MGT4023 Strategic Management - Tesco Case

He added customers were returning because Tesco has cut prices, is simplifying its ranges and improving service in stores. While management roles have gone, Lewis has put an additional 4,652 staff on to the shop floor to ensure shelves are well stocked and customers served better.

City analysts welcomed the signs of green shoots. Bruno Monteyne, of Bernstein Research, said: “Dave Lewis has made the right initial steps on the long journey to potentially stabilising the company, and we believe Tesco has a fighting chance of regaining some of its former glories: a fantastic operator chasing cash returns to investors rather than global domination.”

But the annual financial results made clear the scale of the challenge for Lewis. Group sales fell 3% and trading profit, which excludes the impact of one-off costs, dived by 58% to £1.4bn. Trade at established UK stores improved in recent months, but sales still slid 1% in the final quarter compared to 3.6% for the year as a whole.

Tesco posts highest growth in seven years

You are required to: 

Having critically evaluated the case study you are required to:

1. Critically evaluate the pattern of actions that TESCO has implemented to return to profit;
2. Review TESCO’s approach to ICT and comment on its contribution to its

Answer

Tesco Case, Srategic Management in the face of the 2014 crisis

Introduction

Tesco, one of the largest retailers of UK founded in 1919 in East London. It is considered the first British supermarket with a market share of 29.1% and second in the world by turnover (Digital Economy, 2015). Tesco,underwent a sharp loss of 6.4 billion pounds that was reported the worst ever results due to slumps in values of its property portfolio and stocks. To add to this big loss Tesco also faced huge pressure from new stores like Aldi, Lidl which were discounter’s retailers and created competition over low prices of products. To cope with losses, Tesco announced cutting of nearly 5.000 head office and UK store management jobs, around 4.000 jobs in offshore roles and in Tesco’s banking division. Moreover with closing of around 43 Tesco stores in early 2015 resulted to cutting of another 2.500 jobs. According to analysts, Tesco faced such crisis as it launched several large stores which led to cost additions with poor shop floor standards. And with discounter stores around, customers as a result had option to switch their shopping either to online platforms or small shops, discounters store like Aldi/ Lidl, which ultimately made Tesco, face the large scale hit due to unplanned expansion, according to the press article of April 22 of the same year (Butler Sarah & Farrell Sean, 2015).

Faced with this harsh panorama, Tesco presents a new board headed by Dave Lewis, which carries out the implementation of a new management strategy. In the "2018 financial reports" Lewis notes that an attributed net profit of 1,206 million pounds (1,381 million euros) was recorded at the end of the fiscal year on February 24, 2018. (Lewis Dave, 2018).

The question that arises in front of these two scenarios is: How Tesco is managing to reverse these results? In the present work, it is about answering. For this purpose, the present work will be divided into two parts. In the first, we will analyze: 1. Administrative strategies were used to solve this problem in three years of restructuring. We will develop this last point in two complementary ways: a. Carrying out a critical evaluation of the model of actions implemented by Tesco, and b. This model of actions will be presented in an exemplified manner.

The second part will be oriented to the Human Resources strategies, where we will carry out an evaluation on: a. Contributions of ICT to Tesco's overall competitive advantage, and b. Exemplified way, we will reveal how ICT are being used by Tesco.

Finally, we will conclude by synthesizing if the strategies are being effective to guide Tesco to a new position in the face of new times where the stores with low cost present a big challenge. In the words of Dave Levis some of the problems that helped the crisis in 2014 were that: "... buyers prefer purchases online, small local stores or discount stores like Aldy and Lidl".

Evaluation of TESCOs Recent Strategic Decisions

Critical evaluation of the pattern of actions implemented by TESCO

According to Tesco Strategic Report (2018) with help of 6 core strategic drivers meant for turnaround, Tesco had reported 9 back to back quarter of sales rise in their core business in UK, with group sales improving at 2.3% for 2018. While group operating profits before exceptional items was reported rise of 28.4% to 1.644 m pounds as compared to 1.280 m pounds during 2016-17. Also Tesco generated more cash with Retail operating cash flows that increased by 21.7% in 2018 to reach at 2.8 bn pounds as compared to 2.3 bn pounds during 2016-17.Also Tesco made considerable improvement in profit margin goals that was established in 2016 and currently they had strengthened their balance sheet with Net debt down by 29.6% to reach to 2.6 billion pounds in 2018 which was 3.7 bn pounds during 2016-17.  Moreover Tesco has made considerable improvement with their strategic actions that has driven customer referrals for Tesco as place of shopping with 5 points net promoter score. Further loyalty of customers has improved as Tesco has controlled an inflationary pressure that was present in UK market with bringing more sustainable, affordable and healthy food choices for customers that has helped them gain over 260,000 shoppers preferring Tesco.                

Also Tesco has made significant efforts to bring their business close to suppliers that helped to offer new launches and exclusive products and this was possible due to support given to suppliers with investment in innovations. Example, as stated in Presswire (2016) Tesco Sustainable dairy Group is a partnership with suppliers that has helped to pay an extra 300 million pounds to farmers above market rate of milk thus helping them to manage changes in milk prices. Also this collaboration offer incentives to farmers for focusing on quality, sustainability and productivity. Similar partnerships have been made in agriculture products including vegetable and poultry. Also due to strategic actions Tesco started to make return to paying dividends for first time after 2014 to their shareholders due to improved performances and stability in business. Further merger of Tesco with Booker has allowed leveraging benefits of retail and wholesaling together for better access to growth opportunities. This M&A will create benefits that will improve food quality at reasonable price offers and will serve customer better in out of home food markets. Also it will support independent small business by giving them more choices, prices and services with better digital and delivery options along with extending broader markets for suppliers.

Further as Tesco has now turned to be very competitive in prices specifically after launch of Exclusively at Tesco products it has been reported that Tesco’s products are around 22% cheaper than discounter’s offers like Aldi or Lidl.  In 2018, Tesco’s agenda is communicating to their customers that they are cheaper than others in market in context to average baskets that have same products.  Tesco has now embraced approach of being not just price equal but price beating compared to discounters since they had introduced around 8,000 of their 10,000 own label range since 2017 (Quinn 2018).  Tesco across selected products is cheaper than Aldi or Lidl and with Tesco’s focus on new in-store campaigns they are now prepared to heavily promote their Exclusively Tesco brands as direct comparisons to competitors like Aldi or Lidl. 

The pattern of actions supported with examples

According to Johnson, Scholes and Whittington (2008) Strategy is direction and possibility for a firm for a long term that supports in attaining leverages within a changing environment with help of utilisation of resources, competencies so as to meet stakeholder expectations. While strategic directions are long term aims which have activities focused on scope of firm’s that addresses change with capabilities to add value for stakeholders and hence likely influences operational decisions that needs integrated approach to consider changes.

According to Steven (2017) an example of strategic approach and directions can be given through case of Tesco when in 2014 it faced its largest loss of 6.4 bn pounds in history in UK that had been reported as worst ever results that occurred due to large write downs in value of Tesco’s property portfolio and stocks. To deal with this turnaround it was essential to bring Tesco back in track with better results and progress delivered through strategic directions changes and capable decisions. Tesco reported stable improvement and attained significant year-on-year business scope with help of six drivers of strategic changes supported with their patterns of actions. Tesco’s action plans were based on six strategic drivers to overcome turnaround crisis that was aimed to deliver long term value for their stakeholders. These six drivers were differentiated brand, reduction in operational cost, generation of cash flows from operations, maximisation of mix to improve profit margins, maximise value from property and innovation.

Differentiated brand: According to Borja (2016)Tesco created robust and distinctive brand to deliver long term value to every stakeholders with intention to serve customers better each day with brand offerings.  Tesco successfully won back trust of customers and witnessed a 5 point development in customer recommendations for their brands. This betterment has been attained with sharp focus on products/services that helped to make Tesco unique. Example during 2017-18, Tesco re-introduced core and finest food variety and even launched some exclusive new brands like Hearty Food Co. Ready meals; Fox and Ivy homewares. Further Tesco differentiated themselves on food quality which is an impactful driver to strengthen customer thinking in context of supermarket choices that is based on priority of quality. Example, Tesco’s food Love stories campaign drive continued in 2018 to celebrate food that is loved by customers and for the people they love to make food which helped Tesco enhance their customer perceptions for quality rise by 2.7 points year-on-year. Other than Tesco’s customers love for their brand differentiation was even made on the manner Tesco responded to issues that were vital, such as focus on healthy eating, lowering plastic packaging and adding value for society. In 2017 Tesco launched their first ever Health month for their associates and customers named ‘Little Swaps’ which consisted of products that were low in saturated fat, sugar, salt which reported Tesco’s highest ever customer score that made customers live healthier lives.

Reduction in operational cost: according to Fair Disclosure Wire (2017) Tesco to overcome turnaround focused on minimising their operational cost by simplifying their business which helped them lower costs with year-on-year savings of 594 million pounds which has reached to 820 million pounds savings in 2018. This has been a vital improvement towards fulfilling their projected ambition of 1.5 bn pounds. Tesco re-evaluated each element of their operations to recognise saving scopes with specific focus on store operational model, where savings of 541 million pounds were attained, while in logistics & distribution savings of 104 million pounds were made and another 174 million pounds savings from goods not for resale. Tesco even developed a cost conscious culture to figure out savings that were reinvested for customer benefits. Tesco even simplified shopping experiences for customers at same time by lowering costs like for instance by improving availability of Scan as You Shop self scan handsets that are now available in over 500 stores across UK and has started focusing on Central Europe which has created savings of 3 million pounds by making receipts optional. Even costs were lowered with Tesco’s focus on goods/service procurement not meant for resale and by finding synchronisation across group to improve facilities management, freight and media provisions that helped to attain savings of 50 million pounds.

Generation of cash flows from operations: according to Business Monitor International (2018a).Tesco in order to cope with turnaround focused on actions to generate free cash flow specifically retail cash from operations that improved by 495 million pounds to 2.773 million pounds in 2018. This was attained through improvement in profits and strong working capital management. Example, Tesco lowered stockholding to manage working capitals by developing the manner deliveries were received from suppliers. Further to lower environment implications and minimise transportation costs Tesco ordered full trucks of product from suppliers wherever possible by sometimes even rounding up orders. This has helped Tesco sort stocks between trucks and recognises possibilities were trucks could be eliminated.  This eliminated unessential journeys for suppliers and allowed Tesco remove unessential rounded stocks. Thus focus was made by Tesco to order only those products that were need to make sure their availability for customers purchases and this helped Tesco order less to improve cash flow generation of 9 bn pounds from their operations.

Maximisation of mix to improve profit margins: according to Business Monitor International (2018b) Tesco to tackle with previous crisis set an ambition to attain 3.5-4.0% profit margin by 2019-20 across all their business, channels and product portfolios. In 2018 Tesco attained operating margin of 2.9% which was up by 57 basis points and this was possible with effective management by combination of volume, mix and cost effectiveness. Example, in Asia margin improved to 6% as Tesco stepped back from unprofitable bulk selling in Thailand markets, which was a thoughtful decision that occurred in beginning of 2018.This made Tesco focus on serving core retail customers efficaciously to enhance profits. Similarly, in Tesco’s online business they have improved economics of offers by providing customers with more choices and flexibility. Like for instance Tesco has offered delivery saver subscriptions services by launching new monthly schemes that offers greater value to loyal customers. Also Tesco has extended Click & Collect options with same day collection that offers slots of price choices that customers can select for convenience of delivery service.

Maximise value from property: according to Kristina., Campo., Lamey and Breugelmans (2016) as Tesco’s property portfolio is vital for business so they have improved on opportunities by using space in a better way to leverage benefit for customers along with giving value. Since past three years from 2018, Tesco has offered a cumulative 1.4 billion pounds value from property proceedings and at same time has enhanced their proportions of freehold property in UK & ROI from 41% to 52%. Example, in UK Tesco has been exploring opportunities to work with third party to re-create their store sites in high worth locations, such as Hackney store, London. At this location Tesco sold their site for mixed use development allowing getting better value while still holding a store in new location and with continued trade throughout.   Moreover Tesco has built value for their customers by utilising spaces in new manner through repurposing larger stores and in 2018 they have repurposed around 1.1 m sq. ft of spaces. Example, in Central Europe Tesco has collaborated with partners to give new offerings to customers in wide range of stores and in 2018 across the region where Tesco opened 10 shop units with H&M, and 3 with Decathlon. 

Innovation: according to Anusha., Kesharwani and Desai (2017) Tesco overcame turnaround through innovation across each dimension of their offerings with a robust pipeline of ideas to be introduced in market that would serve customer better. Tesco innovated in product offerings like they introduced exclusive Wicked Kitchen range of plant based dishes along with new ingredients, exotic preparations like carrot pastrami and eryngli mushroom Bolognese. These products ranges have helped to enhance demand of vegetarian and vegan food and have been quite popular with customers.  Also as customers are demanding convenient choices for shopping so in 2018 Tesco became first retailer to provide same day grocery delivery across UK and London with help of Tesco Now App that delivers within 1 hour. Also in Tesco bank they have introduced Pay+ digital wallet to facilitate customer shopping.

Also recently as part of strategic actions against discounters like Aldi, Lidl the British giant retailer Tesco introduced its own new discount chain Jack’s named after founder Jack Cohen as move to directly begin new front in price war. This action has been planned by Tesco as approach to win back their customers from Aldi/ Lidl as Tesco’s “Jacks” promises to be cheapest in town.  Jacks discount chain would offer primarily British food at low prices to attract price sensitive customers who need bargain as well as affluent customers who want a bargain. Jacks would be much more than low prices as presently there exists full range, full service supermarkets but a gap persists in context of people looking for small, simple, quick shops with local produce. Jack will fill this gap as these new discount stores will focus predominantly on British food (nearly 80%) sourced from local produces to distinct itself from Aldi, Lidl that stocks more of less known European brands (Butler and Wood 2018) Also layout of Jack’s is kept similar to Aldi/ Lidl with borad aisles and products stocked on pallets to save on time and money. Moreover Tesco clubcards would not be accepted at Jacks.

In another strategic action for future, Tesco the largest British grocer has partnered with Carrefour the biggest European retailer to raise pressure on supermarket suppliers through collaboration and this action would result to more choices at low price for customers. The two retail giants would squeeze suppliers further as a strategic action against rise of Amazon that moved to grocery retail with acquisition of Whole Foods and introduced online delivery service under “Fresh” in UK markets. According to Kollewe (2018) this move was also a fight back action against discounters like Aldi/ Lidl.  Tesco and Carrefour would purchase own brand products together to secure strong deals from rivals along with focus to enhance quality and product choices in supermarkets and sell at lowest prices to serve customer even better. Their united buying power is estimated to be over 80 bn pounds annually resulting into combined savings of nearly 400 million pounds from partnership. Also this alliance will protect from risk against potential supplier price rise in case of hard Brexit.

According to Morrison (2018) in another of Tesco’s growth plan actions it bought Booker for 3.7 billion pounds as a result their sales rose by 14.3% during early quarter of 2018 giving momentum to their business and helping to serve customers better as well as attain their medium term financial goals. With acquisition of Booker, Tesco would be able to relaunch 10,000 of own brand products and has already offered around 2,850 on shelves so far.

Strategic HRM

Evaluation of the contribution of ICT to TESCO’s overall competitive advantage

According to Andrea and Massoudi (2015) Tesco’s is still facing high risk specifically in transformation to achieve objectives due to failure in understanding and delivering technology that is needed which has led to insufficient progress in maintaining or increasing operational margins and creating enough cash to fulfill business goals.  To control this risk Tesco has several transformation programs running underway to simplify their market strategies and plans that will improve implementation activities particularly with investment for technological changes that are supported with experienced talent resources both internally and externally as needed.Also failure of Tesco’s IT infrastructure and systems can lead to loss of information and build operational ineffectiveness or negative impacts on brand due to insufficient capabilities.  As such Tesco has started assessment of their technology resilience abilities to identify opportunities and make improvements with integration of cloud computing and better governance approach to cover both technology disaster, recovery and ensure alignment with better security standards built in IT infrastructure General controls.  

Examples of ICT and how it is utilized

As stated by Johnson, Scholes and Whittington (2008) technology is key driver for innovation of company’s which is leveraged through new knowledge of new products, market and distribution process. This is because technology tool such as ICT advances push that goes to markets to determine innovation. ICT can support innovation either through product or process improvement where in product development innovative features in product/services are leveraged while in process development innovation is made in product production or distributions in context to cost or reliability.Example of ICT improvement at Tesco that had benefitted both customer and their employees are:

Stock counter: to leverage ease for employees who are accountable for stock counting Tesco has launched new RFID enabled barcodes in their clothing range which has allowed products to be automatically counted and removed while entering/ leaving stores before and after purchase This information also provided to suppliers to help in accurate replenishment which has improved overall in-store experiences for customers.

BYOD integration: Tesco has launched Bring Your Own Device for employees that have Inform app integrated which helps employees to download, login and keep real time track of stocks and availability in-stores by scanning of products barcode or side shelf labels that offer accurate inputs to make sure employees get products back to stocks soon as they move out (Yuanzhu, Tan, Li and Tse 2018). This has improved employees effectiveness and quick dealing with customer request and also has lowered wait around time during customer checks of product availability.

IFTTT integration:this application has been launched in Tesco’s offline and online platforms to improve shopping experiences of customers that meets multi-channel approach and is up-to-date with IFTTT (If This Then That)  that allows to connect with other active apps and combine how and why usage to make customer’s shopping efficacious (Grazyna and Stefanska 2017). For instance if a products price goes up or down then customers can get auto emails of price change which gives them options of prices and decisions of purchase.

Tesco Clubcard: these are loyalty card offered by Tesco that can be used by customers during shopping at Tesco or its other services where customers receive points based on amount spent on purchases. These points are stored, built up around four folds yearly and in some cases extra points can be added on special offers which helps customers get value points vouchers that can be then spent on shopping either in-store or offline or can be used to avail discounts in day trips, hotels, restaurants etc.  Tesco has included this loyalty card with their ICT platform to interpret customer responses and manipulate purchase decisions accordingly with machine learning or insights drawn from data analysis. Tesco uses information drawn from clubcards to offer, modify, adapt or launch new products and these work with all Tesco services.

Conclusion

In this report we discussed is made on Tesco to evaluate the strategic management what used, to overcome the financial losses that were incurred in 2014 by we focusing on strategic actions that were implemented to return back to profitability. Also Tesco’s ICT approach and contributions to its usability has been identified and evaluated for better understanding.

Thus it is evident from this report that Tesco has made considerable strategic initiatives to drive improvement from their turnaround crisis to reinstate business capabilities for better growth opportunities and performances drivers. They have implemented improvements by focusing on customers, channels and product so as to improve sales, customer experiences and reinvest in channels to meet customer needs and deliver profits.

References

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