SWOT and Five Forces analysis of Tescos.

Porter’s Five Forces Analysis
An analysis of the structure of the industry should be undertaken in order to find effective sources of competitive advantage (Porter, 1985). Therefore, in order to analyse the competitive environment of Tesco, Porter’s five forces analysis has been used by the researcher as follows:

Threat of substitute products and services

The threat of substitutes in the grocery retail market is considerably low for food items and medium to high for non-food items.
In the food retail market, the substitutes of major food retailers are small chains of convenience stores, off licences and organic shops which are not seen as a threat to supermarkets like Tesco that offer high quality products at considerably lower prices (Financial Times, 2009). Moreover, Tesco is further getting hold of these shops by opening Express stores in local towns and city centres creating a hurdle for these substitutes to enter the market.
However, the threat of substitutes for non-food items , for instance clothing, is fairly high. It should be noted that so long as the economic recession prevails , customers will be inclined towards discounted prices hence Tesco is a threat to the speciality shops.

Threat of entry of new competitors

The threat of entry of new competitors into the food retail industry is low.
It requires huge capital investments in order to be competitive and to establish a brand name. Major brands that have already captured the food retail market are Tesco, Asda, Sainsbury’s and Morrisons and they account for 80% of all shopping in the UK (Mintel, 2010). Therefore, new entrants have to produce something at an exceptionally low price and/or high quality to establish their market value.
Gaining planning authorisation from local government takes a considerable amount of time and resources to establish new supermarkets and this is therefore a considerable barrier to new entrants.

Intensity of competitive rivalry

The intensity of competitive rivalry in the food and grocery retail industry is extremely high.
Tesco faces intense competition from its direct competitors, including Asda, Sainsbury’s, Morrisons and Waitrose, which are competing with each other over price, products and promotions intermittently. It should therefore be highlighted that Asda is one of the key competitors in this segment with an increase of market share from 16.6% to 16.8% during the fiscal year 2010/ 09, while Sainsbury’s has shown an increase to 16.1% from 15.8% and Morrisons to 11.6% from 11.3% through the same period (Euromonitor, 2010). The slow market growth essentially means that these increasing market shares from competitors have intensified the market rivalry, which is threatening Tesco’s market leadership position.
In rural areas where the nearest superstore can be some distance away, some primary consumers are attracted by retailers like Somerfield and Co-op .
Hard discounters like Aldi and Lidl have taken over the market in times of recession. During 2008 they recorded a growth of sales of over 25% (Keynote, 2010).

Bargaining power of buyers

The bargaining power of buyers is fairly high.
In cases where products have a slight differentiation and are more standardised, the switching cost is very low and the buyers can easily switch from one brand to another.
It has been proposed that customers are attracted towards the low prices, and with the availability of online retail shopping, the prices of products are easily compared and thus selected.

Bargaining power of suppliers

The bargaining power of suppliers is fairly low.
It should be noted that the suppliers are inclined towards major food and grocery ...

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Bargaining power of buyers

The bargaining power of buyers is fairly high.
In cases where products have a slight differentiation and are more standardised, the switching cost is very low and the buyers can easily switch from one brand to another.
It has been proposed that customers are attracted towards the low prices, and with the availability of online retail shopping, the prices of products are easily compared and thus selected.

Bargaining power of suppliers

The bargaining power of suppliers is fairly low.
It should be noted that the suppliers are inclined towards major food and grocery retailers and dread losing their business contracts with large supermarkets. Hence, the position of the retailers like Tesco, Asda, and Sainsbury’s is further strengthened and negotiations are positive in order to get the lowest possible price from the suppliers.

Detailed SWOT Analysis
A strengths, weaknesses, opportunities and threats (SWOT) analysis of Tesco has been provided below.

Strengths

Drawing upon Datamonitor (2010), Tesco is ranked third largest grocery retail company in the world, operating over 4,331 stores primarily within the USA, Europe and Asia. The company held 30.7% share of the UK grocery retail market in 2010 (Euromonitor, 2010).
A strong financial performance has been shown by the company over the years, which underlines its strategic capabilities. According to Datamonitor (2010), Tesco is a £ 54billion turnover company recording an increase of 14.9% when compared to 2008. The foremost strategy that has been adopted by the company is the product and services customization in accordance with the market demands. The efficiency in performance of the company over the last decade can be summarised with the help of growth in following key indicators ( Fame, 2010):

Fig 4: Tesco – Yearly Growth in Key Performance Indicators

Tesco’s strategy aims to focus on product affordability which ensures that customer gets the product to suit their budget without compromising on the quality. During 2009 the sales from online non-food retail company Tesco Direct have increased by over 50% (Tesco, 2010).
Tesco has a proven customer retention strategy with the help of its loyalty scheme called ‘ Tesco Clubcard’ . Drawing upon DunnHumby (2008), the company uses data collected from this loyalty scheme in its powerful CRM systems named Crucible and Zodiac, and this information is then used for effective direct marketing and various other promotional techniques.

Weaknesses

Tesco has not been able to perform well over the last year as compared to its competitors. According to Mintel (2010), a number of products were recalled by Tesco in 2009 that has resulted in a financial loss as well as damage to its brand image. These included company’s value lines, which have been marketed as high quality cheaper alternatives to key brands.
The key operations of the company are concentrated within the UK retail sector, where it recorded more than 75% of its revenue during the fiscal year 2009 (Tesco, 2010). This lack of geographic diversification can be seen as a key weakness for the firm as it is subjected to systemic risks of the UK market.

Opportunities

The commercial network portfolio of Tesco is on the rise . They opened over 620 stores in 2009 of which 435 were international (Mintel, 2010). This geographic diversification will help the company in improvising its economy of scale, while minimising its systemic risk exposure.
The popularity of Tesco.com is growing rapidly, accounting for over 1 million customers in 2010 (Guardian, 2010), which has provided an opportunity to the company to attract new customers and reduce the overall cost resulting in more profit.
Company focus is on global expansion as is evident by its entry into the Indian market. This entry will strengthen its global market position. A limited franchise agreement has been signed by Tesco with Trent, retailer of Tata group, which is one of the largest industrial corporations of India (Daily Mail, 2010).
It has been predicted that there will be a rise from £125 billion in 2009 to £145 billion in 2014 in the food retail market segment (Euromonitor, 2010). This is mainly due to the fact that even during times of recession, food retail is the toughest segment since having enough to eat is the priority.

Threats

The commencement of a global financial crisis has resulted in a contraction of the UK’s economy by 2.4% in 2009 which is estimated to contract further by 4.2% by the International Monetary Fund (IMF) ( Poulter, 2009). Tesco’s concentration in the UK market can therefore have a detrimental impact on its financial standings.
The decline in income and the rise in unemployment have affected the discretionary buying behaviour of consumers which has adversely impacted the company’s sales, in particular the non-food items.
There has been fierce competition in the UK grocery market . Tesco though has been leading this sector for 15 years (Mintel, 2010), but is now faced with intense competition from its competitors which are gaining in market share. These include the rest of the ‘ big four’ i.e., Asda, Sainsbury’s and Morrisons respectively.

In light of the above key points, the abridged SWOT analysis of Tesco can be summarised in the following illustration:

Fig 5: Tesco Abridged SWOT Analysis

Value Chain Analysis
According to Lynch (2003), value chain is defined as the links between key value adding activities and their interface with the support activities. Value chain has been implied as a strategic evaluation tool used for distinguishing the strengths and weaknesses in value adding processes (Audrestsch, 1995). The value chain of Tesco has been demonstrated in the following diagram:

Fig 6: Value Addition in Value Chain of Tesco

Inbound Logistics
The overall cost leadership strategic management of Tesco is exhibited in its lean and agile inbound logistics function. Drawing upon Abeysinghe (2010), the company uses its leading market position and economies of scope as key bargaining powers to achieve low costs from its suppliers. The analysts have also highlighted the constant upgrading of their ordering system, approved vendor lists, and in-store processes to induce effectiveness and efficiency into the company’s inbound logistics operations.

Operations Management
Tesco has been praised by a number of supply chain management critics for its effective use of IT systems that facilitate the company’s low cost leadership strategy. According to Tesco (2010), the company has invested over £76 million in streamlining its operations through their Tesco Digital program, which is a third generation ERP solution for the company. The company has achieved £550 million in increased profitability during 2009 alone due to the introduction of this system. This company -wide ERP system has also facilitated the minimisation of stock holdings within the company.

Outbound Logistics
Tesco holds leadership position in online and offline food retail segments, which is due to its efficient and effective outbound logistics. Drawing upon Mintel (2010), the company has developed a range of store formats and types, which are strategically placed to achieve maximum customer exposure. These formats include Express, Metro, Superstores, Extra and Homeplus, which are segmented according to the target population.

Marketing and Sales
Loyalty programs like Tesco Clubcard are being introduced through information technology advances which dissuade the customers from switching over to their competitors. Tesco has introduced its Greener Living Scheme to give consumers advice on environmental issues, including how to reduce food waste and their carbon footprint when preparing meals .

Services
Tesco has been pursuing a dual strategy of cost leadership and differentiation, which has led to an increased importance placed on customer service. Drawing upon Keynote (2010), this dual strategy is exhibited through the development of self-service kiosks, financial services, focused direct marketing and promotions.

In order to put Tesco’s value chain analysis into perspective, it should be noted that despite cost leadership strategy the company has been able to create a high degree of value in comparison with its key competitors. The relative analysis of the value created by the big four supermarket chains, i.e., Tesco, Asda, Sainsbury’s and Morrisons has been provided as follows:

Fig 7: Benchmarking Analysis: Cost as a Percentage of Sales

Conclusion
In light of the above analysis, it can be concluded that Tesco continues to hold its leadership position within the highly turbulent retail segment, where companies are required to pursue both cost leadership and differentiation strategies. Tesco has been able to achieve both with the help of a lean and agile supply chain management, along with the strategic use of information technology. The core competencies of Tesco have been seen to be aligned with the business environment, therefore highlighting a pos