SUBMITTED TO:

UNIVERSITY OF MUMBAI
PROJECT ON:
STRATEGIC MANAGEMENT OF TESCO SUPERMARKET
SUBMITTED BY:
ROHIT MILIND TAMBE
ROLL NO: 74
MASTER OF COMMERCE (M.COM)
UNDER THE GUIDANCE OF:
PROF. KANCHAN FULMALI
P.T.V.A.S
M.L.DAHANUKAR COLLEGE OF COMMERCE
VILE PARLE (EAST), MUMBAI
2014-2015

CERTIFICATE
I, PROF. KANCHAN .S. FULMALIHERE BY CERTIFY THAT
ROHIT MILIND TAMBE OF M.L.DAHANUKAR COLLEGE OF
COMMERCE OF M.COM (SEMESTER I) HAS COMPLETED PROJECT
ON STRATEGIC MANAGEMENT OF TESCO SUPERMARKET IN
THE ACADEMIC YEAR 2014-2015. THE INFORMATION SUBMITTED
IS TRUE AND ORIGINAL TO THE BEST OF MY KNOWLEDGE.

SIGNATURE OF
PROJECT GUIDE

SIGNATURE OF
THE PRINCIPAL

DECLARATION
I, ROHIT MILIND TAMBE OF M.L.DAHANUKAR COLLEGE OF
COMMERCE OF M.COM (SEMESTER I) HERE BY DECLARE THAT I
HAVE COMPLETED PROJECT ON STRATEGIC MANAGEMENT OF
TESCO SUPERMARKET IN THE ACADEMIC YEAR 2014-2015, AS
PER THE REQUIREMENTS OF THE UNIVERSITY OF MUMBAI AS A
PART IN MASTER OF COMMERCE (M.COM). THE INFORMATION
SUBMITTED IS TRUE AND TO THE BEST OF MY KNOWLEDGE.

Student signature

ACKNOWLEDGEMENT
Any accomplishment requires the effort of many people and this is no different. I
would first and foremost like to thank the University of Mumbai for designing such
a precise and practical course and giving me an opportunity to present this project on
Strategic Management of TESCO supermarket which is a result of co-operation
and good wishes of many people.

This project would just not have been complete without the valuable contribution
from various people whom I have interacted with in the course of completion, whose
name if not mentioned would be inappropriate on my part.

It is with great affection and administration that I acknowledge my indebtedness to

my Project Guide, Prof.KANCHAN FULMALI for assisting me in my project.
Without her this project would have remained just an idea, without form or consent.
It was indeed been a great experience working under their guidance during the entire
course of this project.

TABLE OF CONTENTS
Sr. No.

Contents

Pg. No.

1
2
3

INTRODUCTION

6
7
12

4
5
6
7
8
9

INDUSTRY ANALYSIS
INDUSTRY ANALYSIS: PORTERS
FIVE FORCES
CRITICAL SUCCESS FACTORS
ANALYSIS OF RESOURCES,
COMPETENCE AND
CULTURE
TESCOS STRATEGIC OPTIONS:
GENERIC STRATEGIES
MARKET OBJECTIVES AND
STRATEGIES
IMPLEMENTATION
CONCLUSION
WEBILOGRAPHY

16
20
25
27
32
41

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 (Data monitor, 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 companys analysis of resources, competence and culture.
Two future strategic options are suggested in regards to the resources based strategies.
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 companys 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 companys 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 Britains largest independent petrol retailers. Other retailing services
offered include Tesco Personal Finance.

2 Industry Analysis

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), Tescos performance is highly influenced by the political and legislative conditions
of these countries, including the European Union (EU).
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.
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 Tescos 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.
8

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; Data monitor Report, 2003).
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
9

 Intelligent scale
Electronic shelf labeling
Self check-out machine
Radio Frequency Identification (RFID).
The adoption of Electronic Point of Sale (EP0S), Electronic Funds Transfer Systems (EFTP0S)
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, Tescos 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 production to cut waste, reduce consumption of resources and
minimise environmental damage. The latest legislation created a new tax on advertising highly

10

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 governments 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 amount spent on groceries at its stores. While
prices are lowered on promoted goods, prices elsewhere in the store are raised to compensate

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3.0 INDUSTRY ANALYSIS: PORTERS 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, Sainsburys 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 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.

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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.

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). Tescos famous
loyalty card - Cubcard remains the most successful customer retention strategy that significantly
increases the profitability of Tescos 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
13

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.

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 Sainsburys are trying to acquire existing small-scale operations and
opening Metro and Express stores in local towns and city centres Ritz (2005).

14

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 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.

15

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 brands pecific, largely through carefully
branded packaging and the 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 reengineered, 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. Tescos 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

16

people have less time for shopping, Tesco employed this on-line systems and now became the
biggest online supermarket.

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
Tescos reach, delivering 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
17

wireless devices, intelligent scale, electronic shelf labelling, self check-out machine and radio
frequency identification (RFID) systems. This technology is an effort to maintain Tescos ability
to handle an increase in productiservice 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
company policy and companys 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.
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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
Tescos 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
The results highlight that the main threat is potentially coming from Sainsburys that possesses a
strong brand name and is carefully selects and controls its suppliers.

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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, Cstores and an online service. Elsewhere the focus is usually on hypermarkets. In 2003, the
groups 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 the strategic capability, including resources and competence, of the
company that are most likely to impact on strategy development

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5.2 Core Competence

Superior performance, according to Johnson and Scholes (2003), has to be determined by the
way in which companys resources are deployed to create competence in the organisational
activities. Core competencies are activities or processes that critically underpin the companys
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 in the 1990s suggests that over
time companies may develop key areas of expertise which are distinctive to that company and
critical to the companys 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 50000 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).
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Through a long period of operations, core competencies of Tesco have to be rather fixed.
Prahalds and Hamels approach states that core competencies should change in response to
changes in the companys 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 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. For 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 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

22

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 Tescos ability to combine and
exploit these resources in uniquely different ways. In the external environment, the intensity of
competition is not completely under the retailers control, however, to compete effectively Tesco
have to identify its core competences and use them for companys advantage.

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 Tescos
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 companys culture and the subcultures in
adaptation of future strategies.
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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-forg
ranted 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 measurements are constantly under the
management review to monitor the efficiency of the staff and managers decisions. The rituals of
the companys 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 companys hierarchy represent a strong internal
environment.

6.0 TESCOS STRATEGIC OPTIONS: GENERIC STRATEGIES

24

Generic Strategies are charactensed by an individual retailers 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. 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
Tescos 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 is 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 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

25

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.

26

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.

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
companys revenues and expansion strategy. Tescos 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
27

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: 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. Ansoffs 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 Tescos 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 can introduce new product lines. This may require

28

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 Tescos
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).

8.0 CONCLUSION

The success of the Tesco shows how far the branding and effective service delivery can come in
29

moving beyond splashing ones logo on a billboard. It had fostered powerful identities by
making their retailing concept into a virus and spending it out into the cuFture 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
Tescos cognitive and behavioural learning processes.
In large organizations as Tesco strategy should be analysed and implemented at vanous levels
within the hierarchy.

SWOT ANALYSIS: TESCO

Source: Mintel Report, Datamonitor Reports, Tesco Case Studies

Strengths

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Increasing market share: Tesco holds a 13% share of the UK retail market. Its multi-format
capability means that it will continue
levels of strategy should be related and mutually supporting. Tescos 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
To grow share in food, while increasing space contribution from hypermarkets will allow it to
drive a higher share in non-food.
Tescos general growth and ROl show no sign of abating: In the UK. Tescos 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 countrys 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. Tescos
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 Tescos 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

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groups 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 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 worlds 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 companys online services, the company has a strong platform to
further develop this revenue stream.
Brand value: Profits for Tescos 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. Tescos innovative ways of improving the
customer shopping experience, 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 Sainsburys. Also the Competition Commissions report makes it very
difficult for a competitor to challenge its scale and has effectively scuppered Wal-Marts 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
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to contribute greater amounts to Tescos profits over the next few years, the company is still
highly dependent on the UK market (73.8% of 2003 revenues). While this isnt a major weakness
in the short term, any changes in the UK supermarket industry over the next year for example,
like the Morrisons 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 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 Tescos 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 Tescos non-food sales will double over the
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next four years.

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 companys 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: Tescos 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.
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 lnc,

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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 n 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 investors in price. Safeway because of new ownership and Sainsbury because
of new management. Morrison is reducing Safeways 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 Tescos business model. It
also could come as a consequence of an aggressive move into a larger market, such as China or
Japan.
Wal-MartlAsda challenge: Since the US shopping giant Wal-mart purchased Asda, Tescos rank
as the top UK supermarket has been threatened. Asda can now compete extremety well on price
and range of goods. For the moment, Asda is the third largest supermarket in the UK, just behind
Sainsburys and then Tesco.
However, Asda closed the gap on Sainsburys in 2003, leaving the company to directly challenge
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Tescos dominance. 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 Tescos 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. Tescos debt
may increase before it begins to decline.
Korea is contributing a good proportion of Tescos international profit growth. If profits continue
to grow in this way, Korea will probably represent one-third of Tescos international profits in
2003. Korean consumer spending is currently quite low, and coupled with the countrys current
unrest, and Tescos large investment, this represents a high risk area for Tesco to bank on.

APPENDIX C
VALUE CHAIN

Primary Activities
(Currently, Adds value (+), losses value (-), Potential to add value (P+))

Inbound logistics
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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

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
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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 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 pnces
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

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costs and cash control of the companys 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
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
Tescos 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? (-).

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9 WEBILOGRAPHY
Wikipedia
Google
www.tesco.com
Daily Mail
businesscasestudies.co.uk
innovationleaders.org/tes_company_profile.html
www.telegraph.co.uk Finance News by Sector Retail and Consumer
www.theguardian.com Business Freedom of information
https://eternalsunshineoftheismind.wordpress.com
www.ecommerce-digest.com/tesco-case-study.html

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