Tesco Value Chain Analysis: Strategy and Supply Chain

Introduction to Value Chain Analysis

A value chain is defined as the set of specific links that exist between key value-adding activities and their interfaces with all supporting activities (Lynch, 2003). The concept of value chain analysis has long been employed as a strategic tool for evaluation purposes, used to distinguish the various strengths and weaknesses that exist within the value chain process (Audretsch, 1995).

Tesco's Primary Value Chain Activities

Tesco's cost leadership strategic management initiatives are evident in its agile and lean inbound logistics functions. According to Abeysinghe (2010), Tesco employs its leading market position as well as economies of scope as its main sources of bargaining power in order to achieve relatively lower costs from its numerous suppliers. Additional factors include the constant upgrading of the company's ordering systems, in-store processes, and approved vendor lists, all of which induce efficiency and effectiveness into its inbound logistics operations at every level.

The company has often been praised for its effective utilization of information technology systems to facilitate its low-cost energy strategy. Tesco (2010) indicated that the firm invested close to £76 million in streamlining its various operations through its Tesco Digital program, a third-generation Enterprise Resource Planning (ERP) solution that it relies upon. This investment led the company to realize a £550 million increase in profitability in FY2009 as a result of the system's introduction. The ERP solution has also contributed to a reduction in stock holdings within Tesco.

The company holds key leadership positions in both the online and offline consumer food retail segments, a distinction attributed to effective and efficient outbound logistics. According to Mintel (2010), Tesco has managed to develop a wide range of store types and formats placed strategically to achieve maximum customer exposure. These formats include Express, Superstores, Metro, Homeplus, and Extra, and are segmented in order to serve distinct target populations.

The use of loyalty programs such as the Tesco Clubcard is being enhanced through IT advances that are effective in dissuading customers from migrating to competing retailers. The company also introduced the Greener Living scheme to provide clients with advice on environmental matters.

For the last several years, Tesco has been pursuing an improved dual strategy of differentiation and cost leadership, with an increasing emphasis on customer service. According to Keynote (2010), this strategy is implemented through the development of various self-service financial services, kiosks, focused promotions, and direct marketing initiatives.

SWOT Analysis of Tesco's Value Chain

Tesco's principal strengths include its strong financial performance, its leadership in e-commerce retail, its status as market leader in the UK and Europe, its culture of innovation, a strong brand image, increasing market share, insurance services, and its Tesco Online platform.

Key weaknesses identified include high prices in certain segments, a lack of elaborate development in non-food areas, high transportation costs, pollution concerns arising from the large volume of fuel used in transportation, overdependence on the UK market, and the need for debt reduction.

Significant opportunities for Tesco include strategic partnerships with other companies, joint ventures, the opening of new stores, expansion into global markets, and growth in non-food retail.

Tesco faces threats from tough competition from Carrefour, Walmart, and ASDA, as well as fluctuations in taxation, rising costs of raw materials, government regulations, and the challenges of international expansion.

Performance Measurement and Financial Results

Reports indicate that FY2011 was Tesco's worst performance in 20 years (Hawkes, 2011). The company reported profits of close to £3.8 billion but admitted that there is a need to perform better in its UK operations. It is worth noting, however, that 12.3% of the company's profits were derived from its Asian operations. Total sales were recorded at £68 billion, while UK sales increased by 5.5% to approximately £45 billion. Trading profits increased by 3.8% to close to £2.5 billion.

There was also a like-for-like sales decline in the United Kingdom — excluding petrol and VAT — of approximately 0.7% in the final three months of the financial year. The company's clothing, electrical, and general merchandise categories performed particularly badly. US losses worsened compared to 2010, with an increase of £186 million in losses, though these were attributed largely to acquisition costs. The company's strongest growth was in the Asian segment, where profit grew by 30% to approximately £570 million (Tesco, 2011).