Company Sttrgy & Leader Sm-2

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A

PROJECT REPORT

ON

BUSINESS LEADER AND BUSINESS STRATEGY OF TESCO

IN PARTIAL FULFILLMENT OF THE REQUIREMENT FOR THE DEGREE OF

MASTER OF BUSINESS ADMINISTRATION

BY

DARSHAN PARIKH (ROLL NO 36)

(9723886464)

MBA (3nd

SEMESTER)

MS. VARSHA KUCHARA

FACULTY MEMBER, KSMCS

SUBMITTED TO

K.P.PATEL SCHOOL OF MANAGEMENT AND COMPUTER STUDIED

JEEVANSHILP EDUCATION CAMPUS, MBA


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SR

no

Topics Page no

Introduction

Early life

Wealth creater

CareerDiversifide intrest

Great leader

Ramlinga raju quotes

Award

COMPANY STRATEGY

Company introduction

Porters five force

Core Competence

Market Development Strategy

Pestel framework

value chain analysis

Swot analysis: tesco

Tesco's strategic options: generic

strategies


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INTRODUCTION

When Ramalinga Raju (born September 16, 1954, Andhra Pradesh) was born to a wealthy

agricultural family. He took over the family business consisting of construction besides agriculture

when his grandfather died. He is the founder of Satyam group which has become a multinational

company. His net worth is estimated to be $650 million according to Forbes.

EARLY LIFE

He is born to a farmer B. Satyanarayana Raju in Garagaparru village in West Godavari district

of coastal Andhra Pradesh Sep 16, 1954. Satyanarayana Raju moved to Hyderabad in the 1960s.

Ramalinga Raju did his B.Com from Andhra Loyola College in Vijayawada and went to the US in

1975 for MBA degree from Ohio University. He is also an alumnus of Harvard Business School. he

had been a carefree young man, from a well-to-do farming family, with not a worry in the World. To

begin, when Ramalinga Raju came back from the US in 1977 armed with ambition and new ideas, he

tried to build new business for the family. He went into cotton-spinning and construction. This earned

him his bread and butter. Out of curiosity he had brought a small computer back with him from the

US Ramalinga Raju, married to Nandini, has two sons and a daughter. His sons Teja B. Raju and

Rama B. Raju are running Maytas Infrastructure and Maytas Properties.

In the year 1977, Raju returned to India and started a textile business. His company was named Sri

Satyam. After this, he forayed into real estate sector with introducing Satyam Constructions. His

capabilities and intelligence got him going and enabled him to come up with yet another venture - this

time in IT sector. He founded Satyam in 1987 and was so influenced by his father that he named the

company after him. It was a humble beginning for Satyam with only 20 employees. Satyam Computer

Services Ltd was incorporated in 1989 and it went public in 1992. He opened Satyam Infoway or Sify.

Established in the year 1992, Satyam later became one of the earliest companies to get a dedicated

data link for offshore development.

Through his managerial skills and quality leadership, Ramalinga Raju built Satyam into a

multinational company and bagged several key contracts, especially from the US.


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Satyam began trading on New York Stock Exchange in 2001. With each passing year, Satyam

strengthened its position and extended its operations to various locations.

Ramalinga Rajus foray into corporate data and internet services too was path breaking. He founded

Satyam Infoway or Sify and listed it on Nasdaq with great success. The business process outsourcing

(BPO) wing of Satyam also made a remarkable beginning. The company, whose revenues crossed $2

billion in 2007-08, became the first Indian company to list its American Depository Shares (ADS) on

Euronext, which is one single cross-border trading platform of NYSE Euronext Group. this venture

soon took over the Indian IT market with surprise.

Hyderabad, Jan 7 (IANS) Satyam was the brand image of Andhra Pradesh, Hyderabad was identified

with this company, and its founder-chairman B. Ramalinga Raju was a hero to youngsters. The man

who spent three decades in IT services and built Satyam into Indias fourth largest IT services firm

described as a visionary, a global business leader and a thinker. Having made a humble beginning to

rise to the dizzy heights of success and become one of the richest Indians, Ramalinga Raju was

described as the pride of Andhra Pradesh and the pride of Telugus.


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WEALTH CREATER

Wealth Creators of India located and called it Little India. It put up a 64 Kbps connection Satyam

Computers: 63between the two buildings and forbade its 50 odd engineers from ever physically going

to the clients Contributing to Indias Software Success premises. It was an unusual beginning but it

worked and worked well enough to become an - KenSource I idea that is the backbone of the whole

software industry today. f there is one industry, which today one of the most respected Satyam today

within a very short span has names in the software industry is What began, as a hobby is one covered

a lot of space in the quite interesting. Satyam was set- of the most successful software Indian

economy,

it is the up by B Ramalinga Raju, a farmers companies in the world today. software industry.

Though son who initially owned a spinning Satyam has converted itself into a Indian expertise in

many other mill, then dabbled in real estate global consulting and IT Service fields also has been

remarkable in business before settling down to Company offering a wide array of the recent past, the

success of the his current profession as a software solutions across a range of key software industry

far surpasses entrepreneur. Satyam initially did verticals and horizontals. The others when it comes to

evaluating only body shopping and provided company has been a pioneer in the contribution of the

sector to the contract services.

One such story is that into agriculture and construction. provide IT solutions to its clients. of the

Hyderabad-based Satyam The late 80s evoked his interest in Some time back the company Computer

Services Limited. The IT, which prompted him to set up introduced a unique model called company

has come a long way a company for that more as a the RightSourcing Model. This since its inception

in 1987 and hobby rather than a profession. delivery model provides today boasts of a global client

base Soon the visionary in Mr. Raju customers the optimum in excess of 350 customers with realised

the high potential of the IT combination of onsite, offshore and over 100 of them from the Fortune

business and thus began the offsite delivery. The company was 500 list. All along, its successful

success story of Satyam. The solid Indias first private sector player in journey the company has

forged background provided by his the ISP business (Internet Service alliances with nearly 50

business family went a long way in enabling Provider business) under its and technology leaders in

the the entrepreneur in Raju at taking subsidiary company Satyam world and has a presence in almost

big risks and still getting along just Infoway. Sify Broadband is now 45 countries worldwide. Ranked

fine in life. Satyam was one of the among the leading broadband among the top 10 best companies


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first Indian companies if not the providers in the country. to work for in India in an industry first to

experiment with the idea of The company serves customers survey by Business Today Mercer

outsourcing when in 1991 its first across various verticals including TNS, Satyam has been among

the Fortune 500 client John Deere & Co Automotive, Banking & Financial top 5 software players in

the gave a go ahead to the idea of Services, Energy & Utility, country ever since the software

initiating an offshore project. It Healthcare & Insurance, story began doing the rounds. hired a

building on the outskirts of Manufacturing, Retail, The origin of a company that is Molin (Illinois)

where JD & Co was Advanc'edge MBA December 2004

Read on Construction, etc. It provides crore) up 28% from the same Satyam has not enjoyed any

customers with a wide range of period last year and 9% above the major margin expansion during

services, which include; June quarter profit of Rs 173.48 the quarter. Operating profit was Application

Services, Business crore. up by 33% over the year ago period Operational Income Intelligence & Data

Warehousing, at Rs 220.80 crore (Rs 166.57 crore). Business Process Outsourcing, Operational

revenue has shown Sequentially it rose by 11% over the Consulting & Enterprise Solutions, a

remarkably good growth this June quarter profit of Rs 198.83 Embedded Systems, Engineering

quarter. At Rs 848.10 crore (Rs crore. However, for the last 4 Solutions, ERP, Oracle, PeopleSoft,

598.49 crore), income from quarters OPM has stagnated at SAP, GIS, HiTech Solutions, operations

was up 42% from the 26%. Other income, Interest and Managed IT Services, Microsoft year ago

period. Sequentially it depreciation provisioning Solutions Group, Quality was up 10% from the June

quarter Consulting, Silicon Design income of Rs 771.50 crore. Income Other income, which showed a

Services, Enterprise Storage from Banking, Financial Services & remarkable growth during the

Solutions etc.


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CAREER

Bangalore: Byrraju Ramalinga Raju, 54, chairman of Satyam Computer Services Ltd and lover of

science fiction works by Isaac Asimov and Arthur C. Clarke, will be remembered in Indian business

historynot the way he would have wanted, as a successful software entrepreneur, but as the

perpetrator of the countrys biggest corporate fraud, one that saw his company resort to fiction to

burnish its performance.

It used to be said that Hyderabad had two major landmarks: the Charminar and Ramalinga Raju, who

created the company, Satyam Computer Services. Satyam means truth, but Raju, who resigned as

chairman on Wednesday, owned up to creating a tissue of lies.

Ramalinga Raju belongs to a family of farmers from Bhimavaram near the Andhra Pradesh city of

Vijayawada. His father, Satyanaryana, helped create the family fortune in a small way, shifting in the

early 1960s to Hyderabad and starting a textile business even as he bought more land for farming.

Ramalinga Raju has in the past said that it was his father who inspired him to start Satyam.

Ramalinga Raju recently told Business Today magazine that after returning from the US with a

masters in business administration (MBA) degree from Ohio University, I had all the enthusiasm

and passion to do somethingof being an entrepreneur. A friend told me about a part-time teaching

opportunity at the

Administrative Staff College of India. This really appealed to me. But, in late 1977, over dinner one

night, my father told me: It is always important to stay focused and to avoid distractions.

Ramalinga Raju chose to enter the relatively new business of providing software services to

international customers from India. Satyam, launched in 1987, started offering such services initially

onsite to tractor makerJohn Deereand Co. In 1991, the company raised money through a share sale

and listed on the Bombay Stock Exchange.

It was in 1994 that Satyam got its big break when it allied with Dun and Bradstreet Corp. The

partnership was short-lived, but by the time it ended, Satyam was well on its way to growth.

What separated Satyam from rivals such as a Tata Consultancy Services Ltd or an Infosys

Technologies Ltdwas Rajus preference for executives and associates who spoke the same language

he did: Telugu.

For Raju, family, caste and those who could speak Telugu came first. I am not saying he was not a

professional, but other things being equal, he would look at things in that order, said a former
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employee of Satyam Infoway Ltd, the Internet firm Raju eventually sold to a non-resident Indian

entrepreneur, Raju Vegesna. Rajus brother Rama Raju was managing director of Satyam and till

2000, his brother-in-law Chinta Srinivasa Raju used to head a key division. At one point of time

there were so many Rajus (in the company) that it would be difficult to identify who was who, said

an executive at a software firm, who did not want to be identified. Rajus food preferences were also

localhe preferred spicy Andhra food, though he admitted to this writer once that he also liked hot

Thai food.
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DIVERSIFIDE INTREST

Raju was always keen on other businesses, and the controversy over Satyams attempt to buy two

Maytas companies wasnt the first such he faced. In 1998, the publicly listed Satyam Computer

Services had to declare that it would not invest in Satyam Constructions Ltd, a family-owned

company, after news reports to that effect roused investor ire. Satyam had also floated a clutch of

companies, including one for the Internet (Satyam Infoway) and to address large customers (Satyam

Enterprises). At various points of time, these were either merged back into the parent or spun off and

sold.and 2000, at the height of the dot-com bubble, Satyam Infoway paid Rs500 crore to Rajesh Jain-

owned IndiaWorld, which was essentially a clutch of websites. In 2001, Satyam Computer Services

listed on the New York Stock Exchange (Satyam Infoway did so on Nasdaq in 1999).

With the real estate sector booming, the Rajus re-entered the business. Maytas Properties Ltd (Maytas

is a palindrome for Satyam) and Maytas Infra Ltd were looked after by Rajus sons Teja Raju and

Rama Raju. Maytas Infra even won the Hyderabad Metro rail project. Satyam, however, had to cope

with tough competition and a tougher business environment. The company also had to meet analyst

and investor expectations.

In a letter to Satyams board on Wednesday, Raju confessed to having cooked the companys books

and overstated revenue and profits. He added that Rs5,040 crore of the cash that is supposed to be on

Satyams books simply doesnt exist.

rini Raju, who stepped down as executive director of Satyam in 2000, said Rajus revelations came as

a surprise to him. He now runs Peepul Capital Llc., which has $325 million (Rs1,580 crore) of funds

under management. He also runs news channels in several languages under the TV9 brand.

I am shocked and yet to digest what has happened, Srini Raju said. Satyam Computer is one ofthe

iconic companies of Indian software industry and fudging of accounts by such a company will have a

very high impact on the industry as a whole.

Raju must have known this as his letter indicates. His letter refers to the tremendous burden on my

conscience and likens Satyams descent into financial purgatory to riding a tiger.


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GREAT LEADER

Amid of Economic Recession, Biggest news of 2009 start was, When Mr. Raju announced, Satyams

Financial statements are based on lies. Raju resigned as chairman, revealing profits had been falsified

for years and that $1 billion of cash on the books did not exist. With this news, Satyam badly

damaged on Stock Exchange and a big question mark raised on Indians largest IT Company and its

53,000 Employees. Ramalinga Raju resigned after revealing that he had systematically falsified the

companys accounts as it expanded from a handful of employees into a back office giant with a

workforce of 53,000 and operations in 66 countries. Mr. Raju said Wednesday that 50.4 billion

rupees, or $1.04 billion, of the 53.6 billion rupees in cash and bank loans the company listed in assets

at the end of its second quarter that ended in September were nonexistent.Revenues for the quarter

ending September 30 were 20 percent lower than the 27 billion rupees reported, and the companys

operating margin for the quarter was a fraction of what it declared, he said in a letter to the Bombay

stock exchange authorities.

Satyam serves as the back office for some of the largest banks, manufacturers, health care and media

companies in the world, handling everything from computer systems to customer service. Clients have

includedGeneral Electric,General Motors, Nestle and the United States government. In some cases,

Satyam is even responsible for clients finances and accounting.

The revelations will spark a major shake-up in Indias outsourcing industry, analysts say, and mayforce many of the worlds largest companies to investigate and completely revamp their back offices.

This development is going to have a major impact on Satyams business with its clients, said

analysts with Religare Hichens Harrison on Wednesday. In the short term we will see lot of Satyams

clients migrating to competition like Infosys, TCS andWipro, they said. Satyam is the fourth largest

outsourcing firm after the three named.

In a four-and-a-half page statement to the Bombay stock exchange, Mr. Raju described a small

discrepancy that grew beyond his control. What started as a marginal gap between actual operatingprofit and the one reflected in the books of accounts continued to grow over the years. It has attained

unmanageable proportions as the size of company operations grew, he said. It was like riding a tiger
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RAMLINGA RAJU QUOTES

1-"There was no dialogue. There is no intent, The question is, what companies are willing to be

acquired?"

2-"The cost advantage got our foot in the door. Then we added quality. Now we need innovation. Ten

to 15 years ago, it was about how many lines of code and at what cost. Now, it's no longer about

technology but about business value."

3-We believe that demand will remain buoyant in fiscal 2007 due to increased IT spending by

organizations

4 -Being the youngest in the IT services segment, to achieve the billion-dollar landmark is a

significant mile

5-"Our salary packages are fairly competitive."

6-"Our marketing expenses will go down too. We are taking a stand where we would be guided by

what opportunities it brings, whether it preserves our margins or whether it ensures higher growth.

There is a range of things that we can do to structure these deals."

7-"As we step into the new fiscal year, we believe that the demand environment will continue to

remain buoyant and there is an increasing acceptance in the market towards the global delivery

model."
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AWARD

1- Ernst and Young Entrepreneur of the Year Services Award in the year 1999

2-Dataquest IT Man of the Year Award in the year 2000

3-CNBC's Asian Business Leader - Corporate Citizen of the Year Award in the year 2002

4-Lifetime Achievement Award conferred upon by Hyderabad Management Association (HMA) in

.the year 2005

5- Asia Business Leader Award 2002.

6- E&Y Entrepreneur of the Year 2007

A soft-spoken Ramalinga Raju received several awards during his career, including Ernst & Young

entrepreneur of the years 1999 and 2007, Andhra Pradesh Academy of Sciences medal 1999,

Dataquest IT man of the year 2000, CNBC Asian Business leader - corporate citizen of the year award

2002, Hyderabad Management Association life time achievement award 2006, and honorary doctorate

by Jawaharlal Nehru Technological University 2006.

He was elected to several organisations, including the National Asso ciation of Software and Services

Companies (Nasscom), the apex forum of the Indian IT industry.

Awards and Achievements for Ramalinga Raju

Ramalinga Raju received several awards and honors including E&Y Entrepreneur of the Year (2007);Asia Business Leader Award by CNBC (2002); Dataquest IT Man of the Year Award (2000) and

Ernst & Young Entrepreneur of the Year Services award (1999).

Hyderabad: Satyam Chairman B. Ramalinga Raju was awarded the Asia Business Leader Award

2002 (ABLA) for Corporate Citizen of the Year in the Asia Business Leader Awards 2002 ceremony

held in Hong Kong.

The Asia Business Leader Awards 2002 recognize excellence in business leadership in Asia. This

years awards were presented by CNBC Asia Pacific and TNT Asia, and sponsored by Citigroup

Private Bank.The Awards embody the spirit of the new corporate Asia and serve to identify

exceptional examples of outstanding business leadership.


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COMPANY INTRODUCTION

The food and drink retail sector represents the largest industry in the UK, providing

employment for over three million people in primary production, manufacturing and retailing. In 2003

retail accounted for 9% of gross domestic product (Datamonitor, 2003). In recent years UK

supermarkets have come under increased scrutiny over their treatment of suppliers, particularly of

own-label products, yet the development of strategic supply networks has been an integral part of

most supermarket strategies for the past decade.

The report below provides an insight into the supermarket company, Tesco, with emphasis on

its external environment analysis and company's analysis of resources, competence and culture. Two

future strategic options are suggested in regards to the resources based strategies.

Tesco is one of the largest food retailers in the world, operating around 2,318 stores and

employing over 326,000 people. It provides online services through its subsidiary, Tesco.com. The

UK is the company's largest market, where it operates under four banners of Extra, Superstore, Metro

and Express. The company sells almost 40,000 food products, including clothing and other non-food

lines. The company's own-label products (50 percent of sales) are at three levels, value, normal and

finest. As well as convenience produce, many stores have gas stations, becoming one of Britain's

largest independent petrol retailers. Other retailing services offered include Tesco Personal Finance.


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PORTERS FIVE FORCE

1-Threat of new Entrants

The UK grocery market is primary dominated by few competitors, including four major brands of Tesco,

Asda, Sainsbury's and Safeway that possess a market share of 70% and small chains of Somerfield,Waitrose and Budgens with a further 10%. Over the last 30 years, according to Ritz (2005), the grocery

market has been transformed into the supermarket-dominated business. Majority of large chains have

built their power due to operating efficiency, one-stop shopping and major marketing-mix expenditure.

This powerful force had a great impact on the small traditional shops, such as butchers, bakers and etc.

Hence, nowadays it possesses a strong barrier for new companies who desire to enter the grocery market.

For instance, it becomes rather difficult for new entrants to raise sufficient capital because of large fixed

costs and highly developed supply chains. This is also evident in huge investments done by large chains,

such as Tesco, in advanced technology for checkouts and stock control systems that impact new entrants

and the existing ones. Other barriers include economies of scale and differentiation (in the provision of

products or services with a higher perceived value than the competition) achieved by Tesco and Asda

seen in their aggressive operational tactics in product development, promotional activity and better

distribution

2-Bargaining Power of suppliers Bargaining

This force represents the power of suppliers that can be influenced by major grocery chains and that fear

of losing their business to the large supermarkets. Therefore, this consolidates further leading positions of

stores like Tesco and Asda in negotiating better promotional prices from suppliers that small individual

chains are unable to match Ritz (2005). In return, UK based suppliers are also threatened by the growing

ability of large retailers to source their products from abroad at cheaper deals. The relationship with

sellers can have similar effects in constraining the strategic freedom of the company and in influencing

its margins. The forces of competitive rivalry have reduced the profit margins for supermarket chains and

suppliers.

3-Bargaining Power 0f Customers

Porter theorized that the more products that become standardized or undifferentiated, the lower the

switching cost, and hence, more power is yielded to buyers Porter M. (1980). Tesco's famous loyalty card

- Clubcard remains the most successful customer retention strategy that significantly increases the

profitability of Tesco's business. In meeting customer needs, customizing service, ensure low prices,

better choices, constant flow of in-store promotions enables brands like Tesco to control and retain their

customer base. In recent years a crucial change in food retailing has occurred due to a large demand of

consumers doing the majority of their shopping in supermarkets that shows a greater need for

supermarkets to sell non-food items. It has also provided supermarkets with a new strategic expansion

into new markets of banking, pharmacies, etc. Consumers also have become more aware of the issues


15/30

surrounding fairer trade and the influence of western consumers on the expectations and aspirations of

Third World producers. Ecologically benign and ethically sound production of consumer produce such as

tea, coffee and cocoa is viable, and such products are now widely available at the majority of large

chains.

4-Threat of Substitites

General substitution is able to reduce demand for a particular product, as there is a threat of consumers

switching to the alternatives Porter M. (1980). In the grocery industry this can be seen in the form of

product-for-product or the substitute of need and is further weakened by new trends, such as the way

small chains of convenience stores are emerging in the industry. In this case Tesco, Asda and Sainsbury's

are trying to acquire existing small-scale operations and opening Metro and Express stores in local towns

and city centres Ritz (2005).

5- Bargaining Powerof Competitors

The grocery environment has seen a very significant growth in the size and market dominance of the

larger players, with greater store size, increased retailer concentration, and the utilisation of a range of

formats, which are now prominent characteristics of the sector. As it was mentioned above, the

purchasing power of the food-retailing industry is concentrated in the hands of a relatively small number

of retail buyers. Operating in a mature, flat market where growth is difficult (a driver of the

diversification into non-food areas), and consumers are increasingly demanding and sophisticated, large

chains as Tesco are accruing large amounts of consumer information that can be used to communicate

with the consumer Ritz (2005). This highly competitive market has fostered an accelerated level of

development, resulting in a situation in which UK grocery retailers have had to be innovative to maintain

and build market share. Such innovation can be seen in the development of a range of trading formats, in

response to changes in consumer behaviour. The dominant market leaders have responded by refocusing

on price and value, whilst reinforcing the added value elements of their service.


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CORE COMPETENCE

Superior performance, according to Johnson and Scholes (2003), has to be determined by the way in

which company's resources are deployed to create competence in the organisational activities. Core

competencies are activities or processes that critically underpin the company's competitive advantage.

The primary target for the company is to recognize that competition between businesses is as much a race

for competence as it is for market position and market power. Therefore, the goal for Tesco management

is to focus the attention on competencies that really affect competitive advantage.

The competence leads to levels of performance from an activity or process that is significantly better than

competitors. Benchmarking may help in understanding performance standards and what constitutes good

or bad performance. However, it will be crucial for Tesco to look at the generic level. Core competences

may be embedded deep in Tesco at an operational level in the work routines. The framework developed

by Prahalad and Hamel in the 1990s suggests that over time companies may develop key areas of

expertise which are distinctive to that company and critical to the company's long term growth (Drejer,

2000; De Toni, and Tonchia, 2003). In the case of Tesco the areas of expertise are most likely to develop

in the critical, central areas of the organisation where the most value is added to its service and its

delivery. For example, trust in the Tesco brand lies at the heart of these services and in 2003 the number

of retail service accounts rose by 36%. Some 50,000 new service accounts per week are being opened

and Tesco sees these areas as long term businesses with the potential to build real scale. Financial

services have also been launched internationally in for example Hungary and Korea (Datamonitor

Report, 2003; MarketWatch, 2004).

Through a long period of operations, core competencies of Tesco have to be rather fixed. Prahald's and

Hamel's approach states that core competencies should change in response to changes in the company's

environment and be flexible and evolve over time. Therefore, Tesco needs to adapt to new rapidly

changing circumstances and opportunities, so its core competencies will have to adapt and change. The

example of this was when the company has launched its loyalty card and went into banking.

Core competences framework suggests three factors, which can help to identify core competences:

Provide potential access to a wide variety of markets: enables the creation of new products and

services. Fro instance, Tesco has established a strong leadership in food retailing industry. The core

competence that enabled Tesco to enter retailing of food and non-food products was a clear distinctive

brand proposition that had a focus on a properly define market segment. Tesco is recognized as the

company, providing the most customized and efficient service, based on a good customer relationship

management.

Makes a significant contribution to the perceived customer benefits of the outcome: delivers a

fundamental customer benefit. In order to identify core competences in a particular market, the question

of - why is the customer willing to pay more or less for one product or service than another- needs to be


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addressed. For example, Tesco have been very successful in capturing the leadership of the retailing

market. This shows that Tesco designs and implements effective supply systems and deliver an efficient

"customer interface". Tesco was the first UK grocer to launch a loyalty card and has been the most

effective. Palmer (2004) claims that until recently, it was the only grocer to use the information to mail

customers every month.

Difficult for competitors to imitate highlights the need for a core competence to be competitively

unique. This indicated the importance of product differentiation. For example, for many years up to 2003

(In 2003 Tesco has been recognised a leading UK food retailer) Tesco had a very strong position within

the retailing industry. It had a different approach to the service concept, providing good corporate

reputation and introducing new premium quality products (MarketWatch, 2004).

Applying this framework to Tesco shows that the company in order to be successful has to base its

business strategy on these capabilities. Capabilities result from Tesco's ability to combine and exploit

these resources in uniquely different ways. In the external environment, the intensity of competition is

not completely under the retailer's control, however, to compete effectively Tesco have to identify its

core competences and use them for company's advantage.


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MARKET DEVELOPMENT STRATEGY:

Joint Developments and Strategic Alliances

By entering new markets like China and Japan it can serve as a key growth driver of the company's

revenues and expansion strategy. Tesco's interests in Japan are likely to continue growing in due course,

as Asian markets are showing an increase in consumer spending and increased trend towards retailing.

These new markets are also demographically high opportunity markets.

In the case of Tesco, one of the suggested strategic options is in international alliances with the local

retailers in Asian markets. It will be considered as a method of development and may be formed to

exploit current resources and competence. By entering into joint ventures or partnerships, in order to

gain a larger economy of scale and larger market presence, Tesco will draw on the extensive local

knowledge and operating expertise of the partner whilst adding its own supply chain, product

development and stores operations skills to deliver a better shopping experience to customers. However,

given the huge scale, potential and complexities of these markets, Tesco may feel that being the first

mover is not necessarily an advantage. The success of the partnership will be related to three main

success criteria: sustainability, acceptability and feasibility. Sustainability will be concerned with

whether a strategy addresses the circumstances in which the company is operating. It is about the

rationale of this expansion-market development strategy. The acceptability relates to the expected return

from the strategy, the level of risk and the likely reaction of stakeholders. Feasibility will be regarded to

whether Tesco has the resources and competence to deliver the strategy.

Product Development: Diversification

Johnson and Scholes (2003) believe that changes in the business environment may create demand for

new products and services at the expense of established provision. Ansoff's matrix also suggests that if

new products are developed for existing markets, then a product development strategy has to be

considered by the management level of a company. In expanding and diversifying Tesco's product mix, it

is also crucial to implement internal development when new products are developed. The nature and the

extent of diversification should also be considered in relation to the rationale of the corporate strategy

and the diversity of the portfolio. By following the changing needs of the customers Tesco can introduce

new product lines. This may require more attention to R&D, leading to additional spending. The retailing

industry is experiencing overcapacity and innovative services and products being the major competitive

advantage. Therefore, innovation has to be a major driver for Tesco's product development. For example,

Tesco can develop a portfolio of different store formats in the UK, each designed to provide a different

shopping experience. While the majority of Eastern European and Far Eastern outlets are hypermarkets,

Tesco can also develop different store types in these markets as well. This value added by the uniqueness

will eventually lead Tesco to command a premium price. The management of technological innovation is


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increasingly involved in strategic decision-making. Tesco have to exploit their internal strengths and

minimise their internal weaknesses in order to achieve sustained competitive advantage (Although a

competitive advantage is the goal innovators want to achieve, the ability to create platform(s) depends on

how they could manage the innovation. Nevertheless, it does not mean that the innovator has to possess

all requisite capabilities, the important thing is the ability to organise and use the capabilities of others in

order to create a business platform).


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PESTEL FRAMEWORK

1-Political Factors

Operating in a globalized environment with stores around the globe (Tesco now operates in six countries

in Europe in addition to the UK; the Republic of Ireland, Hungary, Czech Republic, Slovakia,Turkey and Poland. It also operates in Asia: in South Korea, Thailand, Malaysia, Japan and Taiwan),

Tesco's performance is highly influenced by the political and legislative conditions of these countries,

including the European Union (EU).

For employment legislations, the government encourages retailers to provide a mix of job

opportunities from flexible, lower-paid and locally-based jobs to highly-skilled, higher-paid and

centrally-located jobs (Balchin, 1994). Also to meet the demand from population categories such as

students, working parents and senior citizens. Tesco understands that retailing has a great impact on jobs

and people factors (new store developments are often seen as destroying other jobs in the retail sector as

traditional stores go out of business or are forced to cut costs to compete), being an inherently local and

labour-intensive sector. Tesco employs large numbers of; student, disabled and elderly workers, often

paying them lower rates. In an industry with a typically high staff turnover, these workers offer a higher

level of loyalty and therefore represent desirable employees.

2-Economical Factors

Economic factors are of concern to Tesco, because they are likely to influence demand, costs, prices and

profits. One of the most influential factors on the economy is high unemployment levels, which decreases

the effective demand for many goods, adversely affecting the demand required to produce such goods.

These economic factors are largely outside the control of the company, but their effects on performance

and the marketing mix can be profound. Although international business is still growing (Appendix A),

and is expected to contribute greater amounts to Tesco's profits over the next few years, the company is

still highly dependent on the UK market. Hence, Tesco would be badly affected by any slowdown in the

UK food market and are exposed to market concentration risks.

3-Social/Cultural Factors

Current trends indicate that British customers have moved towards one-stop' and bulk' shopping, which

is due to a variety of social changes. Tesco have, therefore, increased the amount of non-food items

available for sale.

Demographic changes such as the aging population, an increase in female workers and a decline in home

meal preparation mean that UK retailers are also focusing on added-value products and services. In

addition, the focus is now towards; the own-label share of the business mix, the supply chain and other

operational improvements, which can drive costs out of the business. National retailers are increasingly

reticent to take on new suppliers (Clarke, Bennison and Guy,1994; Datamonitor Report, 2003).


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The type of goods and services demanded by consumers is a function of their social conditioning and

their consequent attitudes and beliefs. Consumers are becoming more and more aware of health issues,

and their attitudes towards food are constantly changing. One example of Tesco adapting its product mix

is to accommodate an increased demand for organic products. The company was also the first to allow

customers to pay in cheques and cash at the checkout.

4-Technological Factor

Technology is a major macro-environmental variable which has influenced the development of many of

the Tesco products. The new technologies benefit both customers and the company: customer satisfaction

rises because goods are readily available, services can become more personalised and shopping more

convenient.The launch of the Efficient Consumer Response (ECR) initiative provided the shift that is

now apparent in the management of food supply chains (Datamonitor Report, 2003). Tesco stores utilise

the following technologies:

Wireless devices Intelligent scale Electronic shelf labelling Self check-out machine Radio Frequency Identification (RFID).The adoption of Electronic Point of Sale (EPoS), Electronic Funds Transfer Systems (EFTPoS) and

electronic scanners have greatly improved the efficiency of distribution and stocking activities, with

needs being communicated almost in real time to the supplier (Finch, 2004).

5- Environmental Factors

In 2003, there has been increased pressure on many companies and managers to acknowledge their

responsibility to society, and act in a way which benefits society overall (Lindgreen and Hingley, 2003).

The major societal issue threatening food retailers has been environmental issues, a key area for

companies to act in a socially responsible way. Hence, by recognizing this trend within the broad ethical

stance, Tesco's corporate social responsibility is concerned with the ways in which an organization

exceeds the minimum obligations to stakeholders specified through regulation and corporate governance.

(Johnson and Scholes, 2003)

Graiser and Scott (2004) state that in 2003 the government has intended to launch a new strategy for

sustainable consumption and production to cut waste, reduce consumption of resources and minimise

environmental damage. The latest legislation created a new tax on advertising highly processed and fatty

foods. The so-called fat tax' directly affected the Tesco product ranges that have subsequently been

adapted, affecting relationships with both suppliers and customers


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6-Legislative 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 setup banning many of the current practices, such as demanding payments from suppliers and changing

agreed prices retrospectively or without notice (Mintel Report, 2004). The presence of powerful

competitors with established brands creates a threat of intense price wars and strong requirements for

product differentiation. The government's policies for monopoly controls and reduction of buyers' power

can limit entry to this sector with such controls as license requirements and limits on access to raw

materials (Mintel Report, 2004; Myers, 2004). In order to implement politically correct pricing policies,

Tesco offers consumers a price reduction on fuel purchases based on the amount spent on groceries at its

stores. While prices are lowered on promoted goods, prices elsewhere in the store are raised to

compensate.


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VALUE CHAIN ANALYSIS

[A] Primary Activitie

1- Inbound logistics

Inbound logistics are placed at the first stage of the value chain as they possess the earliest opportunity to

create value. Therefore, the elements of this stage are considered to be upstream activities. The logistical

tasks, in this case, include the receipt of goods from suppliers, storage of goods, handling &

transportation of goods internally and placing the products on the shelves. Tesco tries to maintain the

level of consumer choice in store (+), whilst improving the efficiency of its distribution system (+). In

applying a quality control procedure concerning damaged goods and products, it provides an excellent

opportunity to reduce costs unfairly incurred by the company, therefore preventing these costs being

passed on to the consumer (P+).

2-Operations

The production element of Tesco activities are service orientated. Hence, operations could be the second

upstream opportunities that enable services and products to be provided, tasks such as opening every day

in accordance with trading hours, maintaining the shelves, and the stock (+). In order to obtain future

competitive advantage Tesco has to consider expanding further in terms of operating hours in those

places, where it does not occur or opening new Metro and Express stores (P+). However, this might be

restricted by law or planning councils, which is essentially takes away competitive advantage (-).

3-Outbound logistics

The third stage of the value chain is the outbound logistics that is concerned with delivering the product

to the customer. Tesco currently adds value in its home delivery service (+). However, other tangibles

that have to be improved are those of parking facilities, trolley collectors, till staff and systems to gain

competitive advantage, if executed more efficiently than competitors, they will add value by saving thecustomer time (+), whilst increasing the turnaround (+). Adding value could be achieved through the

implementation of a trolley deposit system, keeping them tidy and enabling customers to get to and from

the premises quicker, as well as making these facilities readily available and quicker to obtain (P+).

4-Marketing and sales

Marketing and sales are placed under downstream elements of the value chain. Clubcard gives further

discounts and loyalty for the customers (+). However, Tesco may also decide to attract more customers

by advertising via radio, local newspaper and national T.V. e.g. the lower prices advertising campaign

or more discounts offers (+). With a more customer sophistication and their awareness of ethical business


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practices, it may give the company some constraints in terms of selling environmentally friendly products

(-). In return, Tesco can take it as an advantage and provide customers with more of the recycling points

and include information in their advertisements, adding value for customers who will believe that by

choosing to shop at Tesco, people are helping the environment (P+).

[B]Support Activities

1-Company Infrastructure

Planning and control functions are the ones that account to provide the continued focus on the costs and

cash control of the companys operations (+). And departments such as profit protection whose main jobs

are to reduce shrink. The company has now increased its staff count who are involved in upgrading its

anti-fraud software (infrastructure/technology, interdependence), and installing new security systems

which aim to reduce internal theft, an expense the customer will now not have to cover in the price of

their purchases (+).

2-Human resource management

HRM is regarded as up and downstream activity, covering everything from recruitment to management

development. The company aims to increase the number of training schemes and further develop its

recruitment programmes so to pass on to the customer the benefits of a well recruited, well trained staff,

not the costs (+). Tesco continues to invest in customer service (+), where training is also linked directly

to pay, so the staff are motivated to learn, and are encouraged to improve their approach to customers and

service provision quality. (P+).

3-Technology development

It is a downstream activity and is the ability to provide new innovative product ranges/ solutions that

anticipate customer needs. It also remains a key competitive advantage, adding value, as Tescos brand

name gives the product vitality (+). However, installation and capital investment is a long term process

and needs total commitment of the staff. But who will be responsible for the service provision and the

floor personnel? (-).


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SWOT ANALYSIS: TESCO

STRENGTHS

1-Increasing market share:

Tesco holds a 13% share of the UK retail market. Its multi-format capability means that it will continue

to grow share in food, while increasing space contribution from hypermarkets will allow it to drive a

higher share in non-food.

2-Tesco's general rowth and ROI show no sign of abating: In the UK, Tesco's late 2002 investment

into West-midlands based convenience store group T&S was billed as the most aggressive move into the

neighborhood market by a big-name retailer so far. The deal has turned Tesco into the country's second

biggest convenience store chain after the Co-operative Group, and the company also plans to open up 59

new stores in the UK this year. Tesco has grown its non-food division to the extent that its revenues now

total 23% of total group earnings. Tesco's international business segment is growing steadily, and is

predicted to contribute nearly a quarter of group profits over the next five years. If geographical spread

continues to grow, this will ensure Tesco's continued regional strength.

3-Insurance:

In fiscal 2003 Tesco Personal Finance reached the milestone of one million motor insurance policies,

making it the fastest growing motor insurance provider ever. The group's instant travel insurance allows

Clubcard holders to buy their holiday insurance conveniently at the checkout. Pet insurance now has over

330,000 cats and dogs covered, while the life insurance policy followed on from the success of last year,

when it was voted The Most Competitive Life Insurance Provider in the MoneyFacts Awards 2003.

4-Tesco online:

Tesco.com is the world's biggest online supermarket and this year the group had sales of over 577million, an increase of 29% on last year. Tesco online now operates in over 270 stores around the

country, covering 96% of the UK. With over a million households nationwide having used the company's

online services, the company has a strong platform to further develop this revenue stream.

5-Brand value:

Profits for Tesco's operations in Europe, Asia and Ireland increased by 78% during the last fiscal year.

The company has a strong brand image, and is associated with good quality, trustworthy goods that

represent excellent value. Tesco's innovative ways of improving the customer shopping experience, as

well as its efforts to branch out into finance and insurance have also capitalized on this.


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6-UK market leadership reinforced:

Since acquiring number one ranking in 1996, Tesco has developed a successful multiformat strategy that

has accelerated its advantage. Its UK sales are now 71% larger than Sainsbury's. Also the Competition

Commission's report makes it very difficult for a competitor to challenge its scale and has effectively

scuppered Wal-Mart's chances of stealing UK leadership. Therefore, Tesco is in an enormously strong

position in its domestic market.

WEAKNESSES

1-Reliance upon the UK market:

Although international business is still growing, and is expected to contribute greater amounts to Tesco's

profits over the next few years, the company is still highly dependent on the UK market (73.8% of 2003

revenues). While this isn't a major weakness in the short term, any changes in the UK supermarket

industry over the next year for example, like the Morrison's group successfully purchasing the Safeway

chain could alter the balance of UK supermarket power, and affect share.

2-Debt reduction:

Tesco is not expected to reduce its debt until at least 2006. Tesco has a large capital expenditure program

mainly due to its huge investment in space for new stores. Since its expansion is so aggressive, Tesco haslittle free cash for any other operations.

3-Signs point to serial acquisitions:

With an enterprise value of 23 billion, Tesco clearly has enormous firepower. Also, its product range is

vast and almost any acquisition can be justified, particularly in the UK. While 'fill the gap' strategy would

be useful to the company, as has been the case with the UK convenience market, there is the danger of

Tesco becoming a serial acquirer, as this tends to reduce earnings visibility and quality.

OPPORTUNITIES

1-Non-food retail:

The growth in Tesco's hypermarket format in the UK means that there are expectations of seeing its 13%

share of retail sales climb sharply over the next few years. It can use its footfall and low cost structure

together with improved merchandising skills to add another leg to growth. Equally, its growth overseas

will further increase earnings and scale, taking Tesco onto the virtuous circle of growth. It is estimated

that Tesco's non-food sales will double over the next four years.


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Worldwide it has sales of 7 billion in non-food, some 23% of the total. Its aim to be 'as strong in non-

food as we are in food', no longer sounds like the consultancy-speak that it once did, and they are getting

there using the basic tenets of value, choice and convenience that have been so successful in food.

Around half of new space opened in the UK last year was for non-food and the result has been to

increase its market share from 5% to 6% and its overall share of UK retail sales has increased by 100

basis points to 12.8%.

The company's telecoms venture is the latest stage in its strategy to develop popular retail services. It has

repeated its approach in banking, by capitalizing on its brand.

2-Health and beauty:

Tesco's UK health and beauty ranges continue to grow, and it is currently the fastest growing skincare

retailer in the market. The company has a volume market-leading position in both toiletries and

healthcare and is number one retailer in the baby goods markets. Across all health and beauty ranges

Tesco continues to invest in price to deliver the value customers have come to expect and this year

invested 27 million on health and beauty pricing alone. The company now has 19 stores with opticians

and nearly 200 stores with pharmacies.

3-Further international growth:

Tesco now operates in six countries in Europe in addition to the UK; the Republic of Ireland, Hungary,

Czech Republic, Slovakia, Turkey and Poland. It also operates in Asia: in South Korea, Thailand,

Malaysia, Japan and Taiwan. Seven years ago, its International sales were 770 million. Now, they are

nearly 10 times larger, at almost

7 billion, with profits of 306 million. In the current year, Tesco will add 2.5 million square feet to sales

area and could well enter another major market. Growing internationally has forced Tesco to become

serious about hypermarkets and this has had seriously positive implications for growth in the UK. Tesco

has formed a strategic relationship with US supermarket, Safeway Inc, to take the tesco.com home

shopping model to the US. Telecoms are the latest stage in its strategy to develop popular retail services.It has repeated its approach in banking, by capitalizing on its brand. In 2004 the company plans to enter

the Chinese market, as China is one of the largest economies in the world with tremendous forecast

growth and will present many opportunities for Tesco.

THREATS

1-UK structural change could spark a price war:

The price followers in the UK market are about to become aggressive investors in price, Safeway

because of new ownership and Sainsbury because of new management. Morrison is reducing Safeway's

prices by up to 6% and Sainsbury is bound to see lower prices as one of the basic changes necessary to


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drive its recovery. With both Asda and Tesco committed to price leadership, this could result in a step

down in industry profitability.

2-Overseas returns could fall:

The buy case for Tesco is predicated around investment overseas driving higher group returns as each

country moves past critical mass. This might not happen, either because of economic conditions,

competitor action, or failure in Tesco's business model. It also could come as a consequence of an

aggressive move into a larger market, such as China or Japan.

3-Wal-Mart/Asda challenge:

Since the US shopping giant Wal-mart purchased Asda, Tesco's rank as the top UK supermarket has been

threatened. Asda can now compete extremely well on price and range of goods. For the moment, Asda is

the third largest supermarket in the UK, just behind Sainsbury's and then Tesco. However, Asda closed

the gap on Sainsbury's in 2003, leaving the company to directly challenge Tesco's dominance. Tesco is

well aware of this, and has so far been quick to keep up with price cuts or special offers at Asda. Wal-

mart may also decide to wield its buying power more heavily in the UK, and this could spell the end of

Tesco's brand dominance in the future.

4-International expansion:

International growth is expensive. Entering new markets with a new brand requires heavy investment and

marketing, as well as land prices (which are currently low) and extra distribution and operation expense.

Tesco's debt may increase before it begins to decline.

Korea is contributing a good proportion of Tesco's international profit growth. If profits continue to grow

in this way, Korea will probably represent one-third of Tesco's international profits in 2003. Korean

consumer spending is currently quite low, and coupled with the country's current unrest, and Tesco's

large investment, this represents a high risk area for Tesco to bank on.


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TESCO'S STRATEGIC OPTIONS: GENERIC STRATEGIES

Generic Strategies are characterised by an individual retailer's response to the industry structure. For a

giant retailer, such as Tesco, to obtain a sustainable competitive advantage they should follow either one

of three generic strategies, developed by Porter.

The first strategy ofCOST LEADERSHIP is one in which Tesco can strive to have the lowest costs in

the industry and offer its products and services to a broad market at the lowest prices. This strategy will

be based on the Tesco's ability to control their operating costs so well that they are able to price their

products competitively and be able to generate high profit margins, thus having a significant competitive

advantage.

If Tesco uses SECOND STRATEGY OF DIFFERENTIATION, than it has to try to offer services

and products with unique features that customers value. Tesco will be able to create brand loyalty for

their offerings, and thus, price inelasticity on the part of buyers. Breadth of product offerings,

technology, special features, or customer service are popular approaches to differentiation.

The THIRD STRATEGY OF FOCUS CAN BE EITHER A COST LEADERSHIP ORDIFFERENTIATION STRATEGY aimed toward a narrow, focused market. In pursuing a cost

leadership strategy Tesco focuses on the creation of internal efficiencies that will help them withstand

external pressures. Therefore, it appears reasonable to think that Tesco will have frequent interactions

with the governmental/regulatory and supplier sectors of the environment. In accordance to this

framework, while both overall cost leadership and differentiation strategies are aimed at the broad

market, Tesco may also choose to confine their product to specific market areas or may choose to offer a

smaller line of products to the broad market, thus pursuing a strategy of focus or niche (Porter, 1980). In

other words, Tesco pursues a strategy of cost leadership or differentiation either in a specific market orwith specific products.The danger some organisation face is that they try to do all three and become what

is known as stuck in the middle. In case of Tesco it is not appropriate, as they do have a clear business

strategy with a clearly defined market segment.


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