Developing Tesco’s Strategy, Coursework Example

Executive Summary

Tesco is a key player in the retails industry. It is currently operating in fourteen countries across the globe. Tesco adopts a seven-part strategy to maintain its competence. The current Chief Executive also sets out priorities, being the strengthening of Tesco’s performance in UK to be of paramount importance. This report discusses the current situation of worldwide retail industry and how Tesco performs within the industry. The changes and trends within the business environment call for an internationalization strategy that applies emphasis on the difference between markets. This strategy is a multi-domestic strategy, which this reports recommends for Tesco to strengthen its competency in the international market.

I. Introduction

Tesco, a major competitor in the retail industry, is a multinational corporation headquartered in Cheshunt, UK. In terms of revenues, it ranks third in the world. It is founded in 1919 by Jack Cohen. The goods and services Tesco offers were generally groceries, consumer goods, financial services, and telecoms. Tesco now operates in fourteen nations across North America, Europe, and Asia. Tesco operates nearly 6,000 stores worldwide. The firm employs around 520,000 people across the globe (Tesco plc, 2012, “Annual Report”).

Tesco employs internationalization as a strategy for growth and development. In line with this, this report aims to submit the following objective: To develop a management strategy that Tesco can adopt to achieve its organizational purpose.

This strategy is based on the information gathered from conducting internal and external evaluation of retail business. This is presented in the sections that follow. The internal analysis involves discussing the strategies that Tesco is taking in order to achieve its organizational objectives. This involves the seven-part strategy that the company has been taking for the past years. The external analysis involves discussion of the major trends in the industry where Tesco is competing in, which is the retail industry. It is important to know the trend within the industry in order to foresee the changes that will occur within the industry in the next three to five years. The strategy that this report will present is based on the findings of such analysis in order to make the strategy appropriate given the kind of situation the strategy has to address.

II. Drivers for Change

Tesco has proven its success in adopting internationalization as a strategy for growth and expansion. The ever-changing global environment demands multinational firms, such as Tesco, to be flexible in their management strategies to keep up with the changes. These changes include the trends in the industry where a firm competes in. Tesco competes within the retail industry.

Internal Environment Analysis

Tesco adopts a seven-part strategy. The strategy concentrates on fulfilling the following objectives (Tesco plc, 2012, “Our Strategy”):

• To improve the UK core;
• To be an excellent global retailer in stores and online;
• To be strong in everything Tesco sells as the firm is in food products;
• To expand retail services in all of Tesco’s markets;
• To increase the firm’s responsibilities to the communities where the firm operates;
• To be a producer of highly valued brands;
• To build a team to create more value.

According to the 2012 report of Tesco, these seven objectives remain the priorities of Tesco. According to Philip Clark, Tesco’s Chief Executive, there are management priorities set up for the year 2011. These priorities are to keeping UK firm and expanding, to be outstanding globally, to be a multi-channel retailer wherever the firm operates, to use group skills and scope, and deliver higher result. The Chief Executive reports that the company’s performance within its home country is weaker than expected or planned (Tesco plc, “Annual Report”). There is a reduction in trading profit despite the recorded 6.2% increase in sales (Tesco plc, “Annual Report”). As a response, there are six areas identified where Tesco will allocate considerable amount of investment (Tesco plc, “Annual Report”). These six areas are on “service and staff, stores and formats, price and value, range and quality, brand and marketing, and clicks and bricks” (e.g. online presence)(Tesco plc, “Annual Report”).

In terms of its performance in the international market, Tesco performed successfully, setting a record of 18% in its trading profits (Tesco plc, “Annual Report”). Tesco is specifically successful in its markets located in Asia with 10% growth in sales and over 20% growth in trading profit. Tesco also recorded growth in Europe but in a difficult environment. Tesco’s 2012 report sees a path to profitability in the US due to enhancements made in the company’s client offers (Tesco plc, “Annual Report”).

External Environment Analysis

Deloitte Touche Tomatsu Limited presented a report that provides an overview of the retail industry in global environments. The following are the highlights of the report, “Switching Channels: Global Powers of Retailing in 2012” (Deloitte, 2012):

2010 Statistics of the Retail Industry

DTTL ranks the top 250 players in the retails industry and comes up with the following figures (Deloitte, 2012):

• $3.94 trillion – aggregate sales of the Top 250
• $15.763 billion – average size of the Top 250
• $3.292 billion – minimum sales required to be on the Top 250 list
• 5.3% – composite year-over-year retail sales growth
• 5.7% – composite compound annual growth rate (2005-10) in retail sales
• 3.8% – composite net profit margin
• 5.8% – composite return of assets
• 1.5 times – composite asset turnover
• 23.4% – rate of the Top 250 retails sales from foreign operations

Despite the economic turmoil that swept over the global environment, the retail industry was able to weather the storm. A growth of 5.3% was recorded in 2010(Deloitte, 2012), which is a significant figure considering the economic fragility due to the fiscal crisis that started in the US and the Euro zone crisis.

Trends in the Retail Industry

The 2012 trends in the retails industry include to “significantly customize market models and product offerings” (Deloitte). Full empowerment of store in regional managers is also something that should be expected. This is in terms of development of marketing strategies as store and regional managers have a better understanding of regional customer preferences and behavior. In addition, real estate will remain utterly essential especially when entering a new market (Deloitte). This is due to the challenges to be encountered when establishing foothold when local firms already have the best locations. Moreover, the critical areas for maintaining competitive advantage within the retail industry are in innovation in multi-channel strategies, mobile, and data analytics (Deloitte).

Tesco PLC ranks 3rd in DLLT’s Top 250 global retailers (Deloitte). The 1st and 2nd on the list are Wal-Mart Store, Inc. and Carrefour S.A., respectively. This list included fourteen more retailers, nine of which are included for the first time. The report shows a striking feature of the new entrants in the retail industry. Six of the new entrants were Japanese retailers. Strong foreign exchange rates and a high percentage of sales growth are the key factors that made these new entrants are included in the Top 250 list. Considering sustained growth over a five-year period, five of the new entrants were in the top 50 fastest-growing retailers (Deloitte).

Given the significant impact of technology in the trends within the retail industry and in international business environment in general, the trends discussed above will remain in the next three to five years. Multi-channel strategies, mobile, and data analytics will continue to be developed that enables firms to expand their reach towards consumers who are becoming more and more demanding more efficient shopping experience.

III. Proposed Strategy

There are three corporate level internationalization strategies that Tesco can consider considering the trends in the retail industry. These strategies are multi-domestic, global, and transnational strategies (Hitt, Ireland and Hoskisson, 2011).

Multi domestic strategy is characterized by operating choices that are decentralized to strategic business units in each country (Hitt, Ireland and Hoskisson, 2011). This strategy is an extension of the business level internationalization strategy (Peng, 2006). Moreover, the business units in one nation are autonomous of each other. This approach has the assumption that market by region or location. The assumption explains the reason that, within this strategy, products and services are tailored to each country. The point is competing within each market. Among European companies, this is a dominant strategy due to the rich diversity of traditions and trade in Europe (Hitt, Ireland and Hoskisson, 2011).

Firms that appropriate global strategy manufacture products that are standardized across national markets (Hitt, Ireland and Hoskisson,2011). Decisions that involve business-level strategies are centralized in home offices. Unlike multi-domestic strategies, strategic business units are assumed to be interdependent. Moreover, the focus of this strategy is economies of scale. The global strategy is often short of receptiveness to local markets. This also necessitates distribution and coordination of assets across national or regional borders (Hitt, Ireland and Hoskisson, 2011).

An advantage of firms that adopt a global strategy is that standardizing products lead to efficiency (Cavusgil et al., 2008). This efficiency is on introducing a product around the globe faster. Coordinating prices are also efficiently done. In addition, overlapping facilities are eliminated (Cavusgil et al., 2008). These advantages are all attributed to the premise behind global strategy that a global market exists. This means that firms adopting such strategy believe that the all the people around the world are ready to take the same type of product and experience the same kind of lifestyle. This is why firms with global strategy standardize their products. Standardization process involves using common suppliers to design and produce goods and services (Cavusgil et al., 2008).

Transnational strategy has the purpose of achieving global capability and local responsiveness (Hitt, Ireland and Hoskisson, 2011). In other words, this strategy aims to integrate multi-domestic and global strategy to address both pressures of cost reduction and local responsiveness. In order to achieve efficiency at a global scale, strong central control and coordination are needed. To obtain local responsiveness, decentralization is needed. Transnational strategy then becomes difficult to develop and to perform. Competitive advantage can be achieved through pursuing organizational learning (Hitt, Ireland and Hoskisson, 2011).

Again of transnational corporate level internationalization strategy is that its effective implementation means higher performance than multinational and global strategies. The disadvantage is, however, this strategy is difficult to achieve due to the conflicting goals. These conflicting goals are the goals to fulfill the need to get close global coordination while maintaining local flexibility (Hitt, Ireland and Hoskisson, 2011). Implementing this strategy is difficult, and yet, the global business environment indicates that this is the most effective strategy.

Given the trends in the retail industry outlined by the DTTL report, the best internationalization that Tesco can assume is a multi-domestic strategy. This strategy is essential for an environment that demands goods and services that are developed to fit the needs of a particular area or market. In relation to this, a multi-domestic internationalization strategy is also suitable for a business environment that may require corporations to decentralize power structure in order to provide more authority to local managers. The strategy is further evaluated in the next section.

IV. Evaluating the Strategy

There are three critical success criteria that can be used to evaluate the internationalization strategy that is best for a firm (Johnson et al., 2008). These criteria are suitability, feasibility, and acceptability.

Multi-domestic strategy, given the situation of the retail industry, is suitable. In other words, considering the trends in the retail industry, multi-domestic is right and compatible with the expected external environment. This strategy is also feasible as the strategic concept can be executed with the resources available to Tesco. According to the company website and its annual reports, Tesco’s core competencies remain to be in offering environmentally friendly products, customer-focused strategy, low priced quality products, and improved labeling. Moreover, Tesco can consider building their infrastructure in foreign countries and avoid the mistake of Wal-Mart, upon entering Brazil, replicates its stores in the United States which is characterized by a large number of American footballs (Kazmi, 2008). This did not appeal to the Brazilian consumers as they do not apply with the image of American footballs. Brazilians do not play American football. Hence, an environment that makes business-level internationalization seems sensible is a situation where the pressure for cost reduction and pressure for local responsiveness are low. In terms of acceptability, Tesco appears to uphold diversity (Tesco PLC). This means that the strategy that recognizes that markets are diverse is a concept that is acceptable for Tesco in general.

In addition, this strategy is appropriate in terms of developing further Tesco’s corporate social responsibility. This is because recognizing the differences among countries means recognizing the need to tailor-fit human resource management according to the values and belief systems of employees with different cultural background (Cavusgil, Gary and John, 2008). Corporations all over the world put emphasis on human resource management now more than ever. Globalization is the major force that drives the importance of human resource management strategies. This is because the internationalization of businesses compels managers to confront differences of personnel with different cultural background. Moreover, the effectiveness of strategies of managing human resources is a major factor that determines the competitiveness of companies (Keating and Thompson).Companies all over the world are now taking advantage of the force of globalization to extend their reach towards other nations. The discipline of HR management is a major component of globalization of business. Strategic international HRM is, indeed, an important discipline for organizations which operate internationally and in different countries. It is perhaps theories on business ethics that is the most significant theoretical underpinning of international human resource management strategy. This is because of the growing interest of society towards how corporations adopt high ethical standards on business practices.

V. Expected Changes

The expected changes will occur in the power structure of Tesco. As a multi-domestic internationalization strategy will be adopted, concentration of power is expected to be decentralized. Also, the emphasis in upholding the diversity of markets, there will be expected changes on how the goods and services offered will be marketed to local customers. This means that Tesco may want to consider changes in their budget allocation for investing in research and development programs to provide local or regional managers with more information that informs their decisions in marketing strategies. The emphasis on diversity among the work force also signals changes in human resource management strategy. Also, in connection with implementing a decentralized power structure, the focus will include all the areas where Tesco operates and no longer applying significant emphasis on improving Tesco’s performance in UK, its home country.

VI. Conclusion

Tesco has shown increased performance over the past years in its operations in UK and abroad. The same seven-part strategy is being utilized. The Chief Executive identifies strengthening Tesco’s UK core as the priority. This is due to the political and economic forces in Europe that is making growth and expansion difficult to achieve. This report suggests that Tesco should also develop a strategy that seeks to strengthen Tesco’s foothold in foreign grounds, given the Tesco’s findings that Asian and North American countries are promising regions. The trends in the retail industry demands firms to put emphasis on local consumers’ needs and preferences. This report shows that a multi-domestic corporate level internationalization strategy needs to be developed by Tesco PLC to maximize profit. This strategy is appropriate given the features of the international markets, specifically for the retail industry. Also, adopting multi-channel strategies and improving mobile and data analytics are features that will continue for the next three to five years. This is because the major force behind such trends is the digital revolution, which, upon closer inspection, is still on the process of making its features more aggressive in making changes within the business environment (BBC News). To conclude, this report strongly suggests a further development of a multi-domestic strategy in order to strengthen the foothold of Tesco PLC on foreign grounds.

References

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