1. IntroductionTesco is a British based supermarket engaged in retailing of food and non-food products. The company operates in 12 markets worldwide, having a team of 500,000 employees (Tesco.com, 2014). Tesco was founded in 1919 by Jack Cohen from a market stall in London's East end. Tesco is one of the world's largest retailers, serving millions of customers every week (Tesco.com, 2014). It operates via various store formats such as express, metro, extra and superstores. In 2013, Tesco recorded revenue of £43.6 bn and trading profit of £2,191m in the UK (Tesco Annual report, 2014). In the next section, the report will make use of the PEST framework and Porter's five forces to analyse the external business environment in which Tesco operates. To analyse the internal business environment, the SWOT tool will be used.
2. Business Environment“ A business firm does not operate in a vacuum but in a given environment, and has to interact and transact its business within this environment” (Fernando, 2011, p33). The two types of business environment are external (macro and micro environment) and internal.
2.1 External Environment
2.1.1 PEST Analysis of Tesco
126.96.36.199 PoliticalAs Tesco operates globally, it has to obey various government regulation and laws where they are operating. In terms of employment, the UK government encourages retail organisations to offer various types of job opportunities ranging from flexible, low wage and locally based jobs to high skilled, high wage and centrally located jobs to cater to the demands of groups such as students and senior citizens (Balchin, 1994). Most governments encourage businesses to employ local people for the development of the local economy. Many laws, regulations, codes of practice and guidance control the manufacturing, processing, distribution, packaging and labeling of food products (FSA, 2014). The Food and safety act provides food legislations acts in areas like hygiene, false description of food, low quality and unsafe food. Various environmental organisations encourage companies to reduce carbon emission in different stages of their supply chain. Tesco is working to achieve its 2020 target to reduce carbon emission throughout its supply chain. For example: using sea and rail modes of transport instead of doing so by road, opening new distribution centres to reduce transportation and hence reduce carbon emissions (Tesco.com, Tesco and society, 2014).
188.8.131.52 EconomicEconomic factors like recession, unemployment and GDP are important for Tesco as they influence demand of products in the market. People tend to spend less on goods in times of recession. Due to recession and unemployment, as the disposable income decreases, customers switch to discount stores such as Aldi and Lidl. According to the Office For National Statistics (2014), the number of people out of work declined to a five year low of 6.8 % (BBC News, 2014). Also, the youth unemployment rate declined with 283,000 people finding jobs in the early months of 2014, which is the highest since 1971 (BBC News, 2014). Though Tesco is expanding internationally, the economic indicators like unemployment rate in the UK will be of prime importance to Tesco's profits in the future as the company is highly dependent on its home market.
184.108.40.206 SocialCustomer buying behaviour keeps on changing and hence retailers have to keep track of customers' shopping trends. Customers like to shop at the smaller convenience stores rather than large stores (Tesco Annual report, 2014). Thus, Tesco has reduced opening of new stores and is focusing on convenience and online shopping. Shoppers are becoming more health conscious and they are more concerned about the quality of food (Doward, 2014). Thus, Tesco is investing in organic foods to meet the demands of customers.
220.127.116.11 TechnologicalWith the rise in the use of the Internet and digital technology, retailers have an added responsibility to incorporate new technology in their supply chain. According to the chairman of Tesco (2014), the capacity for customers to interact with each other and the organisation is driving different expectations in terms of service, choice and the overall shopping experience (Tesco Annual report, 2014). A major portion of consumers use smartphones for online shopping, comparing prices with competitors and reading reviews (Tesco Annual report, 2014). Tesco is increasing its investment in new technologies to serve customers better. In 2013, Tesco made huge investment to integrate point of cash management SMARTtill technology in over 10,000 UK tills to provide better customer service (Retail technology, 2013)
2.1.2 Porters Five Forces Analysis of TescoAccording to Porter (2008), the five forces that shape industry competition are as follows: threat of a new entry, bargaining power of buyers, bargaining power of suppliers, rivalry between competitors and threat of substitutes (Figure 1).
Figure 1 Porter's Five Forces
(Source: Porter, 2008, p80)
18.104.22.168 Threat of a new entryThe threat of a new entry is
low. The retail industry demands huge investment from a potential entry in the market (Economics Online, 2014). Many big players such as Tesco, ASDA, Sainsbury are operating in the market. Also, discount supermarkets stores such as Aldi and Lidl are present. Over the years, they have been investing in developing supply chain and efficient technology. It would be difficult for a new entry to compete with the well-established players. Moreover, it would be difficult for a new player to build relationship with suppliers. It should be noted that it would be difficult for a new start-up to compete in the UK retail market, however, for retailers established in other countries, it could be possible to gain a foothold in the UK market, just like Aldi and Lidl. Barriers to entry also include getting government authorisation to establish a new supermarket. This demands significant resources and time.
22.214.171.124 Bargaining power of suppliersPorter (2008) stated that suppliers have less bargaining power if they deal with big organisations in an industry. There are four leading players such as Tesco, Sainsbury, Morrison and Asda, accounting for 59% of total retail value sales in 2013 (Euromonitor International, 2014). These players are big organisations and can easily switch from one supplier to another due to strong financial resources. Hence, suppliers are dependent on the retail organisations and are keen to maintain long working relationships in order to remain profitable. Tesco, being the market leader can negotiate in terms of price with the suppliers and hence it has a strong position as compared to suppliers. Thus, power of suppliers is
126.96.36.199 Bargaining power of buyersThere are many retail organisations operating in the UK market, offering standardised and less differentiated products. Buyers can easily switch from one brand to another due to the absence of switching costs. However, loyalty schemes like Tesco's club card plays an important role in retaining customers. There are 38 million club card customers shopping in Tesco stores (Tesco Annual report, 2014). With the help of the Internet, customers can easily compare different prices to help inform their purchasing decisions. Overall, the bargaining power of buyers is
moderate to high.
188.8.131.52 Rivalry among existing competitorsThe rivalry among competitors is
high. The competitors of Tesco are ASDA, Morrisons and Sainsbury's. The retail organisations compete directly in price wars in their stores such as labeling their product as low cost compared to the competitors. For example: ASDA has a price guarantee, and give a refund if the price offered is higher than other supermarkets. Tesco is also facing competition from low discount stores such as Aldi and Lidl. Tesco's market share experienced a decline from 30.7% in 2012 to 30.1% in 2013, while discount stores Aldi and Lidl increased their market share to 3.6% and 3.1% in 2013 respectively, from 2.9% in 2012 (Neville, 2013).
184.108.40.206 Threat of substitute product or servicesSubstitutes to supermarkets are the small convenience stores offering products to customers in their vicinity. However, supermarkets are planning to open convenience stores and smaller store formats closer to homes due to the preference of customers to shop more frequently and closer to home (Tesco Annual report, 2014). For food retailing, the threat of substitutes is
low to moderatewhereas for non- food products, it is
moderate to highas people have various options to buy such as online and clothing stores.
2.2 Internal Environment
2.2.1 SWOT Analysis of TescoA SWOT analysis is used to analyse the internal business environment of Tesco to identify strengths and opportunities. In addition, the SWOT tool also results in identification of core competencies of an organisation, and opportunities that the company is not able to exploit due to lack of resources (Wheelen and Hunger, 2011).
Table 1: SWOT analysis of Tesco
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