Tesco strategic plan by Aurélia Moretto

Miss Moretto AurĂŠlia

Strategic Management BU3004C

STRATEGIC PLAN

Tutor: G.Panagioutou

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Contents

Report: Executive summary

p.3

Key issues

p.3

Vision, mission&corporate objectives

p.4

Situational analysis

p.4

Strategy

p.10

Marketing objectives

p.12

Marketing strategy

p.12

Appendix Industry analysis.

p.15

Market place analysis.

p.16

Micro-environmental analysis.

p.17

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STRATEGIC PLAN I.

Executive summary. Tesco is the leader of the retail industry in the UK and the third in the world behind

Wal-Mart and Carrefour. To continue its expansion strategy, the company had to develop new products on its domestic market first and then at an international level because of the saturation of the British market. After successful experiences in Central Europe, Turkey and Asia via acquisition of existing retailing chains or joint venture operations, Tesco wants to enter the US market while still remaining the leader in the UK. To achieve its goals, the company has to develop new strategies in order to remain competitive and to be well prepared to face its competitors. The relevant strategy to adopt on the US market is an offensive strategy, whereas it would be more adequate to adopt a defensive strategy on the UK market.

II.

Key issues. Tesco ltd is a retail company ranked 64th on the Global fortune 500, 2005 ranking,

realising more than $62,500 millions. It is the forth-bigger global retailer after Carrefour, Metro and Royal Ahold. Tesco is the first retail company in the UK –domestic market-, owning 30.6% market shares in 2006. The company is also present in European countries, especially Eastern Europe. Tesco is competing on those markets with global retail companies such as Carrefour-N°1-, Metro, Lidl&Schwartz and Auchan. After conquering Eastern Europe, Tesco has now projected to enter into the US market. The company will have to face a strong competition, as the leader over-Atlantic ocean is the giant Wal-Mart. In order to be successful, the retailer will have to focus on its strengths – strong brand identity, organisational structure, core values, and strong relationship with its suppliers…- and its opportunities on the US market – Tackle a new market segment, be aware of the environment…-. The company will have to face a huge competitiveness, which is increasing by the competitively law applied in the US market.

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III.Vision, mission and corporate objectives Tesco ltd is a generating turnover company that is looking for further global expansion. After entering into the Europe and Asia market, what the next step is going to be? A. Vision The business plans to open small convenience stores in the US, where the grocery worth on average $700 billion with an estimated growth of 40% over the next five years. Despite few of its competitors have already tried to enter into the American market – Sainsbury’s and M&S –, Tesco is the first to launch convenience stores, targeting a segment where competition is for now low. B.Mission. The corporate missions for the US market are the values that Tesco vehiculates. It is important for the company to be customer focused, environmentally oriented, convenient…. C.Corporate objectives. To reach this aim, the company plans to develop its US business through organic growth with an initial investment of £250 million a year. Based on a market research, the Tesco convenience stores will be especially adapted to the US customers.

IV.Situational analysis. In the following part, we will bring an environmental analysis, which will help us to identify the external environment of the firm – trade policy, economic trends, social trends, technologic aspect and the environmental impact – in both UK and US market. The retail industry and the market places will be also analysed. Then, the internal environment will be studied – competitors, suppliers, company’s organisation…-.

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A. Macro-economic analysis.

Political

Economical

• • • • • •

• • • • •

Sociological

• • • •

Technological

•

• Legal

• •

Ecological

• •

Tax policy Trade barriers Employment laws Trade restrictions Political stability Competition policy (UK law to increase competition in the retail industry) Devaluation of the £ and $ Liberal states Interest rates (UK: 5% / US: 2%) Inflation (US : 4,2%) Unemployment (US: 5, 1%) People worried about quality of food Look for greater prices Family Working class Use of internet : UK market = x internet users / US market = y internet users Payments methods (Tesco cards) Ban on alcohol and cigarettes (age, states) Technologic competitive advantage Environmental consciousness Recycled products

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United

Kingdom

States

+ +

B.Meso-economic analysis. During this section, we will stay focus on the industry analysis, and on the retail market analysis. This will bring us a better understanding of the retail industry and its market place within the UK and the US. 1. The industry analysis. The retail industry was born in the 60’s with the apparition of the first supermarkets in the US. Since then, in the industrialized countries, it has not stopped growing. Nowadays, concerning the UK and the US markets, the retail industry is in a saturation cycle1, where competitiveness between retail companies is very strong. Thus, to enter into a new market, such as the US for example, a company has to be enough competitive. According to the General Electric matrix (GEM), on the UK market, Tesco is in pole position, ensuring a leading competitive strength in high industry attractiveness. However, concerning the US market, Tesco ltd has to compete with the leader Wal-Mart. De ipso facto; the company has to proceed with care to tackle this new market2 On a global trend, Tesco is competing with few retailers within the UK and the US market. Those competitors are a part of Tesco’s strategic group3. This group is made according few criteria, such as product diversification and price. The UK majors Tesco’s rivals are Sainsbury’s, Asda, and Morrison’s. The American ones are the giant Wal-mart, K-mart, and the popular Target. Nevertheless, the retail industry in those two countries is threatened by the incoming of potential new entrants. To enter into the industry within the UK and the US, potential new entrants will have to face high capital requirements, high scale thresholds, strong brand identity from the existing grocery retailers (Tesco, Wal-Mart, Sainsbury’s, Target...). What is more, New companies will have to easily access to distribution channels and be able to face the technologic level of their competitors. For instance, the only potential companies to fit with the criteria, are the large companies such as Carrefour, Auchan...Break into the UK and the US markets comports a degree of risks as the markets are saturated. 1

See Industry life cycle in appendix1 p.

See General electric matrix in appendix 2 p.

See Cognitive map in appendix 3 p.

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On a general point of view, the retail industry remains attractive – especially in the US – which seems to be a favorable climate for Tesco. 2. The market place analysis. Considering the strong competitiveness between the retail companies, target the right market is a successful key for Tesco. The company has segmented the market according to social and economic factors, such as income per year, people budget expenditure, social life... Tesco is targeting essentially lower class to middle-class families, single persons, people who are according certain importance to some values – environmental issues, quality of food...- aged from zero to 99 years old. People are seeing Tesco as a family store, retailing grocery and non-food products at cheaper price than competitors do. Tesco has ensured a leadership position offering better value to its customers as well as social and environmental awareness. Its successful position makes it the first retailer in the UK and one of the first in Asia and Europe. Tesco’s branding policy is the reason for such a success. Indeed, the first of its strength is branding. Retail Company’s brand development includes pricing, share of values, differentiation and quality4. Tesco’s prices are affordable for everyone and offer the best quality. Tesco’s values are including in its brand – care of the environment and involvement in social issues. Through its social issues, Tesco is improving its quality brand by focusing on its employees and on its consumers. Thus by developing loyalty schemes, which differentiate itself from its rivals, Tesco has improved the loyalty of its customers and staff. According to the Boston Consulting Group matrix5, the three Tesco’s star sectors are the non-food sector, the food sector, and the e retailing. The last is particularly important as it generated high market shares and allows Tesco to gain competitive advantage on its competitors. This will be one of the key components of their marketing communication within the US6. Considering the analyse of its market place, the company has all the opportunities to be successful on the US market. However, an internal analysis is needed in order to identify its strength and weaknesses. 4

See Brand development in appendix 4 p.

See Boston Consulting Group matrix in appendix 5 p.

Refered to marketing strategy in Part 6 p.

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C.Micro-economic analysis. In this new section, the task is to analyse the internal environment of the firm in order to identify its strength and weaknesses. Here, the internal analysis deals with Tesco’s human resource management, Tesco’s financial analysis - through a calculation of ratios - , and Tesco’s supplier relationship analysis. 1.Human resource management. Skilled workforce is one of the Tesco’s success keys. One of Tesco’s rules is their “every little helps” scheme, in which employees have to be close to the customers in order to improve their day to day shopping. to obtain efficient employees, Tesco has applied this “every little helps” scheme through its human resource management7. To do so, the company has realised surveys to understand where and how managers will be efficient and improve their employees skills. Thus, it is a democratic managerial style, where every managers is ready to help at all level of the organisation. What is more, the firm has developed all a range of loyalty schemes to develop their staff loyalty and motivate them8. For instance, employees can have access to business’ shares thanks to the “share in success scheme”. Moreover, employees can beneficiate of discounts on all the products range of their store. Some training, development programs and promotion opportunities need to be added in the managerial strategy. Tesco’s managerial style is the main strength of the company. 2.Financial analysis. The financial analysis that follows is based on the calculation of ratios, relevant of the business’ financial activity9. The comparisons were made considering the financial results of the years 2006 and 2007. The findings are the following: - The percentage of the return on capital employed attests of the Tesco’s business performance. Between the two years the ratio indicates that the company has improved its managing performance. - During the year 2007, Tesco has increased its trading operation by 0.3% in comparison with the previous year. 7

See Core competencies and capabilities in appendix 7 p.

See McKinsey 7’s in appendix 8 p.

See Calculation of ratios in appendix 9 p.

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- The assets during this period were not intensively worked. As there is no variation between the two years, we can say that the company didn’t change its policy concerning the working of its assets. - The current ratio shows that Tesco’s current liabilities have financed an half of its current assets for the both year, especially in 2007 as the ratio has increased by 0.12. Nevertheless, the business is not considered liquid. - The low quick ratio indicates that the company is facing a risk of cash flow problems and insolvency. - This interest cover ratio indicates that the company has increased its risk to finance its debts if its profits fall. It seems that the company has to improve its financial results in order to keep a financial advantage on its competitors. 3.Supplier relationship. For a global company such as Tesco, the relation with the suppliers is a key to their “Tesco,better value”. In that case, Tesco treats its suppliers as its customers. In each geographic zone, Tesco uses the existing distribution channels with local suppliers of the firms. They buy in Asia and in Central Europe to find products that fit the local needs. The business is promoting UK suppliers on the UK market but it also has to import specific products due to an increasing specific demand within the UK (e.g. Polish products). On the US market, Tesco would have to rely on the local retailers to avoid custom fees and improve the distribution system. Tesco is developing the loyalty of its suppliers as it is important for the consumers to have access at a selection of the same products every time, especially when the products come from their country. that is the reason why, in order to still gain competitive advantage the choice of the suppliers according the country and the consumer buyer behaviour is crucial. On a general point of view, Tesco is successful with its relation with its suppliers. The company ability to deal with the distribution is as well one of the main successful key , which has helped to build the empire Tesco. As said beyond, Tesco plc is a successful retail firm, who considering the environmental factors has been able to export itself and succeed in several countries. Nowadays, the company wants to tackle a new market, the US market. The analyses beyond will help to build the strategy that Tesco has to adopt to enter into the US market successfully.

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V.Strategy. The analysis presented above make possible the development of strategies for the UK and US markets. Due to the huge differences between those two markets (different competitors and adaptation to the market environment in the US), two distinct strategies must be applied. A.Strategy to enter into the US market. To enter the US market, Tesco has done a lot of research on consumers’ habits and popular store format. A marketing team has spent more than a year in the US to study shopping habits and draw the profil of the ideal store. A dummy shop was built in order to test consumer reaction on it. The result of this survey showed that a shop based on the Tesco Express format was the most suitable for this market. Whereas Tesco’s strategy around the world is to buy existing retail chains or create joint ventures, the company choose to develop its business through organic growth (creation of the all retail chain) with an initial investment of £250 million per year. Tesco created also a new brand name for this market, Fresh & Easy, to make the consumers aware of the values and quality that Tesco brings to its customers worldwide. This strategy of organic growth allows the British firm to have a total control on the operations on the US market and avoid the failure experienced by Sainsbury and Marks & Spencer when they have chosen to enter the American market via acquisitions in 2004. The choice of entering the US market, which is the domestic market of the world leader in the retailing industry, Wal-Mart, is a bit strange when there are still many emerging market to conquer without facing such a competition. However, surveys made by Tesco indicate that this market is expected to grow at 40% over the next five years. Moreover, the US are the world’s biggest consumer economy and have the third largest population. The strategy Tesco should adopt is an offensive strategy, and more precisely a flanking attack on Wal-Mart. Indeed, the British company enter a market segment where the American retailer is weak and not yet ready to go in. This offer Fresh & Easy a time lag to develop strong partnerships with local suppliers in order to have a good bargaining power to face the future price war on this segment. Furthermore, this time lag also allows Tesco to develop its relationship with customers thanks to the quality of its products and services to customers, which made the brand known worldwide.

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The offensive strategy model, suitable for the US market isn’t really appropriate to the UK market, as Tesco is already the leader. It is better to consider a defensive strategy on this market. B.Strategy for the UK market. Tesco is the market leading food retailer in the UK since 1995. In 2006, its market share was 30.5%. The quality of its products, at the best price on the market, associated to an incredible customer relationship management policy which delivers an added value hard to imitate for its competitors are the key elements of this success. To continue develop into its saturated domestic market, Tesco has diversified its product range offering non-food products, personal finance, telecommunication (mobile phones and broadband internet access), travel agency and online grocery. The retailer as also created new store format, in order to have a better geographic cover with Convenience-Stores like Tesco Express or Tesco Metro. Big investments are made in technology development and staff training to keep the company’s competitive advantages. As the UK market is saturated and Tesco has developed almost all the possible means of diversification, the company should adopt a defensive strategy to remain the market leader. The position defence strategy seems to be the most suitable to achieve this goal. To succeed in this strategy, Tesco has to improve constantly its relationship with its suppliers and partners to remain competitive on price and be perceived as a company who cares about ethical issues in doing business. It also has to maintain a good rewarding system to ensure employees’ motivation and commitment. This is the first steps of customers’ satisfaction which lead to customer retention (The Virtuous Circle, Reichheld et al., 2000), which is the core competency of the retailer. Furthermore, Tesco has to promote more its involvements in social issues because it is perceived by the consumers as added value. In other words, Tesco has to maintain its competitive advantages by keeping its operations at the same level but also being ready to face any frontal attack from its competitors by constantly surveying the market.

VI. Marketing objectives. A.Marketing objectives for the UK market.

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On the UK market, investment in marketing will be less important than on the US market. Indeed, Tesco is already the leader on this market where its brand is well established and its values have been integrated by the consumers for ages. However, Tesco is facing a problem that all the big retailers are facing on their domestic markets: being accused to force their suppliers to reduce their prices at a critic level and causing unemployment by forcing corner shops to close because they can’t face such a competition. The marketing campaign should promote Tesco’s involvements in social issues across the country and how it contributes to the creation of jobs where the company opens stores. The campaign should also focus on the efforts made by Tesco in environmental issues, such as reduction of pollution in the logistic sector and the recycling of plastic bags. Moreover, it should emphasise the development of “fair deals” between Tesco and its suppliers. B.Marketing objectives for the US market. As Tesco is entering the US market, they have to build entirely their brand image. A strong advertising campaign should underline the high quality products sold at the best prices. Staff members should be trained in order to be aware of the customer relationship management strategy developed by the company. It could be a good idea to introduce a loyalty card scheme to make customer retention more easy for Fresh & Easy.

VII. Marketing strategy.

Price

Place

Promotion

People

UK The objective is to sell best

US Best products at the best price

quality products at a low price

to target a big part of the

(“Quality for everyone”) in order

population

to have a large audience to target Multi-format stores to have a

Convenience-Store format in

better geographic cover of the

key geographic areas

market Emphasise on the ethical matters

Big advertising campaign to

(“green”, social issues and

make the customers aware of

suppliers care) Huge efforts on internal

the company’s values Store managers from the UK

marketing (favour employee

Training sessions to develop

retention)

the organisational culture Page 12 sur - 18

Product

“Share in Success” scheme Food, non-food, personal finance,

(“Every little helps”) Food provide by local

telecom, online services

suppliers in order to meet customers needs

Major brands, specialised suppliers to ensure the quality of the products, Tesco’s own brands

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APPENDIX

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INDUSTRY ANALYSIS: Appendix 1: Industry life cycle. Appendix 2: General Electric matrix. Appendix 3: Cognitive map.

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MARKET PLACE ANALYSIS: Appendix 4: Brand developement. Appendix 5: Boston consulting map.

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MICRO- ENVIRONMENTAL ANALYSIS: Appendix 7: Hierarchy of organisational competencies&capabilities.

Appendix 8: Mc Kinsey 7â&#x20AC;&#x2122;s. Appendix 9: Calculation of financial ratios. Appenddix 10: Competitive advantage. Appendix 11: Value chain.

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Appendix 12: Porterâ&#x20AC;&#x2122;s 5 forces. Appendix 13: Key factors for success VS Critical factors for success Appendix 14: Telescopic observation.

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