Tesco owes its success to fulfilling their major business objectives and meeting consumer needs. These are as follows:
- Making a profit
- Increasing sales and market share
- Providing services to the community
- Producing high quality products and offering high quality services
- Developing a skilled workforce
- Expanding into overseas markets
- Fulfilling charitable or non-profit objectives
Tescos Market share
Market share is the term used to describe the proportion of total sales in a particular market for which one or more firms are responsible. This is usually expressed as a percentage.
The supermarket sector has always been highly competitive. Tesco is the leading company in the sector with a huge 27% market share. Tesco is under much increased competition for market share and sales with the rise of Asda Walmart, sainsburys and the takeover of Safeway by Morrisons.
Tesco’s dominant market share is put down to their policy of cheaper prices, offering better choice and convenience for their customers and its emphasis on meeting changing consumer needs through service and innovation, while maintaining its commitment to value and quality.
In June 2003 the third largest supermarket was created. This came about by the takeover of Safeway by Morrisons. According to BBC news a deal worth £2.9bn was agreed by the two supermarket chains. The combined firm, with 598 stores, a turnover of £12.6bn and a market share of 16%, aims to compete with Tesco, Sainsburys and Asda- the giants of the U K supermarket sector. This was a massive boost for Morrisons which prior to the takeover was a fast growing but medium sized supermarket chain based in the north of England. The take over has opened up the South of England to Morrisons where Safeway was predominantly located.
The well documented takeover of Safeway by Morrisons was proposed by all of the supermarket giants including Tesco. Tesco showed a great deal of interest in the takeover but their bid was blocked by the competition commission. The office of fair trading decided to block Tescos bid stating that it would give Tesco increased buying power over manufacturers and suppliers resulting in a push up of prices. The office of fair trading also had concern for small stores and its negative effect on local communities.
Financial Information
In April 2003 Tesco announced a 14.7% rise in annual profits. This rise in profits has been put down to increased emphasis on non-food products and its expanding overseas operations. Tesco announced pre-tax profits of 1.4bn for the year to February 22nd. These profits exceeded forecasts of 1.3bn.
Tesco decided six years ago to focus on expansion into higher margin non-food products such as clothing, healthcare and retail services such as banking, as well as expanding overseas. Tescos International sales rose 31.2% to £5.2bn in the year to February 22nd. Meanwhile in the U K sales grew 7.9% to £23.4bn.
SWOT analysis of Tesco
Strengths
- Leading supermarket retailer in the U K with a market share of 27%.
- Tesco is a household name therefore the company has a strong brand name and customer loyalty.
- Tesco employees have strong customer service skills leading to satisfied customers.
- Tesco have a large product range giving choice to customers. This gives stability to company.
- Excellent management methods leading to high levels of organisation in the firm.
- Tesco offers low prices and a great service.
- There is a constant demand for products.
Weaknesses
- Increased competition from rival supermarkets.
- Motivation within the workforce could be affected by boredom and monotony.
- Alienation- employees have no say in issues that arise in the business.
Opportunities
- Expansion into new markets such as car sales and a wider non-food product range.
- Expansion into new geographical areas such as Eastern Europe.
- Development of a global brand and possible global marketing.
- Development of internet shopping.
Threats
- Increased competition from other supermarkets.
- Intervention from government bodies may restrict growth and investment.
- Increased pressure on environmental issues such as waste and recycling.
Economies of scale within Tesco
Tesco is a rapidly growing business at both a national and international level. Rapidly growing businesses can benefit from external and internal economies of scale. The term Economies of scale is used to describe the reductions in cost gained by firms as they grow. Tesco is a huge company and as it expands it can gently increase production, therefore benefit, as the average costs per unit of production falls.
Internal economies of scale – Growth in Tesco is evident by the rise of sales and turnover as discussed in the financial analysis of Tesco. As a result Tesco can enjoy certain benefits that arise within the firm. These are known as internal economies of scale. They occur for a number of reasons.
Managerial economies – Specialist managers are employed by Tesco in different areas of the company such as finance, marketing, personnel and customer services. These are required due to the sheer size of the business. Managers specialise in their own departments rather than attempting to perform several different roles. This results in high levels of efficiency and will ultimately reduce average costs.
Financial economies – Tesco is a huge company and a financially stable institution. Therefore they find it easier to get large bank loans. This is the case as Tesco is considered less of a risk and can offer large assets as security. Tesco can also negotiate lower rates of interest on loans as banks see them as less of a risk compared to smaller companies. Selling shares are also an easy way of raising capital.
Purchasing and Marketing economies – Tesco will benefit from lower rates when buying assets in bulk. Tesco enjoys special privileges from their suppliers as it is considered a valued customer. The sheer volume of materials it buys from its suppliers will result in lower rates and prices. Tesco also has the financial power to use the media to advertise its products and legendary service.
Risk-bearing economies – As Tesco grows it has moved into different areas of retail such as non-food products and financial services, therefore it is diversifying to reduce risk. Tesco will also benefit from having constant demand for 70% of its products resulting in high levels of sales all year round. Research and development teams are set up to research cyclical demand and seasonal demand changes to gain competitive advantages over their rivals.
Technical economies – New technology and advances in machinery often have many advantages. The main point about economies of scale is as production rises average costs will fall this is due to increased dimensions within the firm. Capital costs and running costs will not rise in proportion to their size. Tesco can benefit from having increased buying power to acquire sophisticated machinery to produce vast amounts of goods thus cutting costs per unit of output. Tesco also benefits from linking certain processes which reduce the cost of units of output. For example Tesco financial services can use the same computer server for company accounts and administration. This is called the economy of linked processes. Division of labour and specialisation this results in high efficiency within the firm as it saves time, allows the use of specialist machinery and leads to greater skill among workers.
External economies of scale – These are the reductions in cost which any business in an industry might enjoy as the industry grows. External economies are more likely to a rise if the industry is concentrated in a particular region.
Labour – Tesco supermarkets are generally located in cities and towns, therefore open to a wide variety of labour. Situated by universities and colleges will open up suitable qualified labour for management roles. On the other hand Tosco asks for no formal qualifications for shop floor jobs and checkout staff. Therefore training costs will be minimised due to the nature of these jobs.
The role of production in Tesco
Production takes place when a business takes inputs, such as raw materials, carries out a process and produces an output or product. There are 40 000 own brand products present in Tesco. Tesco produces all of these products and ensure they meet a high standard of quality. The main objective to Tesco when producing their own brand products is to minimise the cost per unit of output, this is known as productive efficiency. Efficiency plays a vital role in the various production processes that Tesco employ. The production process in Tesco maintains a high level of efficiency, but ensures that the quality of their products will not be affected by increased efficiency.
Methods of production in Tesco
Tesco has a huge product range therefore there will be different methods of production used for different products. There are three different methods of production available to Tesco, but generally Tesco will only use two of them. Batch production and Flow production are the main methods of production that Tesco will use. Job production is not used in Tesco, this involves the production of a single product at a time. It is used when orders for products are small. Small scale examples include the baking of a child birthday cake, a dentists treatment session or the construction of an extension to a house. Job production requires a skilled workforce and skilled craftsmen to produce specialist “one off” products.
Batch production – This is a suitable method of production for an organisation like Tesco. Batch production is used when demand for a product is regular. An example might be the production of bread. Tesco bakes bread in the in-store bakery by dividing the production process into a number of different operations. Each batch of bread goes through several baking stages before it’s completed. It is possible to vary each batch of bread produced. This offers flexibility in the production procedure. Ingredients can be changed to produce different types of bread and shape. Tesco also employs batch to different products such as cans of soup and other tinned products. Once again the recipe can be changed slightly to produce different products. Productive efficiency is evident in this production method. Batch production in Tesco is used on a very large scale therefore larger production runs will lower the average cost of production. The introduction of new technology will also make batch production a more efficient production method.
Flow production – Flow production or mass production is used by Tosco to produce products such as breakfast cereals, bottled drinks, canned food and some non food products such as soap powder and other cleaning products. Production is organised so that different operations can be carried out, one after the other, in a continuous sequence. Features of Flow production are:
- Large quantities are produced
- A simplified or standardised product
- A semi-skilled workforce; specialising in one operation only
- Large amounts of machinery and equipment
- Large stocks of raw materials of raw materials and components
Advantages of Flow production -
- Unit costs reduced as Tesco gains from economies of scale
- Use of automated machines reduces the need for labour
- Production can be controlled if demand for the products falls.
Disadvantages of Flow production –
- High setup costs, therefore companies must be confident demand for production is sufficient to cover costs.
- Motivation within workers could be affected by monotony and boring tasks.
- A standardised product range.
Quality systems in Tesco
Businesses are more likely to be successful if they can produce high quality products and services. Tesco is well aware of this and have developed a successful quality function within the company. This involves managers attending meetings every day on quality control issues that need to be addressed. These meetings on total quality management help Tesco to achieve their quality objectives. A quality improvement team are also employed to meet weekly to lead and monitor the quality process.
There are three key points to ensure quality within Tesco:
- Meeting customer requirements
- Prevention of defects
- An attitude to satisfy customers all the time
These quality measures ensure their staffs have an accident free operation, likewise for their customers.
Another way of achieving high levels of quality is “Quality control”. This involves an inspection system which is carried out at various stages of production to ensure that faulty items do not remain in the production chain. Tesco achieves this by statistical quality control, this enables quality levels to be monitored through random sampling from the production process. This method is cost effective as it replaces the need for expensive 100% inspection of every item. Quality problems can be caused by poor staff performance. In many cases this can be addressed by training, improving the manual skills of workers through training courses or improving management techniques through management development programs.
Stock control in Tesco
Modern stock control systems make use of bar coded information that is scanned into computers. This ensures that the computer knows exactly which products have entered and left the stockroom. Tesco uses a new system called the EPOS system. The system is used at the checkout to scan barcodes in a new and efficient way. This allows staff to serve many more customers and ultimately leads to reduced costs as it means less staff will be required to work on the tills. In addition to this the new system is used to record exactly what has been sold which allows up to date stock records to be kept. This data assists staff when deciding how much to order and when to order. This in turn, can help to reduce cost as there will be less wastage in the stock room. The new system employed by Tesco will also give a permanent electronic link with suppliers that can automatically reorder stocks. Again this reduces costs. Tesco will not need to employ staff to process all of the paper work that is involved in the ordering of goods, as computers will do it automatically.
All stock information can be held in a database. Tesco can then use this information to produce a printout of the stock in order of age. This can help the manager to make decisions about future stock purchases. Management can reduce orders of goods if there is a surplus. Again this helps the business to reduce costs as there will be less wastage.