Tesco Nature Scope And Purpose Of Strategic Management

Tesco Nature Scope And Purpose Of Strategic Management INTRODUCTION Tesco started as a one-man business in Londons East End. Tesco was founded by Jack Cohen, son of a Polish Jewish tailor. He sold groceries in the markets of the East End from 1919. The Tesco brand first appeared in 1924. The name derived after Jack Cohen bought a large shipment of tea from T.E. Stockwell (formerly Messrs Torring and Stockwell of Mincing Lane), he made new labels by using the first three letters of the suppliers name and the first two letters of his surname forming the word TESCO. The first Tesco store was opened in 1929 in Burnt Oak, Edgware, and London. The firm was floated on the London Stock Exchange on 23 December 1947. The first Tesco self-service store opened in 1948 in St Albans and is still trading in 2006 as a Tesco Metro store.The first Tesco supermarket was opened in 1956 in a converted cinema in Maldon, Essex. Tescos first superstore was opened in 1968 in Crawley, West Sussex. The group began selling petrol in 1974 and its annual turnover reached one billion pounds in 1979. Also In 1975 Tesco opened one of its first Hypermarkets in Irlam. The first Hypermarket under the Extra name opened in 1997. EXPANSION: In 1994, the company took over the Scottish supermarket chain William Low. Tesco successfully fought off Sainsburys for control of the Dundee-based firm, which operated 57 stores north of the border, paving the way for Tesco to expand its weak presence in Scotland. To the present day, Tesco has based its Scottish headquarters at the former Wm. Low offices in Dundee. From small beginnings in Scotland Inverness was recently branded as Tescotown, since an estimated 50p in every  £1 spent on food is believed to be spent in the three Tesco stores within the city. (Nationally, it is estimated that 1 in every  £8 is the proportion spent) It introduced a loyalty card branded Clubcard in 1995 and later an Internet shopping service. During the 1990s it expanded into Central Europe, Ireland and East Asia. In July 2001 it became involved in internet grocery retailing in the USA when it obtained a 35% stake in GroceryWorks. In October 2003 it launched a UK telecoms division, comprising of mobile and home phone services, to complement its existing internet service provider business. In August 2004, it also launched a broadband service. NATURE, SCOPE AND PURPOSE OF STRATEGIC MANAGEMENT NATURE: Tesco opened its first store in Edgware, North London in 1929.It is founded by John Cohen and T. E. Stockwell. Tesco mainly used strategies to build customer loyalty. It reached the  £billion pound turnover in 1979.It became the first UK business to reach  £2 billion pound and became the largest retailer in UK. STRATEGY: According to Johnson and Scholes strategy is defined as the direction and scope of an organisation over the long term; which achieves advantage for the organisation through it configuration of resources within a changing enviroment,to meet the needs of markets and to fulfil stakeholder expectations. Tescos growth over the last two or three decades has involved a transformation of its strategy and image. Its initial success was based on the Pile it high, sell it cheap approach of the founder Jack Cohen. The disadvantage of this was that the stores had a poor image with middle-class customers. In the late 1970s Tescos brand image was so negative that consultants advised the company to change the name of its stores. It did not accept this advice, yet by early 2005 it was the largest retailer in the United Kingdom, with a 29.0% share of the grocery market according to retail analysts TNS Super Panel, compared to the 16.8% share of ASDA and 15.6% share of third-placed Sainsburys, which had been the market leader until it was overtaken by Tesco in 1995. Key to success: Focus on customers. Focus heavily on value for money. Finest and low price. Core UK business. Non-food business. Retailing services. International Expansion. SCOPE According to Mintzberg and Quinn there are five definitions if strategy Strategy as a plan Strategy as a pattern Strategy as a position Strategy as a perspective Strategy as a ploy Tescos growth over the last two or three decades has involved a transformation of its strategy and image. Its initial success was based on the Pile it high, sell it cheap approach of the founder Jack Cohen. Levels of planning Planning of strategy in any organisation is categorised into three levels: Top level planning: this is done by the top management and is termed as strategic planning. It is a long range planning and is linked to long range goals. Second level planning: This is carried out by senior executives and is termed as tactical planning. The plans are devised to achieve the organisations main objectives. The long-range plans of the organisation are segmented and are oriented to functions and departments. Third level planning: This is the concern of the departmental managers and supervisors and is called activity planning or operational planning. It is confined to short term activities and also individual assignments and establishes performance of the organisation. Corporate strategy: It is concerned with the overall purpose and scope of the business to meet stake holder expectations. It is often expressed as mission statement of the organisation. The companys mission statement reads, Our core purpose is, To create value for customers to earn their lifetime loyalty. We deliver this through our values, No-one tries harder for customers, and Treat people how we like to be treated'. The underlying aim is of course to make higher profits, but there is a clear focus on customer service at the top level of the company. Business strategy: It is concerned with how a business competes successfully in a particular market. Tescos business strategy is to Expand overseas Maintain a strong uk business Expand into non-food merchandise Operational strategy: It is concerned with the operations to deliver the corporate and business strategy of the organisation. Tesco has its every little helps strategy to make both its employees and customers happy while achieving the organisational goals. PURPOSE Tesco adopts its strategy with a core purpose to create value for customers to earn their lifetime loyalty. This is expressed as two key values. No one tries harder for customers Treat people as we like to be treated. Tesco positions all its resources with a purpose to satisfy this strategy while achieving its organisational goals. PROCESS FOR DEVELOPING STRATEGIC MANAGEMENT While the corporate strategy of an organisation sets the objectives for different businesses; business strategy deals with individual sections of the overall business and the operational strategy directs and determines each function of the organisation. The process of business strategy of Tesco can be outlined as: Stating and understanding The Companys vision. Stating and understanding The Companys mission. Analysing the business environment. Crafting and evaluation of strategy. Implementation, monitoring and control. VISION Tescos vision can be clearly understood in the statement of its CEO Terry Leahy we have got only 5% of the non-food market in Britain, we have got only 6% of the convenience market and we have got only 2-3% of the banking market In all these examples we could be much bigger. This statement clearly presents the idea where Tesco wants to be in the future. MISSION A mission statement spells out the central purpose and shared values of a business organisation. Mission of Tesco is To create value for customers to earn their lifetime loyalty which is delivered through two key values no one tries harder for customers and treat people how they like to be treated. ANALYSIS OF THE BUSINESS ENVIRONMENT For the formulation of strategy, it is necessary to analyse the organisational environment. These would include political, economic, social and technological factors. According to Johnson and Scholes: Managers face difficulties in trying to understand the environment. First, the environment encapsulates many different influences; the difficulty is making sense of this diversity in a way which can contribute to strategic decision making. A simple analysis of the business environment so Tesco involves three aspects: Analysing Internal capabilities and resources(core competencies) Analysing external environment by PEST Analysis Analysing the competitive environment by Porters five forces Core Competencies Core competences relate to those resources and capabilities if the firm which enable to Attain a competitive edge in the market According to Johnson and Scholes core competencies create and sustain the ability to meet the critical success factors of particular customer groups better than other providers in ways that are difficult to imitate. Tesco identifies core competencies by three factors: Creation of new products and services which provides potential access to a wide variety of markets. Skill which makes a significant contribution to the perceived customer benefits of the end product. competitive unique skills which are difficult for competitors to imitate PEST ANALYSIS The external environment of an organisation is analysed by PEST analysis. It helps to identify the key changes that are taking place around the organisation and which influence it in the future. A PEST Analysis looks at Political Factors Economic factors Social factors Technological factors The following is the PEST Analysis for Tesco Political Factors Risks of potential competition commission enquiry GM- Food EU competition Law Economic Factors Intensive price competition between the large supermarkets Cost of products keep falling because of strengthening buying power Socio cultural factors Organic foods and drink Customer concerns about GM food, allergies and additives Animal welfare policies Environmental policies and practices Technological Factors Radio Frequency identity technology in operation of its supply chain Radio barcode technology for tagging cases. Self service check-out system. PORTERS FIVE FORCES Porters five forces are used to analyse the external environment of an organisation and to determine the attractiveness of the market. The five forces are: The bargaining power of customers The bargaining power of suppliers The threat of new entrants The threat of substitute products The intensity of competitive rivalry Bargaining power of customers The buying power of customers may influence Tesco to force prices down. This may lead to competition where the other rivals may also bring down the prices. Tesco should maintain the customer loyalty to stop them from drifting to others. Bargaining power of suppliers Demand of suppliers to pay high prices for their goods. Recently, the agitation by the dairy farmers to get high price for milk is an example. But market giants like Tesco has an overwhelming advantage over their suppliers where they dictate the price they pay their suppliers. Threat of new entrants Supermarket chains like Tesco manage the threat of new entrants by imposing barriers to entry. This is achieved by paying high price to suppliers and buying large volumes of goods. This makes Tesco to supply goods at cheaper prices to its customers where it corners the new entrants. Tesco also has the advantage of economies of scale. Threat of substitute products Tesco faces the threat of cutting down the prices of groceries and goods by other giants like Asda and Sainsbury. This may lead to lowering of prices where the buyer gets an advantage. Intensity of competitive rivalry Retail industry is the one where the profit margins are low and the competition is high. According to classical economics, rivalry between companies should drive profits to zero. All the above mentioned factors impact the intensity of competition for Tesco. Asda, Sainsburys, Morrisons and others with their expansion plans and strategies are making the competition tough. Their disciplined approach towards prices setting is preventing the destruction in profit war. Environmental evaluation of Tesco The environmental audit is reliant on the monitoring activity undertaken by the organisation. It includes Market intelligence Largest supermarket chain with a market capitalisation of  £26.037bn New strategies for mergers and expansion plans to US Effective and low prices Continuous monitoring and direct information on the sales figures in stores Efficient maintenance of customer loyalty. Technical intelligence RFID technology for supply chain management EPOs and Bar-coding technology Extension of RFID technology for tagging the cases through out the supply chain by 2007. Effective implementation of one in front policy at the tills to satisfy the customers. Acquisition intelligence Decision of receding from the bid to takeover Safeway. Expansion plans for US Other issues Convenience stores according to the needs of the people Decisions regarding the environmental issues Crafting a strategy By considering the above factors Tesco clearly crafted a strategy that keeps it in the leading position in all the aspects: The selected strategy of Tesco is To provide all the customers with excellent value and choice in UK business which is its biggest market and where Tesco enjoys top slot. Having a six element approach to be an international retailer while focusing on satisfaction of needs of the different local customers. KEY FACTORS FOR DEVELOPING STRATEGY The key factors for an organisation are those which exist within an environment and may generate a need for change. These are triggers for change in the organisation. The following is a brief description of the key factors which may lead to strategic change in Tesco. EXTERNAL ENVIRONMENTAL FACTORS Macro environmental analysis increases awareness of the relevant environmental changes at managerial level. This enhances strategic planning. Macro environmental analysis further focuses attention on the primary influences of strategic change and provides anticipation to opportunities and carefully develops responses to change. The following are the external environmental factors which pose challenges to Tesco High energy costs High recovery costs Improving position of competitors Risks of the potential competition commission enquiry Growing cautiousness among consumers STAKEHOLDERS Stakeholders can be defined as As those individual actors and parties, organisations and professions and institutions that have a bearing on the behaviour of the organisation as revealed in its policies and actions on the environment. Stakeholders can be divided into two categories; Those view the organisation externally Those have an internal interest External stakeholders for Tesco are competitiors, customers, suppliers, shareholders government departments etc.They judge the efficiency and try to influence its activities. So Tesco always determines the outputs required by the stakeholders. Internal stakeholders for Tesco are the owners, managers and employees. In large companies like Tesco there are thousands of shareholders who have a vested interest in the success of the business. MEDIA Media plays a very important role in an organisations strategy. It works in two ways; Interest in the success of the organisation and its subsequent positive feedback Interest in the proposed developments Tesco notifies well that the influence of effective public relations on the opinions of a wide range of groups will enhance the likelihood of success for its strategy. So it always maintains good relations with the media. Tescos media centre contain the latest news releases, images and briefing notes. Their latest TV ad campaign can also be viewed from their video library. The media people can also access to their media centre for easy access to the latest developments. LEGAL Organisations need to anticipate and prepare themselves for changes in legal procedures. The potential competition commission enquiry and other regulations are important legal factors which can influence retail sector now.Tesco has all the legal resources which enables it to respond to such changes well in advance and as a part of its developing strategy. ETHICAL These are the moral principles that should govern human relations and conduct. These are very important considerations in formulating strategy which involve subjective personal feelings about human behaviour. Tesco identifies as one of the key factors in its strategy and accepts this with enthusiasm and commitment. EDUCATIONAL In the present business scenario, the capacity to transmit knowledge through devices as the internet has become formidable. The most important and interesting aspect of the improvement in education and subsequent growth of knowledge has been the increasing professionalism of workforces in an organisation. Tesco understand this well and implements it in the improvement of skills of its human resources. It conducts training programmes a least two times a year. POLITICAL Political factors generally effect the organisation in two ways. One driven by the government pr by the multinational political initiatives and another concerned with the political shifts within the particular business environment. INTERNAL ENVIRONMENTAL FACTORS The following are the factors that are instrumental to the internal environment of Tesco. Organisational policy The mission statement of an organisation sets out the purpose of a business The mission statement of an organisation is refined over the time to reflect the developed or enhanced capabilities of the business .The following are the purpose statements for Tesco which gives a clear picture of its policy Scope of an organisations activities is a fundamental element of strategy. Tescos scope relates to the extent of the market into which it sells its products and services. It is already the largest retailer in UK and is planning to expand to US .It has already wide markets in Europe and Asia. A key consideration for a firm is to identify what areas of activity to pursue in its markets. Tesco targets customers of all ages with its products and services ranging from food, household products and retail to insurance and personal finance. An important aspect of strategy is for a company to identify the positions held by their products and services in the market place. Tesco has already built a very strong businesses over the time with very strong market positions. Each and every one of them has huge potential for further growth. Human resources Tesco is the largest private sector employer in UK. Tesco is the largest private sector employer in UK. It employs 250,000 staff alone in the UK and 367,000 staff worldwide. It has 2365 stores all over the world. Tesco employs about 11,000 employees every year. It recruits about 80 to 150 graduates each year to two training schemes one store and one office based. It recruits by in-store advertising, events in local areas. and recommendations From existing employees through an employee referral scheme. These employees are the need for effective communication in the field of management. Financial resources As per the statistics of 2006 Tesco is the fourth largest retailer in the world. Its market capitalisation was  £26.035 billion which was the largest of any retailer based outside the united states. Tesco also has got tremendous property portfolio. It does its own development and owns about 85 of all its assets around the world. And always Tesco invests a lot in its property. According to company authorities over the next five years its property value will be  £5 billion and still be a predominantly freehold property company. All these factors are described as the key factors for Tesco DEVELOPMENT AND EVALUATION OF STRATEGIC OPTIONS Strategy whether developed for a whole organisation or for an operating department or a team follows the same building process .Its central concern is to create a long-term vision of where we want to be or what we would like to become .Strategy that an organisation adopts should be feasible and practicable. Its pulling power is extremely important to survive in the tough competitive environment where an organisation operates .The art of strategic development involves a set of sophisticated tools to facilitate the process. The following is a brief context of different strategic options for TESCO and their evaluation. PEST ANALYSIS To develop a strategy for an organisation to assure its long-term effectiveness it should carry an analysis about its future. For this PEST Analysis is the best tool. It carries analysis of four or six major factors which can effect the organisation in future .TESCO which is the largest player in retail sector carries PEST Analysis to analyse the external factors which may affect in the future .The following is the PEST Analysis for TESCO: Political and legal considerations Risks of potential commission enquiry TESCO may face the risk of the potential commission enquiry in future which aims to curb the unhealthy competition in the retail sector. GM-Food With increasing awareness in the consumers all over the world TESCO may face the risk with Green peace workers regarding the labelling of genetically modified foods. . EU Competition Law EU Competition Law constituted to regulate monopoly power may impact TESCO and its expansion in the European Union in the near future. Economic considerations Intensive price competition between the large supermarkets Cost of products keep falling because of strengthening buying power Social Factors Organic foods and drink Consumers growing concerns about the organic food and drinks may influence in near future Customer concerns about GM food, allergies and additives With growing cautiousness and discontent about the GM food and use of allergic causing agents and additives in the manufacture of food may show impact Animal welfare policies Animal welfare policies which oppose the testing of the products on animals Environmental policies and practices Green peace workers and changing concerns about environmental issues. Technological Factors Radio Frequency identity technology in operation of its supply chain Use of RFID technology in its supply chain helps TESCO to efficiently carry its operations and maintain its position. Radio barcode Technology for tagging cases. Use of Radio barcode Technology to tag the cases and extending this technique to the entire chain by the end of 2007 will show an impact on operations in TESCO. Self-service checkout system SWOT Analysis IT is a commonly used tool .Its main purpose is to locate the organisation in its operating environment and try to assess its internal and external capabilities and vulnerabilities. SWOT stand for strengths, weaknesses, opportunities and threats. Strengths are internal and opportunities are environmental. Similarly weaknesses are internal and threats are environmental. The following is the SWOT analysis for TESCO Strengths These are the strengths of TESCO TESCO s Brand name Loyal customers Largest player in the retail sector Well established supply chain Excellent ware housing capability Largest online grocer Great store locations Skilled work force Club card scheme for enhancing customer loyalty. Weaknesses These are the weaknesses of TESCO Vast usage of fossil fuel in transport chain and super market heating systems Lack of integration between departments at certain times Opportunities These are the opportunities where TESCO can explore in future Improving customer relationships Real growth opportunity for grocery retailing in the newly enlarged European Union. Increasing sales through better integration of high street and internet resources Threats These are the threats that might affect TESCO in the future. High energy costs Increasing taxes on retail items Expansion of low cost supermarkets like LIDL. Recovering competitions like Sainsburys and Morrisons. A weakening economy An increase in unemployment PORTERS GENERIC STRATEGIES After establishing the strengths and weaknesses of the organisation and analysing the competitive environment, we have to establish the generic strategy of the organisation. No set of the strategic tools will be complete without a look at Michael porters generic strategies. Porter advocates, Gaining and maintaining competitive advantage The three generic strategies of Porter are Differentiation This is a strategy where the organisation offers a product or service which is unique compared with those of its competitors .This differentiation must be known to at least a segment of the market. Cost Leadership This is a strategy where the organisation enables itself to provide the products or services at a cost less than any other competitive organisation. It is the ability the organisation has to price below competitors if and when it needs so. Focus This is a strategy where the organisation targets its products or services at a given sector of the market with great accuracy and with a depth of capability and knowledge to support its position in the sector. In the retail sector with a very low profit margin the environment is hypercompetitive .TESCO being the largest player adopts the Cost Leadership strategy to challenge its competitors. TESCO has all the capabilities to adapt to this strategy. It develops its internal resources and its core competencies to support this strategy. In addition to these a number of generic strategies have emerged to define the modern organisation .The following is a list of the strategies. Reducing cost base Improving quality Getting closer to the customer Shorter cycle times Strategic partnerships Ability to change fast Of the above mentioned generic strategies, TESCO adopts the following: Reducing cost base To cut down the expenses and to increase productivity and efficiency, TESCO adopts this strategy to face the challenges of price war with its competitors, high property costs a and to provide value based products to the customers. Improving quality TESCO always concentrates on improving quality to rule the existing markets. It adopts new techniques and softwares both in the logistics and in-store operations to consistently serve the customers. Getting closer to the customer Customers are whimsical, customers are fickle, customers are not loyal. The ability to anticipate this fickleness is a strategic strength.TESCO understands this well and introduced club card schemes which helps TESCO to have millions of loyal customers. THE ANSOFF MATRIX This is a classic model in strategy building .Its main purpose is to analyse the organisations approaches to its products and to its market to ensure that an appropriate marketing strategy is being pursued .The following is the An off matrix for TESCO Current products New products Current markets Market penetration Improving services Improving quality Product development Expand own brands like The Finest and TESCO Value. Expansion into non-food sector Adding new products to the existing product line New markets Market development International expansion and globalisation Home shopping Developing small express stores Diversification New services Using the Ansoff matrix in conjunction with the BCG matrix, TESCO conducts a useful review of its strategy to achieve its vision. EVALUATION The BCG matrix The Boston Consulting Group matrix is a valuable tool .Its purpose is to analyse the organisations product portfolio. The definitions used in the BCG matrix are very precisely expressed in terms of the generation and use of cash. This makes this matrix a sharp-edged tool. the following are the definitions used in BCG matrix Stars These are the products that are performing well .They are generating positive cash and they usually require continuous update to maintain their market share. Problems These are the products which are not performing and not generating sufficient cash to maintain them in their markets. Cash cows These are the products which are performing well in markets which are growing slowly or are static. They are probably generating more money that can be profitably invested in them. Dogs They have low market share in markets which are growing slowly or are static. They may be consuming more resources to maintain their availability. They need quick decisions. The following is the BCG matrix for Tesco Market share High low Star On-line shopping Organic foods Loyalty cards Non-grocery items New services Problems On-line shopping with demographic analysis Home delivery of products Cash cows Cash cows Branded produ