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Tesco

Models for Analysis

There are a number of different models by which the company's strategic options can be analyzed. Two of the best are the SWOT Matrix and the BCG Matrix. The SWOT matrix focuses on the internal strengths and weaknesses of the organization, and its external opportunities and threats. By analyzing these variables, the best strategy for the company can be revealed. Strengths can be used to defend against threats or to take advantage of opportunities. Weaknesses can prohibit taking advantage of opportunities, and they can open the company up to competitive threat. So the company will need to understand all of these dynamics in order to determine if it should shore up weaknesses or leverage strengths as the main part of its strategy.

The BCG Matrix holds that there are basically four categories for a company's product/service offerings. These are either cash cows, stars, dogs or question marks. The strategy implications of this analysis are that investment of time and money should be put into stars, pulled from dogs, and that the firm will need to make decisions about its question marks.

SWOT Matrix

Strengths

Weaknesses

Opportunities

Threats

Strong, established brand

Saturated home market

Expand into non-food

Competition

Good financial condition (liquidity, D/E ratio)

Susceptible to economic downturn

Foreign markets

Market change factors

Managerial quality

Diversification away from retailing

Regulatory environment

Economic slowdown

From this analysis, a few different strategic options can be noted. Ideally, the company would be able to use its strengths to take advantage of some of those opportunities. The company's brand is not necessarily something that can be applied universally to non-food retailing. It does, however, have some strength within the context of a hypermarket, where food and non-food products are both sold. The company's managerial abilities might lie mainly in what it already does. That points to geographic diversification as perhaps the optimal opportunity for Tesco to pursue. The company has the financial clout, a strong brand and the managerial talent. While it has some operations in Asia (Malaysia, etc.) it does not have a strong profile. Thus, the brand will have at least some recognition and the company will have some experience with dealing in Asian countries, but it still has many major markets that it does not serve -- Thailand, China and India are three major ones.

The analysis also reveals a significant weakness in that the company is at least somewhat vulnerable to economic downturn. The company's sales have proven to slump during downturns, and its home market is in a prolonged slump at present, with no sign that the disastrous economic policies responsible for the slump are going to be reversed. Continued slowdown is a long-run threat for the company, and it needs to take steps to compete. At present, Tesco is a middling player, neither high end nor low, and that means that customers will abandon it during recessions. The company therefore needs to undertake strategies that will shore up this weakness.

One way to reduce this weakness is to diversify geographically, another is to diversify by product line. Diversification typically reduces organizational dependence on a given product or market. As discussed above, geographic diversification fits well with the company's strengths. Diversifying outside food altogether would probably require the company to utilize a different brand. This can be done via acquisition, but ultimately such a strategy might not be desirable. Strengthening the company's brand is another way to reduce the effects that an economic downturn would have on the company. In the past, that company has used price promotions to help build brand loyalty. Another option is to increase the portfolio of private label brands, giving the company's shoppers more incentive to continue shopping at Tesco during tough economic times.

BCG Matrix

The second major model is the BCG Matrix, which helps to categorize the company's businesses and illustrate where the company should direct its resources. Most of Tesco's revenue derives either from supermarkets or hypermarkets, so it might be better to view its businesses in terms of geographic regions. The home market of the UK is clearly a cash cow. This is Tesco's largest and most-developed market. The company has been in business for decades, and has a large geographic footprint. Tesco is profitable in the UK, comfortably so despite the ongoing economic troubles, and the business is relatively slow-growing. That makes the UK market a cash cow. Strategically, a cash cow is used to produce earnings that can be invested elsewhere, in faster-growing businesses, since the cash cow does not require much investment to retain.

The stars are areas where the company can achieve high growth in areas that are also growing rapidly. China and India are particularly strong options, though there are a number of other international choices that fit this bill. Thailand is perhaps less well-prepared. There are significant risks of market entry into either China or India, but their size and long-run growth trajectories are excellent. The company's experiences in other Asian nations will help. The specific method of market entry is not important -- the potential of the large and rapidly growing economies of the world makes them potential stars.

The question marks are high growth industries with a low market share. The U.S. (>1% share, 13% growth) is a good example. Some foreign markets could be classified this way. In several emerging markets, Tesco has a good presence, but the markets themselves are beset by volatility that brings about uneven income growth (and therefore uneven demand). The result of this is that the company might be forced to make some decisions in a few of its emerging markets. Tesco might benefit from selling off assets, if the further investment needed to convert those question mark markets into stars or cash cows is going to be too much. The dogs are those markets where the company has a low share and low growth. These are markets that Tesco needs to cut.

The implications of the BCG Matrix are that Tesco can improve its growth rates and profitability by restructuring its international operations. There are probably markets in which it does not operate where it would be able to perform better than the markets in which it does currently operate. By selling off underperforming assets and seeking new markets -- one of the large, high-growth ones -- Tesco will be in a better position to grow in the future. Further, adding a new major market will in time improve the diversification of the company such that a recession in the UK is not as harmful.

Versus Current Strategy

At present, the company is pursuing these new markets, along with Thailand. This is a good strategy, though perhaps entering both India and China at once is biting off more than the company can chew. The company has also chosen to expand its non-food categories. This form of diversification expands on the experience in non-food that the company has with its hypermarkets, but there is risk that the Tesco name does not translate as readily outside of food. If that is the case, the strategy might not succeed. Moreover, entering both new product markets and new geographical markets puts the company at risk of spreading its resources too thin.

The strategy to diversify outside of retailing is even riskier, since the company has far less expertise in things like telecommunication, e-commerce and market research. It competes against specialized firms, and that can pose a challenge because the Tesco approach to business (high volume, low price) is generally not conducive to these businesses. Again, there is a risk that the company is going to stretch itself too thin -- financially, managerially or both -- by undertaking a broad diversification strategy.

The other issue with the current strategy that Tesco is undertaking is that it is…[continue]

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