Strategic Advantage
Introduction and Description of the Problem
Tesco is the market leader in the UK supermarket industry, with a share of 28.8% as of the summer 2014 (Statista 2014). Other major firms in the industry are Asda, Sainsburys and Morrisons, but the industry overall is highly fragmented. Most firms in the industry compete in the mainstream segment of the market, including Tesco. Few major players operate with a premium platform. The industry has recently been characterized by the rise of discounters, including new market entrants from the continent in Aldi and Lidl, both of which compete in the discount segment, along with incumbent discounter Iceland.
The emergence of the discounters is a major strategic problem for Tesco. The discounters, well-financed and operationally sophisticated, have been able win market share in the UK with their low prices, and at this point are stealing share away from the more established companies. Tesco has seen its share of the UK market decline by 2% in the past couple of years, almost all of it going to the new discounters (The Economist, 2014). A new competitive threat is certainly within the category of a critical business issue.
The new competition raises other issues for Tesco. Discounters tend to leverage supply chain efficiencies and buying power. Tesco should have significant capabilities with respect to both of these elements, but the company needs to evaluate at this point if it does have a supply chain problem. In particular, Tesco needs to decide on the level of commitment it is willing to have to British producers, as the country's food self-sufficiency is declining in the face of price reductions owing to the supermarket wars (Rayner 2014). Tesco's commitment to British food producers could be marketed as a source of advantage, and it certainly is something that would be reflected in its corporate values. It is worth noting that the company does not express a commitment to British values in its current statement of values (Tesco 2014).
The third issue for Tesco is how to view the new UK competition in light of the company's disastrous forays into international markets. Tesco wants to succeed internationally, but has struggled and retreated from the major markets in China (The Observer 2013) and the U.S. (Kirka 2013). This leaves the company's international presence in minor markets like Hungary and Malaysia, which sound more like a distraction than anything else. According to the company's latest annual report, international markets are worth ?19.6 billion in revenue and ?930 million in trading profits. This is a 4.7% net margin, compared with 5.02% net margin on domestic sales. The company saw its profits decrease in all regions last year, however, and revenues declined in Europe while flatlining in the UK.
Thus, Tesco has three major strategic challenges. The first is to determine its response to the threat posed by discounters entering the domestic market. The second is to determine what its values are with respect to UK producers, and the third is that Tesco needs to determine what it needs to do about its international operations. Having lost the two largest international grocery markets, but still earning 27.6% of group revenue internationally, Tesco may find that losing money overseas is hurting its ability to defend the domestic market, so all of these three strategic issues tie in together.
Analysis
There are a number of analytical tools that can be used to help Tesco determine the strategy that it needs to adopt to address these different strategic issues. The purpose of using these analytical frameworks and diagnostic tools is to understand the different facets of the company's operating environment, both internal and external. Doing so will give Tesco management the perspective needed to develop better strategy. Among the tools and frameworks are PESTLE, Porter's Five Forces, the industry life cycle and the key success factors.
PESTLE
The PESTLE analysis covers the political, economic, social, technological, legal and environmental aspects of the macroenvironment. The political environment is moderately favourable for Tesco. While the emphasis on free trade has made it easy for foreign companies to enter the UK market, it has also allowed Tesco to pursue growth elsewhere in Europe. The political environment is otherwise fairly neutral once food safety concerns are met. The economic environment is moderately favourable for the grocery industry, at best. While demand for food is constant -- everybody needs to eat -- people will reduce the sterling value of their food purchases in response to poor economic conditions. While the UK has recently experienced an improvement in its GDP growth...
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