Analysis Of Tescos Corporate Strategy

Analysis Of Tescos somatic outlineIn this report I have discussed Tescos embodied strategy. The first section provides background into the companion and shows that it currently dominates the UK grocery merchandise.The next section explains the importance of a corporate strategy for prospicient term success in any market place. Tescos is in operation(p) a two tier strategy the first includes en large-mouthedment into non nutriment products within the UK market and creating strategic alliance with RBS for example, to create Tesco Personal Finance. The next one includes vulturine expansion into overseas grocery markets. The main aim of this report will be to study the corporate strategy regarding expansion into Middle eastern get together States India.This is passed by a review of Tescos expansion plans explaining why it is necessary for Tescos to expand into overseas markets. almost of the points discussed ar that Tescos UK market share in the grocery has reached a satu ration point and it faces expense wars from budget supermarkets such as Lidl which puts a downward push on profit edges. in any case, Tesco earns three quarters of its r hithertoue from UK sales and in a hawkish environment it and unavoidablenesss to expand into India and the Middle East to augment revenue sources.The next section provides analysis on Tescos corporate strategy.The first part of the analysis is based on Porters Generic Strategy that provide options in stock(predicate) to Tesco to sustain a competitive proceeds. Cost Leadership strategy is suitable for trading operations in India as low prices will attract volume sales. that a combination of differentiation and niche strategy is necessary to remain profitable in UAE market due to its smaller population but tall GDP per capita. Porters flipper forces model is used to assess the competition in the target market with use of generic strategys attributes to defend against these competitive forces.SWOT analy sis is carried out to analyze Tescos present corporate strategy showing the external factors that learn the blood. Strengths include Tescos high egress in UK and overseas and its commercial stand up and known brand. It has access to cheap lending and Economies of scale. Its biggest strength is its consumer orientated approach which caters to require and demands for local anaesthetic consumers.Weaknesses include strength to enter into price wars with has a baneful affect on profit margins. Also while it whitethorn offer multiple non food product lines it may not be able to debate with specialist sellers. Finally regulatory barriers in India that restrict foreign will origin of retail stores could slow down expansion into the region.The report concludes by evaluating the present corporate strategy for Tescos expansion into overseas grocery markets. The expansion is important to sustain a competitive edge. Tesco needs to ensure that in order for undefeated expansion it ne eds to remain flexible and consumer oriented and avoid mis allots made by Walmart in Germany and Brazil and Carrefour in Eastern Europe.Introduction BackgroundTesco was founded in 1919 by Jack Cohen in East London, It is now a UK-based international grocery and general merchandising retail chain. It is the largest British retailer by twain global sales and domestic market share, with profits exceeding 3 billion. It is currently the second largest retailer in the world based on profit. in the beginning specialising in food and drink, it has diversified into areas such as clothing, consumer electronics, financial services, telecoms, and planetary house and health products. (http//www.tescoplc.com/plc/about_us/tesco_story/)The aim of this report is to analyse Tescos present corporate strategy with strain on what it could do to improve its business. I will provide evidence and cogitates on why the companys present strategy has potentially high profitability and the aspects that ne ed to be altered.Even though Tescos primary business of selling groceries is not unique but it is the business model that differentiates it from the rest and maintains its global market share. It has generated high profits through aggressive overseas expansion into US, Eastern Europe and South East Asia. It has maintained a immobile customer focused business model, with extensive use of its edict card homage scheme and utilizing top of the range information systems to maintain a really efficient supply chain. (P. McGoldrick, 2002)Tescos Corporate StrategyStrategic management is a set of managerial decisions and actions that determine the long term mathematical process of a corporation. Many companies passel manage lilliputian term bursts with high performance but only a few can sustain it over a long period of time.Of the original Forbes ascorbic acid companies listed in 1917, only 13 are unflustered in business. (E.D. Beinhocker, 2006)In the last decade, Tesco brought abo ut a lot of strategic changes and has grown to become UKs tote up one retailer. It is also considered to be one of Europes fastest growing financial company and probably the most successful internet supermarket in the world. (A. Seth G. Randall ,1999)Tescos is operating a two tier expansion strategy.The first part is expansion into non food sector within its home market in the UK. This includes offering home and health, pharmacy, telecommunications and financial services products. It has continued to maintain its market share in its grocery sales via aggressive pricing and targeted marketing while expanding into more uncivilized and high profit areas with good success. Tesco setup a strategic alliance with Royal Bank of Scotland whereby it offers most of RBS banking services in its stores around the UK. It has taken advantage of its widespread network of stores. In 2008 Tesco Personal Finance had posted 71m half year profits with 5.6m customer accounts. It is aiming to incr solac e that profit including from other services including telecommunications to 1bn. (J. Bamford and D. Ernst, 2002)http//news.bbc.co.uk/1/hi/business/6257331.stm(The Economist, Supermarket Finance A Mortgage from Tesco? second Oct 2008)The second part of Tescos strategy is to expand its grocery business into Continental Europe, India, South East Asia and the Middle EastReview of Tescos Expansion PlansTesco has had great success in the UK market where it has gained over 30% of the grocery market share. There are overly many hurdles such as restrictions from competition commission and local groups that will not allow Tesco to open many stores in new locations on with planning restriction in the UK. It has however continued to profit from its share in financial services and telecommunications sector. It also gained the first mover advantage when it launched tesco.com.From the act above, we can deduce that majority of Tescos sales are from its UK operations (100-23.4 = 76.6%). This make s it more important to continue aggressive international expansion as it provides more opportunities for revenue evolution.The UK grocery market share has reached a saturation point. With low cost brands such as Lidl and aggressive price war with ASDA in the UK, the profit margin for grocery products have perishen.The strategy is to diversity grocery sales into other countries and make use of the fast growing economy of India and cash heavy consumer of United Arab Emirates. In todays competitive environment Tesco cannot rely on three quarters of its revenues from one country. Of the worlds top 250 retailers, 104 have no international operations at all, fit in to Deloitte, a consultancy firm. Tesco could be the first one to enter the market in UAE and India to obtain the first mover advantage. (The Economist, Global RetailingTrouble At Till, second Nov 2006)In this report I will concentrate on Tescos strategy for overseas expansion in the grocery market as I intend it carries mor e opportunities and has higher growth potential. The primary objective of this report is on Tescos expansion plan in the India the Middle East.Analysis of Tescos Corporate StrategyThe reason to carry out external analysis is to identify potential opportunities and threats facing Tesco. External analysis provides information that strategic managers use in planning, decision fashioning and strategy formulation. It helps reduce environmental uncertainty(B.K. Boyd J. Fulk, 1996)Michael Porter has made major contribution to corporate strategy and I will use some models to sound out potential of success for Tescos existing corporate strategy.Porters Generic StrategiesThey outline the three main strategic options available to Tesco to achieve a sustainable competitive advantage. They are cost leadership, differentiation and focus/niche strategy.http//tatler.typepad.com/images/strategy.jpgCost Leadership The company producing products at the lowest cost can obtain competitive advantage. This strategy is suited to Tescos business operations in India as currently their involvement is restricted to wholesale sector. Foreign firms in India are unable to have 100% ownership at retail statge. Technopak, a Delhi-based retail consultancy, expects Indian retail sales to cosmetic surgery to nearly $430 billion by 2010. Modern retailers share will rise from just 3% now to 16-18%, it says. A low cost/low price business model will yield the highest returns and sales volumes due to size of Indias population. (The Economist, Retailing Setting up shop in India, 2nd Nov 2006)Differentiation It involves selling products that have unique attributes preferred by customers and as a solution they are willing to pay a higher price. Although Tescos business of selling grocery products is not unique, Its business model differentiates it from rivals. Especially its club card loyalty program that allows Tesco to react to changes in consumer preferences faster and gain advantage by bein g the first one to address any new demand for products. respite Its usually suited to smaller corporations, they can enter particular segment of the market and offer specialist products.Michael Porter argued that in order to be successful in the long run, a firm must choose one of the strategies or they will not benefit. However, contemporary research has shown evidence of firms practicing such a hybrid strategy. Hambrick (1983 cited by Kim et al. 2004, p.25) identified successful organisations that adopt a mixture of low cost and differentiation strategy. A combination of differentiation and niche strategy would be most effective in the UAE market. First of all due to small population of 6m, Cost leadership model would not work as there is little potential for higher sales volumes. UAE is still a developing market and there are not many supermarkets chains with large market share. Also Tesco could offer unique products, such as its healthy living range and finest brand range that w ould appeal to the expatriates community which makes up 80% of UAEs population. GDP per capita of UAE is over $54,614 and high disposable income due to absence of income tax, this makes it an ideal market for niche, high end products that carry high profit margin.M. Porter, Competitive Strategy Techniques for Analysing Industries and Competitorshttp//tatler.typepad.com/images/strategy.jpg(The Economist, Retailing Setting up shop in India, 2nd Nov 2006)Porters 5 ForcesPorter explains that there are five forces inherent in markets that determine the aim of competition and profitability for Tesco in UAE and India.The first force is the threat posed by new entrants, Tescos rivals, Wal-Mart and Carrefour are also expanding into overseas markets and this could lead to aggressive pricing to retain market share which may have a detrimental effect on profit margins. Currently Tesco has sufficient purchasing power to experience economies of scale which acts as a barrier to entry for other bu sinesses. Also, it is planning a confederation with Bharti Enterprises in India where by Tesco will control wholesale market and distribution network responsible for supplying products to 5000 stores.(The Economist, Retailing Setting Up Shop In India, 2nd Nov 2006)The second force is threat of substitutes, marketplace products have highly elastic demand and customers have alternatives if price is set too high. For example, in UAE retail sector, Tesco could establish itself as a premium grocery retailer. Once way to reduce the threat of substitutes is to diversify the business and expand into non food sectors. It could form strategic alliance with local firms to offer services, similar to its partnership with RBS in the UK.The third force is the threats from the bargaining power of buyers, this is strong for all retailers in the grocery market. It could gain significant market share if it offers products to cater for westbound expatriates as currently there is limited availability of English grocery items. Also, it could reduce threat of substitutes by extending its loyalty program to the UAE. Such as club card scheme, Healthy living club and Tesco Vine club etc. With prices for eating out rising fast, it could offer healthy and finest range ready meals to increase its customer base.Finally the threats from the suppliers bargaining power, its fairly low for Tesco as its usually a major customer for most suppliers and has the power to control its supplier pricing to an extent. Also in terms of rivalry, there is several small supermarkets within the UAE but none of the big ones such as Carrefour and Wal-Mart have yet entered the market.The five forces analysis gives an improved understanding of the degree of competition faced by Tesco. The analysis shows that the grocery industry can be highly competitive, with buyers possessing powerful influence over the large number of substitute brands available to them. From the previous section we can see that generic st rategies each have attributes that help to defend against competitive forces.SWOT AnalysisSWOT analysis has proven to be the most enduring analytical technique used in strategic management. In a 2007 McKinsey Co global survey of 2700 executives, 82% stated that the most relevant activity for strategy formulation were evaluating the strengths and weaknesses of the organisations and identifying top environmental trends affecting business performance over 3-5 years.(J. Choi, D. Lovallo A. Tarasova, McKinsey Quarterly Online, July 2007)StrengthsTesco has published sales gain of 13% for UK markets which is higher than rivals in the UK and 26% revenue growth in international markets.Tesco has a strong brand and excellent commercial standing. It won the retailer of the year 2008 award at World Retail Awards.On basis of its size and credit worthiness, Tesco can experience economies of scale and obtain funding for expansion into India/UAE even during credit crisis.Tescos approach is very f lexible, they dont always push the Tesco brand name unless it has an advantage when debut a market, for example in Turkey Tesco maintained the name Kipa as local customers were familiar with it.http//www.worldretailcongress.com/page.cfm/action=Archive/ArchiveID=7/EntryID=1http//news.bbc.co.uk/1/hi/business/4781458.stm(The Economist, Global Retailing Trouble At Till, 2nd Nov 2006)http//www.worldretailcongress.com/page.cfm/action=Archive/ArchiveID=7/EntryID=1WeaknessesThere are regulatory barriers in obtaining retail trade licences in India. At present a foreign company can only operate as a distributor/wholesaler. However it is still a good opportunity to enter the market as a wholesaler and establish a distribution network.If it enters into a price war with local retailers, the margins will suffer and since UAE population is only 6million, the low margin high volume strategy will not be effective.Tesco is a public company and if it spends too much of its capital on overseas expansi on the UK market may suffer in the short term and shareholder may counteract some expansion decisions.Tesco may offer multiple product lines in the same store, but since there are specialist stores for electrical products for example Tesco may struggle in non food sector.(The Economist, Retailing Setting up shop in India, 2nd Nov 2006)OpportunitiesUAE allow foreign investment and ownership which combined with ease of funding provide low barriers to market entry.Tesco has created a very efficient home delivery network in the UK, It could utilise its expertise to create the very first home delivery service for grocery products in the UAE.With wide access to the internet among UAE residents, Tesco could enter the online market for food and non food product.Economic growth in India has maintained at 6-8% per annumDespite the credit crunch UAE has experienced a growth rate of 23%in 2008 with double digit growth in grocery sales.The GDP per capita of a UAE is $54,607 making it an ideal l ocation to offer high margin top end products such as the Tescos finest range.Tesco could follow its business model in the UK to setup strategic alliance with local firms to diversify its products and services on offer.http//uaeinteract.com/docs/UAE_GDP_soars_23_to_Dh934_billion_in_2008_/36962.htmhttp//www.imf.org/external/pubs/ft/weo/2009/02/weodata/index.aspxhttp//www.arabianbusiness.com/574404-uae-grocery-sales-growth-slumps-in-2009ThreatsRising prices of raw materials and food products may lower profit margins.People tend to vary of new brands. This problem can be overcome since Tesco has a strong internationally appreciate brand. In addition Tesco tends to enter the market via partnerships or familiar brand name to avoid alienating the local consumer.Local communities in some split oppose Tesco and other major retailers from setting up stores as they believe it will destroy their community and small businesses.Lower available income will bear on and strategic focus may need to change to lower priced basic products with less focus on higher priced brands suggesting a switch in price architecture.Retailers who set out on foreign adventures need to remember three basic rules. First, dont forget the local touch. Wal-Mart got off to a bad start in Germany by appointing a country manager who did not speak German. In Brazil it failed to notice that people like to shop en famille the aisles of its shops were too reduce to accommodate the standard family party. Successful foreign adventurers adjust their formats to local needs. BQ, a British do-it-yourself retailer, discovered that Chinese people look down their noses at doing things themselves. It became a buy-it-yourself, and get somebody else to do it for you, retailer.Second, make sure your timing is right. In 1995 Yaohan, an aggressive Japanese retailer, opened one of the worlds biggest department stores in Shanghai. It plan to build 1,000 Chinese shops. But a decade ago Chinese people were too poor to s upport its vision and in 1997 Yaohan filed for bankruptcy. Third, be selective about what you try. Tesco, which has been pretty successful in foreign markets, is shortly going into America-but with convenience stores only, because it reckons the supermarket business is too crowded.(The Economist, Global Retailing Trouble At Till, 2nd Nov 2006)ConclusionIn this era of globalisation an organisation can no longer trade in its locality and sustain a competitive advantage. Tesco needs to continue its expansion overseas as UK market has reached saturation point in the grocery sector. It needs at least half of its revenues from overseas operations to reduce its over reliance on UK sales. The Porters generic strategy and SWOT analysis shows some promising opportunities in India and UAE which could turn into profitable operations. Some of the potential threats can easily be overcome.The key to success for Tesco in its expansion strategy is flexibility and timing. India has recently allowed s ome Foreign Direct Investment even though its restricted to ownership of wholesale sector, its a good opportunity as retail sales in India are forecasted to be $430bn by 2010. foreign Wal-Mart which failed to enter the market in Germany and Brazil due to lack of knowledge of local trends and consumer preferences. Tesco has been successful in entering several overseas markets. This is due to their consumer oriented approach and their study of local demand prior to setting up.Before expanding into the US, researchers, including a small cohort of Tescos top executives, spent two weeks living with 60 American families and studied their grocery purchasing habits.Strategic management is an ongoing process, the key for managers is to remain flexible, open and alert to changing circumstances. Strategies dont always succeed, results may fall short due to internal short coming or predictions about external opportunities and threats were inaccurate. Whatever the reason we change the strategy as needed to take advantage of new information.