External Business Environment At Tesco Management Essay
The main objective of the work is dealt with the financial analysis of Tesco through various methods of accounting. The key factors of Internal and External Business Environment affecting the financial performance of Tesco are critically analyzed.
1.2 COMPANY’S PROFILE
Tesco is the third largest food-grocery retailers in the world and the leading retailer in UK. It operates with four different networks as Extra, Metro, Express and Superstore. Jack Cohen founded Tesco in 1919 when he sold groceries in the stalls of East London where he got a profit of £1 from the first day sales of £4. The brand name, came from, tea supplier provided tea shipment to Jack Cohen. The company’s brand name, Tesco in 1924 was framed by taking the first three letters as TES from the tea supplier’s name, T.E.Stockwell, and the first two letters as CO from his surname. In 1929 (Tesco 2010), Jack Cohen opened the first Tesco store in Edgeware. Tesco’s first petrol station was launched in 1974 and later it became the UK’s largest independent petro retailer. In the year of 1979, the total sales is £1 Billion and by the year of 1982, the sales got doubled and reached more than £2 Billion. Tesco attracts customers by introducing “Club Card” in 1995.
Now, Tesco operates in 14 countries with approximately 4,331 stores around the world and employees more than 326,000 people. Primarily, the company operates primarily in the USA, Europe and Asia and Hertfordshire, UK is their Head Office. Around 40,000 food products and non-food products were sold in Tesco. From the data analysis of Datamonitor (2010), the company’s network consists of more than 960 Express stores, 170 Metro stores and 450 superstores. Through tesco.com and Direct Tesco, it provides online retailing services. In addition to retailing, they provide services like Broadband Internet connections, financial services through Tesco Personal Finance (TPF), Tesco Finance, Tesco Beauty, etc.
2. COMPETITIVE ANALYSIS
Tesco possess the leading retail market in UK with a share of 30.6%; followed by Asda, Saisbury’s and Morisons with a market share 16.6%, 16.3% and 11.1%. The market share of leading players of UK has been represented below. (Euromonitor, 2010)
FIG 1: Market share of leading players in UK
3. ENVIRONMENTAL ANALYSIS
Analyzing the business environment includes both internally and externally. This analysis for Tesco was done below.
3.1 EXTERNAL ENVIRONMENTAL ANALYSIS
The external factor affects the internal functions of the business. Then critically analyzing these external factors are called as External Environmental Analysis. This analysis can be done through PESTEL and PORTER’s Five Forces for Tesco was given below.
3.1.1 PESTEL ANALYSIS
PESTEL is a key driver that contains interlinking tools used for macro environment analysis of an organization. It refers to the Political, Economical, Socio-cultural, Environmental and Legal analysis of an organization. The brief description of these factors affecting Tesco was described below.
The growth of Tesco has reached the heights globally
Government legislations & poilicies have direct impact on tesco
Tesco’s Annual Report explains that it have stores in more than 14 countries (Tesco Annual Report, 2010).
The trading policies of each country will directly affect the retailing power of Tesco
Economic factor of an organization is directly affected by buying behavior of customers. In spite of recession government reduced their interest rates. But customers prefer organic food items which directly affect sales value
Certain retail industry lost their market due to climatic changes but by providing flexible commodities Tesco retains its value
To overcome these, Tesco manages to sell food items as consumer spending on food will not be affected by economic crisis. So the opportunity to increase output for Tesco is measured. (Euromonitor, 2010)
FIG 2: UK spending on Food Market
The strong brand name attracts global and international customers.
Ageing is one of the factor which affects retail industry. UK’s census shows there are more number of retired people which creates great depression for Tesco
The demand for organic food products due to change in food trend is accommodated by Tesco
Technical environment greatly influences a business in a country. Tesco’s market development shows a steady growth by online grocery retailing
Technical growth has been visual by the introduction of the Tesco club card
Using Radio Frequency Identification(RFID) the data’s has been digitized
Self scanning technology is another asset for Tesco’s growth.
The main environmental factors for Tesco is customers, government and employees
Tesco creates a comfortable environment for their employee’s and Tesco is planning to give Christmas bonus worth £40 million
Cost leadership and differentiation are the key aspects that contribute overall environmental factors of Tesco
Recycling scheme for food and reduction in plastic bags by Tesco creates eco-friendly environment 70% of the store waste has been recycled in Tesco
Government legislations & poilicies have direct impact on tesco
Tesco’s revenue will be affected if government impose tax raise to 20% by next year as information from sources
Labor shortage will affect Tesco’s employee development
3.1.2 PORTER’S FIVE FORCES ANALYSIS
Porter’s five force models have been employed for analyzing the competitive environment of an organization. The complete analysis was given below.(Appendix 8.1)
Threats of New Entry (Products)
In the UK retail market UK, Tesco has a market share of 30.6%; followed by Asda, Saisbury’s and Morisons with a market share 16.6%, 16.3% and 11.1%. From the above datas, its clearly understood that, it is very difficult for a new market to enter in the existing market; and also very hard to withstand and compete with these current surviving markets.
Bargaining Power of Suppliers
The suppliers sell their products in the stores. Usually, the suppliers will be pressurised to accept the cheap price when it is sold to the retail stores. The prices given by Tesco (retailers) are much less than the price set by the suppliers. If they oppose there is a chance for the suppliers to lose Tesco.
Bargaining Power of Buyer
Buyers also try to reduce the maximum retail price set by Tesco. If they feel that the price of the product cannot be reduced or if they feel that the price of one product is costly in Tesco, then they obviously buys the product in one of the Tesco’s leading competitor like Asda or Saisbury’s. So Tesco must be very careful while setting a price. This interrupts Tesco and other supermarkets for profit struggle.
Threats of substitutes
Tesco focuses both on food items and non-food items. The threat for the food items is less when compared with the non-food products. Hence, the threat of substitutes is less.
Rivalry among Competitors
During the time recession, the customers were attracted by discount stores, so Tesco have faced challenges for the quality and price of the products from its rivalry competitors. Hence, the rivalry among the competitors is very high.
3.1 EXTERNAL ENVIRONMENTAL ANALYSIS
The external environment analysis was done by using SWOT Analysis which refers to Strengths, Weakness, Opportunities and Threats. This is explained below.
Tesco is the third largest grocery retail company in the world. In 2010, it possess 30.7% share of UK grocery retail market (Euromonitor, 2010)
Tesco holds a sales gain of 13% for UK markets and 26% growth in international markets.
It focuses mainly on the products that the customer can purchase according to their budget without compromising their quality.
During 2009, the sales from online non-food retail company Tesco Direct have increased by over 50% (Tesco, 2010)
The introduction of promotional technique “Tesco Clubcard” has improved the customer’s retention
In 2008, it have got the “World’s Retail Awards” as it have secured a good position in the global retailing market. This leads to future growth and sustainability. In 2010, the company’s turnover was £54billion, increased by 14.9% when compared to 2008 (Datamonitor, 2010). The growth in key indicators helped to identify the efficiency of the company. (Fame, 2010)
Fig 4: Tesco – Yearly Growth in Key Performance Indicators
Fig 3: Yearly Growth of Tesco in Key Performance Indicators
Poor debts, Credit card problems and insurance problems affects the profit levels
Company’s market share depend in the UK market
There is price variation for each products in different Tesco stores
Tesco have opened around 1000 stores both in UK and international (Mintel, 2010)
The economy and the international markets growth gets improved due to these geographical diversifications
It have been predicted that the there will be a increase in market share in 2014 though there is recession as the people gives priority for food products
Online shopping of products
The company will gets strengthen in global market share if they have Franchise agreement with other industrial corporations
There is a probability of increase in market share, if they focus on non-food based products
4. RATIO ANALYSIS
The ratio analysis analyzes the success, failure, and progress of the business. I have done the ration analysis from the years 2005-2009 and they are given below
4.1 PROFITABILITY RATIO ANALYSIS
These are ratios which are used to examine how the organization is operating or the current status of the organization by comparing with the past records of the organization or with any other organizations. The analysis is done for Gearing Ratio, Returns on Capital Employed (ROCE), Returns on Shareholders Fund (ROSF) and Interest cover Ratio.
4.1.1 Gearing Ratio
The calculation shows that during the year 2006, 2008 and 2009 due to the increase in the asset (mil GBP) of 3919, 6300, and 1404 respectively, there was an increase in the gearing ratio for Tesco as 0.6, 0.68, and 1.17, respectively. This shows that there is a gradual increase of the company’s shareholders fund during these financial years. In the financial year of 2005, 2007 and 2010 respectively, the gearing ratio got decreased to 0.59, 0.59 and 1.06, respectively as the shareholders fund value reaches the same value as that of the long term liabilities.
This is represented by the graph below:
GRAPH 1: Gearing Ratio of Tesco
4.1.2 Returns on Capital Employed (ROCE)
There is a constant increase in the company’s returns (%) from 2005 to 2007 as 15.2 to 19.7, but the capital returns (%) got reduced gradually from 2008 to 2010 as 18.02 to 16, as the profit got reduced after paying tax. This is schematically shown in the graph below:
GRAPH 2: ROCE of Tesco
4.1.3 Returns on Shareholders Fund (ROSF)
There is a constant increase in the company’s returns (%) from 2005 to 2007 as 21.79 to 25.25, but the capital returns (%) got reduced gradually from 2008 to 2010 as 23.72 to 21.76, as the profit got reduced. This is schematically shown in the graph below:
GRAPH 3: ROSF of Tesco
4.2.4 Interest Cover Ratio
This ratio explains the number of time the interest paid by the company at the given profitable level. Hence, the interest cover ration of Tesco increases from 2007 to 2010 as 6.48 to 14.
This is illustrated in the graph below.
INTERESST COVER RATIO
GRAPH 4: Interest Cover Ratio of Tesco
2.2 LIQUDITY RATIOS ANALYSIS
These are the ratios that are derived from the balance sheet that evaluates how an organization must pay its debt. The analysis is done for Current Ratio and Liquidity Ratio as below.
2.2.1 Current Ratio
The calculation shows that there was an increase in the current ratio for Tesco from 1.26 to 0.52 to 0.78 in 2005 to 2009. This shows that there is a gradual increase of the company’s asset during these financial years. In the year of 2010, the current ratio got decreased to 0.73; this is due to the fall down of liquidity. This is represented clearly in the graph below:
GRAPH 5: Current Ratio of Tesco
The current assets (mil GBP) of Tesco from the year of 2006 to 2010 was found to be 3919, 4576, 6300, 14045 and 11765 respectively, while the current liabilities (mil GBP) of Tesco’s leading competitor, Asda and Saisbury’s from the year of 2005 to 2009 was less than that of Tesco. The current liabilities of Tesco and it leading players are given below. From the current assets, it can be clearly understood that the current ratio of Tesco was higher than its leading competitors.
TABLE 1: List of Current Liabilities of Tesco and its leading competitors
2.2.2 Liquidity Ratio
As the cash flow in the company is efficient, the liquidity ratio got increased till the financial year 2010 and the management improves effectively. This is shown in the graph below
GRAPH 6: Liquidity Ratio of Tesco
5. FUTURE STRATEGIES
5.1 BALANCE SCORE CARD
It is also refers to the Steering wheel Approach of Tesco. (Tesco Plc, 2010). It contains five different perspectives such as people, customer, financial, operations and community. Each Tesco store have its own care which associates all staff members. The main objective is the daily activities are connected with the strategy of the organization. (Appendix 8.)
The success of Tesco is based on the following criteria’s as Sustainability, Acceptability and Feasibility. Tesco is the leading retailer in UK grocery market from the past decade. In the current status, its operating only in 14 different countries so it can slow down or stop its expansions globally and concentrate more on the existing stores. Though it have high marking share, Tesco must also function in various sectors like Banking, Fashion, etc to still acquire higher profits. Apart from food products, Tesco can also focus more on non-food products to achieve more profit. It can also withstand in their current global position by forming alliance with other companies so that it can face some weakness like competitors, reaction of stockholders with challenge and attain the target goal.
According to my Balance Sheet,
In the financial perspective, the returns of the company for some couple of years do not have high values as the ROCE value does not increases. The higher profit can be obtained from 2011, if the ROCE value got increased.
In the customer perspective, good quality products, less negative feed backs regarding customer service and quality of product, complements and low price are the major criteria for attaining more customers and thereby the selling rate can be increased.
In internal business process, more profits must be attained.
In learning perspective, it has to compete well with its leading players by focusing on complements, less priced products and good service.
In growth perspective, Tesco capture more markets across globe.
8.1 PORTER’S FIVE FORCES
THREAT OF SUBSTITUTE PRODUCTS
BARGAINING POWER OF SUPPLIERS
THREAT OF NEW ENTRANTS
RIVALRY AMONG COMPETITORS
BARGAINING POWER OF BUYERS
BALANCE SCORE CARD
INCREASE IN ROCE VALUE
Increase the net value : 50% increase
translate overseas profits at average foreign exchange rates
Increase the customer for Tesco
Total cost to customer
Increase customer percentage : 25% loyalty customer compare with last year
Ask feedback; personal attention;
Internal Business Process
the world’s largest business process management project
Leadership conference, training employees.
working across 3,263 stores in 14 countries
IT system : include trading, warehousing, distribution, payroll, financial and in-store systems.
Learning and Growth
Staff development plan including
*Managers and trainees hold a weekly informal review session as well as more formal four weekly sessions to track progress against their personal development plans. The feedback is recorded and is carefully scored. Trainees are given a colour coded development rating
Customer forces, working with others, personal behaviour.
Assess of development.
*Training programme – option programme, development programmes, specialised programme,
On-job training: shadowing, coaching, mentoring, job rotation or secondment.
On-the-job training also has several advantages for the company
*Off-job training: team-building, communications (for example,
making presentations), or organisation and planning.