The document provides an analysis of Tesco's strategic management through a PESTEL analysis, Porter's 5 Forces analysis, critical success factors, SWOT analysis, and value chain analysis. It examines Tesco's external environment and industry factors, identifies Tesco's critical success factors as strong branding, IT integration, and supplier management. The document also analyzes Tesco's strategic options and core competencies.

1. Strategic Management of TESCO supermarket: PESTEL analysis,
Porter's 5 Forces analysis, Critical success factors, SWOT
Analysis, VALUE CHAIN analysis, TESCO'S strategic options,
Core Competences & Cultural Web.
I INTRODUCTION
The food and drink retail sector represents the largest industry in
the UK, providing employment for over three million people in
primary production, manufacturing and retailing. In 2003 retail
accounted for 9% of gross domestic product (Datamonitor, 2003).
In recent years UK supermarkets have come under increased
scrutiny over their treatment of suppliers, particularly of own-label
products, yet the development of strategic supply networks has
been an integral part of most supermarket strategies for the past
decade.
The report below provides an insight into the supermarket
company, Tesco, with emphasis on its external environment
analysis and company's analysis of resources, competence and
culture. Two future strategic options are suggested in regards to
the resources based strategies.
1

2. Tesco is one of the largest food retailers in the world, operating
around 2,318 stores and employing over 326,000 people. It
provides online services through its subsidiary, Tesco.com. The
UK is the company's largest market, where it operates under four
banners of Extra, Superstore, Metro and Express. The company
sells almost 40,000 food products, including clothing and other
non-food lines. The company's own-label products (50 percent of
sales) are at three levels, value, normal and finest. As well as
convenience produce, many stores have gas stations, becoming
one of Britain's largest independent petrol retailers. Other retailing
services offered include Tesco Personal Finance.
2.0 INDUSTRY ANALYSIS: PESTEL FRAMEWORK
2.1 Political Factors
Operating in a globalized environment with stores around the
globe (Tesco now operates in six countries in Europe in addition to
the UK; the Republic of Ireland, Hungary, Czech Republic,
Slovakia, Turkey and Poland. It also operates in Asia: in South
Korea, Thailand, Malaysia, Japan and Taiwan), Tesco's
performance is highly influenced by the political and legislative
conditions of these countries, including the European Union (EU).
2

3. For employment legislations, the government encourages
retailers to provide a mix of job opportunities from flexible, lower-
paid and locally-based jobs to highly-skilled, higher-paid and
centrally-located jobs (Balchin, 1994). Also to meet the demand
from population categories such as students, working parents and
senior citizens. Tesco understands that retailing has a great
impact on jobs and people factors (new store developments are
often seen as destroying other jobs in the retail sector as
traditional stores go out of business or are forced to cut costs to
compete), being an inherently local and labour-intensive sector.
Tesco employs large numbers of; student, disabled and elderly
workers, often paying them lower rates. In an industry with a
typically high staff turnover, these workers offer a higher level of
loyalty and therefore represent desirable employees.
2.2 Economical Factors
Economic factors are of concern to Tesco, because they are likely
to influence demand, costs, prices and profits. One of the most
influential factors on the economy is high unemployment levels,
which decreases the effective demand for many goods, adversely
affecting the demand required to produce such goods.
3

4. These economic factors are largely outside the control of the
company, but their effects on performance and the marketing mix
can be profound. Although international business is still growing
(Appendix A), and is expected to contribute greater amounts to
Tesco's profits over the next few years, the company is still highly
dependent on the UK market. Hence, Tesco would be badly
affected by any slowdown in the UK food market and are exposed
to market concentration risks.
2.3 Social/Cultural Factors
Current trends indicate that British customers have moved
towards 'one-stop' and 'bulk' shopping, which is due to a variety of
social changes. Tesco have, therefore, increased the amount of
non-food items available for sale.
Demographic changes such as the aging population, an increase
in female workers and a decline in home meal preparation mean
that UK retailers are also focusing on added-value products and
services. In addition, the focus is now towards; the own-label
share of the business mix, the supply chain and other operational
improvements, which can drive costs out of the business. National
retailers are increasingly reticent to take on new suppliers (Clarke,
Bennison and Guy,1994; Datamonitor Report, 2003).
4

5. The type of goods and services demanded by consumers is a
function of their social conditioning and their consequent attitudes
and beliefs. Consumers are becoming more and more aware of
health issues, and their attitudes towards food are constantly
changing. One example of Tesco adapting its product mix is to
accommodate an increased demand for organic products. The
company was also the first to allow customers to pay in cheques
and cash at the checkout.
2.4 Technological Factors
Technology is a major macro-environmental variable which has
influenced the development of many of the Tesco products. The
new technologies benefit both customers and the company:
customer satisfaction rises because goods are readily available,
services can become more personalised and shopping more
convenient.The launch of the Efficient Consumer Response (ECR)
initiative provided the shift that is now apparent in the management
of food supply chains (Datamonitor Report, 2003). Tesco stores
utilise the following technologies:
• Wireless devices
• Intelligent scale
• Electronic shelf labelling
5

6. • Self check-out machine
• Radio Frequency Identification (RFID).
The adoption of Electronic Point of Sale (EPoS), Electronic Funds
Transfer Systems (EFTPoS) and electronic scanners have greatly
improved the efficiency of distribution and stocking activities, with
needs being communicated almost in real time to the supplier
(Finch, 2004).
2.5 Environmental Factors
In 2003, there has been increased pressure on many companies
and managers to acknowledge their responsibility to society, and
act in a way which benefits society overall (Lindgreen and Hingley,
2003). The major societal issue threatening food retailers has
been environmental issues, a key area for companies to act in a
socially responsible way. Hence, by recognizing this trend within
the broad ethical stance, Tesco's corporate social responsibility is
concerned with the ways in which an organization exceeds the
minimum obligations to stakeholders specified through regulation
and corporate governance. (Johnson and Scholes, 2003)
Graiser and Scott (2004) state that in 2003 the government has
intended to launch a new strategy for sustainable consumption and
6

7. production to cut waste, reduce consumption of resources and
minimise environmental damage. The latest legislation created a
new tax on advertising highly processed and fatty foods. The so-
called 'fat tax' directly affected the Tesco product ranges that have
subsequently been adapted, affecting relationships with both
suppliers and customers
2.6 Legislative Factors
Various government legislations and policies have a direct impact
on the performance of Tesco. For instance, the Food Retailing
Commission (FRC) suggested an enforceable Code of Practice
should be set up banning many of the current practices, such as
demanding payments from suppliers and changing agreed prices
retrospectively or without notice (Mintel Report, 2004). The
presence of powerful competitors with established brands creates
a threat of intense price wars and strong requirements for product
differentiation. The government's policies for monopoly controls
and reduction of buyers' power can limit entry to this sector with
such controls as license requirements and limits on access to raw
materials (Mintel Report, 2004; Myers, 2004). In order to
implement politically correct pricing policies, Tesco offers
consumers a price reduction on fuel purchases based on the
7

8. amount spent on groceries at its stores. While prices are lowered
on promoted goods, prices elsewhere in the store are raised to
compensate.
3.0 INDUSTRY ANALYSIS: PORTER'S FIVE FORCES
3.1 Threat of New Entrants
The UK grocery market is primary dominated by few competitors,
including four major brands of Tesco, Asda, Sainsbury's and
Safeway that possess a market share of 70% and small chains of
Somerfield, Waitrose and Budgens with a further 10%. Over the
last 30 years, according to Ritz (2005), the grocery market has
been transformed into the supermarket-dominated business.
Majority of large chains have built their power due to operating
efficiency, one-stop shopping and major marketing-mix
expenditure. This powerful force had a great impact on the small
traditional shops, such as butchers, bakers and etc. Hence,
nowadays it possesses a strong barrier for new companies who
desire to enter the grocery market. For instance, it becomes rather
difficult for new entrants to raise sufficient capital because of large
fixed costs and highly developed supply chains. This is also
evident in huge investments done by large chains, such as Tesco,
in advanced technology for checkouts and stock control systems
8

9. that impact new entrants and the existing ones. Other barriers
include economies of scale and differentiation (in the
provision of products or services with a higher perceived
value than the competition) achieved by Tesco and Asda seen
in their aggressive operational tactics in product
development, promotional activity and better distribution.
3.2 Bargaining Power of Suppliers
This force represents the power of suppliers that can be
influenced by major grocery chains and that fear of losing their
business to the large supermarkets. Therefore, this consolidates
further leading positions of stores like Tesco and Asda in
negotiating better promotional prices from suppliers that small
individual chains are unable to match Ritz (2005). In return, UK
based suppliers are also threatened by the growing ability of large
retailers to source their products from abroad at cheaper deals.
The relationship with sellers can have similar effects in
constraining the strategic freedom of the company and in
influencing its margins. The forces of competitive rivalry have
reduced the profit margins for supermarket chains and suppliers.
9

10. 3.3 Bargaining Power of Customers
Porter theorized that the more products that become standardized
or undifferentiated, the lower the switching cost, and hence, more
power is yielded to buyers Porter M. (1980). Tesco's famous
loyalty card - Clubcard remains the most successful customer
retention strategy that significantly increases the profitability of
Tesco's business. In meeting customer needs, customizing
service, ensure low prices, better choices, constant flow of in-store
promotions enables brands like Tesco to control and retain their
customer base. In recent years a crucial change in food retailing
has occurred due to a large demand of consumers doing the
majority of their shopping in supermarkets that shows a greater
need for supermarkets to sell non-food items. It has also provided
supermarkets with a new strategic expansion into new markets of
banking, pharmacies, etc. Consumers also have become more
aware of the issues surrounding fairer trade and the influence of
western consumers on the expectations and aspirations of Third
World producers. Ecologically benign and ethically sound
production of consumer produce such as tea, coffee and cocoa is
viable, and such products are now widely available at the majority
of large chains.
10

11. 3.4 Threat of Substitutes
General substitution is able to reduce demand for a particular
product, as there is a threat of consumers switching to the
alternatives Porter M. (1980). In the grocery industry this can be
seen in the form of product-for-product or the substitute of need
and is further weakened by new trends, such as the way small
chains of convenience stores are emerging in the industry. In this
case Tesco, Asda and Sainsbury's are trying to acquire existing
small-scale operations and opening Metro and Express stores in
local towns and city centres Ritz (2005).
3.5 Bargaining Power of Competitors
The grocery environment has seen a very significant growth in the
size and market dominance of the larger players, with greater store
size, increased retailer concentration, and the utilization of a range
of formats, which are now prominent characteristics of the sector.
As it was mentioned above, the purchasing power of the food-
retailing industry is concentrated in the hands of a relatively small
number of retail buyers. Operating in a mature, flat market where
growth is difficult (a driver of the diversification into non-food
areas), and consumers are increasingly demanding and
sophisticated, large chains as Tesco are accruing large amounts of
11

12. consumer information that can be used to communicate with the
consumer Ritz (2005). This highly competitive market has fostered
an accelerated level of development, resulting in a situation in
which UK grocery retailers have had to be innovative to maintain
and build market share. Such innovation can be seen in the
development of a range of trading formats, in response to changes
in consumer behaviour. The dominant market leaders have
responded by refocusing on price and value, whilst reinforcing the
added value elements of their service.
4.0 CRITICAL SUCCESS FACTORS
After a close evaluation of the external analysis of the grocery
industry and SWOT analysis presented in Appendix B, it is crucial
to consider internal operational effectiveness of Tesco in the form
of identifying critical success factors of the company within the
food retailing sector.
4.1 Branding and Reputation
There are companies that have always understood that they were
selling brands before the product. Tesco is a brand and also
serves as the core strategic advantage. The company was
spreading like wildfire transforming the generic into the brand-
specific, largely through carefully branded packaging and the
12

13. promotion of an “every penny counts” environment. The company
has a strong brand image, and is associated with good quality,
trustworthy goods that represent excellent value.
The product and service development processes of the company
have been substantially re-engineered, to facilitate better
management of product lifecycles and more efficient delivery of
wide ranges of products to customers. Product activity has
focused on enhancing core ranges and introducing quality
products. Tesco's innovative ways of improving the customer
shopping experience, as well as its efforts to branch out into
finance and insurance have also capitalized on strong brand
reputation.
The company is also very successful in terms of customer loyalty
due to its loyalty cards system and its general approach to
customizing services to the needs of every customer. This is truly
evident in terms of tremendous growth of on-line sales where the
company has a strong platform to further develop this revenue
stream. After considering the fact the nowadays majority of people
have less time for shopping, Tesco employed this on-line systems
and now became the biggest online supermarket.
13

14. 4.2 IT Integration
Today companies act in an increasingly dynamic and complex
environment, giving more difficulties making forecasts and
adapting themselves to the continuous changes. In order to be
able to compete in this kind of world, it is necessary to innovate at
an extraordinary speed, continuously improving the products,
services and processes. For Tesco operations have become
necessities rather than luxuries. Systems that control stock, keep
all the stock and deliveries records and analyse business
transactions are the lifelines of the company. It can also be said
that IT has risen beyond its traditional support role and taken up a
central role in business strategy formulation.
Extranet system employed by the company, enables Tesco to use
the Internet to create proprietary and customised information flows
between the company and its business partners. The system
connects business partners online behind virtual firewalls, bringing
more flexibility, scalability, extensibility and integration across the
distribution channels. Extranet also helps to extend the key
information on business partners throughout the supply chain and
facilitate collaborative relationships with partners. Market
exchanges hold the promise of extending Tesco's reach, delivering
14

15. buyers to their virtual doorstep from around the world. Other
examples of the most efficient technological advances that support
daily business operations of Tesco are wireless devices, intelligent
scale, electronic shelf labelling, self check-out machine and radio
frequency identification (RFID) systems. This technology is an
effort to maintain Tesco's ability to handle an increase in
product/service volume while controlling costs; it also enables to
be innovative and market oriented.
4.3 Supplier Management
Tesco, like many other grocery chains companies, sources its
goods from overseas manufacturers who are more competitive on
price and volumes. For many years Tesco has been supporting
British jobs and expertise by encouraging large branded suppliers
to develop exclusive production facilities. But in recent years the
company has realised the need to look abroad for products no
longer available in UK, bud tried to do it through long-established
UK partners. The foods continued to be heavily UK-based due to
the very successful range of prepared foods.
As a major retailer selling diverse product range, they work with
many different suppliers around the world, with employees from
many different cultures and ethnic groups. Therefore, it is the
15

16. company policy and company's main approach to have unique
relationships with suppliers. Applying advanced technology in its
communications and cooperation with the suppliers, the company
aims to control the work of its suppliers and heavily relies on their
efficiency. The direct suppliers use a number of sub-contracted
suppliers, selected to be best in class in their country. Tesco has
established close relationships with the contractors believing that
regular and long term orders promote the investment necessary to
improve conditions in the supply chain.
Being an international company, Tesco develops various supplier
management programmes to survey key suppliers and franchisee
satisfaction. The company also takes part in the Ethnical Trading
Initiative.
The table presented below gives a strategic comparative analysis,
comparing Tesco's successful factors discussed above with the
same factors of the main competitors' in the UK grocery industry.
The scores have been give with the scale from 0 to 5
CSF Sainsbury's Asda Safeway
Branding 5 3.5 3
IT Integration 4 3 3
16

17. Supplier 5 3 4
Management
Total 14 10.5 11
The results highlight that the main threat is potentially coming
from Sainsbury's that possesses a strong brand name and is
carefully selects and controls its suppliers.
5.0 ANALYSIS OF RESOURCES, COMPETENCE AND
CULTURE
5.1 SWOT Analysis
Tesco is the top grocer and leading retailer in its home market of
the UK. Pitched at the broad middle mass-market, it has
maintained its position through a clear focus, well targeted product
offer and excellent record both in product and format innovation.
Tesco also leads the world in online grocery retailing. In the UK
the company concentrates on running grocery superstores, c-
stores and an online service. Elsewhere the focus is usually on
hypermarkets. In 2003, the group's trading record around Europe
and UK has been outstanding.
The full SWOT analysis of Tesco is presented in Appendix B,
summarizing the key issues from the business environment and
17

18. the strategic capability, including resources and competence, of
the company that are most likely to impact on strategy
development
5.2 Core Competence
Superior performance, according to Johnson and Scholes (2003),
has to be determined by the way in which company's resources
are deployed to create competence in the organisational activities.
Core competencies are activities or processes that critically
underpin the company's competitive advantage. The primary
target for the company is to recognize that competition between
businesses is as much a race for competence as it is for market
position and market power. Therefore, the goal for Tesco
management is to focus the attention on competencies that really
affect competitive advantage.
The competence leads to levels of performance from an activity or
process that is significantly better than competitors.
Benchmarking may help in understanding performance standards
and what constitutes good or bad performance. However, it will be
crucial for Tesco to look at the generic level. Core competences
may be embedded deep in Tesco at an operational level in the
work routines. The framework developed by Prahalad and Hamel
18

19. in the 1990s suggests that over time companies may develop key
areas of expertise which are distinctive to that company and
critical to the company's long term growth (Drejer, 2000; De
Toni, and Tonchia, 2003). In the case of Tesco the areas of
expertise are most likely to develop in the critical, central
areas of the organisation where the most value is added to its
service and its delivery. For example, trust in the Tesco brand
lies at the heart of these services and in 2003 the number of retail
service accounts rose by 36%. Some 50,000 new service
accounts per week are being opened and Tesco sees these areas
as long term businesses with the potential to build real scale.
Financial services have also been launched internationally in for
example Hungary and Korea (Datamonitor Report, 2003;
MarketWatch, 2004).
Through a long period of operations, core competencies of Tesco
have to be rather fixed. Prahald's and Hamel's approach states
that core competencies should change in response to changes in
the company's environment and be flexible and evolve over time.
Therefore, Tesco needs to adapt to new rapidly changing
circumstances and opportunities, so its core competencies will
19

20. have to adapt and change. The example of this was when the
company has launched its loyalty card and went into banking.
Core competences framework suggests three factors, which can
help to identify core competences:
Provide potential access to a wide variety of markets :
enables the creation of new products and services. Fro instance,
Tesco has established a strong leadership in food retailing industry.
The core competence that enabled Tesco to enter retailing of food
and non-food products was a clear distinctive brand proposition
that had a focus on a properly define market segment. Tesco is
recognized as the company, providing the most customized and
efficient service, based on a good customer relationship
management.
Makes a significant contribution to the perceived customer
benefits of the outcome: delivers a fundamental customer
benefit. In order to identify core competences in a particular
market, the question of - why is the customer willing to pay more or
less for one product or service than another- needs to be
addressed. For example, Tesco have been very successful in
capturing the leadership of the retailing market. This shows that
Tesco designs and implements effective supply systems and
20

21. deliver an efficient "customer interface". Tesco was the first UK
grocer to launch a loyalty card and has been the most effective.
Palmer (2004) claims that until recently, it was the only grocer to
use the information to mail customers every month.
Difficult for competitors to imitate highlights the need for a core
competence to be competitively unique. This indicated the
importance of product differentiation. For example, for many years
up to 2003 (In 2003 Tesco has been recognised a leading UK food
retailer) Tesco had a very strong position within the retailing
industry. It had a different approach to the service concept,
providing good corporate reputation and introducing new premium
quality products (MarketWatch, 2004).
Applying this framework to Tesco shows that the company in order
to be successful has to base its business strategy on these
capabilities. Capabilities result from Tesco's ability to combine and
exploit these resources in uniquely different ways. In the external
environment, the intensity of competition is not completely under
the retailer's control, however, to compete effectively Tesco have to
identify its core competences and use them for company's
advantage.
21

22. 5.3 Cultural Web
Cultural web theory application (The cultural web theory is also an
effective analysis for management in order to represent the
underlying assumptions linked to political, symbolic and structural
aspect of the company) is a useful tool in considering the cultural
context for Tesco's business. Culture generally tends to consist of
layers of values, beliefs and taken for-granted actions and ways of
doing business within and outside the company. Therefore, the
concept of cultural web is the representation of these actions taken
for granted for understanding how they connect and influence the
strategy (Veliyath and Fitzgerald, 2000; Johnson and Scholes,
2003). It is also useful to understand and characterise both the
company's culture and the subcultures in adaptation of future
strategies.
Culture can be analysed through the observations of how the
company behaves, including routines, rituals, stories, structures
and systems. This presents the “clues” about the taken-for-
granted assumptions. Tesco has a very friendly and supporting
approach in the routine ways that staff at Tesco behave towards
each other, and towards those outside the company that can make
up the ways people do things. The control systems and
22

23. measurements are constantly under the management review to
monitor the efficiency of the staff and managers' decisions. The
rituals of the company's life are the special events, corporate
gatherings, which Tesco emphasises what is particularly important
and reinforce the way things are done. On-going meetings and
communication at every level of the company's hierarchy represent
a strong internal environment.
6.0 TESCO'S STRATEGIC OPTIONS: GENERIC STRATEGIES
Generic Strategies are characterised by an individual retailer's
response to the industry structure. For a giant retailer, such as
Tesco, to obtain a sustainable competitive advantage they should
follow either one of three generic strategies, developed by Porter.
23

24. The first strategy of cost leadership is one in which Tesco can
strive to have the lowest costs in the industry and offer its products
and services to a broad market at the lowest prices. This strategy
will be based on the Tesco's ability to control their operating costs
so well that they are able to price their products competitively and
be able to generate high profit margins, thus having a significant
competitive advantage. If Tesco uses another strategy of
differentiation, than it has to try to offer services and products
with unique features that customers value. Tesco will be able to
create brand loyalty for their offerings, and thus, price inelasticity
on the part of buyers. Breadth of product offerings, technology,
special features, or customer service are popular approaches to
differentiation.
The last strategy of focus can be either a cost leadership or
differentiation strategy aimed toward a narrow, focused market. In
pursuing a cost leadership strategy Tesco focuses on the creation
of internal efficiencies that will help them withstand external
pressures. Therefore, it appears reasonable to think that Tesco
will have frequent interactions with the governmental/regulatory
and supplier sectors of the environment. In accordance to this
framework, while both overall cost leadership and differentiation
24

25. strategies are aimed at the broad market, Tesco may also choose
to confine their product to specific market areas or may choose to
offer a smaller line of products to the broad market, thus pursuing
a strategy of focus or niche (Porter, 1980). In other words, Tesco
pursues a strategy of cost leadership or differentiation either in a
specific market or with specific products.
The danger some organisation face is that they try to do all three
and become what is known as stuck in the middle. In case of
Tesco it is not appropriate, as they do have a clear business
strategy with a clearly defined market segment.
7.0 MARKET OBJECTIVES AND STRATEGIES
IMPLEMENTATION
Strategy frameworks and structuring tools are key to assessing
the business situation. Risk and value trade-offs are made explicit,
leading to concrete proposals to add value and reduce risk.
Explicit plans for action, including effective planning need to be
developed by Tesco as the strategic alternative.
From the generic strategies discussed above, Tesco is likely to
employ two strategic options that are also likely to be primary
market objectives of focus on market development though
partnerships and diversification through new product development.
25

26. Market Development Strategy: Joint Developments and Strategic
Alliances
By entering new markets like China and Japan it can serve as a
key growth driver of the company's revenues and expansion
strategy. Tesco's interests in Japan are likely to continue growing
in due course, as Asian markets are showing an increase in
consumer spending and increased trend towards retailing. These
new markets are also demographically high opportunity markets.
In the case of Tesco, one of the suggested strategic options is in
international alliances with the local retailers in Asian markets. It
will be considered as a method of development and may be
formed to exploit current resources and competence. By entering
into joint ventures or partnerships, in order to gain a larger
economy of scale and larger market presence, Tesco will draw on
the extensive local knowledge and operating expertise of the
partner whilst adding its own supply chain, product development
and stores operations skills to deliver a better shopping experience
to customers. However, given the huge scale, potential and
complexities of these markets, Tesco may feel that being the first
mover is not necessarily an advantage. The success of the
partnership will be related to three main success criteria:
26

27. sustainability, acceptability and feasibility. Sustainability will be
concerned with whether a strategy addresses the circumstances in
which the company is operating. It is about the rationale of this
expansion-market development strategy. The acceptability relates
to the expected return from the strategy, the level of risk and the
likely reaction of stakeholders. Feasibility will be regarded to
whether Tesco has the resources and competence to deliver the
strategy.
Product Development: Diversification
Johnson and Scholes (2003) believe that changes in the business
environment may create demand for new products and services at
the expense of established provision. Ansoff's matrix also
suggests that if new products are developed for existing markets,
then a product development strategy has to be considered by the
management level of a company. In expanding and diversifying
Tesco's product mix, it is also crucial to implement internal
development when new products are developed. The nature and
the extent of diversification should also be considered in relation to
the rationale of the corporate strategy and the diversity of the
portfolio. By following the changing needs of the customers Tesco
27

28. can introduce new product lines. This may require more attention
to R&D, leading to additional spending.
The retailing industry is experiencing overcapacity and innovative
services and products being the major competitive advantage.
Therefore, innovation has to be a major driver for Tesco's product
development. For example, Tesco can develop a portfolio of
different store formats in the UK, each designed to provide a
different shopping experience. While the majority of Eastern
European and Far Eastern outlets are hypermarkets, Tesco can
also develop different store types in these markets as well. This
value added by the uniqueness will eventually lead Tesco to
command a premium price. The management of technological
innovation is increasingly involved in strategic decision-making.
Tesco have to exploit their internal strengths and minimise their
internal weaknesses in order to achieve sustained competitive
advantage (Although a competitive advantage is the goal
innovators want to achieve, the ability to create platform(s)
depends on how they could manage the innovation. Nevertheless,
it does not mean that the innovator has to possess all requisite
capabilities, the important thing is the ability to organise and use
the capabilities of others in order to create a business platform).
28

29. 8.0 CONCLUSION
The success of the Tesco shows how far the branding and
effective service delivery can come in moving beyond splashing
one's logo on a billboard. It had fostered powerful identities by
making their retiling concept into a virus and spending it out into
the culture via a variety of channels: cultural sponsorship, political
controversy, consumer experience and brand extensions.
In a rapidly changing business environment with a high
competitors' pressure Tesco have to adopt new expansion
strategies or diversified the existing in order to sustain its leading
market position in an already established retailing market. The
company must constantly adapt to the fast changing
circumstances. Strategy formulation should therefore be regarded
as a process of continuous learning, which includes learning about
the goals, the effect of possible actions towards these goals and
how to implement and execute these actions. The quality of a
formulated strategy and the speed of its implementation will
therefore directly depend on the quality of Tesco's cognitive and
behavioural learning processes.
In large organizations as Tesco strategy should be analysed and
implemented at various levels within the hierarchy. These different
29

30. levels of strategy should be related and mutually supporting.
Tesco's strategy at a corporate level defines the businesses in
which Tesco will compete, in a way that focuses resources to
convert distinctive competence into competitive advantage.
APPENDIX B
SWOT ANALYSIS: TESCO
Source: Mintel Report, Datamonitor Reports, Tesco Case
Studies
Strengths
Increasing market share: Tesco holds a 13% share of the UK
retail market. Its multi-format capability means that it will continue
30

31. to grow share in food, while increasing space contribution from
hypermarkets will allow it to drive a higher share in non-food.
Tesco's general growth and ROI show no sign of abating: In
the UK, Tesco's late 2002 investment into West-midlands based
convenience store group T&S was billed as the most aggressive
move into the neighborhood market by a big-name retailer so far.
The deal has turned Tesco into the country's second biggest
convenience store chain after the Co-operative Group, and the
company also plans to open up 59 new stores in the UK this year.
Tesco has grown its non-food division to the extent that its
revenues now total 23% of total group earnings. Tesco's
international business segment is growing steadily, and is
predicted to contribute nearly a quarter of group profits over the
next five years. If geographical spread continues to grow, this will
ensure Tesco's continued regional strength.
Insurance: In fiscal 2003 Tesco Personal Finance reached the
milestone of one million motor insurance policies, making it the
fastest growing motor insurance provider ever. The
group's instant travel insurance allows Clubcard holders to buy
their holiday insurance conveniently at the checkout. Pet
insurance now has over 330,000 cats and dogs covered, while the
31

32. life insurance policy followed on from the success of last year,
when it was voted The Most Competitive Life Insurance Provider in
the MoneyFacts Awards 2003.
Tesco online: Tesco.com is the world's biggest online
supermarket and this year the group had sales of over £577
million, an increase of 29% on last year. Tesco online now
operates in over 270 stores around the country, covering 96% of
the UK. With over a million households nationwide having used
the company's online services, the company has a strong platform
to further develop this revenue stream.
Brand value: Profits for Tesco's operations in Europe, Asia and
Ireland increased by 78% during the last fiscal year. The company
has a strong brand image, and is associated with good quality,
trustworthy goods that represent excellent value. Tesco's
innovative ways of improving the customer shopping experience,
32

33. as well as its efforts to branch out into finance and insurance have
also capitalized on this.
UK market leadership reinforced: Since acquiring number one
ranking in 1996, Tesco has developed a successful multiformat
strategy that has accelerated its advantage. Its UK sales are now
71% larger than Sainsbury's. Also the Competition Commission's
report makes it very difficult for a competitor to challenge its scale
and has effectively scuppered Wal-Mart's chances of stealing UK
leadership. Therefore, Tesco is in an enormously strong position
in its domestic market.
Weaknesses
Reliance upon the UK market: Although international business is
still growing, and is expected to contribute greater amounts to
Tesco's profits over the next few years, the company is still highly
dependent on the UK market (73.8% of 2003 revenues). While
this isn't a major weakness in the short term, any changes in the
UK supermarket industry over the next year for example, like the
Morrison's group successfully purchasing the Safeway chain could
alter the balance of UK supermarket power, and affect share.
Debt reduction: Tesco is not expected to reduce its debt until at
least 2006. Tesco has a large capital expenditure program mainly
33

34. due to its huge investment in space for new stores.
Since its expansion is so aggressive, Tesco has little free cash for
any other operations.
Signs point to serial acquisitions: With an enterprise value of
£23 billion, Tesco clearly has enormous firepower. Also, its
product range is vast and almost any acquisition can be justified,
particularly in the UK. While 'fill the gap' strategy would be useful
to the company, as has been the case with the UK convenience
market, there is the danger of Tesco becoming a serial acquirer, as
this tends to reduce earnings visibility and quality.
Opportunities
Non-food retail: The growth in Tesco's hypermarket format in the
UK means that there are expectations of seeing its 13% share of
retail sales climb sharply over the next few years. It can use its
footfall and low cost structure together with improved
merchandising skills to add another leg to growth. Equally, its
growth overseas will further increase earnings and scale, taking
Tesco onto the virtuous circle of growth. It is estimated that
Tesco's non-food sales will double over the next four years.
34

35. Worldwide it has sales of £7 billion in non-food, some 23% of the
total. Its aim to be 'as strong in non-food as we are in food', no
longer sounds like the consultancy-speak that it once did, and they
are getting there using the basic tenets of value, choice and
convenience that have been so successful in food. Around half of
new space opened in the UK last year was for non-food and the
result has been to increase its market share from 5% to 6% and its
overall share of UK retail sales has increased by 100 basis points
to 12.8%.
The company's telecoms venture is the latest stage in its strategy
to develop popular retail services. It has repeated its approach in
banking, by capitalizing on its brand.
Health and beauty: Tesco's UK health and beauty ranges
continue to grow, and it is currently the fastest growing skincare
retailer in the market. The company has a volume market-leading
position in both toiletries and healthcare and is number one retailer
in the baby goods markets. Across all health and beauty ranges
Tesco continues to invest in price to deliver the value customers
have come to expect and this year invested £27 million on health
and beauty pricing alone. The company now has 19 stores with
opticians and nearly 200 stores with pharmacies.
35

36. Further international growth: Tesco now operates in six
countries in Europe in addition to the UK; the Republic of Ireland,
Hungary, Czech Republic, Slovakia, Turkey and Poland. It also
operates in Asia: in South Korea, Thailand, Malaysia, Japan and
Taiwan. Seven years ago, its International sales were £770
million. Now, they are nearly 10 times larger, at almost
£7 billion, with profits of £306 million. In the current year, Tesco
will add 2.5 million square feet to sales area and could well enter
another major market. Growing internationally has forced Tesco to
become serious about hypermarkets and this has had seriously
positive implications for growth in the UK. Tesco has formed a
strategic relationship with US supermarket, Safeway Inc, to take
the tesco.com home shopping model to the US. Telecoms are the
latest stage in its strategy to develop popular retail services. It has
repeated its approach in banking, by capitalizing on its brand. In
2004 the company plans to enter the Chinese market, as China is
one of the largest economies in the world with tremendous
forecast growth and will present many opportunities for Tesco.
Threats
UK structural change could spark a price war: The price
followers in the UK market are about to become aggressive
36

37. investors in price, Safeway because of new ownership and
Sainsbury because of new management. Morrison is reducing
Safeway's prices by up to 6% and Sainsbury is bound to see lower
prices as one of the basic changes necessary to drive its recovery.
With both Asda and Tesco committed to price leadership, this could
result in a step down in industry profitability.
Overseas returns could fall: The buy case for Tesco is
predicated around investment overseas driving higher group
returns as each country moves past critical mass. This might not
happen, either because of economic conditions, competitor action,
or failure in Tesco's business model. It also could come as a
consequence of an aggressive move into a larger market, such as
China or Japan.
Wal-Mart/Asda challenge: Since the US shopping giant Wal-mart
purchased Asda, Tesco's rank as the top UK supermarket has
been threatened. Asda can now compete extremely well on price
and range of goods. For the moment, Asda is the third largest
supermarket in the UK, just behind Sainsbury's and then Tesco.
However, Asda closed the gap on Sainsbury's in 2003, leaving the
company to directly challenge Tesco's dominance.
37

38. Tesco is well aware of this, and has so far been quick to keep up
with price cuts or special offers at Asda. Wal-mart may also decide
to wield its buying power more heavily in the UK, and this could
spell the end of Tesco's brand dominance in the future.
International expansion: International growth is expensive.
Entering new markets with a new brand requires heavy investment
and marketing, as well as land prices (which are currently low) and
extra distribution and operation expense. Tesco's debt may
increase before it begins to decline.
Korea is contributing a good proportion of Tesco's international
profit growth. If profits continue to grow in this way, Korea will
probably represent one-third of Tesco's international profits in
2003. Korean consumer spending is currently quite low, and
coupled with the country's current unrest, and Tesco's large
investment, this represents a high risk area for Tesco to bank on.
APPENDIX C
VALUE CHAIN
38

39. Primary Activities
(Currently, Adds value (+), losses value (-), Potential to add
value (P+))
Inbound logistics
Inbound logistics are placed at the first stage of the value chain as
they possess the earliest opportunity to create value. Therefore,
the elements of this stage are considered to be upstream activities.
The logistical tasks, in this case, include the receipt of goods from
suppliers, storage of goods, handling & transportation of goods
internally and placing the products on the shelves. Tesco tries to
maintain the level of consumer choice in store (+), whilst improving
the efficiency of its distribution system (+). In applying a quality
control procedure concerning damaged goods and products, it
provides an excellent opportunity to reduce costs unfairly incurred
by the company, therefore preventing these costs being passed on
to the consumer (P+).
Operations
The production element of Tesco' activities are service orientated.
Hence, operations could be the second upstream opportunities
that enable services and products to be provided, tasks such as
opening every day in accordance with trading hours, maintaining
39

40. the shelves, and the stock (+). In order to obtain future
competitive advantage Tesco has to consider expanding further in
terms of operating hours in those places, where it does not occur
or opening new Metro and Express stores (P+). However, this
might be restricted by law or planning councils, which is essentially
takes away competitive advantage (-).
Outbound logistics
The third stage of the value chain is the outbound logistics that is
concerned with delivering the product to the customer. Tesco
currently adds value in its home delivery service (+). However,
other tangibles that have to be improved are those of parking
facilities, trolley collectors, till staff and systems to gain competitive
advantage, if executed more efficiently than competitors, they will
add value by saving the customer time (+), whilst increasing the
turnaround (+). Adding value could be achieved through the
implementation of a trolley deposit system, keeping them tidy and
enabling customers to get to and from the premises quicker, as
well as making these facilities readily available and quicker to
obtain (P+).
Marketing and sales
Marketing and sales are placed under downstream elements of
40

41. the value chain. Clubcard gives further discounts and loyalty for
the customers (+). However, Tesco may also decide to attract
more customers by advertising via radio, local newspaper and
national TV eg the “lower prices” advertising campaign or more
discounts offers (+). With a more customer sophistication and
their awareness of ethical business practices, it may give the
company some constraints in terms of selling environmentally
friendly products (-). In return, Tesco can take it as an advantage
and provide customers with more of the recycling points and
include information in their advertisements, adding value for
customers who will believe that by choosing to shop at Tesco,
people are helping the environment (P+).
Support Activities
Company Infrastructure
Planning and control functions are the ones that account to
provide the continued focus on the costs and cash control of the
company's operations (+). And departments such as profit
protection whose main jobs are to reduce shrink. The company
has now increased its staff count who are involved in upgrading its
anti-fraud software (infrastructure/technology, interdependence),
and installing new security systems which aim to reduce internal
41

42. theft, an expense the customer will now not have to cover in the
price of their purchases (+).
Human resource management
HRM is regarded as up and downstream activity, covering
everything from recruitment to management development. The
company aims to increase the number of training schemes and
further develop its recruitment programmes so to pass on to the
customer the benefits of a well recruited, well trained staff, not the
costs (+). Tesco continues to invest in customer service (+), where
training is also linked directly to pay, so the staff are motivated to
learn, and are encouraged to improve their approach to customers
and service provision quality. (P+).
Technology development
It is a downstream activity and is the ability to provide new
innovative product ranges/ solutions that anticipate customer
needs. It also remains a key competitive advantage, adding value,
as Tesco's brand name gives the product vitality (+). However,
installation and capital investment is a long term process and
needs total commitment of the staff. But who will be responsible
for the service provision and the floor personnel? (-).
42

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