The effects of the environment on a Business
This assignment will discuss the internal, external and competitive environment on Tesco, it will also select a variety of techniques to undertake a situational analysis on Tesco. Then, this report will explore how the market structure and influences on supply and demand affect the pricing and output decisions for Tesco. Then it will assess the effects of the business environment on Tesco and how Tesco has responded to changes on the market. Finally, the report will evaluate the extent to which the business environment affects Tesco, using a variety of situational analysis techniques; and evaluate how changes in the market have impacted on Tesco and how it may react to further changes.
Tesco PLC, trading as Tesco, is a British multinational grocery and general merchandise retailer with headquarters in Welwyn Garden City, Hertfordshire, England, United Kingdom. It is the third largest retailer in the world measured by profits and ninth-largest retailer in the world measured by revenues. It has stores in 12 countries across Asia and Europe and is the grocery market leader in the UK, Ireland, and Hungary (www.wikipedia.com). Tesco is a public limited company which means that its aim is to achieve a positive cash flow. The reason for Tesco being a Plc is because of its mammoth size. Due to its size it would be hard to raise enough funds for Tesco if it was owned by a sole trader or by partners whereas in a Plc (like Tesco) the company is owned by shareholders who fund the company. This happens by the people buying shares in the company and becoming shareholders. Tesco is in the private sector which means it is not involved or funded by the state or government and is run purely for profit. Tesco has limited liability, which means that if Tesco went bankrupt or liquidated the shareholders are only responsible for the amount they have put into the business and nothing more. Tesco is a global business as it has expanded its operations to eleven other countries in the world. Tesco is a large business as it is a leading U.K supermarket. Tesco is involved in the secondary, tertiary and quaternary sector. The secondary sector is the manufacturing and assembly process. It involves converting raw materials into components, for example, making plastics from oil. It also involves assembling the product, eg building houses, bridges and roads. The tertiary sector is selling the product. The quaternary sector consists of those industries providing information services, such as computing, ICT and R&D.
Business organisation and environment
Tesco CSR programs and initiatives are developed and implemented by Corporate Responsibility Committee led by Chairman John Allan. The importance of CSR for Tesco maybe greater nowadays than ever before due to a series of ethics-related scandals the supermarket chain had to deal with recently such as inappropriate profit reporting and poor supplier treatment cases. In other words, it is important for the supermarket chain to restore the trust of it’s towards the brand and engagement in CSR programs and initiatives is an effective tool to achieve this objective.
Tesco focuses on supporting local communities, the Company donated GBP 55 million, which accounts to 3.96 per cent of its pre-tax profit to various charities and good causes in total, and GBP 37.9 million has been raised from Tesco employees and via customer fundraising
Tesco also takes great care in educating and empowering workers. 70% of employees stated they would recommend Tesco as a great place to work as much as 77 per cent of managers, directors and business leaders within the company made career progresses.
This is a PESTLE analysis of Tesco, this examines and explains the main external factors impacting on the company:
For a major international business-like Tesco there are many factors in the environment that affect the decisions of the managers and directors in Tesco. Tax changes, new uk laws, new EU laws and new Trade laws, demographic change and government policy changes are all examples of external environment change. The following PESTLE analysis will distinguish between changes and help analyse them:
The political factors refer to government policy’s such as the degree of intervention in the economy and since the retail of Tesco operate worldwide UK, EU and worldwide political factors greatly influence the performance of Tesco. 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).
These include taxation changes, interests, inflation and exchange rates, economic growth, interest rates. Economic change can have a major impact on a firm behaviour and decisions. For example:
Higher interest rates may deter investment because it costs more to borrow, causing less money to be invested in Tesco and less money being spent on products. Meaning a lower cash flow into Tesco.
Changes in social trends in the UK and worldwide can affect the demand for Tesco’s goods and could affect the availability and compliance of individuals to work. For example, as the UK’s population has been ageing, it is increasing the costs of Tesco as they are committed to paying pension payments for longer as their staff are living longer. The ageing population has also created an impact on Tesco’s demand; for example, the need for certain products for senior citizens has increased whereas baby products and children’s toys has fallen. Social factors can change due to different varying factors.
Technology is a major macro-environmental variable which has influenced the development of many of the Tesco products. The new technology that is coming out is benefiting both customers and Tesco itself. This is because the new technology increases 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:
-Electronic shelf labelling
-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).
Different categories of law include:
consumer laws; these are designed to protect customers against unfair practices such as misleading descriptions of the product
competition laws; these are aimed at protecting small firms against bullying by larger firms and ensuring customers are not exploited by firms with monopoly power
employment laws; these cover areas such as redundancy, dismissal, working hours and minimum wages. They aim to protect employees against the abuse of power by managers
health and safety legislation; these laws are aimed at ensuring the workplace is as safe as is reasonably practical. They cover issues such as training, reporting accidents and the appropriate provision of safety equipment.
The new various legislations and policies brought in recently have had 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). In order to implement politically correct pricing policies to combat new government policies, Tesco offers consumers a price reduction on fuel purchases based on the amount spent on groceries at its stores. While prices are lowered on promoted goods, prices elsewhere in the store are raised to compensate.
Environmental factors include the weather and climate change. Changes in temperature can impact on many industries including farming, tourism and insurance. With major climate changes occurring due to global warming and with greater environmental awareness this external factor is becoming an important issue for firms to consider. The growing voracity to care for the environment is having an impact on many industries such as the travel and transportation industries (for example, more taxes being placed on air travel and the success of hybrid cars) and the general move towards more environmentally friendly products and processes is affecting demand patterns and creating business opportunities. Tesco is clearly committed to reducing its carbon footprint by 50% by 2020. Also, Tesco is minimizing the waste produced in their stores by increasing social conscience in customers.
Tesco is the largest food retailer in the UK and one of the leading grocery retailers in the world. It supplies 30% of the food purchases made in the UK. More than 550,000 employees service the company’s customers in nearly 5,000 locations spread across 14 countries in Europe, Asia and North America (Tesco plc, 2010, p 1-3).
Tesco’s operations in the British retailing space, coupled with its overseas expansion, have opened it to numerous competitive challenges and threats. In the UK, the company faces strong and increasing competition from its heavyweight rivals like ASDA-Walmart, Sainsbury’s and Morrison (Finch ; Wood, 2010, p 1-2). Each of these organisations is constantly trying to improve its market share through various customer focused and efficiency-oriented strategies (Finch ; Wood, 2010, p 1-2). Whilst Tesco continues to lead in market share, sales and profitability in the UK, it remains under constant competitive pressure and any strategic or market place error could have adverse. The economic environment in the UK is possibly going through its worst turmoil since the 1980s. Increasing unemployment, thousands of job losses and a very slowly reviving economy have dampened the enthusiasm of supermarket shoppers and created difficult market conditions for market participants. Sharp reduction in government spending, the proposed elimination of thousands of public sector jobs by the present coalition government and the three-fold increase in academic fees have already led to widespread protests and are expected to affect the economic climate further.
Whilst the company is steadily increasing its global footprint, the UK continues to be its overwhelmingly large market and accounts for practically 67 % of its total sales and 71 % of its profits (Tesco plc, 2010, p 1-3). The economic and social turmoil in the country, along with increased competitive pressure from its main competitors will certainly intensify environmental and competitive challenges for the company intense in the coming years.
Tesco has in recent years been working at steadily expanding its global operations. Its global presence is however less than that of Walmart, Carrefour and Metro and its position in the global retail market, whilst strong and increasing, do not mirror its dominant position in the United Kingdom and it is the grocery leader in only two overseas markets, Malaysia and Thailand. Tesco, like other major firms expanding strongly into international markets often faces different and difficult environmental and competitive conditions in its various operational regions. Much of the competition in its overseas markets comes from numerous local competitors who not only operate with far lesser overheads but also understand local tastes and preferences much better. Tesco is combating competition in its overseas markets and trying to establish its presence with the help of well-established local firms and different store formats. However, the global experiences of various supermarket majors like Walmart and Carrefour reveal that global expansion is not easy and significant market failures can occur from incomplete understanding of market requirements and choice of market strategies.
A strengths, weaknesses, opportunities and threats (SWOT) analysis of Tesco has been provided below:
Drawing upon Datamonitor (2010), Tesco is ranked third largest grocery retail company in the world, operating over 4,331 stores primarily within the USA, Europe and Asia. The company held 30.7% share of the UK grocery retail market in 2010 (Euromonitor, 2010).
A strong financial performance has been shown by the company over the years, which underlines its strategic capabilities. According to Datamonitor (2010), Tesco is a £ 54billion turnover company recording an increase of 14.9% when compared to 2008. The foremost strategy that has been adopted by the company is the product and services customization in accordance with the market demands. The efficiency in performance of the company over the last decade can be summarised with the help of growth in following key indicators (Fame, 2010):
Tesco has not been able to perform well over the last year as compared to its competitors. According to Mintel (2010), a number of products were recalled by Tesco in 2009 that has resulted in a financial loss as well as damage to its brand image. These included company’s value lines, which have been marketed as high quality cheaper alternatives to key brands.
The key operations of the company are concentrated within the UK retail sector, where it recorded more than 75% of its revenue during the fiscal year 2009 (Tesco, 2010). This lack of geographic diversification can be seen as a key weakness for the firm as it is subjected to systemic risks of the UK market.
The commercial network portfolio of Tesco is on the rise. They opened over 620 stores in 2009 of which 435 were international (Mintel, 2010). This geographic diversification will help the company in improvising its economy of scale, while minimising its systemic risk exposure.
The popularity of Tesco.com is growing rapidly, accounting for over 1 million customers in 2010 (Guardian, 2010), which has provided an opportunity to the company to attract new customers and reduce the overall cost resulting in more profit.
Company focus is on global expansion as is evident by its entry into the Indian market. This entry will strengthen its global market position. A limited franchise agreement has been signed by Tesco with Trent, retailer of Tata group, which is one of the largest industrial corporations of India (Daily Mail, 2010).
The commencement of a global financial crisis has resulted in a contraction of the UK’s economy by 2.4% in 2009 which is estimated to contract further by 4.2% by the International Monetary Fund (IMF) (Poulter, 2009). Tesco’s concentration in the UK market can therefore have a detrimental impact on its financial standings.
The decline in income and the rise in unemployment have affected the discretionary buying behaviour of consumers which has adversely impacted the company’s sales, in particular the non-food items.
There has been fierce competition in the UK grocery market. Tesco though has been leading this sector for 15 years (Mintel, 2010), but is now faced with intense competition from its competitors which are gaining in market share. These include the rest of the ‘big four’ i.e., Asda, Sainsbury’s and Morrisons respectively.
Porter’s Five Forces Analysis
An analysis of the structure of the industry should be undertaken in order to find effective sources of competitive advantage (Porter, 1985). Therefore, in order to analyse the competitive environment of Tesco, Porter’s five forces analysis has been used by the researcher as follows:
Threat of substitute products and services
The threat of substitutes in the grocery retail market is considerably low for food items and medium too high for non-food items.
In the food retail market, the substitutes of major food retailers are small chains of convenience stores, off licences and organic shops which are not seen as a threat to supermarkets like Tesco that offer high quality products at considerably lower prices (Financial Times, 2009). Moreover, Tesco is further getting hold of these shops by opening Express stores in local towns and city centres creating a hurdle for these substitutes to enter the market.
However, the threat of substitutes for non-food items, for instance clothing, is fairly high. It should be noted that so long as the economic recession prevails, customers will be inclined towards discounted prices hence Tesco is a threat to the speciality shops.
Threat of entry of new competitors
The threat of entry of new competitors into the food retail industry is low.
It requires huge capital investments in order to be competitive and to establish a brand name. Major brands that have already captured the food retail market are Tesco, Asda, Sainsbury’s and Morrisons and they account for 80% of all shopping in the UK (Mintel, 2010). Therefore, new entrants have to produce something at an exceptionally low price and/or high quality to establish their market value.
Gaining planning authorisation from local government takes a considerable amount of time and resources to establish new supermarkets and this is therefore a considerable barrier to new entrants.
Intensity of competitive rivalry
The intensity of competitive rivalry in the food and grocery retail industry is extremely high.
Tesco faces intense competition from its direct competitors, including Asda, Sainsbury’s, Morrisons and Waitrose, which are competing with each other over price, products and promotions intermittently. It should therefore be highlighted that Asda is one of the key competitors in this segment with an increase of market share from 16.6% to 16.8% during the fiscal year 2010/ 09, while Sainsbury’s has shown an increase to 16.1% from 15.8% and Morrisons to 11.6% from 11.3% through the same period (Euromonitor, 2010). The slow market growth essentially means that these increasing market shares from competitors have intensified the market rivalry, which is threatening Tesco’s market leadership position.
In rural areas where the nearest superstore can be some distance away, some primary consumers are attracted by retailers like Somerfield and Co-op.
Hard discounters like Aldi and Lidl have taken over the market in times of recession. During 2008 they recorded a growth of sales of over 25% (Keynote, 2010).
Bargaining power of buyers
The bargaining power of buyers is fairly high.
In cases where products have a slight differentiation and are more standardised, the switching cost is very low and the buyers can easily switch from one brand to another.
It has been proposed that customers are attracted towards the low prices, and with the availability of online retail shopping, the prices of products are easily compared and thus selected.
Bargaining power of suppliers
The bargaining power of suppliers is fairly low.
It should be noted that the suppliers are inclined towards major food and grocery retailers and dread losing their business contracts with large supermarkets. Hence, the position of the retailers like Tesco, Asda, and Sainsbury’s is further strengthened and negotiations are positive in order to get the lowest possible price from the suppliers.
There is clear evidence that the UK grocery supermarket sector is increasingly dominated by a few firms, led by Tesco, Sainsbury and ASDA. The supermarket sector is oligopolistic and the pricing strategy of supermarkets can be understood using game theory approach.
It is also accepted that many farmers and growers are suffering as a result of the increasing monopsony power of the major supermarkets.
The pace of concentration accelerated until 2012, but, since then, the emergence of the low-cost retailers Aldi and Lidl has halted the rise of the big four, and reduced the 4-firm concentration ratio to 72.3% (down from 75% in 2011).
The fact that Tesco dominates a large proportion of the supermarket sector means that they can sometimes control the pricing and output of certain products. For example, if Tesco lower the prices of a certain product, the competitors must lower the price as well to keep customers. This is because if Tesco lower the price of a product and its competitors do not customers will shop at Tesco so they can get it for cheaper, meaning Tesco’s competitors are losing customers.