(1) INTRODUCTION :
BUSINESS ENVIRONMENT :
An organization's environment can be divided into internal & external environments.
Internal environment comprises of the organizational structure , culture , resources etc.
External environment can be further subdivided into operational (immediate) environment & general (contextual) environment.
Operational environment generally includes customers , suppliers , distributors , competitors , labour markets , financial institutions , trade unions etc.
General environment comprises of macro-environmental factors like political , economic , socio-cultural , technological , legal & environmental factors , which influence organizations & can emanate not only from local or national sources but also from international / global developments.
These external factors have an effect on the internal environment of an organization . While organizations have some degree of control over their internal environments , it is often very difficult if not impossible , to control the external environment in which they operate. ( Worthington I. ; Britton C. , 2006 , p. 6 )
* PESTLE ANALYSIS :
PESTLE analysis can be used to analyze an organization's current & future environment as part of the strategic management process.
(1) POLITICAL FACTORS :
Political factors include type of government ( democratic / autocratic ) , stability of government , government's fiscal , monetary , environmental & corporate policies , local government / devolved administrations , trading relationships , government's attitude towards foreign companies , special incentives for investors , grant support to businesses , changes to tax rates , etc.
(2) ECONOMIC FACTORS :
Economic factors include business cycles , money supply , interest rates , inflation , devaluation/revaluation , wage/price controls , energy availability & cost , changes in consumer demand , unemployment levels , disposable income , GNP & GDP trends etc.
(3) SOCIO-CULTURAL FACTORS :
Socio-cultural factors include lifestyle changes , demographic changes , age distribution/growth rate of population , regional shifts in population , birth rates , life expectancies , rate of family formation , income distribution , consumer activism , levels of education , career expectations etc.
(4) TECHNOLOGICAL FACTORS :
Technological factors include productivity improvement through automation , technological innovation in transfer from lab to marketplace , research & development , patent protection , new products , emergence of competing technologies , speed of technology transfer etc.
(5) LEGAL FACTORS :
Legal factors include regulatory laws , anti-trust ( anti-monopoly ) laws , competition laws , tax laws , employment laws , health & safety laws , environmental protection laws etc. ( Kumar R. , 2009 , lecture handout )
(6) ENVIRONMENTAL FACTORS :
The environmental factors include the physical environment , environmental impact , environmental legislation, energy consumption , waste disposal , global warming , green businesses , changing expectations of customers/employees/regulators on sustainable development etc. Ethical factors include shareholders'/stake holders' interests , corporate social responsibility , corporate governance , take-overs , political contributions etc.
* MICHAEL PORTER'S 5 FORCES MODEL :
The five forces model identifies the 5 key factors that drive competition in a market & thus how the organization should orient itself in the market to be successful.
* Customer's bargaining power - the greater the bargaining power of customer the more the pressure on prices , thus less revenue.
* Supplier's bargaining power - the ability of supplier to increase prices (for e.g. relying on 1 supplier only) increases the cost , thus decreasing profitability .
* Threat of new competitors - new competitors entering the market can increase pressure on prices & decrease the organization's market share.
* Threat of substitute products/services - customers may switch to the new/substitute products for e.g. type writers replaced by computer/printers
* Existing competitors - level of competition , no. & strength of competitors , switching-cost for the customer can put downward pressure on prices.
( Businesslink.gov.uk , 2009 )
( 2 ) ORGANIZATIONAL BUSINESS STRATEGY :
Tesco is the world's 3rd largest grocery retailer with operations in 14 countries. UK is the biggest market of Tesco. It also has non-food ranges which accounted for 21% of group turnover in 2008.
Tesco has a well-established and consistent strategy for growth .The rationale for the strategy is to broaden the scope of the business to enable it to deliver strong sustainable long-term growth by following the customer into large expanding markets at home - such as financial services, non-food and telecoms - and new markets abroad, initially in Central Europe and Asia, andmore recentlyin the United States. ( Tesco , 2009 )
* PESTLE ANALYSIS OF TESCO :
Source : ( Ivory research ltd. , 2005-2009 )
(1) POLITICAL FACTORS :
Tesco is a global organization . Thus , Tesco is greatly influenced by the political environment & legislations in the European Union as well as the rest of the world.
Since Tesco is a retail sector business as well as has products of its own brand , it is labour-intensive i.e. from manufacturing , supplies , distribution , retail to advertising etc. Thus it provides jobs for all tiers of population from low skilled to high skilled workers , from students to professionals , from disabled people to the elderly. Hence it helps the government to reduce the unemployment levels in the sgciety. In an industry where the staff turnover is high , students , disabled people & senior citizens are desirable employees for Tesco because of greater doyalty & moreover they are prepared to work at a lower wage rate.
New store derelopments where on one hand generate employment, on the other hand they pose a threat to the surtival of small local businesses . Those small businesses eat`er shut down or have to lower their profit margans substantially in order to survive in that area. But that competition ultimately benefits the society as a whole because of lower prices.
(2) ECONOMIC FACTORS :
Business cycles from high GDP growth to low-negative GDP growth affect all businesses but also validate , the survival of the fittest theory . The weaker organizations are eliminated & the strongest , fittest ones survive the recession & grow more confidently afterwards. Tesco has proved its economical viability & resilience through the current recession. In fact apart from a few supermarkets ( e.g. Woolworth ) , most of the grocery supermarkets have done very well globally even in the recession , giving them a label of recession proof businesses.
However , suffering economy does affect the retail sector also due to increase in the unemployment levels & reduced purchasing power of the consumer. In such economic climate , Tesco & other businesses have to cut down on their profits to get through the recession afloat. The risk of lowering the cost is downsizing which increases the unemployment levels & thus could initiate a vicious circle & a downward spiral of the economy. This can be avoided by reducing the salaries starting from the top i.e. CEO level down to the ordinary labourer . This gives a company high moral standing & employees feel like they are part of a family where sacrifice begins from the top.
Tesco's international business is growing pretty well but since the major market for Tesco is still the UK , it will face hard time till the UK economy recovers from the recession.
(3) SOCIO-CULTURAL FACTORS :
Tesco has increased the amount of non-food items ( like clothing , stationery , medicines etc. ) as well in addition to the groceries as the current trends indicate that the British consumers have moved to one-stop & bulk shopping , probably because of time-saving & convenience .
Demographic changes like ageing population , more women professionals , fast-paced lifestyle means less home cooking & thus Tesco & other retailers have increased their range of frozen meals. Consumers are very health-conscious nowadays & thus focussing on this awareness Tesco has a dedicated range of organic foods .
In addition, the focus is now on , the own-label ( Tesco label ) , share of the business mix, the supply chain and other operational improvements , which can reduce costs of the business & hence increase profit margins ( Michael Porter's Cost leadership generic strategy ) , for e.g. Tesco pure fruit juices ( not from concentrate ) competing with Tropicana pure juices & Tesco Chocolates competing with Cadbury Chocolates . But there are concerns about the suppliers of the own-label products that they are being underpaid & exploited . Tesco has to treat those suppliers a bit more fairly in order to retain them.
Tesco was also the first to allow customers to pay in cheques & cash at the check-outs.
(4) TECHNOLOGICAL FACTORS :
It's the age of information technology . Tesco has adopted the technological advances & benefited in terms of cost reduction , increased net profitability & customer satisfaction .
The home delivery system provides even more convenience to the customers to have the luxury of getting groceries delivered to their doorstep. The Tesco Club Card system gives Tesco data for monitoring the consumer buying patterns & preferences . Accordingly Tesco can give special offers & value-added products , thus maximising sales.
The technologies used by Tesco stores are:
* Radio Frequency Identification ( RFID )
* Self Check-out machines
* Electronic shelf labelling
* Electronic scanners
* Intelligent scale
* Wireless devices
* CCTV Cameras
* Theft prevention scanners at exits
(5) LEGAL FACTORS :
Various government legislations and policies have a direct impact on the performance of Tesco.
For instance, the Food Retailing Commission (FRC) suggested an enforceable Code of Practice should be set up banning many of the current practices, such as demanding payments from suppliers and changing agreed prices retrospectively or without notice (Mintel Report, 2004).
The government's anti-monopoly policies and reduction of buyers' power can limit entry to this sector with controls such as license requirements and limits on access to raw materials . ( Mintel Report, 2004 ; Myers, 2004 )
(6) ENVIRONMENTAL FACTORS :
Tesco is doing its bit for a greener environment in different ways .
Tesco has got cheap alternative options for plastic bags such as the cloth bags if customers want a greener environment & many do . But even the plastic bags of Tesco are biodegradable thus of less harm as compared to the non-degradable plastic bags.
Some Tesco stores have automated , recyclable material (cans , glass bottle etc. ) collection machines installed in the parking space , which shows Tesco's commitment to environmental protection.
Pestle analysis shows how Tesco adapts to , the changes in general environmental factors & the demands of the evolution process .
Tesco's SWOT [ strengths , weaknesses (internal factors) , opportunities & threats (external factors) ] analysis can be employed in order to make a future strategy for Tesco that could help it grow & outcompete its main competitors like Walmart/Asda & Sainsbury .
THREATS & OPPORTUNITIES :
(1) RECESSION :
The business cycle is at its trough currently. In such a gloomy economic environment the purchasing power of the buyers has decreased & thus Tesco has to lower its profit margins in order to remain competitive . Its own label ‘ Tesco ‘ products should be increased in volume as it can afford to sell them at a lower rate & still manage positive growth .
On the other hand , in order to cut down costs if all businesses go for automation of their operations like Tesco auto check-outs , there is a grave risk of rise in unemployment levels & in turn less consumers . Thus Tesco should try to achieve a balance in automation & manpower . Customers like being greeted with a smile when entering & exiting Tesco or any other business. This human element should remain an integral part of customer services rather than shifting totally towards automation.
Tesco can use the recession to its benefit by buying property locally & overseas in the context of future expansion & entry into new markets.
China & India have almost two-thirds of the world's population & thus their markets could be very enticing for any investor/organization especially grocers , because if a product of £1 is sold at a profit margin of even 1 pence ( 1%) to the 4 billion people of these countries , £ 40 million can be made for just one product at a profit margin of 1%.
Hence , Tesco should expand further in the Chinese & Indian markets.
(2) COMPETITORS ( WALMART / ASDA ) :
Tesco's biggest operational environmental threat is Walmart/Asda , the American supermarket giant. Though some government policies have given Tesco ( a UK origin business ) some cushion against the threat of Walmart/Asda ( a US origin business ) , still the threat persists due to the scale of Walmarts global business .
Competing with Walmart/Asda on the pricing of products could be difficult so Tesco should focus on quality of its ‘ own label ' products as well as the quality of customer services with more human element than robots. The delivery of goods to customer door-step & genuine & honest exchange/refund policy should remain the driving force. The price cuts in the basic necessities could be compensated in the range of luxury items since the consumers for those are from the upper class , to whom few extra pennies don't matter .
Since it's the age of information technology , Tesco should further expand into the mobile phones sector as well as the internet/broadband & TV cable services sector.
GENERAL SUGGESTIONS :
* Customers like to see that Tesco cares about its employees for e.g. seats provided for the cash counter assistants , employment of the disabled persons .Thus customers feel secure that if an organization cares about its employees then it would definitely care about its customers & hence a positive image is built about the organization.
* If Tesco can manage to give a free cloth bag on shopping of around £10 - £20 , it would further reinforce its contribution for a greener environment & customers would reuse those bags with a sense of responsibility & ownership of the environmental protection.
* On the aisles of products for e.g. umbrellas , if a customer service assistant is allocated then the sales of such items could be increased because people are wary of opening up such things & thus avoid buying these items as they aren't sure about the quality & durability of the product.
* Regarding the clothing sections , try rooms or boxes should be available in order to maximize sales.
* Washrooms add value to a business since customers ( especially the elderly ) have no apprehensions of spending long time inside the store. Thus Tesco should try to have washrooms within its premises ideally at the supermarkets as well as other branches if possible , to accommodate such people.
* Background instrumental music soothes the customers' senses & should be played at all stores to create a conducive environment for shopping & make customers feel at home.
Hence the future outlook for TESCO is quite brilliant , apart from a few threats that can infact be seen as opportunities to excel & make its mark globally.
REFERENCE LIST :
Worthington I. ; Britton C. , 2006 , The Business Environment , 5th edition , e-book , p. 6 , Pearson education , London , accessed on 12/12/2009 , available from http://books.google.com/books?id=bLWlKRjuwiYC&printsec=frontcover&dq=business+environment&lr=&as_brr=3&cd=1#v=onepage&q=&f=false
ONLINE / WEBSITES :
Business Link , 2009 , guide developed with Cranfield School of Management , Strategic planning , Online , accessed on 12/12/2009 , available from http://www.businesslink.gov.uk/bdotg/action/detail?r.s=sc&r.l1=1074404796&r.lc=en&r.l3=1079687477&r.l2=1074446322&r.i=1079693644&type=RESOURCES&itemId=1079687767&r.t=RESOURCES
Ivory Research Ltd. , 2009 , Strategic Management of Tesco Supermarket : Pestle Analysis , Online , accessed on 12/12/2009 , available from http://www.ivoryresearch.com/sample5.php
Mintel Report (2004) Food Retailing -UK, Retail Intelligence, November
Myers H. (2004) Trends in the food retail sector across Europe, European Retail Digest, Spring, Issue 41, p.1-3
Tesco , 2009 , Our Strategy , Online , accessed on 12/12/09 , available from http://www.tescoplc.com/plc/about_us/strategy/
LECTURE NOTES :
Kumar R. , 2009 , Lecture & hand-out , PESTLE & SWOT factors , London School of commerce , London.