Tesco Strategic Analysis: Porter and Bowman Frameworks

Introduction

In 1980, Michael Porter wrote Competitive Strategy, which fundamentally altered the thinking and attitudes of both managers and academics of that generation (Crowther, 2008; Magretta, 2012). Two strategic management models were formalized in that work: the Five Forces and the Generic Strategies. Porter later added his Value Chain model, which was a broader theoretical contribution. This paper applies three of Porter's models — Generic Strategies (1980), Five Forces (1980), and the Value Chain (1985) — to Tesco, the popular supermarket retailer of the United Kingdom. It also references Bowman and Faulkner's (1997) Strategy Clock as an additional analytical lens.

The paper analyses Tesco's operations in the context of its retail business, including property services and banking, as well as its international presence. The strategy being implemented by Tesco is assessed in light of these three Porter tools, and the paper concludes with a discussion of strategic re-evaluations that could prove fruitful for Tesco's future operations.

As a prologue to the literature review, it is useful to establish an understanding of strategy and its management. Strategy is the long-term scope and direction of an organization, pursued to overcome challenges of changing environments and to gain a position of strength by deploying core strengths and resources toward the fulfillment of stakeholder expectations (Johnson, Whittington, and Scholes, 2009: 3). Strategic management is alternatively understood as "knowing the strategic position that the organization strategically chooses" (2009: 12).

Literature Review

In Michael Porter's (1980) Competitive Strategy, developing a strategy was primarily proposed as an analytical process based on observations, analyses, and evaluations of market forces and other players sharing the same competitive arena. Competitive Strategy differentiates and defines specific competition conditions. The competitive advantage of an industry was emphasized as the basic measure of its strategic acumen. The relative position of an organization within its overall industry is the chief ingredient of its economic success (Mintzberg, 1990, in Mert, Bas, and Yildiz, 2013).

According to Porter's (1980) theory, the main instruments for challenging the competition are generic market segmentation, cost leadership, and product differentiation. There are essentially three ways in which competition manifests: segmentation, differentiation, or the value of the product as perceived by consumers.

Porter's Five Forces influence the overall formation of any industry and define both the rules of competition and the determinants of profitability within that industry (Porter, 2008). The five forces comprise the challenges posed by potential new entrants, powerful buyers, substitute products, competitive rivalry, and powerful suppliers. These five forces allow an analyst to conduct a full organizational analysis (Dobbs, 2012).

Porter (1980) emphasizes that the total gains available in an industry are determined by the combined effect of these five forces (1980: 3, in Dobbs, 2012: 22). The five forces ultimately assess the impact of the strategic strength of an organization.

The ability of managers to make appropriate use of external and internal dynamics to gain continued competitive advantage is captured by Value Chain Analysis (Hansen, Mowen, and Guan, 2007: vii). Baig and Javaid (2011) explain Porter's (1985) Value Chain Analysis as comprising the "transformation of raw materials into acceptable consumable products, such that the intrinsic value of the product differentiates it from that of other players" in the market (2011: 252).

Porter's (1985) generic value chain model proposes that the value chain comprises all activities a firm undertakes to bring services and goods to fruition. There are two elements of the value chain. The first set of activities are those that add value to the firm's final output. The second set are support activities — secondary or complementary in nature — that add indirect value. Support activities include land, buildings, and capital assets, human resource management, technical research and development, and sourcing. Primary activities include inbound logistics, operations, outbound logistics, marketing and sales, and service. The value chain is a sequential representation of the organization as a whole and measures its weaknesses and strengths.

Bowman and Faulkner (1997) developed the strategic framework known as Bowman's Strategy Clock. Working from Porter's (1980) generic strategies of product differentiation, cost leadership, and market segmentation, Bowman and Faulkner (1996) extrapolated these into eight generic corporate strategies. The Strategy Clock elaborates specific combinations of perceived value and pricing strategies adopted by organizations, and seeks to analyze and highlight success through the application of each strategy.

Tesco Company Profile and History

Tesco is a global grocery and general merchandising retailer. It is the largest UK retailer by both global sales and local UK market share. Its profits exceed £3 billion, making it the third-largest global retailer by sales, after America's Walmart and France's Carrefour. The company began in East London as one man's vision, financed by Jack Cohen, the son of a Polish Jewish tailor. He began selling groceries at East End markets in 1919 but launched Tesco as a brand only in 1924. The name was derived from a large shipment of tea purchased from T.E. Stockwell: Cohen used the first three letters of the supplier's name and the first two letters of his own surname to create the label TESCO. The first Tesco store opened in 1929 in London.

In the food retailing sector, Tesco is among the top global retailers, operating around 2,318 outlets and employing over 325,000 individuals. It also offers online services through subsidiaries. In the UK, where it holds the largest market share, Tesco operates in four main formats: Extra, Superstores, Metro, and Express. Tesco sells close to 40,000 food items, clothing, and numerous non-food items. Products bearing the company's own label account for 50% of sales and are categorized as Value, Normal, Finest, and Convenience. Many Tesco stores include petrol stations, making it one of Britain's largest independent petrol retailers since 1991.

Tesco has devised independent international marketing strategies for different countries and regions including Poland, China, Sweden, Malaysia, and others (Essays, 2013). Beyond the UK, Tesco operates more than 2,300 convenience stores, supermarkets, and hypermarkets across Asia, Central Europe, and Ireland. It holds a 35% stake in the US chain Safeway's Grocery Works, making it a leading online grocery retailer globally. The company is in an ongoing expansion phase, with diversification planned across multiple sectors (Essays, 2013).

Strategic Analysis: Porter's Frameworks Applied to Tesco

Porter's generic strategy model is an outside-in method: it analyzes the external environment and bases strategic decisions on that analysis (Campbell et al., 2002). Given the recessionary economic environment, the question of whether Tesco can re-evaluate itself based on external conditions is a key one for Porter's generic strategy framework (McNeilly, 2008).

Generic strategies have been useful for attaining excellence and gaining competitive advantage within industries. They are composed of cost focus, cost leadership, differentiation focus, and differentiation (De Wit and Meyer, 2004). Porter argues that firms should not allow themselves to be confused into inactivity, and must opt for either cost leadership or a differentiation strategy (Campbell et al., 2002).

Tesco's generic strategy most appropriately aligns with cost leadership, given that it can successfully differentiate its clothing line to charge a premium (Johnson et al., 2007). Regarding globalization, Porter extends the generic strategy construct to international settings, proposing five strategic alternatives for organizations operating globally. These alternatives are determined either by the extent of global business presence or by the scope of competitors within the industry (Campbell et al., 2002).

Porter's global strategy holds that "competitive advantage is the outcome of the international scope of a firm's activities as well as the effective implementation and coordination" of those activities (Campbell et al., 2002). He emphasizes that global competitive advantage relies on the manifestation of value-adding actions and their interaction. In this context, Tesco has demonstrated that its initiative to allow customers to purchase almost all of their needs from Tesco outlets has helped it acquire a competitive edge.

Competitive Rivalry: There has been intense rivalry within both the local and international retail markets, involving large supermarkets and many smaller ones. Most supermarkets have been concentrating on local food niches but have begun diversifying and adding other items to their ranges, making competition stiffer (Rigby and Killgren, 2008). Tesco commanded 30.5% of the UK market in the fiscal year 2010 and has continued to grow since then (Annual Report, 2010). The principal rivals for Tesco are Morrisons, Sainsbury's, and Asda, whose scale and reach are comparable to Tesco's. Tesco's key advantage has been its range of stores positioned within reachable distance of most residential areas across the UK (May, 2013).

Barriers to Entry: The barrier to entry in the retail sector is very high, which advantages those already established. Two major requirements face any new entrant: a large initial capital investment and an extensive brand-building exercise. Image-building can take much longer than investors anticipate, and many have run out of patience as a result. Established brands have already reshaped consumer shopping behavior, and changing that is a formidable challenge for new players. Foreign firms that are dominant in their home regions may also find it difficult to establish themselves in the UK, owing to a lack of in-depth understanding of local market conditions and consumer buying patterns.

Threat of Substitutes: Food is an essential commodity, making it a low-risk market. Existing retailers continuously innovate by introducing new categories and mixed offerings to make the shopping experience irreplaceable. The most plausible threat in this area is the overlap of business interests among internal competitors.

Buyer Power: Consumer power is a dominant feature in supermarket retailing. Because many suppliers offer the same or similar products to the same supermarket, buyer choice increases. Supermarkets differentiate suppliers on the basis of green credentials, prices, and consumer brand loyalty. Consumers do not change buying habits rapidly, and the economic slowdown has further entrenched existing patterns (O'Doherty, 2008).

Supplier Power: General product suppliers wield limited power owing to the large number of suppliers populating the market, which offers buyers many options. Large established branded suppliers, however, benefit from an interdependent relationship with supermarkets: their household-name products command loyal consumer followings, meaning consumers will seek them out at alternative stores if a given supermarket declines to stock them. It has been observed, though, that sales of these brands will be adversely affected if they are unable to reach supermarkets for a considerable period of time (Wiggins and Urry, 2007).

Value chain is defined as "the connection between key value-adding activities and their interplay with supportive measures" (Lynch, 2003). Value chain analysis is "a strategic evaluation measure used for evaluating the weaknesses and strengths in the processes of value addition" (Audretsch, 1995).

Inbound Logistics: Tesco's general management strategies are evident in both the leanness and agility of its inbound logistics. As Abeysinghe (2010) observes, the firm makes full use of its market leadership status as bargaining power to acquire lower input costs than its competitors. Researchers also highlight the constant upgrading of in-store processes, ordering systems, and approved vendor lists, thereby driving effectiveness and productivity in inbound logistics operations.

Operations Management: Tesco has been critically acclaimed by many management experts in the retail field for its efficient use of IT systems that support its low cost leadership policies. According to Tesco (2010), the company spent over £76 million to streamline its operations using its own Tesco Digital program — a third-generation ERP software solution. This investment resulted in a £550 million increase in profits throughout 2009. The ERP system, which spans the entire company, has also helped markedly reduce stock holdings and inventory costs.

Outbound Logistics: Tesco maintains a leadership position in both offline and online food retail sectors, primarily because of its efficient outbound logistical strategies. Drawing on Mintel's (2010) observations, the company has developed a wide range of store formats that maximize customer exposure through strategic placement and innovative design. These formats — Homeplus, Extra, Superstores, Metro, and Express — target different population segments.

Marketing and Sales: Tesco has kept competitors at bay by innovating the ClubCard, a product of advanced technology that is difficult to imitate. Through its Greener Living Scheme, the company has positioned itself as a socially and environmentally conscious organization, offering advice on reducing carbon emissions and minimizing food waste.

Services: Tesco pursues a twin strategy of both cost leadership and differentiation, placing customer service as a priority. As Keynote (2010) observes, this strategy is exemplified by innovations such as self-service promotional kiosks, direct marketing, and a range of financial products. Despite its cost leadership strategy, Tesco has managed to create very high value compared to that of its key competitors (ND, 2011).