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Tesco PLC Case Study

Tesco is the third largest retailer globally behind Wal-Mart and Carrefour, and as of March 2011, operates 4,811 stores across 14 countries including Asia, many European countries, UK and the U.S. Tesco is also the leading food, sundry and grocery retailer in the UK and has established itself as the leading provider of ancillary services through the retail channel to Western Europe (Hackney, Grant, Birtwistle, 2006). Tesco has also initiated many extensive information systems projects and pilots to enable their supply chains to be more efficient than competitors (Lindgreen, Hingley, 2003). These include an innovative use of Radio Frequency Identification (RFID) for expediting orders throughout their supply chains and greater levels of coordination throughout their extensive warehouse systems and networks (Bitel, 2011). Tesco concentrates on a very localized approach to expanding markets, go so far as to create ethnographic studies of the potential customers in a given geographic area, as the case study alludes to in the Southern California market. The approach to retailing expansion is unique and quite contrarian to the approach taken by Wal-Mart and their French competitor, Carrefour (Rogers, Ghauri, George, 2005). As of March 2011, the company employs 472,000 globally had attained revenues of £56,910 million ($90,445.4 million) during the latest fiscal year reported. The company attained a net profit of £2,327 million ($3,698.2 million) in the latest fiscal year. The challenges to expanding globally have not specifically affected their revenues in the latest financial period, yet long-term the lack of execution in global markets is a strategic weakness the company must deal with in order to continue profitably growth. The intent of this case analysis is to analyze and recommend how Tesco can grow profitably over time in the U.S.

Table of Contents

Background and Introduction

What environmental trends created the opportunity for Tesco to build its dominant position in the UK market? Analyse the internal and external environment using appropriate strategic management models.

Evaluate Tesco's marketing mix in the UK vs. The U.S. What are its strengths and weaknesses? Why has Tesco been so successful in the UK?

Choose and outline an appropriate marketing strategy (using SAF or another analysis) for Tesco to adopt to increase profit in the short-term and the long-term in the United States.

Bibliography and Reference List

Background and Introduction

As one of the global leaders in retailing, Tesco has divided its investments in store structures and formats Express, Metro, Superstore, Extra and Homeplus formats. As the case indicates, the majority of retail floor space is in the Tesco Superstore (42%) and Tesco Extra (42%) formats. As of March 2011, the company also has 961 Express stores that are configured to 3,000 square feet, with a variety of fresh food at high traffic locations throughput suburban and urban locations. The Express stores sell up to 7,000 products including fresh produce, wines and spirits and bakery products. The next category of retail locations are the 174 Metro stores, which range in size from 7,000 to 15,000 square feet in size and are predominantly in suburban locations. These stores are designed to support families whose time is at a premium and who need to pick up ready-to-eat meals and dinners. Tesco also only 448 superstores as of March, 2011 that range in size from 20,000 to 50,000 square feet, which have selections comparable to its global competitors in this range of store size. Food, sundries, DVDs, books and low-end electronics are sold throughout these stores. Tesco also has 177 Extra stores that are 60,000 square feet or larger and have a full range of food, sundries, electronics, clothing, garden, and automotive products and services. The Extra Stores have proven to be the most challenging to expand globally with, just as Wal-Mart has learned with its comparable format of store (Gripsrud, Benito, 2005).

Tesco also has an extensive range of services (Internet, telephone, insurance and travel services) sold through all of their channels and stores, including tesco.com. Tesco continues to see gains in their customer loyalty initiatives by having Tesco.com and Tesco Direct compliment the loyalty card programs with special deals for the most active customers (Child, 2002).

What environmental trends created the opportunity for Tesco to build its dominant position in the UK market? Analyse the internal and external environment using appropriate strategic management models.

There are a variety of factors that led to Tesco being successful over decades of expansion as the leading grocery retailer in the UK and eventually one of the top three globally. Using the Five Forces Model from Dr. Michael Porter to explain the dynamics of the internal and external environment on the performance of the company over time provides a useful framework for analyzing their competitive advantages over time. Figure 1, the Porter Determinants of Competitive Advantage Model (Porter, 1985), illustrates how the competitive rivalry is influenced by the bargaining power of suppliers, threat of new market entrants, bargaining power of buyers and threat of substitute products or services. Tesco has learned how to navigate through the trade-offs exemplified in this model first in the UK market and later globally. This ability to create competitive advantage is also what has led to their ability to selectively enter the U.S. market.

Figure 1: Determinants of Competitive Advantage or Five Forces Model

Sources: (Porter, 1985) (Porter, 2008)

Using this model as the framework for evaluating the environmental trends and putting them into context from an internal and external standpoint provides insights into how Tesco was able to sustain competitive advantage over the long-term. Analyzing the internal and external environmental factors within this framework also indicates which areas of the company's business are contributing the most and least to competitive rivalry or strength, a point that Dr., Porter has made in the latest iteration of this model (Porter, 2008). The Determinants of Competitive Advantage Model's components are considered balanced between internal and external factors, as the supply chain components (suppliers) and customers (buyers) are balanced with the that of competitors emerging as entirely new market entrants or from substitute products and services from adjacent areas of a company's industry or adjacent industries (Porter, 1985).

When this model is applied to Tesco and the facts presented in the case, it is clear how complex of a value chain this business has and how difficult the balancing of competitive dynamics is to maintaining competitive advantage over the long-term. It is also evident how powerful pricing is within their markets, as it acts as both an accelerator of supply chains and the defining attribute of elasticity on the buyer dimension of the Porter Determinants of Competitive Advantage Model (Top, 2006). Pricing is an attribute of the Tesco business model that must be managed not as a promotional strategy or inducement, but as a means to arbitrate segments, define differentiation of store type, and most importantly, communicate value (Palmer, 2004). The internal and external factors that put pressure in price are potentially lethal to profitability and create the illusion of elasticity in emerging markets including the western U.S., where the company's focus is during the time period of the case study. The internal and external factors driving the company to consider moving to these new markets are partially influenced by price which at one point in the case study is misconstrued as saturation of present markets. For Tesco, misreading pricing signals can be especially detrimental, as in many instances they could raise prices, gain market share, increase differentiation, and become even more of the premier brand they aspire to (Palmer, 2005). The Determinants of Competitive Advantage Model also shows Tesco managers that even if they are successful with their expansion efforts in the U.S., they still must be very precise in how they balance their core business that fuels the many ancillary store formats, services, and financial services programs they are offering. Tesco must stay focused on the performance of their supply chains, specifically ensuring they stay agile enough to respond to customers' varying tastes, preferences and requirements if they are to stay relevant as a retailer for the pong-term, and this applies in the UK as well as globally (Jones, Clarke, 2002). The internal and external factors influencing Tesco, including the ones that are obfuscating their efforts to expand into the use, are more supply chain systemic and less about price elasticity than the management team can see in the context of the case study timeframe.

The internal and external factors that force the company to pursue local sourcing for fresh meats, vegetable and produce, in effect creating their own strategic sourcing strategy and infrastructure in California, illustrates how adept the company is at supplier collaboration, a key success factor in any distributed order management system in retailing (Hadaya, Cassivi, 2007). Tesco has an innate strength with supply chains, sourcing and the ability to motivate its most proven supply chain partners to create global outposts to support their development efforts, as is evidenced in the case study with Wild Rocket and 2 Sisters. This innate strength of the…[continue]

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