contributed by limited places like Canada, the UK, Mexico, and the US.
Controversies- Tesco has been involved in a number of controversies and scandals like defending for infringement claims and horsemeat scandal wherein horse-related puns were identified in teh burgers offered by the Company (Carraresi et al. 2016).
High growth in the market- Tesco is provided with the opportunity of increasing the market due to the top drive market in the next five years.
Acquisitions- The Company has the opportunity to enhance its process by acquiring certain processes and companies in the near future.
Risk in the oil and gas industry- There is a high risk of damages caused by operations of the Company such as exploration and production applications.
Through the SWOT analysis, it is seen that Tesco is characterized by a number of strengths which has made it a leading company in the sector. The weightage of strengths in comparison to weaknesses is more; however, the Company has to fix issues related to its public image. It is offered with an opportunity of acquisitions which is likely to help the business in future (Bull et al. 2016).
To achieve this criterion, the macro environment discussed through PESTLE analysis is critically evaluated considering the favorable as well as unfavorable factors that affect the strategic management decisions of Tesco.
To achieve distinction criterion, the information derived from the environmental and competitive analysis of PESTLE and SWOT are critically interpreted to produce strategic directions to the Company.
1.3 Effectiveness of techniques used for developing strategic plans
In strategic management decisions, analysis of the internal environment and the organizational capabilities becomes an important step as it is the organisation which has to compete in the market to strive for excellence. Every organization is characterized by strategic capabilities which are the capacities of businesses to survive and deliver value to the customers which are the prime aim of businesses. In other words, the strategic capability of the business is a set of resources and skills used by companies to create long term competitive advantage. To understand the strategic capability of Tesco following the VRIO framework has been discussed to identify whether the capabilities or resources are valuable, rare, costly to imitate, and organized to capture value.
2.1 Strategic positioning and organizational audit
Value– The resources of the Company add value to the firm by exploiting opportunities and defend against threats. The Company has provided 24-hour stores and online shopping experience to customers which have increased the perceived value for its customers. Apart from this, the cash flow position and balance sheet have also been showing positive trends. Thus, the resources have added value to the Company (Min et al. 2016).
Rare- The resources which are rare are acquired by very few companies. The capabilities of Tesco are rare and thus, competitive advantage is granted. Considering the other competitors, it is seen that very less grocery stores have come up with the idea of online platform to provide products and services. However, leading competitors like Sainsbury and Waitrose already have their online presence in the market. Apart from that, the Company has been able to maintain positive cash balance which the other competitors were unable to.
Inimitability-The capabilities of Tesco with regards to imitation are not so effective as it is very easy to create an online presence through social networking sites. However, considering the efficient human resources of the Company, the factor of social complexity with regards to company’s culture makes it difficult for other companies to imitate (Santos and Morris 2017).
Organization- Organisation to capture the value is the ability of the form to confer advantage. The management systems and processes of the Company along with culture has been able to realize the potential of the value, rareness as well as imitability of the resources.
Thus, it can be analyzed that the VRIO model has been useful in evaluating the strong points as well as weak points of the organization. For instance, the resources of Tesco are rare and valuable and at the same time they are easily imitable (Steger 2015).
2.3 Significance of stakeholder analysis for developing strategy
With regards to internal environment and capabilities, the McKinsey 7S model is also used. According to this model, the connection between different business elements is derived. There are a total of 7S which are categorised into two groups- hard and soft elements. Hard elements comprise of strategy, system, and structure, whereas, soft elements are shared values, skills, staff, and style. Below is the model of Tesco.
Strategy- Tesco pursued cost leadership strategy by minimizing its capital expenditure and replaced the benefit of pension schemes for all the employees with an aim to reduce cost.
System- Tesco is highly dependent on a wide range of systems which sustains its business operations. A new performance evaluation system was followed by the business as against Steering Wheel system in which 40 different measures were used which made it complicated and difficult to understand (Ravanfar 2015).
Structure- The organizational structure of Tesco was simplified by eliminating the roles of deputy store managers.
2.4 New strategy for Samsung
Shared values- The norms and standards have been revised by the Company to include values like discipline, client centricity, innovation, integrity, and compliance which laid down its foundation.
Skills- Regular training and development opportunities are provided by the Company to enhance the ability of the employees to perform well.
Staff- Various batches of fresh graduates have been recruited to cater to the growing needs of the Company. Moreover, efficient reward system is provided to train and reward the staff (Steger 2015).
Style- Democratic leadership style is used by the Company to manage the employees. However, the leadership style is a bit laid back as the managers have lost control of the employees.
Considering this model, it is seen that the internal strengths and capabilities of the Company have been analyzed. Tesco has been able to draw new strategies and systems which have helped the Company in identifying the internal capabilities and resources (Steger 2015).
Merit criterion is achieved by critically analyzing the internal environment through the VRIO model and McKinsey 7S model to assess the strengths and weaknesses of the internal environment and capabilities of the resources of Tesco.
To meet this criterion, the information derived from the McKinsey 7S model and VRIO network has been critically interpreted and analyzed to study the internal environment of Tesco. This helps in formulation of strategic tactics and directions which is likely to help the business in the future.
2. PART B
2.1 Task 3
In order to study the competitiveness of the Company, Porter’s five forces model helps in analyzing the competitive edge provided by the Company to the competitors. Below is the analysis of Tesco:
2.1.1 Porter’s Five Forces Analysis
Bargaining power of buyers- The bargaining power of the buyers is high. Buyers are provided with similar products and thus, the cost of change is very low and the buyers can easily shift to another company. All the companies in retail industry provide low prices and therefore, the bargaining power of buyers is high.
Bargaining power of suppliers– With regards to bargaining power of suppliers, it is seen that it is quite low in the case of Tesco. The position of Tesco is strong as the suppliers fear losing commercial contracts with big supermarkets. The negotiations of suppliers are positive which helps the Company in obtaining low prices (Barney 2017).
Threat of substitutes– Considering this factor, it is seen that Tesco is not so competitive in the supermarket industry. Tesco is characterized by the threat from small department stores which can provide similar products at cheaper prices. In the retail industry, products offered are the same and thus, the threat of substitutes is high.
Competitive Rivalry– The major competitors of Tesco are Sainsbury and Morrison. A high degree of competition is provided by these companies and thus, competitive rivalry is high for Tesco.
The threat of new entrants– Considering this particular force, the retail industry is characterized by very few entry barriers. However, despite the high threat of new entrants, Tesco is able to maintain a low level of threat for new entrants as the market share and brand value of the Company is high. Thus, the threat of new entrants is not likely to impact Tesco in near future (Cohen and Olsen 2015).
On analyzing the competitiveness by Porters’ five forces model, it is seen that the high bargaining power of buyers hampers the competitive advantage of the Company. The buyers are able to switch to other products which are likely to cause a problem in providing a competitive edge to the competitors. Thus, the Company can make use of strategy of increasing the online presence over social media sites like Facebook and Twitter to provide a different shopping experience to the customers. This would help the Company to retain its buyers so that the bargaining power of the buyers is reduced, thus, improving the competitive advantage. Considering the threat of substitutes, it has been observed that Tesco is characterized by a high threat of substitutes in which small departmental stores are likely to imitate the product and service offerings of Tesco. It is seen that by increasing the quality of the products, Tesco can ensure a competitive advantage to its competitors which is not easily imitable and replaced (Dobbs 2014).
To meet this merit criterion, it is seen appropriate strategies have been devised in order to provide recommendations to the Company to improve its competitive advantage with respect to the outcomes of the evaluation of Porter’s five forces model.
For this criterion, the data relating to environmental and competitive analysis such as Porter’s five forces is critically analyzed which is useful in devising appropriate strategies.
2.2 Task 4
To devise a strategic plan, it is very important to analyze the environment and competition in which the firm operates, therefore, a detailed study of Tesco is conducted through Bowman’s strategic clock and Porter’s generic strategies.
2.2.1 Bowman’s Strategic Clock
Bowman’s strategic clock is used to achieve a strong competitive position. There are a total of eight potential positions that can be adopted. They are-
Position 1 is in which low price is charged along with low value provided to customers. Position 2 is in which low price is charged. The third position is the hybrid stage which is characterized by low price and product differentiation. The fourth position is differentiation in which products are differentiated. Focussed differentiation is the fifth position in which high price is charged by high value (Hao and Song 2016). Risky high margins are the sixth position in which high price is charged and not much value is provided to the customers. Monopoly pricing is the seventh position in which companies have their monopolies. The last position is a loss of market share.
Keeping into account all the eight strategic moves, Tesco should consider hybrid strategy which provides the benefit to customers with regards to low price as well as product differentiation which in turn provides the advantage of competitive positioning to the Company. The customers are offered with added value by providing differentiation of products such as the introduction of nutritional products as well as products relating to the convenience shops. All these products are offered at low prices (Bolden 2016).
2.2.2 Porter’s Generic Strategies
Apart from Bowman’s clock strategy, generic strategies provided by Porter are also useful in analyzing competitive positioning. There are three types of strategies which are cost leadership, differentiation and focus strategies. Cost leadership strategy is the one in which profits are increased by developing the edge which increases the sales of the Company and takes it away from the competitors (Rothaermel 2015). Tesco makes use of this strategy by increasing competition in the retail industry by reducing its cost which impacts the price of the products and services offered. Through this, market share can be increased by charging lower prices. Considering another strategy is the differentiation strategy in which products and services are made attractive as compared to the competitors. Tesco can differentiate its products by aligning the strategy with new product development processes. The third strategy is the focus strategy in which particular niche markets are concentrated (Hill, Jones, and Schilling 2014). For this, Tesco needs to understand the dynamics of the markets which tends to build strong brand loyalty among their customers to contribute to reducing costs and increasing differentiation. By considering all the three strategies, it is seen that the best strategy for Tesco is the cost leadership strategy in which the cost of the products and services is to be reduced.
By taking into account all the environmental and competitive analyses discussed in the previous tasks, the following strategic management plan has been developed.
2.2.3 Strategic Management Plan
- To increase sales by 2.5% at the end of mid-quarter of 2019
- To increase customer value and enhance customer base by 2% in the first quarter of 2019
Following business strategies are likely to help in achieving the above mentioned strategic objectives:
- The prices of the products can be reduced by cutting down the cost of the manufacturing of goods and services. High customer traffic is guaranteed through this approach as the retail sector is characterized by a high level of competition from small departmental stores and Sainsbury as discussed in the above competitive analysis (Hao and Song 2016).
- Efficient technology can be used as the PESTLE analysis suggests that the Company can suffer losses if advanced technology is not used. To bring the cost down, efficient technology and logistics need to be used to follow the cost leadership strategy.
- Customer value can be increased by making use of online platforms to market differentiated products and services. It is the need of the hour to diversify the products and services like introducing nutritional foods and many more as per the third stage of Bowman’s strategic model.
Product Mix- The product must include new ranges of products in supermarket, hypermarket and convenience stores as per environmental analysis.
Place mix- A number of distributors can be used in different territories all over the world.
Price Mix- Economy pricing would be used to lower down the prices so as to increase customer base and market share as identified in the internal and external environment analysis (Santos and Morris 2017).
Promotion mix- To increase the customer’s value, customers need to be informed about the new products and services through various promotion strategies, especially social networking sites.
For attaining this criterion, a strategic management plan has been devised in order to formulate strategies that can be used by the Company to increase its competitive position in the market.
All the information which has been used to devise strategic plan such as in Bowman’s strategic clock and Porter’s generic strategies are critically interpreted.
Through this discussion, it is concluded that the retail industry is characterized by tough competition which is the main reason responsible for effective strategic directions and planning of Tesco. The PESTLE analysis concludes that technological and environmental factors are to be considered by the Company as the pace of technical and environmental concerns are on the rise. The social factor is in favor of the Company. As per SWOT analysis, the wide product portfolio and enhanced customer base are the strengths and public image is the weakness and high growth in the market is the opportunities. Considering the opportunities to increase market share, a strategic management plan has been devised which focuses on cost leadership strategy which is to reduce cost of the products and services which in turn results in lowering of the prices. Through this strategy, the Company would be able to increase its market value. The plan has been made by considering the hybrid strategy of Bowman’s model which emphasizes on product diversification. The strategic capabilities of the organisation are also discussed with respect to Tesco.
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