SM Final Assignment - Krum Garkov - MBA 6 Part Time

STRATEGIC MANAGEMENT

FINAL ASSIGNMENTStrategic analysis of Tesco Plc

by Krum Garkov, MBA 6 Part-time

London School of Business and Finance

Abstract

The purpose of this paper is to provide analysis of business strategy

followed by Tesco Plc, one of the world’s largest retailers. Using tools

and techniques from the arsenal of business consulting we will try to

find the source of Tesco’s sustainable success and potential for further

development.

Each chapter addresses a particular question related to Tesco:

Chapter 1 deals with characteristics of the retail industry

Chapter 2 provides insight on Tesco’s performance and the

reasons for its business success

Chapter 3 recommends strategies for further business

development and potential issues that needs to be considered

Information Systems assignmentMBA 6, Part-time

The Knowledge management strategy as a prerequisite for successful BPR

1 INTRODUCTION.........................................................................................................................................2

2 CHARACTERISTICS OF RETAIL INDUSTRY.....................................................................................3

2.A TYPE AND KEY DIMENSIONS OF THE INDUSTRY...........................................................................................3

2.a.1 Type of the industry...............................................................................................................................3

2.a.2 Key characteristics of the retail industry..............................................................................................4

2.a.3 Industry environmental factors (PESTEL analysis)..............................................................................5

2.a.3.1 Political Factors.................................................................................................................................5

2.a.3.2 Economic Factors...............................................................................................................................5

2.a.3.3 Social/Cultural Factors.......................................................................................................................6

2.a.3.4 Technological Factors.........................................................................................................................6

2.a.3.5 Environmental Factors........................................................................................................................7

2.a.3.6 Legislative Factors..............................................................................................................................8

2.B KEY PLAYERS...............................................................................................................................................8

2.C FORCES AT WORK (PORTER’S FIVE FORCES ANALYSIS).............................................................................9

2.c.1 Threat of New Entrants.........................................................................................................................9

2.c.2 Buyers Power....................................................................................................................................10

2.c.3 Threat of Substitutes........................................................................................................................10

2.c.4 Power of Suppliers...........................................................................................................................11

2.c.5 Industry rivalry...................................................................................................................................11

3 TESCO’S PERFORMANCE AND REASONS FOR SUCCESS...........................................................11

3.A SWOT........................................................................................................................................................12

3.B VALUE CHAIN.............................................................................................................................................16

3.b.1 Primary activities................................................................................................................................17

3.b.2 Support Activities..............................................................................................................................18

3.C FINANCIAL PERFORMANCE.........................................................................................................................19

3.D CONCLUSION..............................................................................................................................................21

4 RECOMMENDATIONS & POTENTIAL ISSUES................................................................................24

Strategic management assignmentMBA 6, Part-time

Strategic analysis of Tesco Plc

1 INTRODUCTION

The food and drink retail sector represents the largest global industry. In the UK specifically it provides employment for about 3 million people in primary production, manufacturing and retailing. In 2007 retail accounted for 10.7% of gross domestic product (Data monitor, 2007). In recent years UK supermarkets have come under increased pressure regarding their market share and treatment of suppliers, particularly of own-label products. Nevertheless development of strategic supply networks has been an integral part of most successful supermarket strategies for the past two decades.

The paper below provides a strategic insight on one of the most successful supermarket company ever, Tesco plc, with focus set on its external environment and company's performance. In addition future strategic options are suggested based on this analysis.

Tesco is one of the largest food retailers in the world, operating more than 2,300 stores and employing over 330,000 people. It explores both classic retail business model and online services through its subsidiary, Tesco.com. The largest market for Tesco is the UK, where it operates under four different banners like Extra, Superstore, Metro and Express. However in the last year Tesco established operations in many countries, primarily in Eastern Europe and Asia. The company sells almost 40,000 food products, including clothing and other non-food lines. The company's own-label products ( approx. 50 % of sales) are positioned at three levels: value, normal and finest. In addition to retail operations, many stores have gas stations, becoming one of Britain's largest independent petrol retailers. Tesco offers also retail finance services through its subsidiary Tesco Personal Finance.

____________________________________________________________________________________

Page 2



2 CHARACTERISTICS OF RETAIL INDUSTRY

2.a Type and key dimensions of the industry

Purpose of this section is to provide inside view on the key dimensions of retail industry. This view is being divided into two areas:

Key characteristics of the industry Industry environmental factors ( PESTEL analysis )

In both areas it’s been considered global retail industry, rather than regional or local UK market.

2.a.1 Type of the industry

Using categories provided by Boston Consulting Group Environmental Matrix ( BCG EM ) retail industry is qualified as ‘volume industry’. Therefore it can be described as:

Mass market, large sales volumes

Relatively homogenous customer need

Standardised product offer, delivered consistently

Mass repetitive manufacture, ass distribution, well developed infrastructure

Differentiation through branding Dominated by a few large competitors

____________________________________________________________________________________

Page 3



2.a.2 Key characteristics of the retail industry

The key characteristics of the global retail industry considered for the purpose of this paper are [1][2]:

Retail industry is capital-intensive: Retail companies typically are required to invest significantly in fixed assets (retail outlets, warehouses) and distribution networks. These assets need to be continuously managed to provide optimal returns. They also need to be refurbished and relocated on an ongoing basis.

Diversity in business risk: In retail industry business risk is generally a function of the segment in which the retail companies operate. It is also influenced by the overall competitive environment and the retailer's positioning within the specific segment. For example, specific segments which cater to more inelastic products (e.g. food) are generally exposed to a lower business risk than other segments. Conversely, specialty retailers (e.g. fashion clothes)are more exposed to cyclical and seasonal volatility, product obsolescence and fashion risk, and therefore subject to higher business risk. A further complicating factor is the general regulatory environment governing new store openings and goods offering.

Tight logistics and high standards of execution: A successful retail business has to demonstrate its ability to efficiently provide customers with the right product at the right time, and at the right price. Competition in retail is fierce, and customer loyalty can fluctuate significantly if the value proposition of the retailer can not meet demand. A retailer that is unable to provide and sustain satisfactory customer value will feel an impact on its operating and financial performance

Growth strategy: The growth model for most retail operators is based on organic growth. However the largest retailers perform some acquisition activities mostly in non-food. On the other hand in markets where concentration has reached a high level or organic growth is limited, some retailers have chosen to expand abroad to find new sources of growth (e.g. Tesco, Metro). However, retail formats and business models do not always seem to transfer seamlessly from country to country. Customers across the world can be resistant to changes and do not always react well to new concepts.

Relevant markets are local or regional in nature: Very few really large retailers (Wal-Mart, Tesco, Metro ) can show significant geographic diversification in their operations. Most retailers are

____________________________________________________________________________________

Page 4



predominantly local or regional businesses. Regional considerations are therefore important characteristic of retail business throughout the world

2.a.3 Industry environmental factors (PESTEL analysis)

2.a.3.1 Political Factors

Operating in a globalized environment with stores around the globe, retailers’ performance is highly influenced by the political and legislative conditions of the countries of operations, including the European Union (EU).

The governments usually encourage 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. 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 labor-intensive sector. In that sense retailers (at least most of them ) employ large numbers of; student, disabled and elderly workers, often paying them lower rates. Since staff turnover in retail industry typically is, these workers offer a higher level of loyalty and enable cost-effectiveness of retail operations.

2.a.3.2 Economic Factors

Economic factors influence demand, costs, prices and profits. One of the most influential factors is unemployment levels, which change the effective demand for many goods, adversely affecting the demand required to produce such goods.

These economic factors are generally outside the control of the retailers, but their effects on performance and the marketing mix can be long-term. Nevertheless there are still many opportunities for growth globally and it is expected the largest retail companies to continue their expansion, retailers are dependent on their primary ( or domestic ) markets. Hence, they would be badly affected by any

____________________________________________________________________________________

Page 5



slowdown in their ‘native’ markets and are exposed to significant market risks.

2.a.3.3 Social/Cultural Factors

Current trends in retail industry indicate that globally customers are moving (or have moved already) towards ‘one-stop' and ‘bulk' shopping, due to a variety of social diversification. As a result retailers started to increase the amount of non-food items and services offered for sale.

Demographic changes such as the aging population (e.g. in Europe ), an increase in female workers and changes in the standard of living forced retailers to focus their efforts on added-value products and services. These new products and services require different and more efficient business model with emphasis set towards the own-label share of the business mix, the supply chain and other operational improvements, that can enable costs efficiency [1].

The goods and services demanded by consumers is a function of their social status and their consequent attitudes and beliefs. Today consumers are more and more aware of health issues, and their attitudes towards food are constantly changing. Taking as illustration Tesco, in the last years company amended its product mix to accommodate the increased demand for organic products. Tesco was also the first to allow customers to pay with cheques and cash at the checkout etc.

2.a.3.4 Technological Factors

Technology is one of the most important factors influencing retail industry. The new technologies benefit both customers and the companies. Customer value and satisfaction rises because goods are readily available, services can become more personalized and shopping more convenient. Technology also enables efficiency supply chain management and significant costs reduction. Some of the technologies adopted in retail industry are:

Wireless devices

Intelligent scale ____________________________________________________________________________________

Page 6



Electronic shelf labeling

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 [5].

2.a.3.5 Environmental Factors

Since the beginning of the new century, 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 [7]. In this context the major issue impacting retailers is the environmental issues and impact of operations on environment. Hence, by recognizing this trend within the broader ethical context, retailers’ corporate social responsibility is concerned with the ways in which an organization meets and exceeds the minimum obligations to stakeholders specified through government regulation and corporate governance [6].

Many governments have launched strategies for sustainable consumption and production to cut waste, reduce consumption of resources and minimize environmental damage. In addition many countries introduced changes in their domestic legislation setting new taxes ( or increasing existing ) on advertising and selling products considered to be dangerous for environment. All these changes directly affected product ranges of retailing companies and forced their subsequent adaptation, affecting relationships with both suppliers and customers

2.a.3.6 Legislative Factors

Many government regulations and policies have a direct impact on the performance of retailing companies. For instance, the Food Retailing Commission (FRC) in the UK suggested an enforceable Code of Practice should be set up banning many of the current practices followed by retailers, such as demanding payments from suppliers and changing agreed prices retrospectively or without

____________________________________________________________________________________

Page 7

Major global retailers

256,32953%

79,79616%

60,50312%

51,53510%

44,5849%

Wal-Mart

Carrefour

Metro

Tesco

Ahold

UK retail market shares

30.6

16.616.3

11.1

5.43.7

1.8

14.5

Tesco Asda

Sainsburi's Morrison's

Somerfield Waitrose

Iceland Other



notice [8]. Increasing competition between retailers creates a threat of intense price wars and strong requirements for product differentiation. To address this treat many governments established policies for monopoly controls and reduction of buyers' power. However their collateral impact can limit entry to retail sector with such controls as license requirements and limits on access to raw materials [7] [10].

2.b Key players

On the global retail market there are few really large companies that hold dominant market share. These companies are:

Wal-Mart US Carrefour France Tesco UK Metro Germany Ahold Netherlands

Their combined market share exceeds 40 % [8] with total sales for 2005th of approximately 500 billion US dollars. Distribution of sales is shown on the chart to the right. On the UK market however Tesco has a dominant position with more than a 30% market share. It’s closest competitor is Wal-Mart owned Asda with approximately 17 % market share. Other competitors are Sainsbury’s, Morrison’s etc.

2.c Forces at work (Porter’s five forces analysis)

2.c.1 Threat of New Entrants

____________________________________________________________________________________

Page 8



The global retail market is being dominated by few competitors, including four major brands of Wal-Mart, Carrefour, Merto and Tesco. It is not different on the UK market where Tesco along with Asda, Sainsbury's and Safeway possess a joint market share of 70%. Over the last 30 years, according to Ritz (2005), the retail market has been transformed into the supermarket-dominated business. Majority of large chains have built their power due to operating efficiency, tight value chain control and major marketing-mix expenditure. Hence, nowadays a strong barrier exists for new entrants on the retail market ( global or local ). Since retail industry is capital-intensive, it becomes very difficult for new entrants to raise sufficient capital because of large fixed costs and highly developed supply chains. This is also evident looking at huge investments done by large chains, such as Wall-Mart and Tesco, in advanced technology for stock control systems that impact new entrants and the existing ones. Other barriers include differentiation of brands & product ranges as well as economies of scale achieved by the largest retailers in their aggressive operational tactics in product development, promotions and efficient distribution.

____________________________________________________________________________________

Page 9



2.c.2 Buyers Power

Michael Porter theorized that the more products become standardized, the lower the switching costs are, and hence customers gain more power over companies[9]. This general conclusion is valid for retail industry as well. Changes in customer demand, needs and standard of living in the past few decades forced retailers to start looking for innovative ways to retain their customers. Tesco's famous loyalty card – Clubcard is a good example in this respect and it significantly increased the profitability of Tesco's business. Customers’ needs reinforced many other changes in the retail business such as sell of non-food items and organic goods. Today retailers are able to control and retain their customers only with customizing service, ensuring low prices, broader choices, and constant flow of in-store promotion. On the other hand shift in clients’ needs provided retailers with new strategic opportunities for expansion into new markets of banking, pharmacies, clothing etc.

2.c.3 Threat of Substitutes

In the retail industry direct substitution in the form of product-for-product or the substitute of need is hardly possible today due to standardization and unification of offered goods. Treat of substitution for the large retailers come from new trends in retailing, such as shift of the consumers to small chains of convenience stores. To address this treat large retailers usually try to acquire existing small-scale operators or diversify format of their stores.

2.c.4 Power of Suppliers

Power of suppliers to bargain and put pressure on the large retail chains decreased significantly in the last two decades. This is a result of fear of losing their business combined on the other hand with aspiration of retailers to continuous offering of promotional prices and cost efficiency. Suppliers are also threatened by the globalization of the markets that enable large retailers to source their products from any place in the world at cheaper price.

____________________________________________________________________________________

Page 10



2.c.5 Industry rivalry

In the last two decades retail market recorded significant growth in size and volume. It was pursued though with establishment of market dominance of few larger companies, with greater store size, increased concentration of companies, and utilization of a range of different store formats, which are now prominent characteristics of the industry. Given that today retail market is highly competitive. It is mature and flat therefore growth is difficult while consumers become more and more demanding and sophisticated. This highly competitive market has fostered an accelerated level of development and innovation, resulting in new range of trading formats new product lines etc. The market leaders have been forced to refocus continuously on price and customer value, reinforcing the added value elements of their service.

3 TESCO’S PERFORMANCE AND REASONS FOR SUCCESS

This section provides in-depth overview on TESCO’s performance using well-accepted analytical tools such as SWOT analysis, Value Chain analysis and financial analysis based on performance of TESCO in the last 10 years. At the end conclusion is provided that outlines key capabilities and competencies that enabled TESCO to achieve sustainable high performance during the last 6-10 years.

____________________________________________________________________________________

Page 11



3.a SWOT

Chart to the right provides overview on TESCO’s strengths, weaknesses, opportunities and treats.The general conclusion that comes form this analysis is while strengths and opportunities for TESCO come from excellent control of supply chain and distribution, weaknesses and treats are related to the strong dependency from the UK market and yet developing growth strategy.

In the table below are provided more detailed comments of the outcomes from SWOT analysis.

Area of

SWOTItem Comment

Strengths Increasing market share

Tesco holds about 30 % share of the UK retail market.

Its multi-format capability means that it will continue to

grow share in food, while increasing space contribution

from hypermarkets will allow it to drive a higher share in

non-food.

____________________________________________________________________________________

Page 12



StrengthsSustainable growth of

revenue

At the end of its previous financial year Tesco reported

net sales of 54.327 bn GBP, which represents 13%

increase compared with previous FY. This trend is

sustainable for the last 6 years. At the same time Tesco

has grown its non-food division to the extent that its

revenues now total 23% of total group earnings.

Tesco's international business segment is growing

steadily, and is predicted to contribute nearly a quarter

of group profits over the next five years.

Strengths Brand value

Profits for Tesco's operations in Europe, Asia and

Ireland increased by 78% during the last fiscal year.

The company has a strong brand image, and is

associated with good quality, and goods that provide

excellent value. In addition Tesco's innovative ways of

improving customer satisfaction, as well as its efforts to

branch out into finance and insurance have also

capitalized on this.

Strengths Online sales

Tesco.com is the world's biggest online supermarket

and the last year had sales of over £577 million, an

increase of 29% compared with previous year. Tesco

online now operates in over 300 stores around the

country, covering 100% of the UK. With over a million

households nationwide having used the company's

online services, the company has a strong platform to

further develop this revenue stream.

Weaknesses Strong reliance upon the UK

market

Although international business is still growing, and is

expected to contribute greater amounts to Tesco's

profits over the next few years, the company is still

highly dependent on the UK market (approx. 75% of ____________________________________________________________________________________

Page 13



2008 revenues). While it is not a strong weakness in

the short term it could impact performance of Tesco

and its market share in long term.

Weaknesses Debt volume

Due to intensive expansion & growth in the last few

years Tesco’s debt (short & long term ) increased.

Indication for this are changes in current ratio and

debt to capital ratio that reached 0.78 and 0.36 in

2009th, compared with 0.56 and 0.28 in 2004 th.

If this trend continues, Tesco may face a situation

where insufficient free cash will be available for

operations.

Weaknesses Serial acquisitions

With a market capitalization of over £30 billion, Tesco

clearly has enormous firepower. It has a vast product

range is vast and almost any acquisition can be

justified. However, there is the danger of Tesco

becoming a serial acquirer, as this tends to reduce

earnings visibility and quality

Opportunities Further development of non-

food retail

The growth in Tesco's market share in the UK to over

30% in the last years and strong competition combined

with the financial crisis mean that it will not grow so

sharply over the next few years. Situation abroad do

not differ significantly. On the other hand it is estimated

that Tesco's non-food sales will double over the next

four to five years.

Worldwide it has sales of £7 billion in non-food, some

27% of the total sales volumes. Around half of new

space opened in the UK last two years was for non-

food and the result has been to increase its market

____________________________________________________________________________________

Page 14



share from 5% to 7.5% contributing to overall increase

of the UK retail market share to over 30%.

Opportunities Health & beauty

Tesco's health and beauty ranges continue to grow,

and it is currently the fastest growing skincare retailer in

the market. The company is a volume market leader in

both toiletries and healthcare and is number one

retailer in the baby goods markets. Tesco continues to

invest in price to deliver the value customers have

come to expect and this year invested £47 million on

health and beauty pricing alone. The company now has

29 stores with opticians and more than 200 stores with

pharmacies.

Opportunities Further international growth

Tesco operates in 13 countries abroad in Eastern

Europe and Asia. International sales have grown nearly

10 times in the last 6 years, reaching £7 billion, with

profits of £356 million. In the current year, Tesco will

add 2.5 million square feet to sales area and could well

enter another major market creating a strategic

relationship with US supermarket chain, Safeway Inc,

to take the tesco.com home shopping model to the US.

It is expected that growth abroad will drive further

increase of revenues and scale for Tesco.

TreatsStrong reliance upon UK

market

The price followers in the UK market are about to

become aggressive investors in price. Since Tesco is

committed to price leadership, this could result in a step

down in profitability.

Treats Revenue from international

operations drops

As mentioned above expansion abroad is expected to

be the main driver of Tesco’s growth and profitability in

____________________________________________________________________________________

Page 15



the coming years. However this might not happen,

either because of economic conditions, competitor

action, or failure in Tesco's business model. It also

could come as a consequence of an aggressive move

into a large new market.

TreatsChallenge from

Wal-Mart/ASDA

Since the US shopping giant Wal-mart purchased

Asda, Tesco's rank as the top UK supermarket has

been threatened. Asda can now compete extremely

well on price and range of goods. Today, Asda is the

2nd largest retailer in the UK, with market share around

17% making Asda the greatest Tesco’s competitor.

TreatFast & unbalanced

international expansion

International growth is capital-intensive. Entering new

markets with a new brand requires heavy investment

and marketing, as well as extra distribution and

operation expense. Therefore Tesco's debt may

increase further and it represents a high risk area for

Tesco.

3.b Value chain

One of the factors that enabled Tesco’s success was tight control over entire value chain. The main characteristics of Tesco’s value chain are:

3.b.1 Primary activities

____________________________________________________________________________________

Page 16



Inbound logistics

Inbound logistics includes tasks, related to receipt of goods from suppliers, storage of goods, handling & transportation of goods internally and placing the products on the shelves. The main strengths of Tesco’s inbound logistics are:

o Provides high level of consumer choice in store

o Efficient distribution system

o Tight quality control procedure of goods and products, reducing losses and enabling cost efficient operations and better supplier management

Operations

Tesco’s operations are service orientated. Their main strengths are:

o Different store formats addressing needs of different customers’ segments

o High variety of choices in store

o Range of non-food goods and services adding customer value

o Multiple sales channels ( in store, on line )

Outbound logistics

Outbound logistics is concerned with delivering the product to the customer. Tesco’s strengths in this area are:

o Home delivery serviceo Saving customer’s time through improved and efficient

management of parking facilities, trolley collectors, till staff and system

o Increased turnaround

Marketing and salesMarketing and sales are probably one of the key differentiators of Tesco compared with its competitors. Main strengths in this area are:

o Aggressive marketing using different channels____________________________________________________________________________________

Page 17



o Excellent market segmentation

o Clubcard loyalty card

o Additional non-food value-added services

o Continuous discount offers

o Offering of ‘green’ and ‘organic’ food products

.

3.b.2 Support Activities

Company InfrastructureTesco’s key strengths in this area are:

o Accurate and timely planning and control

o Focus on the costs and cash control of the company’s operations

o Strong internal control department

o Sophisticated anti-fraud software (infrastructure/technology, interdependence),

o New security systems to reduce internal theft, hence improving further cost efficiency of operations

Human resources management

HRM covers everything from recruitment to management development. The key strengths in this area are:

Comprehensive training schemes and staff development programs

Well trained staff

Continuous investments in customer service improvements

Corporate culture encouraging personal development and learning

Technology development____________________________________________________________________________________

Page 18



Technology enables Tesco to provide new innovative product ranges/ solutions that anticipate customer needs. In this aspect key strengths in this area are:

Integrated internal systems covering entire value chain

Corporate network connecting all stores with HQ

Developed on line operation and services

In-store systems ( i.e. queuing system ) enabling better efficiency and quality of service

3.c Financial performance

In the last 6 years Tesco achieved outstanding financial performance. Net sales grew continuously with 8.9 % annually at average, reaching GBP 54.3 billion at the end of last financial year1. Net profit followed the same trend growing with 10.4 % at average annually. Tesco recorded profit growth of approximately 2 % for the last financial year despite financial crisis and crouched consumption of households which is still very positive result (Chart 1). It is also important to note that operations outside UK represented approximately 27% of the total net sales in the last financial year, compared with approximately 20% in FY 2005. This trend clearly indicates that international operations will play more and more important role to ensure further Tesco’s success and growth.

The outstanding financial performance is confirmed by the trend 1 In the UK financial year ends on 31.3.____________________________________________________________________________________

Page 19

£0.00

£10,000,000.00

£20,000,000.00

£30,000,000.00

£40,000,000.00

£50,000,000.00

£60,000,000.00

FY 2004 FY 2005 FY 2006 FY 2007 FY 2008 FY 2009

Tesco net sales & profit ( FY 2004 - FY 2009 )

Net profit (GBP 000 )

Net sales (GBP 000 )

Chart 1: Tesco’s net profit FY 2004 to 2009

Chart 3: Trend of Tesco’s shares (5 years data)

1.64

3.984.18

3.34

1.53 1.46

0.59

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

%

Industryavg.

Tesco Ahold Wal MartStores Inc

Sainsbury(J)

CarrefourSA

Metro AG

Comparisson of net margin of Tesco and its closest rivals

Chart 2: Tesco’s shares movement v. s. FTSE 100 (1 year)

Chart 3: Tesco’s shares movement (5 years)



followed by Tesco’s shares on the London Stock Exchange. In the last year Tesco’s share price performed better than FTSE 100 index with 15 to 20 % at average (Chart 2). Similar trend can be found looking at the development of Tesco’s share price in the last 5 years (Chart 3).However it must be also noted that in the last financial year Tesco’s debt (both short and long term ) increased to approximately GBP 18 billion ( short term ) and GBP 12.4 billion ( long term ). In both cases increase is about 40 % compared with previous financial year. It can be explained with the impact of the global crisis on retail market and aggressive expansion of Tesco abroad. If this trend continues in the next financial year though, be a sign of slow down of Tesco’s growth and further financial troubles. Key financial indicators derived from Tesco’s financial reports also confirm good performance of the company. For the last financial year achieved net margin is 3.98 %, more than twice higher than industry average. It is also higher than net margin achieved from Tesco’s closest rivals (excluding Ahold with net margin of 4.18%). Return on assets achieved by Tesco also is also remarkable, and twice hire than industry average (5.67 % against 3.14 % ). It is also highest compared with Tesco’s rivals. As it could be expected quick ratio2

for Tesco less than 1 ( 60.85 % in particular ). It is however 50 % higher than industry average (45.11 % ). In general it is typical for industries like retailing to have

2 Quick ratio has been chosen as more conservative liquidity measure compared with current ratio____________________________________________________________________________________

Page 20

Chart 4: Net margin comparison (last FY)



liquidity ratios lower than 1 due to the nature of the goods offered ( e.g fast moving goods, clothing etc. ). Finally it must be noted that while return on assets for Tesco is higher than industry average, sales to fixed assets ratio is almost twice lower than industry average ( 2.53 % against 4.03 % ). It indicates either some inefficiency in operations or high investments in fixed assets that did not start to pay off yet.

Further details regarding Tesco’s financial performance are available in appendices B, C and D. 3.d Conclusion

Tesco is the top retailer both in the global retail market and in the UK. It is focused on the broad middle mass-market and has maintained its position for significant period of time. Based on the analysis above it can be concluded that reason for sustainable success is combination between Tesco’s core competencies and internal operation efficiency.

Core competencies built by Tesco can be summarized as:

clear and strong customer focus

well targeted product offers

excellent product and store format innovation

multiple sales channels

well trained and customer-friendly staff

tight value chain control

Further, as Johnson and Scholes [5] noted, sustainable superior performance depends on the way in which company's resources are deployed to create core competencies in the organizational activities. Core competencies are activities or processes that critically underpin the company's competitive advantage. In this sense Tesco succeeded to develop and embed its core competencies at an operational level in the work routines. Through this, company developed over the time key areas of expertise which provided Tesco with competitive advantage over its rivals. On the other hand developed core competencies enabled Tesco to increase value added to its service and its delivery. Tesco did not let its core competencies once built to remain fixed and static through a long

____________________________________________________________________________________

Page 21



period of operations though. Company was continuously developing and changing them to address changes in the business environment customers’ needs and demands. This flexibility was another enabler of Tesco’s long-term success.

The other major driver of Tesco’s success was internal operations efficiency. Implementing comprehensive and integrated processes and procedures in operations enabled Tesco to identify the critical success factors in the retail market and to address them adequately, achieving excellent performance and growth. These factors are:

1. Supplier ManagementTesco, like many other retail companies, sources its goods from many manufacturers based on competitiveness on price and volumes. For many years company has been supporting British labor market using mostly UK suppliers. However with globalization of the markets Tesco realized opportunity to improve its cost effectiveness looking abroad for suppliers, capable to provide quality on lower price. Tesco choose quite unique approach using long-established UK partners to manage supplier abroad. At the same time foods continued to be heavily UK-based due to the well-developed successful ranges of prepared foods.

Applying advanced technology in its communications and cooperation with the suppliers across the globe, Tesco aims to control efficiency of their work. 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 combining regular and long term orders and investment necessary to improve efficiency of the supply chain. Tesco works together with his suppliers to develop their capabilities and efficiency through various supplier management programs.

2. Branding and Reputation

Tesco’s brand has always been serving as the core strategic advantage. It’s associated with good quality, trustworthy goods with excellent value. To sustain its brand image Tesco continuously monitors and re-engineers the product and service development processes of the company, aiming improved management of product lifecycles and more efficient delivery of wide ranges of

____________________________________________________________________________________

Page 22



products to customers. Tesco's innovative ways of improving the customer shopping experience, as well as its efforts to brand non-food goods and services have also capitalized on strong brand reputation.

The company has also very strong and successful customer retention policy due to its loyalty cards system and customized services to meet individual customer’s needs. A good example on this regard is tremendous growth of on-line sales where Tesco has a strong platform for further development of its revenue stream.

3. Information technologies and integration

In order to be able to compete in today’s globalized world, it is necessary to innovate at an extraordinary speed, continuously improving the products, services and processes. For Tesco efficient operations have become a must in order to keep its competitive advantage. Therefore for Tesco IT has risen beyond its traditional support role and become key driver in business strategy formulation. Company implemented systems that control all aspects of operations - stock, deliveries, business transactions etc. Tesco uses the Internet to create proprietary and customized information flows between the company and its suppliers. This approach enables flexibility, scalability, extensibility and integration across the supply and distribution channels. It also helps to extend the key information on business partners throughout the supply chain and facilitate collaborative relationships with partners. IT technology extends Tesco's ability to increase product and service volume while controlling costs. It also enables innovation and responsiveness to the market.

4 RECOMMENDATIONS & POTENTIAL ISSUES

The sustainable success of Tesco shows how business growth ca be driven by the branding, value chain management and effective service delivery. However in today’s rapidly changing business environment with a high competitors' pressure Tesco has to adopt new growth strategies or diversified the existing in order to sustain its leading market position in the challenging retail market. ____________________________________________________________________________________

Page 23



In that sense Tesco has two major business development areas where it shall focus its further efforts. They are (1) further business growth and (2) internal operations efficiency. Further business growth can be achieved through:

a) Development & growth of the non-food products and servicesAt present retail market has changed and clients demand more complex service and product offering. Therefore Tesco can take advantage of the growing demand for non-food products. However, development of Tesco’s non –food product lines must be planned carefully due to the potential impact of the still continuing global crisis on non-food unit’s effectiveness and profitability. Sales of non-food products are largely driven by consumer confidence ratings, which are currently at a low level. It means that the sale of large durable goods and luxury items, in particular, may be significantly depressed as consumers try to avoid or cut unnecessary purchases due to economic troubles. Therefore any further development in this area, a careful risk assessment must be performed.

b) Growth of international operationsToday Tesco operates in 13 countries located in Eastern Europe and Asia. Tesco has to focus on increasing of market penetration in these countries, developing food sales in these countries since usually they are not significantly affected from economic downturns. Once global economic climate improves and using already good brand recognition Tesco must expand offering including non-food product ranges and services. However these countries provide different level of growth and development opportunities due to the size of the local markets and other environmental factors. Therefore Tesco needs to continue its international growth since as forecasts predict international operations will drive business growth in the future. Specifically Tesco needs to focus on developing countries in Europe and Asia, paying specific attention to Chinese market due to its huge potential. However, any further expansion into new markets must be strictly governed by risk assessments that take into account the difficulty of creating a supply and distribution chain network across regions, local culture, tastes and environmental factors. If this assessment is

____________________________________________________________________________________

Page 24



omitted or not done properly Tesco will face significant risk of rapidly decrease the financial benefit gained by entering new markets, reducing overall effectiveness and profitability of the business. To manage and mitigate financial and operational risks from international operations Tesco must build joint ventures with local companies in the countries considered as strategic for further growth of the business ( like China for example ). In the other countries Tesco must use franchising as a tool to balance risks with potential rewards and profit.

c) Development of environmentally friendly and ethical food ranges for the UK marketThe public awareness of the environmental impact of food products is continuously increasing on the UK market. Therefore from consumers’ point of view food quality and food sustainability becomes a key component of value added and driver for choice. A growing awareness of the need for ethical treatment of animals is also a major topic of the modern UK society. Natural and organic product ranges, including not only foods but also cleaning products and personal hygiene products, are becoming more and more popular. This trend represents significant opportunity for Tesco to continue growth on the UK market, developing these lifestyle ranges. Tesco’s high brand recognition and reduction of production and distribution costs due to the scale of operations will make these products affordable the customers increasing Tesco’s customer base. Tesco’s Nature’s Choice product range has already begun to explore this strategy, demonstrating good results. Therefore this development must continue to be enhanced as a way of capturing more of the market in the UK.

In terms of internal operations efficiency Tesco must design and implement common set of performance indicators applicable across all business units. It will be a key for successful management of the company and future business growth. At the same time standardization, integration and development of internal IT systems must continue focusing on Management IS. It will enable Tesco to have comprehensive and timely insight on operations and markets in real-time gaining competitive advantage over its rivals.

____________________________________________________________________________________

Page 25



To implement successfully growth strategies and achieve sustainable results Tesco has to consider following potential issues related to retail market:

Size of the businessIn the last decade size of Tesco grew up significantly, making the company 4th largest retailer globally. However this size must be considered as an issue since increased complexity of operations and reaction of the public to continuous Tesco’s expansion on retail market.

Price deflation and rising costs

Price deflation has a strong impact on the global retail market. The fall in prices has been driven by greater overseas sourcing, improved technology and the growth of supermarkets and discount stores. Against this backdrop, companies are experiencing rising levels of cost inflation. The overall impact on Tesco will be squeeze of profits and profit margin.

Expansion and consolidation of the retail market

Many retailers went through a process of mergers and acquisitions in the last years. Consolidation is occurring across the consumer packaged goods sector, considered as main tool for further business expansion. In this respect Tesco will face stronger international competition continuing its business growth.

Supply chain management and stock control

With expansion of international operations supply chain and distribution management is becoming more and more complex. Shrinkage and fraud remain key stock control issue for retailers. Tesco needs to continue development and improvement of end-to-end tracking of goods through its supply and distribution chain through utilization of existing technologies ( such as RFID ), implementation of new ones and continuous integration of its systems and infrastructure

Sourcing overseas and corporate social responsibility

Tesco must evaluate the risks and rewards of investing in and sourcing from and investing in the emerging markets such as China and Eastern Europe. In addition international operations set a heightened focus on how Tesco manage social, ethical and

____________________________________________________________________________________

Page 26



environmental risks throughout its supply chain. Tesco has to adopt appropriate Corporate Social Responsibility (CSR) practices to address cultural differences in the countries of operations. Otherwise it might be expected company to face troubles on particular markets and even to lose market share.

Consumer and demographic trends

Domination of Internet and changes in consumer tastes and habits caused significant impact on retail industry. Today online retailing competes headlong with the high street shopping. Polarization of buying behaviors from 'value' shopping, particularly in non-food goods is also a fact that needs to be considered and addressed properly.

Human resources issues

Present financial crisis highlighted the issues around effective HR management. Dealing with pension scheme deficits, executive reward and, high levels of staff turnover, retention and skills are the most painful of them. Employees represent a significant cost to their business, and companies shall look increasingly at innovative methods to reduce this cost, including executive rewards.

____________________________________________________________________________________

Page 27



APPENDICES

____________________________________________________________________________________

Page 28



Appendix A

References

[1] Datamonitor Report (2007) Food retail industry profile, January;

[2] Datamonitor Report (2007) Company Profile: Tesco PLC Analysis, October;

[3] Finch P. (2004) Supply chain risk management, Supply Chain Management: An International Journal,

Vol. 9 Issue 2, pp.183-196;

[4] Graiser A. and Scott T. (2004) Understanding the Dynamics of the Retail Sector, The Secured Lender,

Vol. 60 Issue 6, November/December, pp.10-14;

[5] Johnson G. and Scholes K. (2003) Exploring Corporate Strategy, 6th ed., Prentice Hill: London;

[6] Lindgreen A. and Hingley M. (2003) The impact of food safety and animal welfare policies on supply

chain management: The case of the Tesco meat supply chain, British Food Journal, Vol. 105 Issue 6,

pp.328-349;

[7] Mintel Report (2005) Food Retailing –UK, Retail Intelligence, Nobember;

[8] Myers H. (2004) Trends in the food retail sector across Europe, European Retail Digest, Spring, Issue

41, pp.1-3;

[9] Porter M. (1980) How Competitive Forces Shape Strategy, The McKinsey Quartely, Spring 1980, pp.34-

50;

____________________________________________________________________________________

Page 29



[10] Ritz (2005) Store wars, Business Review, Vol. 11, April, pp.22-23;

Appendix B

____________________________________________________________________________________

Page 30



Appendix C

____________________________________________________________________________________

Page 31

Information Systems assignmentMBA 6, Part-time

The Knowledge management strategy as a prerequisite for successful BPR

Appendix D

Profitability Asset utilization Liquidity Capital Structure

Company

Fiscal Period

End Date

Return on

Assets

Return on

EquityROCE

EBIT margin

Pretax income margin

After tax

income margin

Net Margi

n

Sales to

work capital

Sales to total Assets

Sales to

fixed Assets

Quick

ratio

Current ratio

Payout ratio

Financial leverage

Net Debt / Total

assets

GearingRetention

ratio

(%) (%) (%) (%) (%) (%) (%) (x) (x) (x) (%) (%) (%) (%) (%) (x) (%)

Tesco

28 Feb 09 5.67 17.46 13.19 5.90 5.44 3.99 3.98 -13.65 1.43 2.53 60.85 77.85 43.59 127.14 25.42 0.90 56.41

Industry average 3.14 11.48 13.62 3.94 2.59 1.78 1.64 -8.71 1.69 4.03 46.11 88.37 45.08 118.61 22.23 0.79 54.92

Ahold (Kon.)

28 Dec 08 7.80 25.31 23.39 5.08 3.83 2.95 4.18 25.07 1.87 4.71 96.11 127.98 19.74 93.73 11.05 0.32 80.26

Carrefour SA

31 Dec 08 2.45 12.22 17.34 3.19 2.55 1.69 1.46 -9.72 1.67 5.88 46.11 70.35 59.85 120.21 12.77 0.65 40.15

Sainsbury (J)

21 Mar 09 2.87 6.21 10.43 3.51 2.46 1.53 1.53 -17.11 1.88 2.48 30.18 54.50 79.58 53.27 16.98 0.39 20.42

Metro AG

31 Dec 08 1.18 6.62 19.77 2.95 2.08 1.46 0.59 -13.09 2.01 5.47 38.20 73.68 95.72 145.69 13.61 0.79 4.28

Wal-Mart Stores Inc

31 Jan 09 8.20 20.63 19.35 5.68 5.21 3.43 3.34 -46.36 2.45 4.17 26.07 88.37 27.96 64.67 21.38 0.54 72.04

Source: In Financials

SM Final Assignment - Krum Garkov - MBA 6 Part Time

Documents

Transcript of SM Final Assignment - Krum Garkov - MBA 6 Part Time